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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
COMMISSION FILE NUMBER 0-19829
UMBRELLA BANCORP, INC.
------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5818 South Archer Road, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 458-2002
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act) Yes X No
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The Registrant had 1,818,388 shares outstanding as of August 14, 2003.
Transitional Small Business Disclosure Format (check one): Yes No X
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UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2003
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 Financial Statements
Unaudited Consolidated Statements of Financial Condition
as of June 30, 2003 and December 31, 2002 ............................ 3
Unaudited Consolidated Statements of Operations for the Three
And Six Months Ended June 30, 2003 and 2002........................... 4
Unaudited Consolidated Statements of Comprehensive Income
for the Three and Six Months Ended June 30, 2003 and 2002 ............ 5
Unaudited Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2003 and 2002....................... 6
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002................................... 7
Notes to Unaudited Consolidated Financial Statements ................. 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk............ 28
Item 4 Controls and Procedures............................................... 29
PART II - OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 30
Item 2 Changes in Securities ................................................ 30
Item 3 Default Upon Senior Securities ....................................... 30
Item 4 Submission of Matters to a Vote of Security Holders .................. 30
Item 5 Other Information .................................................... 31
Item 6 Exhibits and Reports on Form 8-K ..................................... 31
Form 10-Q Signature Page ....................................................... 32
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002..................................................................
2
PART 1 - FINANCIAL INFORMATION
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
June 30, December 31,
ASSETS 2003 2002
--------- -----------
Cash $ 2,983 $ 2,089
Interest-earning deposits 26,939 69,811
--------- ---------
Total Cash & Cash Equivalents 29,922 71,900
Securities available-for-sale 67,032 105,613
Securities held-to-maturity - -
Loans held for sale 17,458 20,428
Loans receivable, net 72,358 96,024
Mortgage loan servicing rights, net 89 105
Investment in limited partnership 860 1,198
Stock in Federal Home Loan Bank of Chicago 3,377 2,947
Foreclosed real estate, net 4,043 2,361
Premises and equipment held for sale 5,071 5,401
Premises and equipment, net 10,466 13,476
Debt issuance costs, net 1,719 1,757
Accrued interest receivable 1,041 1,861
Receivable from loan servicers 675 2,480
Deferred tax assets 10,399 9,679
Prepaid expenses and other assets 7,207 8,707
--------- ---------
Total Assets $ 231,717 $ 343,937
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 172,821 $ 282,047
Borrowed money 21,395 22,305
Custodial escrow balances for loans serviced for others 5,869 7,423
Accrued interest payable 1,148 1,232
Other liabilities 1,464 5,627
Junior subordinated debt 17,243 17,123
Stockholders' Equity
Preferred stock 0 3
Preferred stock, Series A 8,251 1,921
Preferred stock, Series B 0 0
Common stock 22 21
Additional paid-in-capital 11,092 9,284
Retained earnings (deficit) - substantially restricted (2,047) 2,620
Treasury stock - common, at cost (5,509) (5,261)
Unearned stock awards 0 (248)
Accumulated other comprehensive loss (32) (160)
--------- ---------
Total Stockholders' Equity 11,777 8,180
--------- ---------
Total Liabilities and Stockholders' Equity $ 231,717 $ 343,937
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Interest income:
Loans receivable $ 1,260 $ 4,834 $ 3,024 $ 9,911
Securities available-for-sale 750 1,276 1,865 2,439
Securities held-to-maturity - 19 - 61
Interest-earning deposits 329 1,157 721 2,760
-------- -------- -------- --------
Total interest income 2,339 7,286 5,610 15,171
-------- -------- -------- --------
Interest expense:
Deposits 1,468 4,396 3,398 9,315
Borrowed money 384 588 735 1,154
Junior subordinated debt 490 484 977 966
-------- -------- -------- --------
Total interest expense 2,342 5,468 5,110 11,435
-------- -------- -------- --------
Net interest income (3) 1,818 500 3,736
Provision for loan and lease losses - 8,559 - 8,594
-------- -------- -------- --------
Net interest income after provision
for loan and lease losses (3) (6,741) 500 (4,858)
-------- -------- -------- --------
Non-interest income:
Loan servicing income 172 67 73 140
Gain (loss) on sale of
Loans held for sale 44 (76) 87 (115)
Foreclosed real estate (45) 46 (181) 22
Securities available-for-sale 196 113 (459) (801)
Profits on trading account activity - (518) - (10)
Branch deposits 709 - 1,116 -
Branch facilities 367 41 400 69
Other assets - (5) 222 (5)
Fees and service charges 88 173 266 379
Net loss on investment in limited partnership (311) (2,463) (311) (2,463)
Other income 79 46 10 62
-------- -------- -------- --------
Total non-interest income (expense) 1,299 (2,576) 1,223 (2,722)
Non-interest expense:
Compensation and benefits 939 1,047 1,950 1,975
Occupancy and equipment 916 548 1,518 1,046
Federal deposit insurance premium 84 14 242 36
Other general and administrative fees 1,823 2,721 3,477 4,520
-------- -------- -------- --------
Total non-interest expense 3,762 4,330 7,187 7,577
-------- -------- -------- --------
Loss before income taxes (2,466) (13,647) (5,464) (15,157)
Income tax (benefit) - 5,272 797 6,221
-------- -------- -------- --------
Net loss $ (2,466) $ (8,375) $ (4,667) $ (8,936)
======== ======== ======== ========
Per Share Amounts:
Basic $ (1.34) $ (4.86) $ (2.59) $ (5.21)
Diluted $ (1.34) $ (4.86) $ (2.59) $ (5.21)
See accompanying notes to unaudited consolidated financial statements.
4
UMBRRELLA BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------- ------- ------- -------
Net loss $(2,466) $(8,375) $(4,667) $(8,936)
Other comprehensive income
Unrealized holding gains on securities available-for-sale 392 1,176 (232) 429
Less reclassification adjustment for losses recognized in income 215 113 (440) (801)
------- ------- ------- -------
Net unrealized gains 177 1,063 208 1,230
Tax expense (68) 404 (80) 467
------- ------- ------- -------
Other comprehensive income 109 659 128 763
------- ------- ------- -------
Comprehensive income (loss) $(2,357) $(7,716) $(4,539) $(8,173)
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Preferred Additional Retained
Preferred Stock Common Paid-In Earnings
Stock Series A Stock Capital (Deficit)
--------------------------------------------------------------
Six months ended June 30, 2002
- ------------------------------
Balance at December 31, 2001 $ 3 $ - $ 21 $ 9,214 $ 15,181
Net loss - - - - (8,936)
Other comprehensive income, net of tax - - - - -
ESOP loan principal reduction - - - - -
Stock options exercised - - - 118 -
Cash dividends - - - - (208)
-------- -------- -------- -------- --------
Balance at June 30, 2002 $ 3 $ - $ 21 $ 9,332 $ 6,037
======== ======== ======== ======== ========
Six months ended June 30, 2003
- ------------------------------
Balance at December 31, 2002 $ 3 $ 1,921 $ 21 $ 9,284 $ 2,620
Net loss - - - - (4,667)
Other comprehensive income, net of tax - - - - -
Stock options exercised - - 1 465 -
Transfer MRP Stock to Treasury - - - - -
Proceeds from capital contributions - - - 1,343 -
Issuance of Series A preferred stock (3) 6,330 - - -
-------- -------- -------- -------- --------
Balance at June 30, 2003 $ - $ 8,251 $ 22 $ 11,092 $ (2,047)
======== ======== ======== ======== ========
Accumulated
Treasury Unearned Other Total
Stock ESOP Stock Comprehensive Stockholders'
Common Loan Awards Loss Equity
--------------------------------------------------------------------
Six months ended June 30, 2002
- -------------------------------
Balance at December 31, 2001 $ (5,121) $ (341) $ (248) $ (1,132) $ 17,577
Net loss - - - - (8,936)
Other comprehensive income, net of tax - - - 763 763
ESOP loan principal reduction - 40 - - 40
Stock options exercised - - - - 118
Cash dividends - - - - (208)
-------- -------- -------- -------- --------
Balance at June 30, 2002 $ (5,121) $ (301) $ (248) $ (369) $ 9,354
======== ======== ======== ======== ========
Six months ended June 30, 2003
- ------------------------------
Balance at December 31, 2002 $ (5,261) $ - $ (248) $ (160) $ 8,180
Net loss - - - - (4,667)
Other comprehensive income, net of tax - - - 128 128
Stock options exercised - - - - 466
Transfer MRP Stock to Treasury (248) - 248 - 0
Proceeds from capital contributions - - - - 1,343
Issuance of Series A preferred stock - - - - 6,327
-------- -------- -------- -------- --------
Balance at June 30, 2003 $ (5,509) $ - $ - $ (32) $ 11,777
======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended
June 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (4,667) $ (8,936)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 2,040 1,757
Accretion of discounts and deferred loan fees (311) 79
Provision for loan losses - 8,594
(Gain) loss on sale of:
Loans held for sale (87) 115
Securities available-for-sale 459 801
Trading account securities - 10
Foreclosed real estate 181 (22)
Branch deposits (1,116) -
Branch facilities (400) (64)
Other assets (222) -
Federal Home Loan Bank of Chicago stock dividend (430) (75)
Net change in trading account activity - 1,392
Loans originated and purchased for sale, net 3,057 34,633
Amortization of purchased mortgage servicing rights 16 137
Net change in debt issuance costs 38 36
Amortization of purchase price of MRP and ESOP stock - 40
Change in accrued interest receivable, prepaid expenses and other assets 1,858 908
Change in accrued interest payable and other liabilities (2,509) 50
--------- ---------
Net cash provided by (used in) operating activities (2,093) 39,455
Cash flows from investing activities:
Net (increase) decrease in loans receivable 22,134 2,437
Proceeds from maturities of and principal repayments on:
Securities available-for-sale 192 6,603
Securities held-to-maturity - 292
Proceeds from sale of (payment for):
Securities available-for-sale 193,618 80,438
Foreclosed real estate 1,785 531
Securities held-to-maturity - 1,567
Premises and equipment 1,546 -
Branch deposits, including cash and cash equivalents (28,637) -
Purchase of:
Securities available-for-sale (155,480) (42,138)
Premises and equipment (246) (1,672)
--------- ---------
Net cash provided by (used in) investing activities 34,912 48,058
Cash flows from financing activities:
Net change in deposits (80,589) (65,678)
Proceeds from borrowed money 23,095 213,900
Repayment of borrowed money (24,005) (219,339)
Proceeds from issuance of preferred stock, Series A 6,327 -
Proceeds from capital contributions 1,343 -
Reissuance of junior subordinated debentures 120 1,065
Repurchase of junior subordinated debentures - (663)
Proceeds from exercise of stock options 466 118
Dividends paid - (208)
Net change in custodial escrow balances for loans serviced (1,554) (589)
--------- ---------
Net cash provided by (used in) financing activities (74,797) (71,394)
--------- ---------
Net increase (decrease) in cash and cash equivalents (41,978) 16,119
Cash and cash equivalents at beginning of period 71,900 37,649
--------- ---------
Cash and cash equivalents at end of period $ 29,922 $ 53,768
========= =========
Supplemental disclosures of cash flow information: Cash paid or refunded during
the period for:
Interest $ 5,194 $ 11,251
Income taxes - (453)
Non-cash investing activity - transfer of loans to foreclosed real estate 3,648 1,545
Non-cash investing activity - ending receivable from loan servicers 675 2,950
Non-cash investing activity - transfer of premises and equipment held for sale - 4,539
See accompanying notes to unaudited consolidated financial statements.
7
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND NEW ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals
considered necessary for fair presentation, have been included. The results of
operations for the three and six months ended June 30, 2003, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
Certain reclassifications have been made to prior period amounts in the
financial statements in order to conform to the current period presentation.
The unaudited consolidated financial statements include Umbrella Bancorp, Inc.
(the "Bancorp" or the "Company") and its wholly owned subsidiaries,
UmbrellaBank, fsb, ("UmbrellaBank' or the "Savings Bank"), Argo Redemption
Corp., Inc. ("Argo Redemption" or "ARC"), and the Savings Bank's wholly owned
subsidiary, Umbrella Service Corporation ("Umbrella Service"), formerly
Dolton-Riverdale Savings Service Corporation.
The Bancorp, through its subsidiaries at June 30, 2003, provides a full range of
financial services primarily through its Internet banking delivery channel at
http://www.umbrellabank.com and its retail banking facility in Cook County,
Illinois.
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", and Statement 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities",
both of which generally become effective in the quarter beginning July 1, 2003.
The Company is evaluating the impact of these new accounting standards on its
consolidated financial statements.
NOTE B - REGULATORY COMPLIANCE AND BUSINESS PLAN
As previously disclosed in greater detail in the Company's 2002 Annual Report to
Shareholders, the Office of Thrift Supervision ("OTS") and the Boards of
Directors of both the Bancorp and the Savings Bank have engaged in discussions
to develop mutually agreeable business frameworks designed to strengthen the
regulatory foundation of both the Bancorp and the Savings Bank, respectively. As
a result, the Boards of Directors of both the Bancorp and the Savings Bank,
without admitting or denying that such grounds exist, or the accuracy of the OTS
findings, opinions and/or conclusions, separately agreed to enforcement actions
that became effective on August 16, 2002.
The provisions of the enforcement action between the Bancorp and OTS
established, in principal part, that the Bancorp provide the OTS with a plan for
raising additional common equity capital and restructuring outstanding debt at
the Bancorp, recognizing that economic and market conditions are outside of the
control of the Bancorp. In addition, the agreed upon action required the Bancorp
to provide the OTS with quarterly cash flow projections for the purpose of
identifying the Bancorp's sources and uses of funds for the remainder of fiscal
2002, fiscal 2003 and fiscal 2004. Furthermore, the Bancorp was placed under
various operating restrictions, including a requirement that the Bancorp file
notice with the OTS prior to adding or replacing a director or hiring a senior
executive officer, as well as being restricted in making "golden parachute"
payments to any institution-affiliated
8
party unless authorized by regulation. The subject enforcement action also
provides that the Bancorp ensure that all transactions with affiliates comply
with applicable statutory and regulatory requirements and that the Bancorp
maintain documentation sufficient to evidence such compliance. To date, the
Bancorp is in material compliance with the provisions contained within the
agreed upon action and continues to maintain regular and open dialogue with
representatives of the OTS to ensure continued success.
The agreed upon language in the enforcement action between the Savings Bank and
the OTS provided, in principal part, for the development and implementation of a
plan addressing the level of the Savings Bank's fixed assets, as well as the
adoption and implementation of a capital plan for the establishment and
maintenance of acceptable capital levels. On March 24, 2003, the Savings Bank
submitted to the OTS a revised business plan which replaces the Savings Bank's
previously filed business plan, capital plan and staffing plan. The revised
business plan details the Savings Bank's overall operating strategies, in light
of current economic conditions, and the intent of the Board of Directors to
reformulate and reduce the Savings Bank's overall asset size. The agreed upon
language of the enforcement action also (without prior written approval of the
OTS): prohibits any increase in the Savings Bank's total assets during any
quarter in excess of an amount equal to net interest credited on deposit
liabilities during the quarter and prohibits the purchase or origination of new
loans other than single-family residential mortgage loans, credit card loans and
over draft lines of credit. In addition, the mutual agreement provides for the
Savings Bank to take specific actions affecting its lending activities,
including regular reviews of its loan portfolio, classified assets and
allowances for loans and lease losses ("ALLL"). Operating restrictions on
growth, restrictions on capital distributions, contracts, "golden parachute"
payments and changes in senior executive positions, as well as the development
of and programs related to its internal audit function were also agreed upon.
The Board of Directors has already taken numerous actions to alleviate many of
the issues raised by the OTS and has formalized plans, policies and procedures
to address all of the issues raised by OTS and/or contained in the agreed upon
enforcement action. To date, the Savings Bank is in full material compliance
with the provisions of the agreed upon enforcement action. Furthermore, selected
provisions of the mutually agreed upon enforcement action have been modified,
with operational activities expanded by the OTS, at the express request of the
Savings Bank. The management and Board of the Savings Bank have continued, on a
regular basis and in the spirit of regulatory cooperation, to discuss a variety
of issues to ensure the continued progress and success of the Savings Bank. On
June 26, 2003, the Board of the Savings Bank met with representatives of the OTS
and Federal Deposit Insurance Corporation ("FDIC") to discuss the continued
regulatory progress made by the Savings Bank to date, and as a follow-up to a
recent review completed by the OTS and FDIC. During the meeting, regulatory
officials and representatives of the Savings Bank addressed the Savings Bank's
continued compliance with the agreed upon enforcement action, the continued
improvement in the overall operations of the Savings Bank, and the Savings
Bank's future business plans.
NOTE C - PREMISES AND EQUIPMENT HELD FOR SALE
As of June 30, 2003 and December 31, 2002, premises and equipment held for sale
totaled $5.1 million and $5.4 million, respectively. During June 2002, the
Savings Bank classified its investment in an office building as held for sale
and, as such, it is being carried at the lower of cost or fair value. This
building was purchased in April 2001 as a branch location for the Savings Bank.
As of June 30, 2003, the net book value of this office building was $4.7
million. On May 29, 2003 the Savings Bank entered into a contract for the sale
of the office building at a purchase price of $6 million. The contract is with a
third party who is, assuming all contingencies are satisfied, scheduled to close
the purchase transaction prior to September 30, 2003. During the six month
period ended June 30, 2003, occupancy and equipment expense was reduced by
approximately $217,000 related to rental income from this building and included
approximately $38,000 of expenses from this building.
In addition, as of June 30, 2003 and December 31, 2002, the Savings Bank
classified $343,000 and $835,000, respectively, of land, leasehold improvements,
furniture, fixtures and equipment located in its former two branch and corporate
office locations as held for sale. During the first and second quarters of 2003,
the Savings Bank sold approximately $200,000 of leasehold improvements and
furniture, fixtures and equipment related to the sale of its
9
two branch locations as discussed more fully in Note G - Deposits and the
consolidation of the Company's corporate locations as discussed below. The sales
occurred at net book value, which approximated fair market value.
On March 31, 2003, the two principal shareholders of the Company entered into an
agreement with the Company and third party owner of one of the Company's
corporate locations to assume the obligation under a building lease for
corporate office space in Summit, Illinois. The transfer of the lease
obligations from the Savings Bank to the principal shareholders allowed the
Company to reverse the deferred gain and record additional paid-in capital in
the amount of $987,000 related to this corporate location as of March 31, 2003.
In conjunction with this lease assumption, the two principal shareholders
purchased approximately $200,000 of leasehold improvements at this corporate
location, which was funded by loans from the Savings Bank secured by common
stock of unrelated entities. Effective July 17, 2003, a first position mortgage
lien on residential property was substituted for the common stock collateral
securing these loans. The fair value of the leasehold improvements approximated
the net book value and the terms of the loans were consistent with the Savings
Bank's commercial secured loan terms to unaffiliated parties and in compliance
with all related regulatory requirements.
The June 30, 2003 balance of land, leasehold improvements, furniture, fixtures
and equipment held for sale relates to the further consolidation of the
Company's corporate locations. The Company currently anticipates that new
tenants for its corporate locations will also acquire the land, leasehold
improvements and furniture and fixtures at these locations. Accordingly, the
Company has recorded no impairment charges for these assets as of June 30, 2003.
On July 10, 2003, the Savings Bank sold two (2) parcels of land, which resulted
in an approximate $131,000 gain on sale, net of direct expenses. These parcels
of land had a net book value of $0 as of June 30, 2003.
NOTE D - PREMISES AND EQUIPMENT
As of June 30, 2003 and December 31, 2002 premises and equipment, net, totaled
$10.5 million and $13.5 million, respectively. During the first quarter 2003,
the Savings Bank entered into and closed on the sale of $1.1 million of
automated teller machines ("ATMs"), which were removed from the locations of a
bankrupt retailer. The ATMs were sold at net book value to the Saving Bank's ATM
network deployment partner.
NOTE E - LOANS HELD FOR SALE
As of June 30, 2003, loans held for sale totaled $17.5 million and consisted of
$1 million of recently originated one-to-four family mortgage loans and $16.5
million of commercial and commercial real estate loans which the Savings Bank
has identified as held for sale in conjunction with the Savings Bank's business
plan, as referenced previously in Note B - Regulatory Compliance and Business
Plan. Anticipated gains and/or losses on these sales are not expected to be
significant to future operations.
As of December 31, 2002, loans held for sale totaled $20.4 million and consisted
of $2.1 million of one-to-four family mortgage loans and $17.7 million of
commercial and commercial real estate loans which the Savings Bank had
identified as held for sale in conjunction with the Savings Bank's business
plan, and $647,000 of loans under its discontinued "purchase repurchase" loan
program. During the first quarter of 2003, the Company completed the sale of the
$2.1 million one-to-four family mortgage loans and $647,000 "purchase
repurchase" loans. Based on the sales prices received, the actual gains on these
sales were not significant to operations.
NOTE F - INVESTMENT IN LIMITED PARTNERSHIP
The balance of investment in limited partnership of $860,000 and $1.2 million at
June 30, 2003 and December 31, 2002 represents the Savings Bank's investment in
various divisions of a single limited partnership. The investment
10
at June 30, 2003 and December 31, 2002 includes a $790,000 and $910,000 million
equity interest in a limited partnership whose business activities are to
purchase mortgage servicing rights, and a $70,000 and $288,000 investment in
subordinated debentures of the partnership. During the second quarter of 2003,
the general partner of the partnership in which the Company has an investment in
subordinated debentures, decided to liquidate the partnership. As of June 30,
2003 the Company has recorded its investment in the subordinated debentures at
the estimated final distribution amount to be received during the third quarter
2003, which is approximately $70,000.
NOTE G - DEPOSITS
Deposits totaled $172.8 million and $282.0 million as of June 30, 2003 and
December 31, 2002, respectively. As previously disclosed in the Company's Annual
Report to Shareholders and as referenced in Note B - Regulatory Compliance and
Business Plan and Note C - Premises and Equipment Held for Sale, the Savings
Bank has engaged in activities designed to reduce the amount of its deposits in
accordance with its business plan. The Savings Bank completed the early
redemption of brokered deposits during 2002. On March 28, 2003, the Savings Bank
closed the sale of its branch office in Chicago, Illinois ("Madison Branch"),
with approximately $8.5 million in deposits on the date of sale. The Savings
Bank recorded a gain on the Madison Branch sale of approximately $407,000,
including recognition of the deferred gain on the branch building sold in a
prior year. On April 26, 2003, the Savings Bank completed a separate sale of its
branch office located in Dolton, Illinois ("Dolton Branch"), with approximately
$20.2 million in deposits on the date of sale. The Savings Bank recorded an
additional gain of approximately $1.0 million, including recognition of the
deferred gain on the branch building sold in a prior year. Both transactions
included the sale of leasehold improvements and furniture, fixtures and
equipment at the locations along with the assumption of the building's lease
obligations.
In connection with the Madison Branch and Dolton Branch sales, the Savings Bank
filed an application with the OTS for the redesignation of its home and branch
office to the River North area of Chicago, Illinois ("Huron Branch"). The
application was approved by the OTS on February 24, 2003. The Huron Branch home
office relocation, as well as the branch opening, was effective April 17, 2003.
NOTE H - BORROWINGS AND JUNIOR SUBORDINATED DEBT
Borrowings totaled $21.4 million and $22.3 million as of June 30, 2003 and
December 31, 2002, respectively while Junior Subordinated Debt totaled $17.2
million and $17.1 million as of June 30, 2003 and December 31, 2002,
respectively.
As previously disclosed in the Company's Annual Report to Shareholders and as
referenced herein, the following transactions have taken place during the first
six months of 2003. During first quarter, the Bancorp paid-off an aggregate of
$6.3 million of notes payable to a third party with the proceeds from cash
contributions from the Company's principal shareholders and the proceeds from
the sale of an available-for-sale security. Additionally, on February 28, 2003,
the Savings Bank paid-off a $2.8 million Federal Home Loan Bank ("FHLB") Advance
due April 20, 2003. The Savings Bank incurred a penalty of $17,600 related to
this transaction. During May 2003, the Savings Bank began utilizing its
short-term FHLB open line borrowing capabilities, which have more favorable
borrowing rates. After these transactions, borrowed money totaled $21.4 million
at June 30, 2003 and consisted of the following:
Balance
June 30, 2003
Maturity (In thousands)
-------- -------------
Advances from Federal Home Loan Bank of Chicago 11/25/06 $ 10,000
Open line 8,100
Subordinated debentures 12/08/11 3,000
Note payable Demand 295
--------
$ 21,395
========
11
During 1998 the Company issued 11% junior subordinated debentures aggregating
$17.78 million to Argo Capital Trust Company ("Trust"). The Trust issued 11%
capital securities with an aggregate liquidation amount of $17.25 million ($10
per capital security) to third-party investors. The capital securities and cash
are the sole assets of the Trust. The junior subordinated debentures and the
capital securities pay dividends and distributions, respectively, on a quarterly
basis, which are included in interest expense.
The Trust is a statutory business trust formed under the laws of the State of
Delaware and its common stock is wholly owned by the Company. The junior
subordinated debentures will mature on November 6, 2028, at which time the
capital securities must be redeemed. The junior subordinated debentures and
capital securities can be redeemed contemporaneously, in whole or in part,
beginning November 6, 2003 at a redemption price of $10 per capital security.
The Company has provided a full and unconditional guarantee of the obligations
of the Trust under the capital securities in the event of the occurrence of an
Event of Default, as defined. Debt issuance costs totaling $1.9 million were
capitalized related to the debenture offering and are being amortized over the
30-year life of the junior subordinated debentures.
In 2000, Argo Redemption was formed for the purpose of repurchasing a portion of
the 11% capital securities. Argo Redemption held 700 shares of the 11% capital
securities at a cost basis of $7,000 as of June 30, 2003, as compared to 12,700
shares of the 11% capital securities at a cost basis of $127,000 as of December
31, 2002. The 11% capital securities can be resold.
On February 27, 2003 the Company announced its intention to repurchase, from
time to time, in open market as well as privately negotiated transactions,
shares of the Trust's 11% securities, which trade under the symbol "ATP_P" on
the American Stock Exchange. The present authorization does not impose any
specific limit on the number of Trust securities which may be repurchased, and
is being undertaken in order to reduce debt and debt-like obligations as
required by the capital plan as referenced in Note B - Regulatory Compliance and
Business Plan. The continuing payment on the Trust securities is dependent on
the Company's continuing ability to make payments on the subordinated debenture
it issued to the Trust in connection with the 1998 public offering. In the
absence of prior written approval, the Savings Bank is currently precluded from
making dividend payments to the Company under mutual agreement with the OTS.
Consequently, no assurance can be made that the Company will continue to make
dividend payments on the Trust securities. In the event that shares are
repurchased and retired, the Company will accelerate the amortization of the
debt issuance costs attributable to each security. The net book value of the
debt issuance costs was $1.6 million as of June 30, 2003.
NOTE I - PROVISION FOR LOAN AND LEASE LOSSES
The Company did not record a provision for loan and lease losses during the
three and six months ended June 30, 2003 as compared to $8.6 million in each of
the comparable periods in 2002. As discussed in the Company's 2002 Annual Report
to Shareholders, subsequent to March 31, 2002 the Company recorded a provision
for loan and lease losses of $9.8 million and net charge-offs of $8.6 million
during 2002. The Company's ALLL at June 30, 2003 was $2.6 million or 22.0% of
nonperforming loans. Based on the level of allowance for loan losses as compared
to nonperforming loans and also considering previous charge-off history, the
Company did not deem any provision for loan and lease losses necessary during
the first two quarters of 2003.
NOTE J - EARNINGS (LOSS) PER SHARE
The following table sets forth the components of basic and diluted earnings
(loss) per share. Basic and diluted loss per share are the same for 2003 and
2002, as diluted loss per share would be anti-dilutive.
12
Three Months Ended Six Months Ended
------------------------- ------------------------
June 30, June 30,
------------------------- ------------------------
2003 2002 2003 2002
--------- ---------- --------- ----------
Dollar and shares in thousands,
except per share data
Numerator
Net loss $ (2,466) $ (8,375) $ (4,667) $ (8,936)
========= ========= ========= =========
Denominator
Basic loss per share -
weighted average shares outstanding 1,844 1,723 1,802 1,716
Effect of dilutive stock options outstanding - - - -
--------- --------- --------- ---------
Diluted loss per share -
weighted average shares outstanding 1,844 1,723 1,802 1,716
========= ========= ========= =========
Basic loss per share $ (1.34) $ (4.86) $ (2.59) $ (5.21)
========= ========= ========= =========
Diluted loss per share $ (1.34) $ (4.86) $ (2.59) $ (5.21)
========= ========= ========= =========
NOTE K - STOCK COMPENSATION
The Company applies APB Opinion No. 25 in accounting for the stock option plans
and, accordingly, compensation cost based on the fair value at grant date has
not been recognized for its stock options in the consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss would have been increased to
the pro forma amounts indicated below:
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Dollars in thousands
Net loss
As reported $ (2,466) $ (8,376) $ (4,667) $ (8,936)
Pro forma (2,475) (8,385) (4,685) (8,954)
Loss per share
Basic loss per share as reported $ (1.34) $ (4.86) $ (2.59) $ (5.21)
Pro forma basic loss per share (1.34) (4.87) (2.60) (5.22)
Diluted loss per share as reported $ (1.34) $ (4.86) $ (2.59) $ (5.21)
Pro forma diluted loss per share (1.34) (4.87) (2.60) (5.22)
13
NOTE L - CAPITAL TRANSACTIONS
On March 31, 2003, the Bancorp made a $1.5 million cash contribution to the
Savings Bank in order to increase the Savings Bank's capital ratios.
On May 28, 2003 the Board of Directors of the Bancorp approved the termination
of the Company's Management Recognition Plan ("MRP"). The 27,332 shares subject
to award under the MRP as of May 28, 2003 were cancelled and were treated as
treasury stock shares.
On May 28, 2003 the Board of Directors of the Bancorp approved the redemption of
the Company's Goodwill Convertible Preferred Stock at par which approximates
$3,000.
On June 26, 2003, the Board of Directors of the Bancorp authorized the issuance
of up to 10,000 shares of Series B 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series B Stock"). The Series B Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series B Stock on
the dates specified below shall be entitled to receive, as and when declared by
the Board of Directors and out of assets of the Bancorp which are by law
available for payment of dividends, cumulative preferential cash dividends, at
the rate of $80.00 per share per annum, payable quarterly on the first day of
July, October, January and April in each year. Dividends on the Series B Stock
shall be cumulative, whether or not in any dividend period or periods after
March 31, 2003 there shall be surplus or net profits of the Company legally
available for the payment of such dividends. Dividends on the Series B Stock
shall be junior and subordinate to the payment of the Bancorp's obligations for
dividends or payments under the Company's 11% Junior Subordinate Deferrable
Interest Debentures but pari pasu with the payment of dividends under the
Company's Series A 8.0% Perpetual Convertible Preferred Stock. After March 31,
2004, the Bancorp, at the option of the Board of Directors, may at any time or
from time to time redeem the whole or any part of the Series B Stock by paying
therefore in cash $1,000 per share plus an amount equal to all dividends thereon
declared but unpaid on the date fixed for redemption (the "Redemption Price").
After July 31, 2005, the holder of the Series B Stock may elect to require that
the Company repurchase the whole or any part of the Series B Stock by paying
therefore in cash $1,000 per share plus an amount equal to all dividends thereon
declared but unpaid on the date which tender of shares is to be made (the
"Repurchase Price"). Until March 31, 2008, each holder of Series B Stock may at
any time upon surrender of the certificates therefore, convert any or all of
such holder's Series B Stock into fully paid and nonassessable shares of Common
Stock of the Bancorp, at the rate of 166 shares of Common Stock for each share
of Series B Stock so surrendered for conversion.
For the period January 1, 2003 to June 30, 2003, the Company received from three
of its principal shareholders, several directors and a shareholder cash totaling
$8,642,888 for 6,329.50 shares of Series A Preferred Stock ($6,329,500) and
122,134 shares of common stock ($467,063) related to the exercise of stock
options.
For the period January 1, 2003 to June 30, 2003 the Company recorded additional
paid-in-capital of $987,000 related to the assumption of the Company's lease
obligation on one of its corporate locations by the Company's two principal
shareholders and $357,000 related to the purchase of available-for-sale
securities by the Company's two principal shareholders at an amount which
exceeded fair value.
For the period July 1, 2003 to August 14, 2003 the Company received from its two
principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred
Stock.
On July 14, 2003 the Company issued 300 shares of the Series B Stock to a third
party in exchange for cash of $300,000.
NOTE M - REGULATORY CAPITAL REQUIREMENTS
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), savings institutions must meet three separate minimum capital
requirements. There are no similar minimum capital requirements for thrift
holding companies. The following tables summarize, as of June 30, 2003 and
December 31, 2002, the Savings Bank's actual capital amounts and ratios.
14
As of June 30, 2003 and December 31, 2002, the Savings Bank was well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Savings Bank must maintain total risk-based, Tier I
risk-based, Tier I leverage, and tangible capital ratios as set forth in the
following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
June 30, 2003 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------- ------- -------- ------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Savings Bank $22,430 17.24% $10,409 8.00% $ 13,012 10.00%
Tier I Capital
(to Risk Weighted Assets)
Savings Bank $17,852 13.72% $ 5,205 4.00% $ 7,807 6.00%
Tier I Capital
(to Adjusted Assets)
Savings Bank $17,852 8.13% $ 8,781 4.00% $ 10,979 5.00%
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
================= ------ ------ ------- ------- -------- -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Savings Bank $24,226 13.61% $14,245 8.00% $17,806 10.00%
Tier I Capital
(to Risk Weighted Assets)
Savings Bank $19,047 10.70% $ 7,122 4.00% $10,684 6.00%
Tier I Capital
(to Adjusted Assets)
Savings Bank $19,047 5.76% $13,227 4.00% $16,533 5.00%
NOTE N - COMMITMENTS AND CONTINGENCIES
At June 30, 2003, the Savings Bank had funding commitments totaling $12.5
million. These commitments include $5.3 million for unused lines of credit,
$427,000 for the unfunded portion of construction loans, $1.8 million for
commitments to originate loans and $5 million for commitments to purchase
investment securities. Commitments to fund loans and lines of credit have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Savings Bank's normal credit policies. Commitments to
purchase investment securities are subject to the Savings Bank's normal
investment policies.
As of June 30, 2003, the Savings Bank also had an investment commitment of
$51,000 to be funded over two years for investment in the Kedzie Limited
Partnership, which is a Community Reinvestment Act ("CRA") investment.
15
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could have a material adverse affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or securities portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area, the Company's implementation of new technologies, the
Company's ability to develop and maintain secure and reliable electronic
systems, accounting principles, policies and guidelines, and limitations imposed
on the Savings Bank's operations as a result of the agreed upon enforcement
action described in the "Regulatory Compliance" section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations." These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission
including the Company's Form 10-K for the year ended December 31, 2002.
OVERVIEW
Umbrella Bancorp, Inc. ("Umbrella Bancorp" or "Company") is a unitary savings
and loan holding company and is registered as such with the Office of Thrift
Supervision ("OTS"), Federal Deposit Insurance Corporation ("FDIC") and the
Securities and Exchange Commission ("SEC"). The Company's business activities
currently consist of ownership of UmbrellaBank, fsb, ("UmbrellaBank" or "Savings
Bank"), and investments in other equity and debt securities. The Company is a
Federal Housing Authority approved originator and servicer and an approved
Federal National Mortgage Association servicer.
In October of 1998, the Company formed Argo Capital Trust Company ("Trust"), a
statutory business trust formed under the laws of the State of Delaware. In
November 1998, the Company and the Trust offered 11% Capital Securities with a
liquidation amount of $10.00 per security. The proceeds from the offering were
$17.25 million. The Trust used the gross proceeds from the sale of the Capital
Securities to purchase Junior Subordinated Debentures of the Company. The Junior
Subordinated Debentures carry an interest rate of 11% paid quarterly in arrears
and are scheduled to mature, subject to the Company's right to prepay the
debentures under certain circumstances, on November 6, 2028.
On June 24, 2000, the Company incorporated a wholly owned subsidiary, Argo
Redemption Corporation, an Illinois corporation ("ARC"). ARC was chartered to
effectuate, from time to time, purchases of the Company's outstanding Capital
Securities by tender, in the open market or by private agreement. Acquisitions
through the over-the-counter dealer market are anticipated to comprise the
majority of purchase activity. As of June 30, 2003, ARC held 700 shares of the
Trust's preferred securities with a cost basis of $7,000.
On February 27, 2003 the Company announced its intention to repurchase, from
time to time, in open market as well as privately negotiated transactions,
shares of the Trust's 11% securities, which trade under the symbol
16
"ATP_P" on the American Stock Exchange. The present authorization does not
impose any specific limit on the number of Trust securities which may be
purchased, and is being undertaken in order to reduce debt and debt-like
obligations as required by the capital plan as discussed following in the
"Regulatory Compliance" and "Business Plan" sections. The continuing payment on
the Trust securities is dependent on the Company's continuing ability to make
payments on the subordinated debenture it issued to the Trust in connection with
the 1998 public offering. In the absence of prior written approval, the Savings
Bank is currently precluded from making dividend payments to the Company under
mutual agreement with the OTS. Consequently, no assurance can be made that the
Company will continue to make dividend payments on the Trust securities.
UmbrellaBank is a federally chartered savings institution. The Savings Bank
operates under the authority of the OTS, its deposits are insured by the FDIC,
and it is a member of the Federal Home Loan Bank ("FHLB") system. UmbrellaBank's
primary business is the solicitation of savings deposits from the general
public, and the purchase or origination of loans secured by one-to-four-family
residential and commercial real estate, together with investments in a portfolio
of mortgage mutual funds, mortgage backed securities, municipal bonds and other
agency securities. UmbrellaBank's retail banking operations have been conducted
from two traditional branch facilities, as well as through an Internet banking
channel operating under the name umbrellabank.com. Effective April 26, 2003 the
Savings Bank reduced the number of traditional branch facilities to one (1). At
June 30, 2003, umbrellabank.com deposits totaled $171.4 million and represented
99.2% of total Saving Bank deposits of $172.8 million.
Additionally, UmbrellaBank, with its deployment partner, operates a network of
approximately 1,500 automated teller machines ("ATMs") in 17 states. The Savings
Bank generates interest and fee income from a network of regionally deployed
ATMs. Deployment activities have been concentrated primarily in the Midwest and
Mid-Atlantic regions of the country, with limited expansion in the southeastern
United States and west of the Mississippi. Revenues are derived from interchange
and surcharge fees, together with income from related leasing and interest on
currency used in operations.
During 2003 and in conjunction with its business plan, the Savings Bank intends
to originate, purchase, and, where desired, sell fixed-rate and adjustable-rate
mortgage loans secured by one-to-four family residences. To a lesser extent, the
Savings Bank plans to originate home equity loans, other consumer loans
including consumer credit card facilities and overdraft protection lines of
credit through the umbrellabank.com Internet channel and, subject to regulatory
approval, real estate secured commercial loans.
The Savings Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loan and
security portfolios, and the interest paid on deposits and borrowed funds. The
Savings Bank's operating results are also affected by provisions for loan
losses, loan servicing fees, customer service charges and fees, fees from ATM
operations, gains (losses) on the sale of securities, loans and other assets and
other income. Operating expenses of the Savings Bank include employee
compensation and benefits, equipment and occupancy costs, outsourced servicing
expenses, federal deposit insurance premiums, professional fees and other
general and administrative expenses. The Savings Bank's results of operations
are further affected by economic and competitive conditions, particularly
changes in market interest rates. Results are also affected by monetary and
fiscal policies of federal agencies and actions of regulatory authorities.
During 2002 and continuing into 2003, the implementation of certain initiatives
under the business plan have had and are anticipated to continue to have a
significant effect on the total assets and lending, investing and retail
operations of the Savings Bank and the Company. During 2002, total assets of the
Savings Bank decreased $186.6 million from $521.8 million to $335.2 at December
31, 2001 and 2002, respectively. Consolidated assets of the Company decreased
$192.7 million from $536.6 million to $343.9 million at December 31, 2001 and
2002, respectively. During 2003, total assets of the Savings Bank decreased
$109.4 million from $335.2 million to $225.8 million at December 31, 2002 and
June 30, 2003, respectively. Consolidated assets of the Company decreased $112.2
million from $343.9 million to $231.7 million at December 31, 2002 and June 30,
2003, respectively.
17
REGULATORY COMPLIANCE
As previously set forth in Note B - Regulatory Compliance and Business Plan, and
disclosed in greater detail in the Company's 2002 Annual Report to Shareholders,
the Bancorp and the Savings Bank separately agreed to enforcement actions that
became effective on August 16, 2002 with the OTS.
The provisions of the enforcement action between the Bancorp and OTS
established, in principal part, that the Bancorp provide the OTS with a plan for
raising additional common equity capital and restructuring outstanding debt at
the Bancorp and provide the OTS with quarterly cash flow projections for the
purpose of identifying the Bancorp's sources and uses of funds for fiscal 2002,
fiscal 2003 and fiscal 2004. The Bancorp was placed under various operating
restrictions, including a requirement that the Bancorp file notice with the OTS
prior to adding or replacing a director or hiring a senior executive officer, as
well as being restricted in making "golden parachute" payments to any
institution-affiliated party unless authorized by regulation. The subject
enforcement action also provides that the Bancorp ensure that all transactions
with affiliates comply with applicable statutory and regulatory requirements and
that the Bancorp maintain documentation sufficient to evidence such compliance.
As discussed in Note H - Borrowings and Junior Subordinated Debt, the Bancorp
paid-off an aggregate of $6.3 million of notes payable to a third party at or
prior to March 31, 2003 and, as of June 30, 2003 remains in material compliance
with the provisions contained within the agreed upon action and continues to
maintain regular and open dialogue with representatives of the OTS to ensure
continued success.
The mutually established terms of the enforcement action between the Savings
Bank and the OTS provided, in principal part, for the development and
implementation of a plan addressing the level of the Savings Bank's fixed
assets, the adoption and implementation of a capital plan for the establishment
and maintenance of acceptable capital levels and the submission of a business
plan (discussed below). Additionally, in the absence of prior written approval
of the OTS, the Savings Bank enforcement action also prohibits any increase in
total assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the quarter, and prohibits the purchase
or origination of new loans other than single-family residential mortgage loans,
credit card loans and over draft lines of credit. The mutual agreement also
provides for the Savings Bank to take specific actions affecting its lending
activities, including regular reviews of its loan portfolio, classified assets
and allowances for loans and lease losses ("ALLL"). Operating restrictions on
growth, restrictions on capital distributions, contracts, "golden parachute"
payments and changes in senior executive positions, as well as the development
of and programs related to its internal audit function were also agreed upon.
The Board of Directors of the Savings Bank has already taken numerous actions to
alleviate many of the issues raised by the OTS and has formalized plans,
policies and procedures to address all of the issues raised by OTS and/or
contained in the agreed upon enforcement action. To date, the Savings Bank is in
full material compliance with the provisions of the agreed upon enforcement
action. Furthermore, selected provisions of the enforcement action have been
modified, with operational activities expanded by the OTS, at the express
request of the Savings Bank. On June 26, 2003, the Board of the Savings Bank met
with representatives of the OTS and FDIC to discuss the continued regulatory
progress made by the Savings Bank to date, and as a follow-up to a recent review
completed by the OTS and FDIC. During the meeting, regulatory officials and
representatives of the Savings Bank addressed the Savings Bank's continued
compliance with the agreed upon enforcement action, the continued improvement in
the overall operations of the Savings Bank, and the Savings Bank's future
business plans.
BUSINESS PLAN
On February 28, 2003, the Savings Bank withdrew its business plan previously
submitted to the OTS. Subsequently, on March 24, 2003, the Savings Bank
submitted to the OTS a revised business plan which replaced the Savings Bank's
previously filed business plan, capital plan and staffing plan. The revised
business plan details
18
the Savings Bank's overall operating strategies, in light of current economic
conditions, and the intent of the Board of Directors to reformulate and reduce
the Savings Bank's overall asset size by December 31, 2003, with reductions in
general and administrative expenses continuing as previously established. To
achieve the revised business plan objectives, the Savings Bank and the Company
will continue to evaluate their business strategies and identify additional
assets to be held for sale. Based on the Savings Bank's initial analysis, the
fair value of assets to be held for sale at this time exceeds the book value.
FINANCIAL CONDITION
Total assets decreased by $112.2 million to $231.7 million at June 30, 2003,
from $343.9 million at December 31, 2002. A reduction in ATM vault cash,
proceeds from the sale of securities available-for-sale, principal repayments on
loans receivable, and proceeds from loan sales were used to fund the $109.2
million decrease in deposits, consisting of $28.7 million related to the sales
of the Madison and Dolton branches of the Savings Bank, and a decline in other
deposit accounts, primarily attributable to the Savings Bank's effort not to
renew certificates of deposits ("CDs") yielding higher interest rates and a
targeted reduction in other interest-bearing transaction accounts, as the
Savings Bank executes its business plan as discussed previously.
Interest-earning deposits decreased $42.9 million during the six months ended
June 30, 2003 to $26.9 million primarily due to an $11.8 million decrease in ATM
cash and a $31.1 million decrease in other interest earning deposits.
Interest-earning deposits at June 30, 2003 includes $15.4 million of ATM cash,
on which the Savings Bank earns a return of 200 basis points over the overnight
FHLB rate, and $11.5 million of other interest earning deposits.
Securities available-for-sale decreased by $38.6 million to $67.0 million at
June 30, 2003 from $105.6 million at December 31, 2002, as the Savings Bank
utilized the proceeds of sales of such securities to fund deposit reductions
discussed below.
Loans held for sale decreased $2.9 million to $17.5 million at June 30, 2003
from $20.4 million at December 31, 2002. The decrease is primarily due to a bulk
sale of $2.1 million of one-to-four-family mortgage loans, pay-downs of
approximately $1.2 million related to commercial and commercial real estate
loans, and the final pay-off of the $647,000 of loans outstanding under the
terminated "purchase repurchase" loan program, offset by a $1 million increase
in recently originated one-to-four family mortgage loans. As of June 30, 2003,
loans held for sale consisted of the $1 million of recently originated
one-to-four family mortgage loans and $16.5 million of commercial and commercial
real estate loans which the Savings Bank has identified as held for sale as
described previously in the Business Plan section. Based on the bid prices
received, anticipated gains on these loan sales are not expected to be
significant to future operations.
Net loans receivable decreased by $23.6 million to $72.4 million at June 30,
2003, from $96.0 million at December 31, 2002. As funds were received from loan
repayments, they were utilized to fund the deposit reductions discussed below.
Premises and equipment held for sale decreased $330,000 to $5.1 million at June
30, 2003, from $5.4 million at December 31, 2002. During June 2002, the Savings
Bank classified its investment in an office building as held for sale and, as
such, it is being carried at the lower of cost or fair value. This building was
purchased in April 2001 as a branch location for the Savings Bank. As of June
30, 2003, the net book value of this office building was $4.7 million. On May
29, 2003 the Savings Bank entered into a contract for the sale of the office
building at a purchase price of $6 million. The contract is with a third party
who is, assuming all contingencies are satisfied, scheduled to close the
purchase transaction prior to September 30, 2003. After the closing date, the
Savings Bank and/or Company will lease a portion of the building. The June 30,
2003 balance of land, leasehold improvements, furniture, fixtures and equipment
held for sale relates to the further consolidation of the Company's corporate
locations. The Company currently anticipates that new tenants for its corporate
locations will also acquire the land,
19
leasehold improvements and furniture and fixtures at these locations.
Accordingly, the Company has recorded no impairment charges for these assets as
of June 30, 2003.
As of June 30, 2003 and December 31, 2002, the Savings Bank classified $343,000
and $835,000, respectively, of land, leasehold improvements, furniture, fixtures
and equipment located in its former two branch and corporate office locations as
held for sale. During the first and second quarters of 2003, the Savings Bank
sold approximately $200,000 of leasehold improvements and furniture, fixtures
and equipment related to the sale of its two branch locations as discussed more
fully below, and the consolidation of the Company's corporate locations as
discussed below. The sales occurred at net book value, which approximated fair
market value.
On March 31, 2003, the two principal shareholders of the Company entered into an
agreement with the Company and third party owner of one of the Company's
corporate locations to assume the obligation under a building lease for
corporate office space in Summit, Illinois. The transfer of the lease
obligations from the Savings Bank to the principal shareholders allowed the
Company to reverse the deferred gain and record additional paid-in capital in
the amount of $987,000 related to this corporate location as of March 31, 2003.
In conjunction with this lease assumption, the two principal shareholders
purchased approximately $200,000 of leasehold improvements at this corporate
location, which was funded by loans from the Savings Bank secured by common
stock of unrelated entities. Effective July 17, 2003, a first position mortgage
lien on residential property was substituted for the common stock collateral
securing these loans. The fair value of the leasehold improvements approximated
the net book value and the terms of the loans were consistent with the Savings
Bank's commercial secured loan terms to unaffiliated parties and in compliance
with all related regulatory requirements.
Premises and equipment decreased by $3.0 million to $10.5 million at June 30,
2003 from $13.5 million at December 31, 2002. During the first quarter 2003, the
Savings Bank entered into and closed on the sale of $1.1 million of automated
teller machines ("ATMs"), which were removed from the locations of a bankrupt
retailer. The ATMs were sold at net book value to the Saving Bank's ATM network
deployment partner. Net depreciation expense reflected in the statement of
operations is $980,000 for the six months ended June 30, 2003, which reflects
gross depreciation of $2.04 million less $1.06 million reimbursed to the Company
through its ATM partnership activities.
As of June 30, 2003 and December 31, 2002 deferred tax assets totaled $10.4
million and $9.7 million, respectively. Included in these balances are $18,000
and $95,000 related to securities available-for-sale at June 30, 2003 and
December 31, 2002, respectively. The remaining deferred tax asset primarily
consists of the tax effects of bad debt deductions, partnership interests,
Federal Home Loan Bank stock dividends, the remaining deferred gain on a prior
sale of a branch facility, and federal and state net operating loss
carry-forwards. During second quarter 2003, the Company discontinued recognizing
tax benefits by recording a valuation allowance of $1.1 million against deferred
tax assets. Realization of the remaining $10.4 million of deferred tax assets at
June 30, 2003 is dependent upon the Company realizing gains on possible sales of
certain assets such as the Savings Bank's Internet platform and technology, ATM
network and the Huron Street branch, as well as achievement of future taxable
income at the Savings Bank and other Company subsidiary businesses currently
being evaluated, including but not limited to, a real estate brokerage and
property management company. As of the date of filing this Form 10-Q, however,
the Company's Board of Directors had not committed to sell all these assets, nor
had it committed to acquiring additional subsidiaries such as the real estate
brokerage and property management company. Because of this uncertainty, no
deferred tax asset benefits were recorded in the second quarter. The Company
will continue its efforts to achieve its strategic objectives for restructuring
the business activities at the Savings Bank, while exploring capital raising
initiatives at the Company.
Prepaid expenses and other assets decreased by $1.5 million to $7.2 million at
June 30, 2003 from $8.7 million at December 31, 2002. This decrease was
primarily the result of the receipt in January 2003 of $800,000 related to the
settlement of certain investment transactions and a $700,000 decrease in various
accounts receivable as the Savings Bank received funds or settled disputed
amounts with vendors during the first six months of 2003.
20
Included in prepaid expenses and other assets at June 30, 2003 and December 31,
2002 is $2.7 million related to tax refunds due from the Internal Revenue
Service and Illinois Department of Revenue for previously filed tax returns and
amounts previously paid on prior tax returns that were claimed when the December
31, 2001 tax returns were filed and will be claimed when the December 31, 2002
tax returns are filed. Deposits decreased $109.2 million to $172.8 million at
June 30, 2003, from $282.0 million at December 31, 2002. As previously disclosed
in the Company's 2002 Annual Report to Shareholders and as discussed in the
previous Business Plan section, the Savings Bank has engaged in activities
designed to reduce the amount of its deposits in accordance with its business
plan, which included the sales of its Madison and Dolton branch offices in the
first half of 2003, with deposits of $8.5 million and $20.2 million,
respectively. Both branch sale contracts included the sale of leasehold
improvements and furniture, fixtures and equipment at the locations along with
the assumption of the building's lease obligations, and resulted in an aggregate
gain on sale of $1.5 million, including recognition of the deferred gains on the
branch buildings sold in a prior year. As described above, the decline in other
deposit accounts was primarily attributable to the Savings Bank's effort not to
renew CDs yielding higher interest rates and a targeted reduction in other
interest-bearing transaction accounts.
Borrowings decreased by $910,000 to $21.4 million at June 30, 2003, from $22.3
million at December 31, 2002. During the first half of 2003, the Bancorp
paid-off an aggregate of $6.25 million of notes payable to a third party with
the proceeds from cash contributions from the Company's principal shareholders
and the proceeds from the sale of an available-for-sale security. Additionally,
on February 28, 2003, the Savings Bank paid-off a $2.76 million FHLB Advance due
April 20, 2003. These reductions in borrowings were offset by short-term
borrowings on an FHLB open line at the Savings Bank totaling $8.1 million as of
June 30, 2003.
Other liabilities decreased $4.1 million to $1.5 million at June 30, 2003 from
$5.6 million at December 31, 2002. The decrease is primarily attributable to: 1)
the Savings Bank funding early its Community Reinvestment Act (CRA) investment
commitments to the Chicago Equity Fund and Community Investment Corporation of
$1.2 million and $216,000, respectively; 2) a $1.35 million decrease in deferred
gain on prior facility sales due to the assumption of the Madison and Dolton
branch leases by the respective purchasers and the assumption by the Company's
two principal shareholders of one of the Company's corporate leased locations;
3) a $160,000 decrease in real estate taxes payable due to the transactions
described in 2) above; and 4) a $1.4 million decrease in accounts payable
principally related to the $1.4 million included in accounts payable at December
31, 2002 related to remittances received on loans sold during December 2002
which were remitted to the purchaser of the loans in 2003. These decreases in
other liabilities were partially offset by an increase in other accrued expenses
of $230,000, primarily related to a contractual dispute with one of the Savings
Bank's third party vendors for which expenses have been accrued, but payment
withheld pending resolution of such disputes. The Savings Bank anticipates
settlement of these disputes during third quarter 2003 and a possible favorable
recovery of a portion of these disputed amounts.
Stockholders' equity increased $3.6 million to $11.8 million at June 30, 2003
from $8.2 million at December 31, 2002 primarily as a result of receipt by the
Company of cash totaling $6.8 million from insiders for the sale of 6,329.50
shares of Series A Preferred Stock ($6,329,500) and 122,134 shares of common
stock ($467,063)) related to the exercise of stock options; 2) the recording of
$987,000 in additional paid-in-capital related to the assumption of the
Company's lease obligation on one of its corporate locations by the Company's
two principal shareholders; and 3) the recording of $357,000 in additional
paid-in-capital related to the purchase of available-for-sale securities by the
Company's two principal shareholders at an amount which exceeded fair value.
These increases to stockholders' equity were partially offset by the recording
of a net loss of $4.7 million for the six months ended June 30, 2003.
For the period July 1, 2003 to August 14, 2003 the Company received from its two
principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred
Stock.
On July 14, 2003 the Company issued 300 shares of the Series B stock to a third
party in exchange for cash of $300,000.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds, through the Savings Bank, are deposits,
proceeds from principal and interest payments on the loan and securities
available-for-sale portfolios, custodial deposit accounts related to loans
serviced for others, borrowed money, FHLB advances, and loan and security sales.
The most liquid assets are cash and short-term investments. The levels of these
assets are dependent on operating, financing, and investing activities during
any given period. Cash and interest-earning deposits totaled $29.9 million at
June 30, 2003. The Company has adequate alternative funding sources if
short-term liquidity needs arise.
Legislation repealed the OTS minimum liquidity ratio requirements. OTS
regulations now require the Savings Bank to maintain sufficient liquidity to
ensure the Savings Bank's safe and sound operation.
Liquidity management for the Savings Bank is both a daily and long-term function
of the Savings Bank's senior management. Management meets regularly to monitor
interest rates, current and projected commitments to originate/purchase/sell
loans and the likelihood of funding such commitments, monitor deposit flows and
projected cash flows. Excess funds are generally invested in short-term
investments. Cash flow projections are updated regularly to assure necessary
liquidity.
At June 30, 2003, the Savings Bank's capital exceeded all capital requirements
of the OTS. The Savings Bank's Tier I capital to adjusted assets, Tier I capital
to risk-weighted assets, and risk-based capital ratios were 8.13%, 13.72%, and
17.24%, respectively. On March 31, 2003 the Bancorp paid-off a $4.3 million note
payable to a third party with the proceeds from cash contributions from the
Company's two principal shareholders. The note payable was secured by all the
common stock of the Savings Bank. During January and February the Company
paid-off a $2.0 million note payable with the proceeds from the sale of an
available-for-sale security and capital contributions from the Company's two
principal shareholders. On February 28, 2003, the Savings Bank paid-off a $2.8
million FHLB Advance due April 20, 2003. These reductions in borrowings were
offset by short-term borrowings during second quarter 2003 on an FHLB open line
at the Savings Bank totaling $8.1 million as of June 30, 2003.
On March 31, 2003, the Bancorp made a $1.5 million cash contribution to the
Savings Bank in order to increase the Savings Bank's capital ratios.
For the period January 1, 2003 to June 30, 2003, the Company received from three
of its principal shareholders, several directors and a shareholder cash totaling
$8,642,888 for 6,329.50 shares of Series A Preferred Stock ($6,329,500), 122,134
shares of common stock ($467,063) related to the exercise of stock options, and
$1,846,325 for available-for-sale securities at the higher of fair market value
or amortized cost.
For the period January 1, 2003 to June 30, 2003 the Company recorded additional
paid-in-capital of $987,000 related to the assumption of the Company's lease
obligation on one of its corporate locations by the Company's two principal
shareholders and $357,000 related to the purchase of available-for-sale
securities by the Company's two principal shareholders at an amount which
exceeded fair value.
For the period July 1, 2003 to August 14, 2003 the Company received from its two
principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred
Stock.
On July 14, 2003 the Company issued 300 shares of the Series B stock to a third
party in exchange for cash of $300,000.
At June 30, 2003, the Savings Bank had funding commitments totaling $12.5
million. These commitments include
22
$5.3 million for unused lines of credit, $427,000 for the unfunded portion of
construction loans, $1.8 million for commitments to originate loans and $5
million for commitments to purchase investment securities. Commitments to fund
loans and lines of credit have credit risk essentially the same as that involved
in extending loans to customers and are subject to the Savings Bank's normal
credit policies. Commitments to purchase investment securities are subject to
the Savings Bank's normal investment policies.
As of June 30, 2003, the Savings Bank also had an investment commitment of
$51,000 to be funded over two years for investment in the Kedzie Limited
Partnership, which is a CRA investment.
ASSET QUALITY
The Bancorp and the Savings Bank regularly review assets to determine proper
valuation. The ALLL is maintained at a level determined to be adequate by
management to absorb probable incurred credit losses. Determination of an
appropriate level of ALLL necessarily involves a high degree of judgment.
Primary considerations in this evaluation are prior loan loss experience, the
character and mix of the loan portfolio, adverse situations which may affect a
borrower's ability to repay, size of the loan portfolio, peer group information,
business and economic conditions and management's estimate of probable incurred
losses. While management uses all available information, including the
monitoring of the economic conditions in the geographic regions in which the
loan portfolio is located, future additions to the allowance may be necessary
based on estimates that are susceptible to significant revision as a result of
changes in economic conditions and other factors. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review UmbrellaBank's allowance for loan losses. Such agencies may
require UmbrellaBank to recognize additions to the allowance based on regulatory
judgment of information available to agency personnel at the time of their
examination.
The Company's consolidated ALLL at June 30, 2003 was $2.6 million as compared to
$4.1 million at December 31, 2002. The ALLL as a percentage of consolidated
nonperforming loans was 22.0% and 19.9% at June 30, 2003 and December 31, 2002,
respectively. The $1.5 million decline in the ALLL is primarily related to $1.4
million of charge-offs and specific reserves during 2003 associated with the
Savings Bank's single-family mortgage loan portfolio. Charge-offs occurred at
the time delinquent single-family mortgage loans were transferred to a
foreclosed real estate classification and specific reserves were established on
certain delinquent single-family mortgage loans anticipated for, or in the
process of, foreclosure proceedings. Of the $1.5 million decline, $1.3 million
consisted of charge-offs on loans in portfolio as a result of the Savings Bank's
termination of its "purchase/repurchase" loan program, as discussed further in
the Company's 2002 Annual Report to Shareholders.
At June 30, 2003, the Savings Bank had fifty (50) properties totaling $4.0
million classified as foreclosed real estate, as compared to fifty-two (52)
properties totaling $2.4 million at December 31, 2002. As of June 30, 2003, ten
(10) of the properties totaling $1.0 million were related to the Savings Bank's
purchase of a distressed loan portfolio during 2002. The portfolio was purchased
at a substantial discount with one portion of the exit strategy being converting
the properties to foreclosed real estate and realizing a return on the ultimate
sale. Based on this strategy, and in conjunction with the Savings Bank's
business plan to reduce all non-performing assets, it is likely that the Savings
Bank's investment in foreclosed real estate will increase or remain constant
over the next twelve (12) months, and is largely dependent on the success of its
sales strategies. The underlying properties at June 30, 2003 consisted primarily
of single-family residences and included one significant undeveloped land parcel
for which the Savings Bank has a contract for sale estimated to close prior to
September 30, 2003. The foreclosed real estate has been written down to
estimated fair value at June 30, 2003.
The Savings Bank's total amount of loans receivable ninety (90) days or more
past due at June 30, 2003, was $11.4 million or 12.42% of gross loans receivable
compared to $19.9 million or 16.65% of gross loans receivable at December 31,
2002. The $8.5 million decrease was due to the pay-off of certain commercial
loans previously delinquent, the transfer of loans to foreclosed real estate,
the establishment of specific reserves on delinquent one-to-four family
mortgages, and a general improvement in previously delinquent one-to-four family
mortgages.
23
Loans ninety (90) days or more past due are primarily secured by one-to-four
family residences and, for commercial loans, single and multi-family unit
residential property and commercial business assets. During 2003, management
anticipates the non-accrual loans will be sold or transferred to foreclosed real
estate for their ultimate disposition.
Total Savings Bank non-performing assets, including discounted loans receivable,
were $15.5 million or 6.7% of total assets compared to $22.3 million or 6.5% of
total assets at December 31, 2002.
Along with other financial institutions, management shares a concern for the
outlook of the economy during the remainder of 2003. A slow down in economic
activity beginning in 2002 severely impacted several major industries, as well
as the economy as a whole. Even though there are numerous indications of
emerging strength, it is not certain that this strength is sustainable. In
addition, consumer confidence may be negatively impacted by the recent
volatility in equity prices. These events could still adversely affect cash
flows for both commercial and individual borrowers, as a result of which, the
Savings Bank could experience increases in problem assets, delinquencies and
losses on loans.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2003 AND 2002.
GENERAL
Net loss for the three months ended June 30, 2003 was $2.5 million or ($1.34)
per diluted share as compared to net loss of $8.4 million or ($4.86) per diluted
share for the corresponding period in 2002. The $5.9 million decrease in net
loss is largely attributable to the $8.6 million provision for loan and lease
losses and the $2.5 million valuation allowance on the investment in limited
partnership related to the partnership's investment in PMSRs, which were
recorded during the three months ended June 30, 2002. The elimination of these
first quarter 2002 losses during 2003 was offset by a 130 basis point decrease
in the net interest spread to 0.65% for the three months ended June 30, 2003 as
compared to 1.95% for the same 2002 period. These changes are discussed in more
detail below. In addition, the Company did not record a tax benefit for the
three months ended June 30, 2003. Management's analysis of second quarter tax
benefits and its deferred tax asset are discussed in the preceding Financial
Condition section.
Net loss for the six months ended June 30, 2003 was $4.7 million or ($2.59) per
diluted share as compared to net loss of $8.9 million or ($5.21) per diluted
share for the corresponding period in 2002. The $4.2 million decrease in net
loss is largely attributable to the provision for loan and lease losses and the
investment in limited partnership valuation allowance recorded during the first
half of 2002, as discussed above. The elimination of these first quarter 2002
losses during 2003 was offset by an 88 basis point decrease in the net interest
spread to 0.91% as compared to 1.79% for the same 2002 period. These changes are
discussed in more detail below. In addition, the Company did not record a tax
benefit for the three months ended June 30, 2003. Management's analysis of
second quarter tax benefits and its deferred tax asset are discussed in the
preceding Financial Condition section.
The average outstanding shares increased by 120,900 shares for the three months
ended June 30, 2003 and 85,600 shares for the six months ended June 30, 2003, as
compared to shares for the same period last year. The increase in average shares
is primarily the result of 122,134 shares of common stock ($467,063) related to
the exercise of stock options during the first half of 2003, offset by 27,332
shares cancelled and treated as treasury stock shares during second quarter
2003, as a result of the Company terminating its Management Recognition Plan
("MRP").
INTEREST INCOME
Interest income for the three months ended June 30, 2003 totaled $2.3 million,
as compared to $7.3 million for the
24
comparable 2002 period. The $5 million decrease was partly the result of a 176
basis point decrease in the tax equivalent yield on earning assets to 4.78% from
6.54%. Earning asset yields have declined as a result of re-pricing Prime rate
based loans with each change in the Prime lending rate, which also impacts
yields on securities available-for-sale and interest earning deposits, as well
as a result of the Company's affirmative actions to reduce the amount of assets
of the Savings Bank and Bancorp. Average interest earning assets for second
quarter 2003 totaled $205.2 million, as compared to $459.3 million for the
comparable 2002 period, which is a $254.1 million decline. In addition, during
second quarter 2003, the Savings Bank charged-off approximately $315,000 of its
capitalized net deferred loan fee balance, which resulted in a corresponding
reduction in loan interest income. The average yield on earning assets was 4.81%
at the Savings Bank and (2.10%) at the Bancorp, with a consolidated Company
average yield of 4.78% for the three months ended June 30, 2003.
Interest income for the six months ended June 30, 2003 totaled $5.6 million, as
compared to $15.2 million for the comparable 2002 period. The $9.6 million
decrease was partly the result of a 158 basis point decrease in the tax
equivalent yield on earning assets to 4.86% from 6.44%. Earning asset yields
have declined as a result of changes in the Prime lending rate, as discussed
above, as well as a result of the Company's affirmative actions to reduce the
amount of assets of the Savings Bank and Bancorp. Average interest earning
assets for the first half of 2003 totaled $240.3 million as compared to $483.0
million for the comparable 2002 period, which is a $242.7 million decline. In
addition, during second quarter 2003, the Savings Bank charged-off approximately
$315,000 of its capitalized net deferred loan fee balance, which resulted in a
corresponding reduction in loan interest income. Last, the increase in
nonperforming assets as a percentage of total assets during the first half of
2003 as compared to the first half of 2002 also had a negative impact on
interest income. The average yield on earning assets was 4.84% at the Savings
Bank and 8.82% at the Bancorp, with a consolidated Company average yield of
4.86% for the six months ended June 30, 2003.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2003 totaled $2.3 million
as compared to $5.5 million for the comparable 2002 period. The $3.2 million
decrease was partly the result of a 45 basis point decline in the average cost
of interest-bearing liabilities to 4.13% for the three months ended June 30,
2003 as compared to 4.58% for the same period last year. In addition, consistent
with the Company's affirmative actions to reduce the amount of assets of the
Savings Bank and Bancorp, average interest-bearing liabilities for second
quarter 2003 totaled $223.9 million, as compared to $477.2 million for the
comparable 2002 period, which is a $253.3 million decline. The average cost of
interest bearing liabilities was 3.26% at the Savings Bank and 14.31% at the
Bancorp, with a consolidated Company average cost of 4.13% for the three months
ended June 30, 2003.
Interest expense for the six months ended June 30, 2003, totaled $5.1 million as
compared to $11.4 million for the comparable 2002 period. The $6.3 million
decrease was partly the result of a 70 basis point decline in the average cost
of interest-bearing liabilities to 3.95% for the six months ended June 30, 2003
as compared to 4.65% for the same period last year. In addition, consistent with
the Company's affirmative actions to reduce the amount of assets of the Savings
Bank and Bancorp, average interest-bearing liabilities for the first half of
2003 totaled $257.0, as compared to $491.9 million for the comparable 2002
period, which is a $234.9 million decline. The average cost of interest-bearing
liabilities was 3.25% at the Savings Bank and 12.65% at the Bancorp, with a
consolidated Company average cost of 3.95% for the six months ended June 30,
2003.
Interest-bearing liabilities include $17.2 million of 11.0% junior subordinated
debt, which the Bancorp issued in November, 1998. Interest-bearing liabilities
also include $3.0 million of subordinated debentures issued by the Savings Bank
in November 2001 with an annualized cost of 5.57% for the six months ended June
30, 2003.
NET INTEREST INCOME (LOSS)
Net interest income (loss) for the three months ended June 30, 2003 totaled
$(3,000) as compared to $1.8 million
25
for the comparable 2002 period. The $1.8 million decrease was due to a decrease
in average balances during 2003 as compared to 2002, as discussed above, and a
130 basis point decrease in the net interest spread to 0.65% for the three
months ended June 30, 2003 as compared to 1.95% for the same 2002 period. In
addition, during second quarter 2003, the Savings Bank charged-off approximately
$315,000 of its capitalized net deferred loan fee balance, which resulted in a
corresponding reduction in loan interest income. The net interest spread was
1.55% at the Savings Bank and (16.40%) at the Bancorp, with a consolidated
Company net interest spread of 0.65% for the three months ended June 30, 2003.
Net interest income (loss) for the six months ended June 30, 2003 totaled
$500,000 as compared to $3.7 million for the comparable 2002 period. The $3.2
million decrease was due to a decrease in average balances during 2003 as
compared to 2002, as discussed above, and a 88 basis point decrease in the net
interest spread to 0.91% as compared to 1.79% for the same 2002 period. The net
interest spread has decreased as earning asset yields have declined with each
change in the Prime lending rate, as well as the Company's affirmative actions
to reduce its total assets, as discussed in more detail above. In addition, the
increase in nonperforming assets as a percentage of total assets during the
first half of 2003 as compared to the first half of 2002 had a negative impact
on net interest spread. During second quarter 2003, the Savings Bank also
charged-off approximately $315,000 of its capitalized net deferred loan fee
balance, which resulted in a corresponding reduction in loan interest income.
The net interest spread was 1.58% at the Savings Bank and (3.83)% at the
Bancorp, with a consolidated Company net interest spread of 0.91% for the six
months ended June 30, 2003.
PROVISION FOR LOAN AND LEASE LOSSES
The Company did not record a provision for loan and lease losses during the
three and six months ended June 30, 2003 as compared to $8.6 million in each of
the comparable periods in 2002. As discussed in the Company's 2002 Annual Report
to Shareholders, subsequent to March 31, 2002 the Company recorded a provision
for loan and lease losses of $9.8 million and net charge-offs of $8.6 million
during 2002. As disclosed previously in the Asset Quality section, the Company's
ALLL at June 30, 2003 was $2.6 million or 22.0% of nonperforming loans. Based on
the level of ALLL as compared to nonperforming loans, the Company did not deem
any provision for loan and lease losses necessary during the first two quarters
of 2003.
NON-INTEREST INCOME
Total non-interest income (expense) increased $3.9 million to $1.3 million of
income for the three months ended June 30, 2003, as compared to a loss of $2.6
million for the three months ended June 30, 2002. The increase was primarily the
result of: 1) recording a $2.5 million valuation allowance during the second
quarter of 2002, as opposed to a $300,000 valuation allowance during the second
quarter of 2003, taken against the Company's interest in the limited partnership
and resulting from the declines in interest rates during these periods and the
adverse effect of increased loan prepayment speeds on the value of PMSRs; 2)
recording a $1.04 million gain on sale of the Dolton branch operations during
second quarter 2003; and 3) a $520,000 decline in trading account profits during
second quarter 2003, as compared to the same period in 2002, due to the
elimination of trading account activities.
Total non-interest income (expense) increased $3.9 million to $1.2 million of
income for the six months ended June 30, 2003, as compared to a loss of $2.7
million for the six months ended June 30, 2002. The increase was primarily the
result of: 1) recording a $2.5 million valuation allowance during the first half
of 2002, as opposed to a $300,000 valuation allowance during the first half of
2003, taken against the Company's interest in the limited partnership, as
discussed above; 2) recording $1.45 million of gains on sales of the Madison and
Dolton branch operations; 3) recording a $225,000 gain on sale of an investment
by the Savings Bank subsidiary; 4) a $342,000 decrease in loss on the sale of
available-for-sale securities during the first half of 2003, as compared to the
same period in 2002; and 6) a $202,000 increase in gains on loans held for sale
during the first half of 2003, as compared to the same period in 2002. These
changes were offset by a $67,000 decrease in loan servicing income
26
due to the Company's reduction in loans receivable, a $159,000 increase in loss
on the sale of foreclosed real estate, and a $153,000 decrease in other fees and
service charges due to the Company's reduction in loans and deposits, all
occurring during the first half of 2003, as compared to the first half of 2002.
NON-INTEREST EXPENSE
Non-interest expense decreased by $568,000 to $3.8 million or 6.10% of average
assets for the three months ended June 30, 2003 from $4.3 million or 3.35% of
average assets for the same period last year. The decrease in operating expenses
was primarily the result of targeted expense reductions commensurate with the
Savings Bank's business plan, as discussed in the Business Plan section above,
including sale of the Savings Bank's Madison and Dolton branch locations,
consolidation of the Company corporate offices, and other resulting reductions
associated with the Company's $225.4 million reduction in total assets to $231.7
million as of June 30, 2003, as compared to $457.1 million as of June 30, 2002.
Consistent with the Savings Bank's business plan, throughout the remainder of
2003, the Company will continue to focus on targeted reductions in general and
administrative expenses, with focus on, but not limited to, reductions in
general insurance premiums, federal deposit insurance premiums, data processing
fees, legal fees resulting from the agreed upon enforcement actions discussed in
the preceding Regulatory Compliance section, and other professional fees. In
addition, second quarter non-interest expense included approximately $365,000 of
expense associated with a one-time write-off of capitalized conversion costs,
which resulted from removal of ATMs from the locations of a bankrupt retailer.
These ATMs are currently maintained in a secure storage facility and the Savings
Bank, along with its ATM network deployment partner, is in the process of
redeploying these ATMs to other locations. Second quarter non-interest expense
also included approximately $90,000 of expense associated with an Internet
banking software platform conversion at the Savings Bank during June 2003.
Non-interest expense decreased by $390,000 to $7.2 million or 5.08% of average
assets for the six months ended June 30, 2003 from $7.6 million or 2.88% of
average assets for the same period last year. The decrease in operating expenses
was primarily the result of targeted expense reductions commensurate with the
Savings Bank's business plan, offset by second quarter one-time expenses
associated with the Savings Bank's ATM network and Internet banking software
platform, as discussed immediately above.
INCOME TAX EXPENSE
The Company did not record a tax benefit for the three months ended June 30,
2003, as compared to a tax benefit of $5.3 million for the same period last
year. During second quarter 2003, the Company discontinued recognizing tax
benefits. Management's analysis of second quarter tax benefits and its deferred
tax asset are discussed in the preceding Financial Condition section.
The Company recorded a tax benefit of $797,000 for the six months ended June 30,
2003, as compared to a tax benefit of $6.2 million for the same period last
year. The 2003 benefit is based on a tax rate of approximately 39% calculated on
the pre-tax loss of $3 million for the three months ended March 31, 2003, plus
tax benefits derived from tax-exempt municipal securities and tax-exempt charter
school loans, plus utilization of affordable housing tax credits. In addition,
the Company's tax benefit, as well as its deferred tax asset, was reduced by
approximately $520,000 related to the lease assumption and purchase of
available-for-sale security transactions between the Company and its two
principal shareholders as previously discussed. During second quarter 2003, the
Company discontinued recognizing tax benefits. Management's analysis of second
quarter tax benefits and its deferred tax asset are discussed in the preceding
Financial Condition section.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", and Statement 150,
27
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities", both of which generally become effective in the
quarter beginning July 1, 2003. The Company is evaluating the impact of these
new accounting standards on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Investment Committee, which includes members of
senior management and directors, monitors and determines the strategy of
managing the rate and sensitivity repricing characteristics of the individual
asset and liability portfolios the Savings Bank maintains. The overall goal is
to manage this interest rate risk to most efficiently utilize the Savings Bank's
capital, as well as to maintain an acceptable level of change to its net
portfolio value ("NPV") and net interest income. The Savings Bank's strategy is
to minimize the impact of sudden and sustained changes in interest rates on NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank's change in NPV in the event of hypothetical
changes in interest rates, as well as interest rate sensitivity gap analysis,
which monitors the repricing characteristics of the Savings Bank's
interest-earning assets and interest-bearing liabilities. The Board of Directors
has established limits to changes in NPV and net interest income across a range
of hypothetical interest rate changes. If estimated changes to NPV and net
interest income are not within these limits, the Board may direct management to
adjust its asset/liability mix to bring its interest rate risk within
established limits.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans. The Savings Bank, from time to
time, also invests in long-term, fixed-rate mortgages provided it is compensated
with an acceptable spread. None of these strategies are prohibited or otherwise
restricted by the Savings Bank agreed upon enforcement action discussed
previously.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain
off-balance-sheet items, in the event of a series of sudden and sustained
changes in interest rates ranging from 100 to 300 basis points. Management
assumes that a 200 basis point movement up or down is considered reasonable and
plausible for purposes of managing its interest-rate risk on a day-to-day basis.
NPV is the market value of portfolio equity and is computed as the difference
between the market value of assets and the market value of liabilities, adjusted
for the value of off-balance-sheet items. The following table presents the
Saving Bank's projected change in NPV for the various rate shocks as of March
31, 2003 which is the most recent available.
Estimated Increase
(Decrease) in NPV
Change in Estimated -------------------
Interest Rate NPV Amount Percent
------------- --------- -------- -------
(Dollars in thousands)
300 basis point rise $ 33,186 $ 1,951 6%
200 basis point rise 32,697 1,462 5
100 basis point rise 31,865 630 2
Base scenario 31,235 - -
100 basis point decline 30,544 (691) (2)
Due to the level of interest rates at March 31, 2003, the Company is not able to
model an additional 200 or 300 basis point decrease in rates.
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The NPV is calculated by the Savings Bank using guidelines established by the
OTS related to interest rates, loan prepayment rates, deposit decay rates, and
market values of certain assets under the various interest rate scenarios. These
assumptions should not be relied upon as indicative of actual results due to the
inherent shortcomings of the NPV analysis. These shortcomings include: (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV; (ii) certain assets, including adjustable-rate loans,
have features which affect the potential repricing of such instruments, which
may vary from the assumptions used; and (iii) the likelihood that as interest
rates are changing, the Investment Committee would likely be changing strategies
to limit the indicated changes in NPV as part of its management process. In
addition, as the Company executes its business plan to reduce assets and
liabilities and restructure its balance sheet, the Company could experience
significant changes in NPV at various points in time during 2003 and the
Investment Committee would likely be changing strategies to address these
changes.
The Savings Bank does not use derivative instruments to control interest rate
risk. In addition, interest rate risk is the most significant market risk
affecting the Savings Bank. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of the
Company's business activities and operations.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Principal Accounting and Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14.
Based upon that evaluation, the Company's Chief Executive Officer along with the
Company's Principal Accounting and Financial Officer have concluded that the
Company's disclosure controls and procedures are effective for timely alerting
of material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors, which could have a significant adverse effect on these controls
subsequent to the date the Company carried out its evaluation.
Management's responsibility related to establishing and maintaining effective
disclosure controls and procedures includes maintaining effective internal
controls over financial reporting that are designed to produce reliable
financial statements in accordance with accounting policies generally accepted
in the United States of America and produce reports submitted under the Exchange
Act which are in accordance with the SEC's rules and forms. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bancorp and the Savings Bank are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
On June 26, 2003, the Board of Directors of the Bancorp authorized the issuance
of up to 10,000 shares of Series B 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series B Stock"). The Series B Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series B Stock on
the dates specified below shall be entitled to receive, as and when declared by
the Board of Directors and out of assets of the Bancorp which are by law
available for payment of dividends, cumulative preferential cash dividends, at
the rate of $80.00 per share per annum, payable quarterly on the first day of
July, October, January and April in each year. Dividends on the Series B Stock
shall be cumulative, whether or not in any dividend period or periods after
March 31, 2003 there shall be surplus or net profits of the Company legally
available for the payment of such dividends. Dividends on the Series B Stock
shall be junior and subordinate to the payment of the Bancorp's obligations for
dividends or payments under the Company's 11% Junior Subordinate Deferrable
Interest Debentures but pari pasu with the payment of dividends under the
Company's Series A 8.0% Perpetual Convertible Preferred Stock. After March 31,
2004, the Bancorp, at the option of the Board of Directors, may at any time or
from time to time redeem the whole or any part of the Series B Stock by paying
therefore in cash $1,000 per share plus an amount equal to all dividends thereon
declared but unpaid on the date fixed for redemption (the "Redemption Price").
After July 31, 2005, the holder of the Series B Stock may elect to require that
the Company repurchase the whole or any part of the Series B Stock by paying
therefore in cash $1,000 per share plus an amount equal to all dividends thereon
declared but unpaid on the date which tender of shares is to be made (the
"Repurchase Price"). Until March 31, 2008, each holder of Series B Stock may at
any time upon surrender of the certificates therefore, convert any or all of
such holder's Series B Stock into fully paid and nonassessable shares of Common
Stock of the Bancorp, at the rate of 166 shares of Common Stock for each share
of Series B Stock so surrendered for conversion.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held May 28, 2003, with the following
resolutions ratified and approved in all respects:
I. Election of Directors: The election of Arthur E. Byrnes for a three (3) year term
For: 1,577,584 Votes Withheld: 62,498 Votes
Election of Directors: The election of Frances M. Pitts for a three (3) year term
For: 1,598,098 Votes Withheld: 41,984 Votes
In addition, the following directors continue in office:
John G. Yedinak, Chairman, President and Chief Executive Officer of the
Company, Vice Chairman and Chief Executive Officer of the Savings Bank
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Sergio Martinucci, Vice President of the Company and Chairman of the
Savings Bank, Senior Vice President of Coldwell Banker Residential
Donald G. Wittmer, President and owner of Wittmer Financial Services, Ltd.
Dennis G. Carroll, Chief Executive Officer and owner of Carroll Brothers
Real Estate Appraisals, Detective Chicago Police Department
II. Ratification of Appointment of Crowe, Chizek and Company LLC as Independent
Auditors:
For: 1,635,578 Votes Against: 4,500 Votes
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Amended Certificate of Incorporation of Umbrella Bancorp,
Inc.*
3.2 By-Laws of Umbrella Bancorp, Inc.*
4.0 Stock Certificate of Umbrella Bancorp, Inc.*
11.0 Statement Regarding Computation of Earnings Per Share (See
Note J)
31.0 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.0 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
B. Reports of Form 8-K
Not applicable
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
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SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UMBRELLA BANCORP, INC.
Date: August 14, 2003 /s/ John G. Yedinak
------------------ --------------------------------------
John G. Yedinak, Chairman, President
and Chief Executive Officer
Date: August 14, 2003 /s/ Colleen A. Kitch
------------------ --------------------------------------
Colleen A. Kitch Principal Accounting
and Financial Officer
32