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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 SEPTEMBER 30, 2002
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
----- -----
The Registrant had 1,695,986 shares outstanding as of November 7, 2002.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
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UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2002
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2002 and December 31, 2001 (unaudited)....... 4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001 (unaudited)............. 5
Consolidated Statements of Comprehensive Income for the Three
and Nine Months Ended September 30, 2002 and 2001 (unaudited).... 6
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended September 30, 2002 and 2001 (unaudited) ............ 7
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 (unaudited) ................... 8
Notes to Consolidated Financial Statements ...................... 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk....... 30
Item 4 Controls and Procedures.......................................... 31
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings .............................................. 32
Item 2 Changes in Securities .......................................... 32
Item 3 Default Upon Senior Securities ................................. 32
Item 4 Submission of Matters to a Vote of Security Holders ............ 32
Item 5 Other Information .............................................. 32
Item 6 Exhibits and Reports on Form 8-K ............................... 32
Form 10-Q Signature Page ................................................. 34
2
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2002
INDEX (CONTINUED)
Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.................................................... 35
Exhibit 99.1 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.....................................
Exhibit 99.2 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.....................................
3
PART 1 - FINANCIAL INFORMATION
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in Thousands)
September 30, December 31,
ASSETS 2002 2001
------------- ------------
Cash $ 4,401 $ 647
Interest-earning deposits 52,998 37,002
--------- ---------
Total Cash & Cash Equivalents 57,399 37,649
Trading account securities -- 6,053
Securities available-for-sale 75,603 123,118
Securities held-to-maturity -- 1,859
Loans held for sale 125,969 65,056
Loans receivable, net 85,997 250,353
Mortgage loan servicing rights, net 113 337
Investment in limited partnership 1,212 3,743
Stock in Federal Home Loan Bank of Chicago 2,911 2,800
Foreclosed real estate, net 3,051 730
Premises and equipment, net 14,853 20,609
Premises and equipment held for sale 4,856 --
Debt issuance costs, net 1,776 1,831
Accrued interest receivable 2,532 5,272
Receivable from loan servicers 4,417 4,479
Prepaid expenses and other assets 16,698 12,746
--------- ---------
Total Assets $ 397,387 $ 536,635
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 333,948 $ 458,147
Borrowed money 23,071 28,343
Custodial escrow balances for loans serviced by others 10,136 9,499
Accrued interest payable 1,358 1,707
Other liabilities 3,363 4,759
Junior subordinated debt 16,962 16,603
Stockholders' Equity
Preferred stock 3 3
Preferred stock, Series A 900 --
Common stock 21 21
Additional paid-in-capital 9,190 9,214
Retained earnings - substantially restricted 4,016 15,181
Treasury stock - common, at cost (5,261) (5,121)
Employee Stock Ownership Plan loan -- (341)
Unearned stock awards (248) (248)
Accumulated other comprehensive loss (72) (1,132)
--------- ---------
Total Stockholders' Equity 8,549 17,577
--------- ---------
Total Liabilities and Stockholders' Equity $ 397,387 $ 536,635
========= =========
See notes to accompanying unaudited consolidated financial statements.
4
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited)
Interest income:
Loans receivable $ 4,197 $ 6,281 $ 14,108 $ 18,778
Securities available-for-sale 903 2,070 3,342 3,743
Securities held-to-maturity -- 189 61 1,036
Interest-earning deposits 1,527 1,325 4,287 4,738
-------- -------- -------- --------
Total interest income 6,627 9,865 21,798 28,295
-------- -------- -------- --------
Interest expense:
Deposits 4,630 6,524 13,945 19,969
Borrowed money 560 412 1,714 1,179
Junior subordinated debt 482 537 1,448 1,423
-------- -------- -------- --------
Total interest expense 5,672 7,473 17,107 22,571
-------- -------- -------- --------
Net interest income 955 2,392 4,691 5,724
Provision for loan and lease losses 1,714 37 10,308 143
-------- -------- -------- --------
Net interest income (expense) after provision
for loan and lease losses (759) 2,355 (5,617) 5,581
-------- -------- -------- --------
Non-interest income:
Loan servicing income (26) 77 114 290
Mortgage banking -- -- -- 6
Gain (loss) on sale of loans receivable, securities
available for sale, trading account securities and
foreclosed real estate 327 1,288 (513) 2,386
Fees and service charges 377 113 756 1,063
Net loss on investment in limited partnership -- (1,100) (2,463) (1,100)
Other income 15 126 77 301
-------- -------- -------- --------
Total non-interest income (expense) 693 504 (2,029) 2,946
Non-interest expense:
Compensation and benefits 1,030 1,042 3,005 2,645
Occupancy and equipment 480 575 1,526 1,817
Federal deposit insurance premium 111 14 147 54
Other general and administrative fees 1,865 1,903 6,385 4,359
-------- -------- -------- --------
Total non-interest expense 3,486 3,534 11,063 8,875
-------- -------- -------- --------
Loss before income taxes (3,552) (675) (18,709) (348)
Income tax benefit 1,587 374 7,808 634
-------- -------- -------- --------
Net income (loss) $ (1,965) $ (301) $(10,901) $ 286
======== ======== ======== ========
Per Share Amounts:
Basic $ (1.14) $ (0.18) $ (6.34) $ 0.16
Diluted $ (1.14) $ (0.18) $ (6.34) $ 0.15
See notes to accompanying consolidated unaudited financial statements.
5
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited)
Net income (loss) $ (1,965) $ (301) $(10,901) $ 286
Other comprehensive income
Unrealized holding gains on securities available-for-sale 699 2,017 1,183 2,623
Less reclassification adjustment for gains (losses) recognized in income 219 1,146 (527) 1,457
-------- -------- -------- --------
Net unrealized gains 480 871 1,710 1,166
Tax expense (183) (331) (650) (443)
-------- -------- -------- --------
Other comprehensive income 297 540 1,060 723
-------- -------- -------- --------
Comprehensive income (loss) $ (1,668) $ 239 $ (9,841) $ 1,009
======== ======== ======== ========
See notes to accompanying consolidated unaudited financial statements.
6
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated
Preferred Additional Treasury Unearned Other Total
Preferred Stock Common Paid-In Retained Stock ESOP Stock Comprehensive Stockholders
Stock Series A Stock Capital Earnings Common Loan Awards Loss Equity
--------- --------- ------ ---------- -------- -------- ----- -------- ------------- ------------
Nine months ended
September 30, 2001
- ------------------
Balance at
December 31, 2000 $ 3 $ -- $ 20 $ 8,893 $ 16,189 $ -- $(405) $ (248) $ (678) $ 23,774
Net income -- -- -- -- 286 -- -- -- -- 286
Other comprehensive
loss, net of tax -- -- -- -- -- -- -- -- 723 723
Treasury stock
purchase -- -- -- -- -- (5,121) -- -- -- (5,121)
ESOP loan principal
reduction -- -- -- -- -- -- 49 -- -- 49
Amortization of
purchase price
of MRP stock -- -- -- -- -- -- -- 3 -- 3
Stock options
exercised -- -- -- 166 -- -- -- -- -- 166
Cash dividends -- -- -- -- (302) -- -- -- -- (302)
-------- --------- ------ -------- -------- -------- ----- -------- -------- --------
Balance at
September 30, 2001 $ 3 $ -- $ 20 $ 9,059 $ 16,173 $ (5,121) $(356) $ (245) $ 45 $ 19,578
======== ========= ====== ======== ======== ======== ===== ======== ======== ========
Nine months ended
September 30, 2002
- ------------------
Balance at
December 31, 2001 $ 3 $ -- $ 21 $ 9,214 $ 15,181 $ (5,121) $(341) $ (248) $ (1,132) $ 17,577
Net loss -- -- -- -- (10,901) -- -- -- -- (10,901)
Other comprehensive
income, net
of tax -- -- -- -- -- -- -- -- 1,060 1,060
ESOP termination -- -- -- (142) -- (140) 282 -- -- --
ESOP loan principal
reduction -- -- -- -- -- -- 59 -- -- 59
Stock options
exercised -- -- -- 118 -- -- -- -- -- 118
Cash dividends -- -- -- -- (264) -- -- -- -- (264)
Issuance of
preferred stock
Series A -- 900 -- -- -- -- -- -- -- 900
-------- --------- ------ -------- -------- -------- ----- -------- -------- --------
Balance at
September 30, 2002 $ 3 $ 900 $ 21 $ 9,190 $ 4,016 $ (5,261) $ -- $ (248) $ (72) $ 8,549
======== ========= ====== ======== ======== ======== ===== ======== ======== ========
See notes to accompanying consolidated unaudited financial statements.
7
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
September 30,
2002 2001
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (10,901) $ 286
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,636 1,859
Accretion of discounts and deferred loan fees 7 (98)
Provision for loan and lease losses 10,308 143
(Gain) loss on sale of:
Securities available-for-sale 527 (1,457)
Trading account securities (33) (552)
Loans receivable 115 --
Branch facilities (96) --
Foreclosed real estate -- 25
Net change in trading account activity 5,208 (1,299)
Net change in investment in limited partnership 2,531 644
Loans originated and purchased for sale, net 47,115 2,464
FHLB Stock dividend (111) (52)
Decrease in purchased mortgage servicing rights 224 60
Amortization of debt issuance costs 55 48
Amortization of purchase price of MRP and ESOP stock 59 52
Decrease in accrued interest receivable, prepaid expenses and other assets (1,862) (1,919)
Increase in accrued interest payable and other liabilities (1,649) (1,555)
--------- ---------
Net cash provided by (used in) operating activities 54,133 (1,351)
Cash flows from investing activities:
Loans originated and purchased for portfolio (49,165) (512,959)
Principal repayments on:
Loans receivable 91,569 494,999
Securities available-for-sale 7,166 81
Securities held-to-maturity 292 --
Proceeds from sale, maturity, or call of:
Foreclosed real estate 1,235 2,183
Securities held-to-maturity 1,567 21,794
Securities available-for-sale 125,381 23,409
Investment in GFS preferred stock -- 4,000
Purchase of:
Securities available-for-sale (82,971) (147,402)
Premises and equipment (1,736) (13,148)
--------- ---------
Net cash provided by (used in) investing activities 93,338 (127,043)
Cash flows from financing activities:
Net increase (decrease) in deposits (124,199) 90,807
Proceeds from borrowed funds 295,746 38,208
Repayment of borrowed funds (301,018) (3,272)
Purchase of treasury stock -- (5,121)
Proceeds from issuance of preferred stock, Series A 900
Reissuance of junior subordinated debentures 1,220 --
Repurchase of junior subordinated debentures (861) --
Dividends paid (264) (302)
Proceeds from exercise of stock options 118 166
Net increase in custodial escrow balances for loans serviced 637 748
--------- ---------
Net cash provided by (used in) financing activities (127,721) 121,234
--------- ---------
Net increase (decrease) in cash and cash equivalents 19,750 (7,160)
Cash and cash equivalents at beginning of period 37,649 94,017
--------- ---------
Cash and cash equivalents at end of period $ 57,399 $ 86,857
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 17,456 $ 22,934
Income taxes (491) 1,100
Non-cash investing activity - transfer of loans to foreclosed real estate 3,556 1,063
Non-cash investing activity - ending receivable from loan servicers 4,417 4,263
Non-cash investing activity - transfer of premises and equipment held for sale 4,856 --
Non-cash investing activity - transfer of trading securities to available for sale 878 --
Non-cash financing activity - transfer of unallocated ESOP shares to treasury stock 282 --
See accompanying notes to unaudited consolidated financial statements.
8
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
NOTES TO 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 nine months ended September 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
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, (the "Savings Bank"), Argo Redemption Corp., Inc. ("Argo
Redemption" or "ARC"), and the Savings Bank's wholly owned subsidiary,
Dolton-Riverdale Savings Service Corporation (Dolton-Riverdale).
The Bancorp, through its subsidiaries, provides a full range of financial
services through its Internet banking delivery channel at
http://www.umbrellabank.com and two retail banking facilities in Cook County,
Illinois.
As discussed more fully in the Accounting Developments section of the Management
Discussion and Analysis ("MDE&A") the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 145 "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" and SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities",
effective September 30, 2002 and July 1, 2002, respectively.
NOTE B - PREMISES AND EQUIPMENT HELD FOR SALE
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 September 30, 2002, the net book value of this
office building was $4.6 million. During the nine month period ended September
30, 2002, occupancy and equipment expense was reduced by approximately $477,000
related to rental income from the building and included approximately $191,000
of expenses from the building. In addition, as of September 30, 2002, the
Savings Bank classified $300,000 of leasehold improvements and furniture
fixtures and equipment located in its two branch locations and corporate office
as held for sale. As described further in Note K - Business Plan, the Savings
Bank is pursuing the sale of its branch deposits and operations and is exploring
the consolidation of its corporate locations which would result in the sale of
certain leasehold improvements and furniture fixtures and equipment at these
locations. The Company currently leases the facilities it utilizes for its
branch and corporate locations from third parties. Management anticipates that
the acquirer of its branch deposits and operations and the new tenants for its
corporate locations would also acquire the leasehold improvements and furniture
and fixtures at these locations. Management also anticipates that the third
party owners of these facilities will allow the Company to assign its lease
obligations to these parties.
NOTE C - LOANS HELD FOR SALE
As of September 30, 2002 loans held for sale consisted of loans under the
purchase repurchase program and loans held for sale-other as described further
following. Loans held for sale-purchase repurchase as of September 30, 2002 and
December 31, 2001 were $17.8 million and $65.1 million, respectively. During the
third quarter, the Company decided to cease its lending activity under the
purchase repurchase program as a result of regulatory dissatisfaction with, and
criticisms of, the program and considering the profitability of the program, as
described
9
further in Note K - Business Plan. Subsequent to September 30, 2002 the loans
held for sale under the purchase repurchase program have declined to $3.1
million and it is anticipated that by December 31, 2002 the termination of the
purchase repurchase loan program will be complete. Based on the bid prices
received and anticipated the actual and anticipated gains on these sales is not
expected to be significant to future operations.
Loans held for sale-other, which totaled $108.1 million as of September 30,
2002, consists of both single family mortgage loans and commercial loans which
the Company has identified as held for sale in conjunction with the Company's
Business Plan as described further in Note - K Business Plan. As of September
30, 2002 and through November 14, 2002, the Savings Bank had entered into firm
commitments to sell $42.5 million of the $108.1 million of the loans held for
sale-other. Based on the bid prices received and anticipated the actual and
anticipated gains on these sales is not expected to be significant to future
operations. As of September 30, 2002 loans held for sale-other were transferred
from the loans receivable portfolio and were recorded at the lower of cost or
fair value with no resulting loss on transfer.
NOTE D - ALLOWANCE FOR LOAN AND LEASE LOSSES
During the three and nine month periods ended September 30, 2002, the Company
recorded provisions for loan and lease losses of approximately $1.7 million and
$10.3 million as compared to $37,000 and $143,000 during the three and nine
months periods ended September 30, 2001. As of September 30, 2002 and December
31, 2001, the allowance for loan and lease losses ("ALLL") recorded in the
consolidated statement of condition was $5.0 million and $3.0 million,
respectively. An analysis of the ALLL for the nine month period ended September
30, 2002 is as follows:
Savings
Bank Bancorp Total
--------------------------------------------
ALLL as of December 31, 2001 $ 2,484,000 $ 500,000 $ 2,984,000
Provisions 8,494,000 1,814,000 10,308,000
Charge-offs (6,507,000) (1,814,000) (8,321,000)
------------ ------------ ------------
ALLL as of September 30, 2002 $ 4,471,000 $ 500,000 $ 4,971,000
============ ============ ============
ALLL as a percentage of Gross Loans (including loans held for sale and
discounted loans):
December 31, 2001 .79% 15.73% .95%
September 30, 2002 2.07% 94.58% 2.29%
The significant provisions recorded during the second and third quarters 2002
can be attributable to several internal and external factors, as described
below:
During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Although management continues to investigate the
existence of such supporting documentation, including contacting lead banks on
participation loans and contacting borrowers directly, management downgraded any
loans where documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current
10
payment status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.
In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it is anticipated
that they will likely declare bankruptcy. Although some of these loans had been
previously classified, management downgraded these loans in the second quarter
of 2002 due to the actual and likely bankruptcy filings and recorded a provision
related to these loans totaling $1.9 million, of which $1.6 million was
subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance
of $1.6 million, with an allowance allocation of $240,000. This loan is secured
by leases on consumer "photo center" equipment deployed in a national retailer.
The second is a loan with a remaining balance of $364,000, with an allowance
allocation of $55,000, and is secured by single family real estate. The Company
also provided for and charged off $2.5 million related to one loan relationship
during the second quarter of 2002. Based upon financial information received
during the second quarter 2002 related to this borrower, updated information
received related to the collateral for certain of these loans, and updated
information related to the borrower's business as a whole, the Company charged
off the entire relationship balance in question and is pursuing recovery.
Management intends to actively seek recovery of charged off loan assets through
legal proceedings. Management also increased its allowance factors within all
commercial loan classifications, based on current economic factors.
During the third quarter 2002, the Savings Bank charged-off $2.5 million related
to loans or pools of loans which it had previously provided an allowance of $1.0
million. The most significant was a $3.0 million commercial non-residential loan
in which $1.9 million was charged-off, $900,000 of which had previously been
reserved. During the third quarter, the principal of the company which was
developing the property was indicted for bank fraud related to his financial
dealings with another financial institution. The Company intends to pursue all
avenues against the principal of the development company and his professional
service firms to recover its investment in this loan, however, as of September
30, 2002 the loan was written down to its fair value based on recent appraisals
of the land collateralizing the loan.
Finally, during the second and third quarters 2002, delinquencies increased in
the single-family mortgage loan portfolio. The total amount of single-family
mortgage loans ninety (90) days or more past due at December 31, 2001, March 31,
2002, June 30, 2002 and September 30, 2002 were $7.6 million, $10.6 million,
$14.6 million and $16.6 million, respectively. Management believes these
increases are attributable to a declining economy and higher unemployment
levels. To address this situation, the Savings Bank lowered the classification
on certain pools of loans and also increased its allowance factors within
certain single-family loan classifications.
As discussed more fully in the Regulatory Compliance section of the MD&A, during
May 2002, the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC") began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank and the
Bancorp, which commenced on July 1, 2002, and is nearing completion. This
examination follows the safety and soundness examinations by the OTS of the
Savings Bank and Bancorp completed January 2002, for which the Reports of
Examinations were delivered, as appropriate to the Savings Bank and Bancorp in
March 2002 and in which no loans were classified as "loss" assets.
During the current joint OTS/FDIC safety and soundness examination, management
has met with the OTS/FDIC representatives numerous times. Based on these
meetings, management believes that all loans have been properly graded by
management and the Company's analysis of its ALLL, as of September 30, 2002, has
properly considered all the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of September 30, 2002 is adequate.
11
Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: 1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (such as origination date, interest rate, maturity date,
payment dates, etc.) was re-verified to source documents such as the original
note or payment tickets; and 2) during the period July 2002 to October 2002, the
Savings Bank has expanded its commercial loan department by hiring new senior
loan credit administrators and several mid-level managers to effectively monitor
and evaluate the commercial loan portfolio.
NOTE E - INVESTMENT IN LIMITED PARTNERSHIP
The balance of investment in limited partnership of $1.2 million and $3.7
million at September 30, 2002 and December 31, 2001 represents the Savings
Bank's investment in two divisions of a single limited partnership. The
investment at September 30, 2002 includes a $900,000 equity interest in a
division of a limited partnership whose business activities are to purchase
mortgage servicing rights ("PMSRs"), and a $300,000 investment in subordinated
debentures of another division of the limited partnership. The debentures have
an interest rate of 30%. As of December 31, 2001, the investment included $3.0
million in equity interests and $700,000 in subordinated debentures. During the
second quarter 2002 the Company recorded a $2.5 million valuation allowance
against its interest in the limited partnership due to the impact of the recent
declines in interest rates and the adverse effect of increased loan prepayment
speeds on the value of PMSRs, and a change in accounting for the value of a $5.0
million escrow deposit of the PMSR servicer associated with the PMSR. Management
estimates the value of the escrow deposit to be approximately $750,000 at
September 30, 2002. Management is awaiting a ruling from the OTS regarding
whether the value of this escrow can be utilized in the PMSR valuation, and
management may reverse this $750,000 valuation allowance upon receipt of that
ruling from the OTS.
NOTE F - BORROWINGS
On September 30, 2002 the Bancorp's $4.8 million note payable to a third party
matured. The note payable is secured by all the common stock of the Savings
Bank. The Bancorp is currently in negotiations with the third party to extend
the maturity date of the note payable until approximately December 2003,
consisting of a $2.0 million principal reduction by March 2003, quarterly $1.0
million principal reductions in the second and third quarters of 2003, with the
remainder due at maturity. In addition, the principal shareholders of the
Company will likely be required to pledge additional personal assets as
collateral for the note payable. The ultimate repayment of this note payable is
contingent upon the Bancorp receiving future capital infusions, refinancing
the note payable through another third party or a future dividend from the
Savings Bank, subject to OTS approval, based on its future profitability.
NOTE G - EMPLOYEE STOCK OWNERSHIP PLAN
The Savings Bank maintained an ERISA qualified employee stock ownership plan
("ESOP") for eligible employees. In previous years the ESOP borrowed funds from
the Bancorp in order to purchase shares for the ESOP. Effective September 30,
2002 the ESOP was terminated and the Bancorp accepted the unallocated shares in
full satisfaction of the outstanding loan balance of $289,000. The unallocated
shares were accounted for as a treasury stock transaction by the Bancorp.
NOTE H - 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 2002, as
diluted loss per share would be anti-dilutive.
12
Three Months Ended Nine Months Ended
--------------------- ---------------------
September 30, September 30,
-------- ------- -------- -------
2002 2001 2002 2001
-------- ------- -------- -------
Dollar and shares in thousands,
except per share data
Numerator
Net income (loss) $ (1,965) $ (301) $(10,901) $ 286
======== ======= ======== =======
Denominator
Basic earnings (loss) per share -
weighted average shares outstanding 1,724 1,687 1,719 1,813
Effect of dilutive stock options outstanding -- -- -- 142
-------- ------- -------- -------
Diluted earnings (loss) per share -
weighted average shares outstanding 1,724 1,687 1,719 1,955
======== ======= ======== =======
Basic earnings (loss) per share $ (1.14) $ (0.18) $ (6.34) $ 0.16
======== ======= ======== =======
Diluted earnings (loss) per share $ (1.14) $ (0.18) $ (6.34) $ 0.15
======== ======= ======== =======
NOTE I - CAPITAL TRANSACTIONS
On September 29, 2002, the Board of Directors of the Bancorp authorized the
issuance of up to 10,000 shares of Series A 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series A Stock"). The Series A Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series A 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 A 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 A 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. 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 A 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"). Until March 31, 2008, each holder of Series
A Stock may at any time upon surrender of the certificates therefore, convert
any or all of such holder's Series A 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 A Stock so surrendered for conversion.
On September 30, 2002 the Company issued 900 shares of the Series A stock to the
Company's two principal shareholders in exchange for cash of $900,000. The form
of consideration to be paid by the Company for additional cash contributions of
$175,000 and $1.0 million, received from the Company's two principal
shareholders on October 15 and November 7, 2002, respectively, has not yet been
finalized. The Company anticipates additional Series A stock may be issued, that
the shareholders may accept Common Stock pursuant to exercise of currently
exercisable options, illiquid assets may be transferred at book value, or a
combination of the foregoing options will be agreed upon.
On September 30, 2002, the Bancorp made a $2 million cash contribution the
Savings Bank in order to increase the Savings Bank's capital ratios.
13
NOTE J - 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 September 30, 2002 and
December 31, 2001, the Savings Bank's actual capital amounts and ratios.
As of September 30, 2002, the Savings Bank was well capitalized under the
regulatory framework for prompt corrective action as compared to adequately
capitalized as of June 30, 2002 and well capitalized as of December 31, 2001.
Requirements for the well capitalized and adequately capitalized categories,
with respect to the ratio of total risk-based, Tier I risk-based, Tier I
leverage, and tangible capital ratios, are set forth in the following table.
Additionally, as a result of regulatory actions arising from the October 29,
2001 OTS Report of Examination of the Savings Bank, as described further in the
Regulatory Compliance section of the MD&A, the Savings Bank is restricted from
increasing assets during any quarter in excess of an amount equal to net
interest credited on deposit liabilities during the quarter, in the absence of
the prior written approval of the OTS.
On November 28, 2001, the Savings Bank issued and sold $3.0 million subordinated
debentures in a pooled security offering. On December 5, 2001, the Savings Bank
filed an application with the OTS seeking inclusion of the proceeds of the sale
of the debentures in regulatory "Tier II" (risk weighted) capital. As of June
28, 2002, the OTS approved the application. Thus, the Savings Bank's "Tier II"
ratios below reflect the $3.0 million of subordinated debentures as of September
30, 2002 and the "Tier II" ratios do not reflect the subordinated debentures as
of December 31, 2001.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
September 30, 2002 Amount Ratio Amount Ratio Amount Ratio
================== ------ ------ ------ ----- ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Savings Bank $25,928 10.82% $19,177 8.00% $23,971 10.00%
Tier I Capital
(to Risk Weighted Assets)
Savings Bank $19,946 8.32% $ 9,588 4.00% $14,382 6.00%
Tier I Capital
(to Adjusted Assets)
Savings Bank $19,946 5.19% $15,358 4.00% $19,197 5.00%
14
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
================= ------ ------ ------ ----- ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Savings Bank $32,745 10.77% $24,329 8.00% $30,411 10.00%
Tier I Capital
(to Risk Weighted Assets)
Savings Bank $30,261 9.95% $12,164 4.00% $18,247 6.00%
Tier I Capital
(to Adjusted Assets)
Savings Bank $30,261 5.82% $20,785 4.00% $25,981 5.00%
NOTE K - BUSINESS PLAN
As described further in the Regulatory Compliance section of the MD&A the
Bancorp and Savings Bank have provided to the OTS their plans for increasing the
capital levels at both the Bancorp and Savings Bank as well as a business plan
at the Savings Bank level which outlines the future operating strategies of the
Savings Bank to achieve the targeted capital levels along with providing the
framework for achieving profitability. In November 2002, these plans were
approved by the respective Boards of Directors of the Bancorp and the Savings
Bank and were delivered to the OTS for their review and approval. To achieve the
targeted capital levels and profitability levels the business plan of the
Savings Bank highlights the following actions; 1) reduction of total assets to
$250 million by March 31, 2003, to be achieved through the reduction of deposits
by selling the Savings Bank's branch deposits and operations, rate reductions
and the early redemption of brokered deposits with corresponding decreases in
loans and investments; 2) the elimination of certain lending programs; 3) a
restructuring of the Savings Bank's statement of financial condition to achieve
the desired mix of interest earning assets and interest bearing liabilities; 4)
staff and management reductions; 5) consolidation of personnel into one facility
to achieve overhead reductions; 6) general reductions in general and
administrative expenses; and 7) capital infusions from the Bancorp. The increase
in capital levels at the Bancorp is to be achieved through capital infusions
from current principal shareholders and potential third party investors.
During the fourth quarter 2002 and the first quarter 2003 the Company
anticipates it may experience significant one time charges, which could total as
much as $1.2 million before tax effects, related to the business plan discussed
above that were not accrued at September 30, 2002, in accordance with accounting
principles generally accepted in the United States. In addition, one time gains,
which could total as much as $2.6 million before tax effects, are expected as
the action plans described above are implemented to achieve the desired capital
and profitability levels management anticipates. In addition, in future quarters
the Company may identify additional assets to be held for sale or remove current
assets identified as held for sale.
NOTE L - COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Savings Bank had funding commitments relating to
loans, lines of credit and letters of credit totaling $43.5 million. Included in
this amount is $21.3 million related to the Savings Bank's purchase repurchase
program which the Savings Bank does not anticipate funding due to the
termination of this program. Commitments to fund loans, lines of credit and
letters 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. The Savings Bank also had Community Reinvestment Act ("CRA")
investment commitments outstanding of $923,000. The Savings Bank also had
commitments to sell and purchase $6.1 million and $6.3 million of mortgage
backed securities, respectively. As of September 30, 2002 and through November
14, 2002 the Savings Bank had entered into firm commitments to sell $42.5
million of $108.1 million classified as loans held for sale-other.
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 which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiary include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan
and 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 information systems and 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 following. 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. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 2001 Form
10-K.
OVERVIEW
Umbrella Bancorp, Inc. (the "Bancorp" or the "Company") is a unitary savings and
loan holding company and is registered as such with the Office of Thrift
Supervision ("OTS"). The Company is an active holding company with assets
consisting of investments in UmbrellaBank, fsb (the "Savings Bank"), marketable
securities, loans receivable, and interest-earning deposits. The Company is a
Federal Housing Authority ("FHA") approved originator and servicer and an
approved Federal National Mortgage Association ("Fannie Mae") servicer.
The Savings Bank's principal business consists of attracting deposits from the
public through its Internet banking delivery channel at
http://www.umbrellabank.com and its two traditional branch locations and
investing these deposits primarily in residential and commercial real estate
secured loans. The Savings Bank also invests, to a lesser extent, in purchase
repurchase loan facilities, for which it offers for sale to a number of mortgage
banking firms. During the third quarter, the Company decided to cease its
lending activity under the purchase repurchase program as a result of regulatory
dissatisfaction with, and criticisms of the program and considering the
profitability of the program. Management anticipates that the termination of the
purchase repurchase loan program will be complete by December 31, 2002. These
purchase repurchase loans are, and historically have been, classified as held
for sale on the consolidated statement of financial condition.
Additionally, the Savings Bank maintains a portfolio of bank qualified
securities and operates a network of more than 1,900 ATM machines. The Savings
Bank's deposit accounts are insured to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC").
The Savings Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities portfolios, and the interest paid on deposits and borrowed funds. The
Savings Bank's operating results are also affected by provisions for loan and
lease losses, loan
16
servicing fees, customer service charges and fees, fees from ATM operations,
gains (losses) on the sale of securities 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 and other 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.
REGULATORY COMPLIANCE
The OTS commenced risk-focused safety and soundness examinations of the Savings
Bank and the Bancorp on October 29, 2001 and November 14, 2001, respectively.
The OTS Reports of Examinations, which were primarily based on financial
information as of September 30, 2001, were transmitted to the Savings Bank and
Bancorp in March 2002.
The November 14, 2001 Holding Company Report of Examination ("Bancorp ROE") was
not limited to any one area, but focused on the risk factors of Transactions
with Affiliates, Funds Distribution, Financial Effect and Management Quality.
During the course of the OTS examination, the Bancorp addressed the specific
regulatory violations identified and developed and implemented policies and
procedures to ensure future regulatory compliance. The OTS commented in the
Bancorp ROE on the Bancorp's level of operating losses, debt service
requirements and capital position. As a result of the findings contained in the
Bancorp ROE, the Bancorp was required to provide OTS with a quarterly financial
cash flow projection report and quarterly monitoring reports. The Bancorp was
also required to take actions to ensure future regulatory compliance, and take
actions sufficient to ensure safe and sound operations. In addition, 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. The Bancorp was also restricted in making
"golden parachute" payments to any institution-affiliated party unless
authorized by regulation. The Bancorp has been, and is currently in compliance
with the requirements set forth by the OTS, as a result of the findings
contained in the Bancorp ROE.
The October 29, 2001, Report of Examination of the Savings Bank ("Savings Bank
ROE") focused on Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk. The OTS identified various regulatory
deficiencies resulting, in part, in supervisory imposed operating restrictions
on growth and lending activities, as well as restrictions on capital
distributions, contracts, "golden parachute" payments and changes in senior
executive positions. In addition, the Savings Bank was required to provide
reports to the OTS detailing corrective actions taken, identification of
policies and procedures adopted and implemented to remedy areas of criticism and
ensure future regulatory compliance. Management and the Board of Directors have
responded to the Savings Bank ROE, and have provided OTS with either assurance
of compliance with the material exceptions noted in the Savings Bank ROE or the
current status of efforts to correct matters requiring on-going remediation.
On May 20, 2002, the OTS and FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank. According
to the OTS/FDIC regulators, the purpose of the Field Visit was, in part, to
obtain an initial assessment of the asset quality and capital levels of the
Savings Bank to determine the effectiveness of corrective actions taken by the
Board of Directors and management since the issuance of the Savings Bank ROE,
and establish the scope for the full joint risk-focused examination of the
Savings Bank, which commenced on July 1, 2002, and is nearing completion.
Since completion of the Bancorp ROE and Savings Bank ROE, management officials
and the Boards of Directors of both the Bancorp and the Savings Bank have
engaged in active discussions with the OTS to develop a mutually agreeable
business framework that will strengthen the regulatory foundation of the Bancorp
and the Saving Bank. As a result, in the spirit of regulatory cooperation, the
Board 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
17
conclusions, separately agreed to enforcement actions that became effective on
August 16, 2002.
The provisions of the enforcement action between the Bancorp and OTS establish,
in principal part, that the Bancorp will 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 to the operating restrictions previously
placed on the Bancorp by the OTS, pursuant to the Bancorp ROE, the agreed upon
action requires the Bancorp to provide 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. The subject enforcement
action also provides assurance that Bancorp will maintain documentation
sufficient to evidence that all transactions with affiliates and insiders are in
compliance with statutory and regulatory requirements. To date, the Bancorp is
in full compliance with the provisions of the agreed upon enforcement action.
The agreed upon language in the enforcement action between the Savings Bank and
the OTS provides, in principal part, for 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.
In conjunction with the capital plan, the Savings Bank has developed a business
plan that details the Savings Bank's overall operating strategies, in light of
current economic conditions. The agreed upon language 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. The Board of Directors has
already taken action to alleviate many of the issues raised by the OTS and, has
formalized plans, policies and procedures concerning the Savings Bank's staffing
levels, internal audit function, overall lending programs, including loan
administration, and refined its Allowance for Loan and Lease Losses ("ALLL")
policy and practices. In addition to the operating restrictions previously
imposed on the Savings Bank, as a result of the findings contained in the
Savings Bank ROE, the Savings Bank has developed and implemented policies and
procedures to: i) ensure compliance with its loans to one borrower limitation;
ii) address its classified assets; iii) monitor its interest rate risk; and iv)
ensure continued accurate thrift financial reports. Furthermore, the Savings
Bank has agreed not to accept, renew or roll over any brokered deposits without
the prior consent of the OTS. Beginning no later than fourth quarter 2001,
management of the Savings Bank had already initiated a plan not to renew
maturing brokered deposits. Additionally, the agreed upon action provides for an
independent loan review of the Saving Bank's construction, commercial real
estate, commercial, direct lease financing and broker purchase/repurchase
lending programs. Of additional note, the Savings Bank will continue to utilize
its recently formed Board of Directors Oversight Committee for the purpose of
reviewing and approving new lending and investment initiatives. To date, the
Savings Bank is in full compliance with the provisions of the agreed upon
enforcement action.
As part of the regulatory spirit of cooperation and the mutual desire for future
success, both the Bancorp and the Savings Bank will report to, and consult with,
the OTS on all matters addressed under the agreed upon enforcement actions.
On September 17, 2002 the OTS issued a letter to the Savings Bank requiring, in
part, the Savings Bank to i) establish position and loss limits for its
available for sale investment portfolio; ii) reduce its borrowings under reverse
repurchase agreements and margin debt to $0 and discontinue their use other than
the permitted use of reverse repurchase agreements up to $10 million for
liquidity purposes; iii) reduce its investment in a pass through investment
mutual fund to a predetermined percentage; iv) suspend its trading portfolio;
and v) revise its Investment Policy accordingly. In management's opinion it has
complied with the provisions of the subject OTS letter.
18
BUSINESS PLAN
As described above, the Bancorp and Savings Bank have to provided the OTS their
plans for increasing the capital levels at both the Bancorp and Savings Bank as
well as a business plan at the Savings Bank level which outlines the future
operating strategies of the Savings Bank to achieve the desired capital levels
along with providing the framework for achieving profitability. In November
2002, these plans were approved by the respective Boards of Directors of the
Bancorp and the Savings Bank and were delivered to the OTS for their review and
approval. To achieve the desired capital levels and profitability levels the
business plan of the Savings Bank highlights the following actions: 1) reduction
of total assets to $250 million by March 31, 2003 to be achieved through the
reduction of deposits by selling the Savings Bank's branch deposits and
operations, rate reductions and the early redemption of brokered deposits with
corresponding decreases in loans and investments; 2) the elimination of certain
lending programs; 3) a restructuring of the Savings Bank's statement of
financial condition to achieve the desired mix of interest earning assets and
interest bearing liabilities; 4) staff and management reductions; 5)
consolidation of personnel into one facility to achieve overhead reductions; 6)
general reductions in general and administrative expenses; and 7) capital
infusions from the Bancorp. The increase in capital levels at the Bancorp is to
be achieved through capital infusions from current principal shareholders and
potential third party investors.
During the fourth quarter 2002 and the first quarter 2003, the Company
anticipates it may experience significant one time charges, which could total as
much as $1.2 million before tax effects, related to the business plan discussed
above that were not accrued at September 30, 2002, in accordance with accounting
principles generally accepted in the United States. In addition, one time gains,
which could total as much as $2.6 million before tax effects, are expected as
the action plans described above are implemented to achieve the desired capital
and profitability levels management anticipates. In addition, in future quarters
the Company may identify additional assets to be held for sale or remove current
assets identified as held for sale. Although management believes the successful
implementation of the action plans described above will allow the Bancorp and
Savings Bank to achieve the desired capital and profitability levels there can
be no assurances of such or that the OTS will approve the plans submitted to it.
FINANCIAL CONDITION
Total assets decreased by $139.2 million to $397.4 million at September 30,
2002, from $536.6 million at December 31, 2001. Proceeds from the sale of
securities available-for-sale and principal repayments on loans receivable as
well as proceeds from loan sales were used to fund the $124.2 million decrease
in deposits, consisting primarily of a $94.5 million decrease in brokered
certificates of deposit ("CDs") and a $30.7 million decrease in money market
accounts. Of the $94.5 million decrease in high yielding/costing brokered CDs
$52.2 million is attributable to the Savings Bank's effort not to renew maturing
brokered certificates of deposit CDs yielding higher interest rates and the
Savings Bank's early redemption of $43.4 million of brokered CDs during
September 2002. In addition, the Company recorded an $10.3 million provision for
loan and lease losses and a $2.5 million valuation reserve on its purchased
mortgage servicing rights ("PMSRs") during the nine month period ended September
30, 2002, as described in the Results of Operations section following. Borrowed
money also decreased by $5.3 million at September 30, 2002, as compared to
December 31, 2001.
Interest-earning deposits increased $16.0 million during the nine months ended
September 30, 2002 to $53.0 million as the Savings Bank invested the proceeds
from the sale of securities available-for-sale and loans held for sale into
interest-earning deposits. Interest-earning deposits at September 30, 2002
includes $26.4 million of ATM cash, on which the Savings Bank earns a return of
200 basis points over the overnight FHLB rate, and $26.6 million of other
interest earning deposits with an annualized yield of 5.38% at September 30,
2002.
Securities available-for-sale decreased by $47.5 million to $75.6 million at
September 30, 2002 from $123.1 million at December 31, 2001, as the Company
utilized the proceeds of sales of such securities to fund its initiatives to
reduce high yielding/costing brokered CDs at the Savings Bank and to payoff
borrowings at the Bancorp, as described below. In addition, during the first
quarter 2002, the Company sold approximately $27.0 million of its Trust
Preferred Securities ("TPS"), for regulatory compliance purposes in conjunction
with the Savings Bank's ROE described in the preceding Regulatory Compliance
section. During September 2002, the
19
Savings Bank reclassified trading account securities with a market value of
$878,000 to its securities available for sale based on the direction of the OTS
discussed in the previous Regulatory Compliance section.
As of September 30, 2002 loans held for sale consisted of loans under the
purchase repurchase program and loans held for sale-other as described further
following. Loans held for sale-purchase repurchase decreased by $47.2 million to
$17.8 million at September 30, 2002 from $65.1 million at December 31, 2001 as
the Savings Bank implemented a planned approach to reduce its purchase
repurchase loan program. During the third quarter, the Company decided to cease
its lending activity under the purchase repurchase program as a result of
regulatory dissatisfaction with, and criticisms of, the program and considering
the profitability of the program. Subsequent to September 30, 2002 the loans
held for sale under the purchase repurchase program have declined to $3.1
million and it is anticipated that by December 31, 2002 the termination of the
purchase repurchase loan program will be complete. Based on the bid prices
received and anticipated the actual and anticipated gains on these sales is not
expected to be significant to future operations.
Loans held for sale-other was $108.1 million as of September 30, 2002 with no
corresponding amount as of December 31, 2001. Loans held for sale-other consists
of both single family mortgage loans and commercial loans which the Company has
identified as held for sale in conjunction with the Company's business plan as
described in the preceding Business Plan section. As of September 30, 2002 and
through November 14, 2002, the Savings Bank had entered into firm commitments to
sell $42.5 million of the $108.1 million of the loans held for sale-other. Based
on the bid prices received and anticipated the actual and anticipated gains on
these sales is not expected to be significant to future operations. As of
September 30, 2002 loans held for sale-other were transferred from the loans
receivable portfolio and were recorded at the lower of cost or fair value with
no resulting loss on transfer.
Net loans receivable decreased by $164.3 million to $86.0 million at September
30, 2002, from $250.3 million at December 31, 2001, primarily due to the
transfer of $108.1 of loans to the loans held for sale category, the recording
of a $10.3 million provision for loan and leases losses consisting of a $2.0
million increase in the allowance for loan and lease losses and $8.3 million in
loan and lease charge-offs and finally during the third quarter the Company
experienced minimal loan originations or purchases of loan pools as the funds
received from loan repayments were utilized to fund the deposit reductions.
Premises and equipment decreased by $5.7 to $14.9 million at September 30, 2002
from $20.6 million at December 31, 2001. The decrease is attributable to $2.6
million in gross depreciation expense for the nine months ended September 30,
2002, offset by additions of $1.7 million. Additions include an investment of
$1.4 million in 217 ATMs during May 2002. Net depreciation expense reflected in
the statement of operations is $900,000, which reflects gross depreciation of
$2.6 million less $1.7 million reimbursed to the Company through its ATM
partnership activities. In addition, during June 2002, the Savings Bank
classified its investment in an office building as held for sale and, as such,
the office building 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 September 30, 2002, the net book value of this office building was $4.6
million. During the nine month period ended September 30, 2002, occupancy and
equipment expense was reduced by approximately $477,000 related to rental income
from the building and included approximately $191,000 of expenses from the
building. In addition, as of September 30, 2002, the Savings Bank classified
$300,000 of leasehold improvements and furniture fixtures and equipment located
in its two branch locations and corporate office as held for sale. As previously
described in the Business Plan section, the Savings Bank is pursuing the sale of
its branch deposits and operations and is exploring the consolidation of its
corporate locations which would result in the sale of certain leasehold
improvements and furniture fixtures and equipment at these locations. The
Company currently leases the facilities it utilizes for its branch and corporate
locations from third parties. Management anticipates that the acquirer of its
branch deposits and operations and the new tenants for its corporate locations
would also acquire the leasehold improvements and furniture and fixtures at
these locations. Management also anticipates that the third party owners of
these facilities will allow the Company to assign its lease obligations to these
parties.
20
Prepaid expenses and other assets increased by $4.0 million to $16.7 million at
September 30, 2002 from $12.7 million at December 31, 2001. This increase was
primarily the result of a $6.3 million increase in current and deferred tax
assets, offset by a $2.3 million decrease in prepaid and other expenses. The
current tax asset at September 30, 2002 was approximately $3.2 million, and
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. The deferred tax asset at September 30, 2002 totaled approximately
$8.3 million, of which $32,000 related to securities available-for-sale. The
remaining deferred tax asset primarily consists of the tax effects of bad debt
deductions, partnership interests, Federal Home Loan Bank stock dividends, the
deferred gain on a prior sales of facilities, and federal and state net
operating loss carry-forwards. Based upon the Company's prior history of paying
taxes and management's projections of future taxable income, no valuation
allowance is recorded against the deferred tax asset.
Deposits decreased $124.2 million to $333.9 million at September 30, 2002, from
$458.1 million at December 31, 2001. The decrease consists primarily of a $94.5
million decrease in high yielding/costing brokered CDs and a $30.7 million
decrease in money market accounts. Of the $94.5 million decrease brokered CDs
$52.2 million is attributable to the Savings Bank's effort not to renew maturing
brokered certificates of deposit CDs yielding higher interest rates and the
Savings Bank's early redemption of $43.4 million of brokered CDs during
September 2002. The Savings Bank's deposit composition at September 30, 2002
includes approximately 45% personal/business CDs, 3% brokered CDs, 38% money
market and savings accounts and 14% demand deposit and NOW accounts. In
addition, deposits include $289.0 million, or 87%, of deposits attracted via its
Internet delivery channel, as compared to $296.3 million, or 64.7%, at December
31, 2001. All deposits attracted via the Internet are consumer deposits. As
discussed in the preceding Business Plan section to achieve the desired capital
levels and profitability levels the business plan of the Savings Bank
anticipates the reduction of total assets to $250 million by March 31, 2003 to
be achieved through the reduction of deposits by selling the Savings Bank's
branch deposits and operations, rate reductions and the early redemption of the
remaining brokered deposits. All three initiatives are anticipated to reduce
total deposits by an additional $143.0 million by March 31, 2003.
Borrowings decreased by $5.2 million to $23.1 million at September 30, 2002,
from $28.3 million at December 31, 2001, primarily due to the repayment of $2.4
million in federal funds purchased using the proceeds from the sale of
securities available-for-sale and loans held for sale at the Savings Bank and
the repayment of $1.7 million in notes payable and $1.4 million in margin
account open lines using the proceeds from the sale of securities
available-for-sale offset by an increase of $300,000 in short term debt at the
Bancorp.
Stockholders' equity declined $9.0 million to $8.6 million at September 30,
2002, from $17.6 million at December 31, 2001 primarily as a result of the $10.9
million after-tax net loss for the nine months ended September 30, 2002, which
includes the pre-tax $10.3 million provision for loan and lease losses and $2.5
million valuation allowance for PMSRs. On September 30, 2002 the Company
received a capital infusion of $900,000 from the Company's two principal
shareholders through the issuance of 900 shares of preferred stock as described
below. In addition, the Company paid dividends of $264,000, received $118,000
through the exercise of stock options and had other comprehensive income of
$1,060,000 through decreased unrealized losses on its securities
available-for-sale portfolio. Also, effective September 30, 2002 the ESOP was
terminated and the Bancorp accepted the unallocated shares in full satisfaction
of the outstanding loan balance of $289,000. The unallocated shares were
accounted for as a treasury stock transaction by the Bancorp. On October 15 and
November 7, 2002 the Company received additional cash contributions of $175,000
and $1.0 million, respectively from the Company's two principle shareholders.
The form of consideration to be paid by the Company for these contributions has
not yet been finalized. The Company anticipates additional Series A stock may
be issued, that the shareholders may accept Common Stock pursuant to exercise
of currently exercisable options, illiquid assets may be transferred at book
value, or a combination of the foregoing options will be agreed upon.
On September 29, 2002, the Board of Directors of the Bancorp authorized the
issuance of up to 10,000 shares of Series A 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series A Stock"). The Series A Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series A Stock on
the dates specified
21
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 A 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 A 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. 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 A 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"). Until March 31, 2008, each holder of Series
A Stock may at any time upon surrender of the certificates therefore, convert
any or all of such holder's Series A 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 A Stock so surrendered for conversion.
LIQUIDITY
The Savings Bank's primary sources of funds 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, and
the sale of discounted loans receivable and newly originated fixed rate
long-term mortgage loans. The most liquid assets are cash and short-term
investments. The levels of these assets are dependent on the operating,
financing and investing activities during any given period. Cash and
interest-earning deposits totaled $57.4 million at September 30, 2002.
Recent 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 on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments such as federal funds.
Cash flow projections are updated regularly to assure necessary liquidity.
On September 30, 2002 the Bancorp's $4.8 million note payable to a third party
matured. The note payable is secured by all the common stock of the Savings
Bank. The Bancorp is currently in negotiations with the third party to extend
the maturity date of the note payable until approximately December 2003,
consisting of a $2.0 million principal reduction by March 2003, quarterly $1.0
million principal reductions in the second and third quarters of 2003, with the
remainder due at maturity. In addition, the principal shareholders of the
Company will likely be required to pledge additional personal assets as
collateral for the note payable. The ultimate repayment of this note payable is
contingent upon the Bancorp receiving future capital infusions, refinancing the
note payable through another third party or a future dividend from the Savings
Bank, subject to OTS approval, based on its future profitability.
ASSET QUALITY
The Bancorp and the Savings Bank regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for loan
losses is established when, in the opinion of management, the net realizable
value of the property collateralizing the loan is less than the outstanding
principal and interest and the collectibility of the loan's principal and
interest becomes doubtful. See further discussion in Provision and Allowance for
Loan and Lease Losses section following.
At September 30, 2002, the Company had fifty-six (56) properties, totaling $3.1
million classified as foreclosed real estate, as compared to twenty-seven (27)
properties totaling $730,000 at December 31, 2001. As of September 30,
22
2002, thirteen (13) of the properties totaling $1.3 million were related to the
Company'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 it is likely that the Company's
investment in foreclosed real estate will increase in future. The underlying
properties at September 30, 2002 consisted primarily of single-family
residences. The foreclosed real estate has been written down to estimated fair
value at September 30, 2002. The total amount of loans receivable ninety (90)
days or more past due at September 30, 2002, was $20.6 million or 9.50% of total
loans receivable compared to $20.1 million or 7.44% of total loans at June 30,
2002, $11.0 million or 3.90% of total loans at March 31, 2002 and $9.0 million
or 2.82% of total loans at December 31, 2001. The $11.6 million increase is
comprised of a $9.0 million increase in delinquent one-to-four family loans and
a $2.7 million increase in commercial delinquent loans offset by a $100,000
decrease in other types of loans. 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. Total non-performing assets at September 30, 2002, totaled $23.7 million
or 5.96% of total assets compared to $9.7 million or 1.81% of total assets at
December 31, 2001. Excluded from these totals are $464,000 of discounted loans
ninety (90) days or more contractually past due at September 30, 2002, and
$901,000 at December 31, 2001.
Along with other financial institutions, management shares a concern for the
outlook of the economy during the remainder of 2002. 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 NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001.
GENERAL
Net loss for the three months ended September 30, 2002 was $2.0 million or
($1.14) per diluted share as compared to net loss of $301,000 or ($.18) per
diluted share for the corresponding period in 2001. The operating results were
significantly impacted by the $1.7 million provision for loan and lease losses
and the early redemption of $43.3 million of brokered deposits resulting in
additional interest expense of $657,000 during the quarter. In addition,
non-interest income, exclusive of the $1.1 million valuation allowance on
investment in partnership recorded in 2001, for the three month period ended
September 30, 2002 declined to $693,000 as compared to $1.6 million during the
three month period ended September 30, 2001. Non-interest expense remained
constant at $3.5 million for the three month periods ended September 30, 2002
and 2001.
Net loss for the nine months ended September 30, 2002 was $10.9 million or
($6.34) per diluted share as compared to net income of $286,000 or $.15 per
diluted share for the corresponding period in 2001. The operating results were
significantly impacted by the $10.3 million provision for loan and lease losses,
the $2.5 million valuation allowance on the investment in limited partnership
related to the partnership's investment in PMSRs and the early redemption of
$43.3 million of brokered deposits resulting in additional interest expense of
$657,000 during the third quarter. In addition, non-interest income, exclusive
of the valuation allowance on investment in partnership in both the nine month
periods ended September 30, 2002 and 2001, declined to $521,000 during the nine
month period ended September 30, 2002 as compared to $1.8 million during the
nine month period ended September 30, 2001. Non-interest expense increased to
$11.1 million for the nine month period ended September 30, 2002 as compared to
$8.9 million for the nine month period ended September 30, 2001.
23
The average outstanding diluted shares increased by 37,000 shares for the three
months ended September 30, 2002 and declined by 236,000 shares for the nine
months ended September 30, 2002, as compared to shares for the same period last
year. The increase in average shares for the three months ended September 30,
2002 is primarily the result of the exercise of options during 2002. The decline
in average shares for the nine months ended September 30, 2002 is primarily the
result of the Company repurchasing 365,796 of its shares from Deltec Banking
Corporation Limited ("Deltec") in April 2001 and the effect of dilutive stock
options outstanding in the prior periods.
INTEREST INCOME
Interest income for the three months ended September 30, 2002 totaled $6.6
million, as compared to $9.9 million for the comparable 2001 period. The $3.3
million decrease was primarily the result of an 89 basis point decrease in the
tax equivalent yield on earning assets to 6.27% from 7.16%. Earning asset yields
have declined as a result of re-pricing Prime rate based loans with each change
in the Prime lending rate, as well as a result of the Company's affirmative
actions to reduce the amount of assets of the Savings Bank and Bancorp. In
addition, the increase in non-performing loans during 2002 had a negative impact
on interest income. The average yield on earning assets was 6.19% at the Savings
Bank and 12.35% at the Bancorp, with a consolidated Company average yield of
6.27% for the three months ended September 30, 2002.
For the nine months ended September 30, 2002, interest income decreased by $6.5
million to $21.8 million from $28.3 million for the same period last year. The
$6.5 million decrease was primarily the result of a 150 basis point decrease in
the tax equivalent yield on earning assets to 6.46% from 7.96%. Earning asset
yields have declined as a result of re-pricing Prime rate based loans with each
change in the Prime lending rate, as well as a result of the Company's
affirmative actions to reduce the amount of assets of the Savings Bank and
Bancorp. In addition, the increase in non-performing loans during 2002 had a
negative impact on interest income. The average yield on earning assets was
6.38% at the Savings Bank and 10.89% at the Bancorp, with a consolidated Company
average yield of 6.46% for the nine months ended September 30, 2002.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2002, totaled $5.7
million as compared to $7.5 million for the comparable 2001 period. The $1.8
million decrease was primarily the result of a 52 basis point decline in the
average cost of interest-bearing liabilities to 5.07% for the three months ended
September 30, 2002 as compared to 5.59% for the same period last year. The
average cost of interest-bearing liabilities was 4.79% at the Savings Bank and
10.06% at the Bancorp, with a consolidated Company average cost of 5.07% for the
three months ended September 30, 2002. The Savings Bank and the consolidated
Company average cost of funds was increased by 59 basis points due to the
additional interest expense of $657,000 incurred in September 2002 related to
the early redemption of $43.4 million of high yielding/costing brokered CDs.
This will have a positive effect on the cost of funds in future periods.
For the nine month period ended September 30, 2002 interest expense decreased by
$5.5 million to $17.1 million from $22.6 million for the same period last year.
The $5.5 million decrease was primarily the result of a 125 basis point decline
in the average cost of interest-bearing liabilities to 4.80% for the nine months
ended September 30, 2002 as compared to 6.05% for the same period last year. The
average cost of interest-bearing liabilities was 4.50% at the Savings Bank and
10.06% at the Bancorp, with a consolidated Company average cost of 4.80% for the
nine months ended September 30, 2002. The Savings Bank and the consolidated
Company average cost of funds was increased by 18 basis points due to the
additional interest expense of $657,000 incurred in September 2002 related to
the early redemption of $43.4 million of high yielding/costing brokered CDs.
This will have a positive effect on the cost of funds in future periods.
Interest-bearing liabilities include $17.0 million of 11.0% junior subordinated
debt, which the Bancorp issued in
24
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 6.19% for the three months ended September 30, 2002 and an
annualized cost of 6.62% for nine months ended September 30, 2002.
NET INTEREST INCOME
Net interest income for the three months ended September 30, 2002 totaled
$955,000 as compared to $2.4 million for the comparable 2001 period. The $1.4
million decrease was primarily due to a 37 basis point decrease in the net
interest spread to 1.20% as compared to 1.57%. The net interest spread has
decreased as earning asset yields have declined as a result of re-pricing Prime
rate based loans with each change in the Prime lending rate, as well as a result
of the Company's affirmative actions to reduce the amount of assets of the
Savings Bank and Bancorp. In addition, the increase in non-performing loans
during 2002 had a negative impact on the net interest spread. The net interest
spread was 1.40% at the Savings Bank and 2.29% at the Bancorp, with a
consolidated Company net interest spread of 1.20%. The Savings Bank and the
consolidated Company net interest spread was decreased by 59 basis points due to
the additional interest expense of $657,000 incurred in September 2002 related
to the early redemption of $43.4 million of high yielding/costing brokered CDs.
This will have a positive effect on the net interest spread in future periods.
For the nine month period ended September 30, 2002 net interest income decreased
by $1.0 to $4.7 million from $5.7 million for the same period last year. The
$1.0 million decrease was primarily due to a 24 basis point decrease in the net
interest spread to 1.67% as compared to 1.91%. The net interest spread has
decreased as earning asset yields have declined as a result of re-pricing Prime
rate based loans with each change in the Prime lending rate, as well as a result
of the Company's affirmative actions to reduce the amount of assets of the
Savings Bank and Bancorp. In addition, the increase in non-performing loans
during 2002 had a negative impact on the net interest spread. The net interest
spread was 1.88% at the Savings Bank and 0.84% at the Bancorp, with a
consolidated Company net interest spread of 1.67%. The Savings Bank and the
consolidated Company net interest spread was decreased by 18 basis points due to
the additional interest expense of $657,000 incurred in September 2002 related
to the early redemption of $43.4 million of high yielding/costing brokered CDs.
This will have a positive effect on the net interest spread in future periods.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
During the three and nine month periods ended September 30, 2002, the Company
recorded provisions for loan and lease losses of approximately $1.7 million and
$10.3 million as compared to $37,000 and $143,000 during the three and nine
months periods ended September 30, 2001. As of September 30, 2002 and December
31, 2001, the allowance for loan and lease losses (ALLL) recorded in the
consolidated statement of condition was $5.0 million and $3.0 million,
respectively. An analysis of the ALLL for the nine month period ended September
30, 2002 is as follows:
Savings
Bank Bancorp Total
-----------------------------------------------
ALLL as of December 31, 2001 $ 2,484,000 $ 500,000 $ 2,984,000
Provisions 8,494,000 1,814,000 10,308,000
Charge-offs (6,507,000) (1,814,000) (8,321,000)
------------ ------------ ------------
ALLL as of September 30, 2002 $ 4,471,000 $ 500,000 $ 4,971,000
============ ============ ============
25
ALLL as a percentage of Gross Loans (including loans held for sale and
discounted loans):
December 31, 2001 .79% 15.73% .95%
September 30, 2002 2.07% 94.58% 2.29%
The significant provisions recorded during the second and third quarters 2002
can be attributable to several internal and external factors, as described
below:
During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Although management continues to investigate the
existence of such supporting documentation, including contacting lead banks on
participation loans and contacting borrowers directly, management downgraded any
loans where documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current payment
status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.
In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it is anticipated
that they will likely declare bankruptcy. Although some of these loans had been
previously classified, management downgraded these loans in the second quarter
of 2002 due to the actual and likely bankruptcy filings and recorded a provision
related to these loans totaling $1.9 million, of which $1.6 million was
subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance
of $1.6 million, with an allowance allocation of $240,000. This loan is secured
by leases on consumer "photo center" equipment deployed in a national retailer.
The second is a loan with a remaining balance of $364,000, with an allowance
allocation of $55,000, and is secured by single family real estate. The Company
also provided for and charged off $2.5 million related to one loan relationship
during the second quarter of 2002. Based upon financial information received
during the second quarter 2002 related to this borrower, updated information
received related to the collateral for certain of these loans, and updated
information related to the borrower's business as a whole, the Company charged
off the entire relationship balance in question and is pursuing recovery.
Management intends to actively seek recovery of charged off loan assets through
legal proceedings. Management also increased its allowance factors within all
commercial loan classifications, based on current economic factors.
During the third quarter 2002, the Savings Bank charged-off $2.5 million related
to loans or pools of loans which it had previously provided an allowance of $1.0
million. The most significant was a $3.0 million commercial non-residential loan
in which $1.9 million was charged-off and $900,000 had previously been reserved
for. During the third quarter, the principal of the company which was developing
the property was indicted for bank fraud related to his financial dealings with
another financial institution. The Company intends to pursue all avenues against
the principal of the development company and his professional service firms to
recover its investment in this loan, however, as of September 30, 2002 the loan
was written down to its fair value based on recent appraisals of the land
collateralizing the loan.
Finally, during the second and third quarters 2002, delinquencies increased in
single-family mortgage loan portfolio. The total amount of single-family
mortgage loans ninety (90) days or more past due at December 31, 2001, March 31,
2002, June 30, 2002 and September 30, 2002 were $7.6 million, $10.6 million,
$14.6 million and $16.6 million, respectively. Management believes these
increases are attributable to a declining economy and
26
higher unemployment levels. To address this situation, the Savings Bank lowered
the classification on certain pools of loans and also increased its allowance
factors within certain single-family loan classifications.
As discussed more fully in the Regulatory Compliance section of the MD&A, during
May 2002, the OTS and the FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank and the
Bancorp, which commenced on July 1, 2002, and is nearing completion. This
examination follows the safety and soundness examinations by the OTS of the
Savings Bank and Bancorp completed January 2002, for which the Reports of
Examinations were delivered, as appropriate to the Savings Bank and Bancorp in
March 2002 and in which no loans were classified as "loss" assets.
During the current joint OTS/FDIC safety and soundness examination, management
has met with the OTS/FDIC representatives numerous times. Based on these
meetings, management believes that all loans have been properly graded by
management and the Company's analysis of its ALLL, as of September 30, 2002, has
properly considered all the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of September 30, 2002 is adequate.
Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: 1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (such as origination date, interest rate, maturity date,
payment dates, etc.) was re-verified to source documents such as the original
note or payment tickets; and 2) during the period July 2002 to October 2002, the
Savings Bank has expanded its commercial loan department by hiring new senior
loan credit administrators and several mid-level managers to effectively monitor
and evaluate the commercial loan portfolio.
NON-INTEREST INCOME
Total non-interest income increased $200,000 to $700,000 for the three months
ended September 30, 2002, as compared to $500,000 of income for the three months
ended September 30, 2001. The increase was primarily due to the recording of a
$1.1 million valuation allowance during the third quarter 2001, taken against
the Company's interest in limited partnership that invests in PMSRs. This was
offset in 2002 due to net gains on the sale of assets declined $800,000, to a
net gain of $300,000 as compared to a net gain of $1.2 million for the
comparable period in 2001. Included in the $800,000 decrease in gain on sale of
assets is a decrease of $700,000 related to securities available for sale and
$200,000 related to trading securities. Due to declining market conditions in
the third quarter, the Company's equity securities in its trading portfolio
declined in value and securities sold from the available for sale portfolio also
had declines.
Total non-interest income (expense) decreased $5.0 million to an expense of $2.0
million for the nine months ended September 30, 2002, as compared to $3.0
million of income for the nine months ended September 30, 2001. The decline was
primarily the result of recording a $2.5 million valuation allowance during 2002
compared to $1.1 million in 2001, taken against the Company's interest in the
limited partnership and resulting from recent declines in interest rates and the
negative adverse effect of increased loan prepayment speeds on the value of
PMSRs. In addition, net gains on the sale of assets declined by $2.5 million to
a net loss of $500,000 as compared to a net gain of $2.0 million for the
comparable period in 2001. Included in the $2.5 million decline in gain on sale
of assets is a decline of $2.0 million related to securities available-for-sale
and $500,000 related to trading account securities. Of the $2.0 million pre-tax
loss on the sale of securities available-for-sale, $770,000 was related to the
Company selling its excess investment in TPS, for regulatory compliance
purposes, and in conjunction with the Savings Bank's ROE that is described in
the preceding Regulatory Compliance section. Due to declining market conditions
in 2002, the Company's equity securities in its trading portfolio declined in
value and securities sold
27
from the available for sale portfolio also had declines. In addition, fees and
service charges decreased approximately $300,000 primarily due to a decrease of
approximately $300,000 of income related to the Savings Bank's ATM network
during first quarter 2002.
NON-INTEREST EXPENSE
Non-interest expense remained constant at $3.5 million for the three months
ended September 30, 2002 and 2001 and represented 2.75% and 2.79% of average
assets, respectively. During the three months ended September 30, 2002, a
$100,000 increase in federal deposit insurance premiums was offset by a $100,000
decline in occupancy and equipment expenses.
Non-interest expense increased by $2.2 million to $11.1 million or 2.18% of
average assets for the nine months ended September 30, 2002 from $8.9 million or
2.32% of average assets for the same period last year. The $2.2 million increase
in operating expenses was primarily the result of increases in: (i) professional
fees of approximately $800,000, consisting of legal, consulting and audit
related fees, and resulting, in part, from the Bancorp ROE and Savings Bank ROE
discussed in the preceding Regulatory Compliance section; (ii) data processing
expense of approximately $200,000 due to the Savings Bank's increased volume of
Internet transaction processing; (iii) loan servicing expense of approximately
$200,000 due to the Savings Bank's increase in non-performing assets; (iv)
compensation expense of approximately $400,000; (v) net ATM overages / shortages
of approximately $200,000; and (vi) general administrative expenses of
approximately $700,000 including $200,000 for insurance, consisting of a
$100,000 increase in federal deposit insurance premiums and $100,000 increase in
general business insurance. All of which were offset by a $300,000 decline in
occupancy expenses.
INCOME TAX EXPENSE
The Company recorded a tax benefit of $1.6 million for the three months ended
September 30, 2002 compared to a tax benefit of $374,000 for the same period
last year. The 2002 benefit is based on a tax rate of approximately 39%
calculated on the pre-tax loss of $3.6 million, plus tax benefits derived from
tax-exempt municipal securities and tax-exempt charter school loans, plus
utilization of affordable housing tax credits.
The Company recorded a tax benefit of $7.8 million for the nine months ended
September 30, 2002 compared to a tax benefit of $634,000 for the same period
last year. The 2002 benefit is based on a tax rate of approximately 39%
calculated on the pre-tax loss of $18.7 million, plus tax benefits derived from
tax-exempt municipal securities and tax-exempt charter school loans, plus the
utilization of affordable housing tax credits.
Management's analysis of the deferred tax asset at September 30, 2002 is
discussed in the preceding Financial Condition section.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 141 "Business Combinations" in June 2001. SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interest method. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 will only impact the Company's
financial statements if it enters into a business combination.
The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which
addresses the accounting for such assets arising from prior and future business
combinations, in June 2001. Under SFAS No. 142, goodwill arising from business
combinations will no longer be amortized, but rather will be assessed regularly
for impairment, with any such impairment recognized as a reduction of earnings
in the period identified. Other identified intangible assets, such as core
deposit intangible assets, will continue to be amortized over their estimated
useful lives. The Company adopted SFAS No. 142 on January 1, 2002. The adoption
of SFAS No. 142
28
did not have any impact on the Company's financial statements at that date as
the Company had no recorded goodwill at December 31, 2001.
Effective January 1, 2003, SFAS 143, "Accounting for Asset Retirement
Obligations" will apply. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
incurred. The effect of this statement on the financial position and operations
of the Company is not anticipated to have a material affect.
The Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. The statement requires that the Company
recognize an impairment loss on long-lived assets when the carrying amount is
not recoverable and the measurement of the impairment loss is the difference
between the carrying amount and the fair value of the asset. This pronouncement
did not have a material effect on the Company's financial statements.
On April 1, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 is effective for financial statements issued on or
after May 15, 2002. SFAS 145 requires that any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that are
not unusual in nature and infrequent in occurrence be reclassified to other
income or expense. SFAS No. 145 also amends SFAS No. 13 to require certain
modifications to capital leases be treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
or guarantor. Adoption of SFAS No. 145 on September 30, 2002 resulted in the
Company recording $657,000 of additional interest expense on deposits in the
statement of operations. The additional interest expense was the result of an
early redemption of brokered CDs. Prior to adoption of this pronouncement, the
expense would have been recorded as an extraordinary event.
On June 1, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, and may be early applied.
SFAS No. 146 supersedes EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 provides guidance on the
accounting for the recognition of liabilities associated with exit and disposal
activities. Under SFAS No. 146, "a liability for a cost associated with an exit
or disposal activity should be recognized when the liability is incurred." The
FASB concluded that an entity's commitment to a plan, by itself, does not create
a present obligation to others that meet the definition of a liability. The
Company has adopted SFAS No. 146 effective July 1, 2002 and the adoption of this
standard did not have a material effect on the Company's consolidated financial
position or results of operations. However as the Company exits certain business
activities and reduces personnel it is anticipated the Company will recognize
liabilities in accordance with SFAS No. 146.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 is effective October 1, 2002, and may be
early applied. SFAS No. 147 supersedes SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions." SFAS No. 147 provides guidance
on the accounting for the acquisition of a financial institution, and applies to
all such acquisitions except those between two or more mutual enterprises. Under
SFAS No. 147, the excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired in a financial
institution business combination represents goodwill that should be accounted
for under SFAS No. 142, "Goodwill and Other Intangible Assets." If certain
criteria are met, the amount of the unidentifiable intangible asset resulting
from prior financial institutions acquisitions is to be reclassified to goodwill
upon adoption of this Statement. Financial institutions meeting conditions
outlined in SFAS No. 147 are required to restate previously issued financial
statements. The objective of the restatement is to present the balance sheet and
income statement as if the amount accounted for under SFAS No. 72 as an
unidentifiable intangible asset had been reclassified to goodwill as of the date
the Company adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002
did not have a material effect on the Company's consolidated financial position
or results of operations. The adoption of SFAS No. 147 did not have any impact
on the Company's financial statements at that date as the Company had not
previously acquired any financial institutions branches.
29
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 re-pricing 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 and 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 re-pricing characteristics of the Saving 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 Board
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 and the purchase of adjustable
rate/floating rate U.S. agency issued mortgage backed securities and
collateralized mortgage obligations. 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 ROE 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 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 June 30, 2002
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 $ 31,941 $ (724) (2)%
200 basis point rise 33,248 583 2
100 basis point rise 34,448 1,783 5
Base scenario 32,665 -- --
100 basis point decline 30,811 (1,854) (6)
Due to the level of interest rates at June 30, 2002, the Company is not able to
model an additional 200 or 300 basis point decrease in rates.
30
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 re-pricing of such instruments, which
may very 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.
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 concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic Securities and
Exchange Commission ("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.
Disclosure controls and procedures are those controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and
Principal Accounting and Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
31
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 September 29, 2002, the Board of Directors of the Bancorp authorized the
issuance of up to 10,000 shares of Series A 8.0% Perpetual Preferred Convertible
Preferred Stock ("Series A Stock"). The Series A Stock has a par and face value
of $1,000. After March 31, 2003, the holders of record of the Series A 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 A 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 A 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. 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 A 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"). Until March 31, 2008, each holder of Series
A Stock may at any time upon surrender of the certificates therefore, convert
any or all of such holder's Series A 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 A Stock so surrendered for conversion.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 99.1 Certificate of Chief Executive Officer
Exhibit 99.2 Certificate of Principal Accounting and Financial Officer
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
32
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 D)
B. Reports of Form 8-K
None.
* 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.
33
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: November 19, 2002 /S/ John G. Yedinak
------------------------- ---------------------------------------
John G. Yedinak, Chairman, President
and Chief Executive Officer
Date: November 19, 2002 /S/ Frank J. Shinnick
------------------------- ---------------------------------------
Frank J. Shinnick, Principal Accounting
and Financial Officer
34
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Yedinak., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Umbrella Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flow of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
35
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /S/ John G. Yedinak
------------------------- ----------------------------------------
John G. Yedinak, Chairman, President and
Chief Executive Officer
36
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank J. Shinnick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Umbrella Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flow of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
37
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /S/ Frank J. Shinnick
------------------------ ---------------------------------------
Frank J. Shinnick, Principal Accounting
and Financial Officer
38