10-Q 1 c79077e10vq.txt QUARTERLY REPORT ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 COMMISSION FILE NUMBER 0-19829 UMBRELLA BANCORP, INC. ------------------------ (Exact name of registrant as specified in its charter) Maryland 36-3620612 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5818 South Archer Road, Summit, Illinois 60501-1830 (Address of principal executive offices) (708) 458-2002 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes X No ----- ----- The Registrant had 1,818,388 shares outstanding as of August 14, 2003. Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- ================================================================================ UMBRELLA BANCORP, INC. AND SUBSIDIARIES FORM 10-Q JUNE 30, 2003 INDEX

2 PART 1 - FINANCIAL INFORMATION UMBRELLA BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements. 3 UMBRELLA BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements. 4 UMBRRELLA BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements. 5 UMBRELLA BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements. 6 UMBRELLA BANCORP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements. 7 UMBRELLA BANCORP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION AND NEW ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for fair presentation, have been included. The results of operations for the three and six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Certain reclassifications have been made to prior period amounts in the financial statements in order to conform to the current period presentation. The unaudited consolidated financial statements include Umbrella Bancorp, Inc. (the "Bancorp" or the "Company") and its wholly owned subsidiaries, UmbrellaBank, fsb, ("UmbrellaBank' or the "Savings Bank"), Argo Redemption Corp., Inc. ("Argo Redemption" or "ARC"), and the Savings Bank's wholly owned subsidiary, Umbrella Service Corporation ("Umbrella Service"), formerly Dolton-Riverdale Savings Service Corporation. The Bancorp, through its subsidiaries at June 30, 2003, provides a full range of financial services primarily through its Internet banking delivery channel at http://www.umbrellabank.com and its retail banking facility in Cook County, Illinois. The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", and Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities", both of which generally become effective in the quarter beginning July 1, 2003. The Company is evaluating the impact of these new accounting standards on its consolidated financial statements. NOTE B - REGULATORY COMPLIANCE AND BUSINESS PLAN As previously disclosed in greater detail in the Company's 2002 Annual Report to Shareholders, the Office of Thrift Supervision ("OTS") and the Boards of Directors of both the Bancorp and the Savings Bank have engaged in discussions to develop mutually agreeable business frameworks designed to strengthen the regulatory foundation of both the Bancorp and the Savings Bank, respectively. As a result, the Boards of Directors of both the Bancorp and the Savings Bank, without admitting or denying that such grounds exist, or the accuracy of the OTS findings, opinions and/or conclusions, separately agreed to enforcement actions that became effective on August 16, 2002. The provisions of the enforcement action between the Bancorp and OTS established, in principal part, that the Bancorp provide the OTS with a plan for raising additional common equity capital and restructuring outstanding debt at the Bancorp, recognizing that economic and market conditions are outside of the control of the Bancorp. In addition, the agreed upon action required the Bancorp to provide the OTS with quarterly cash flow projections for the purpose of identifying the Bancorp's sources and uses of funds for the remainder of fiscal 2002, fiscal 2003 and fiscal 2004. Furthermore, the Bancorp was placed under various operating restrictions, including a requirement that the Bancorp file notice with the OTS prior to adding or replacing a director or hiring a senior executive officer, as well as being restricted in making "golden parachute" payments to any institution-affiliated 8 party unless authorized by regulation. The subject enforcement action also provides that the Bancorp ensure that all transactions with affiliates comply with applicable statutory and regulatory requirements and that the Bancorp maintain documentation sufficient to evidence such compliance. To date, the Bancorp is in material compliance with the provisions contained within the agreed upon action and continues to maintain regular and open dialogue with representatives of the OTS to ensure continued success. The agreed upon language in the enforcement action between the Savings Bank and the OTS provided, in principal part, for the development and implementation of a plan addressing the level of the Savings Bank's fixed assets, as well as the adoption and implementation of a capital plan for the establishment and maintenance of acceptable capital levels. On March 24, 2003, the Savings Bank submitted to the OTS a revised business plan which replaces the Savings Bank's previously filed business plan, capital plan and staffing plan. The revised business plan details the Savings Bank's overall operating strategies, in light of current economic conditions, and the intent of the Board of Directors to reformulate and reduce the Savings Bank's overall asset size. The agreed upon language of the enforcement action also (without prior written approval of the OTS): prohibits any increase in the Savings Bank's total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter and prohibits the purchase or origination of new loans other than single-family residential mortgage loans, credit card loans and over draft lines of credit. In addition, the mutual agreement provides for the Savings Bank to take specific actions affecting its lending activities, including regular reviews of its loan portfolio, classified assets and allowances for loans and lease losses ("ALLL"). Operating restrictions on growth, restrictions on capital distributions, contracts, "golden parachute" payments and changes in senior executive positions, as well as the development of and programs related to its internal audit function were also agreed upon. The Board of Directors has already taken numerous actions to alleviate many of the issues raised by the OTS and has formalized plans, policies and procedures to address all of the issues raised by OTS and/or contained in the agreed upon enforcement action. To date, the Savings Bank is in full material compliance with the provisions of the agreed upon enforcement action. Furthermore, selected provisions of the mutually agreed upon enforcement action have been modified, with operational activities expanded by the OTS, at the express request of the Savings Bank. The management and Board of the Savings Bank have continued, on a regular basis and in the spirit of regulatory cooperation, to discuss a variety of issues to ensure the continued progress and success of the Savings Bank. On June 26, 2003, the Board of the Savings Bank met with representatives of the OTS and Federal Deposit Insurance Corporation ("FDIC") to discuss the continued regulatory progress made by the Savings Bank to date, and as a follow-up to a recent review completed by the OTS and FDIC. During the meeting, regulatory officials and representatives of the Savings Bank addressed the Savings Bank's continued compliance with the agreed upon enforcement action, the continued improvement in the overall operations of the Savings Bank, and the Savings Bank's future business plans. NOTE C - PREMISES AND EQUIPMENT HELD FOR SALE As of June 30, 2003 and December 31, 2002, premises and equipment held for sale totaled $5.1 million and $5.4 million, respectively. During June 2002, the Savings Bank classified its investment in an office building as held for sale and, as such, it is being carried at the lower of cost or fair value. This building was purchased in April 2001 as a branch location for the Savings Bank. As of June 30, 2003, the net book value of this office building was $4.7 million. On May 29, 2003 the Savings Bank entered into a contract for the sale of the office building at a purchase price of $6 million. The contract is with a third party who is, assuming all contingencies are satisfied, scheduled to close the purchase transaction prior to September 30, 2003. During the six month period ended June 30, 2003, occupancy and equipment expense was reduced by approximately $217,000 related to rental income from this building and included approximately $38,000 of expenses from this building. In addition, as of June 30, 2003 and December 31, 2002, the Savings Bank classified $343,000 and $835,000, respectively, of land, leasehold improvements, furniture, fixtures and equipment located in its former two branch and corporate office locations as held for sale. During the first and second quarters of 2003, the Savings Bank sold approximately $200,000 of leasehold improvements and furniture, fixtures and equipment related to the sale of its 9 two branch locations as discussed more fully in Note G - Deposits and the consolidation of the Company's corporate locations as discussed below. The sales occurred at net book value, which approximated fair market value. On March 31, 2003, the two principal shareholders of the Company entered into an agreement with the Company and third party owner of one of the Company's corporate locations to assume the obligation under a building lease for corporate office space in Summit, Illinois. The transfer of the lease obligations from the Savings Bank to the principal shareholders allowed the Company to reverse the deferred gain and record additional paid-in capital in the amount of $987,000 related to this corporate location as of March 31, 2003. In conjunction with this lease assumption, the two principal shareholders purchased approximately $200,000 of leasehold improvements at this corporate location, which was funded by loans from the Savings Bank secured by common stock of unrelated entities. Effective July 17, 2003, a first position mortgage lien on residential property was substituted for the common stock collateral securing these loans. The fair value of the leasehold improvements approximated the net book value and the terms of the loans were consistent with the Savings Bank's commercial secured loan terms to unaffiliated parties and in compliance with all related regulatory requirements. The June 30, 2003 balance of land, leasehold improvements, furniture, fixtures and equipment held for sale relates to the further consolidation of the Company's corporate locations. The Company currently anticipates that new tenants for its corporate locations will also acquire the land, leasehold improvements and furniture and fixtures at these locations. Accordingly, the Company has recorded no impairment charges for these assets as of June 30, 2003. On July 10, 2003, the Savings Bank sold two (2) parcels of land, which resulted in an approximate $131,000 gain on sale, net of direct expenses. These parcels of land had a net book value of $0 as of June 30, 2003. NOTE D - PREMISES AND EQUIPMENT As of June 30, 2003 and December 31, 2002 premises and equipment, net, totaled $10.5 million and $13.5 million, respectively. During the first quarter 2003, the Savings Bank entered into and closed on the sale of $1.1 million of automated teller machines ("ATMs"), which were removed from the locations of a bankrupt retailer. The ATMs were sold at net book value to the Saving Bank's ATM network deployment partner. NOTE E - LOANS HELD FOR SALE As of June 30, 2003, loans held for sale totaled $17.5 million and consisted of $1 million of recently originated one-to-four family mortgage loans and $16.5 million of commercial and commercial real estate loans which the Savings Bank has identified as held for sale in conjunction with the Savings Bank's business plan, as referenced previously in Note B - Regulatory Compliance and Business Plan. Anticipated gains and/or losses on these sales are not expected to be significant to future operations. As of December 31, 2002, loans held for sale totaled $20.4 million and consisted of $2.1 million of one-to-four family mortgage loans and $17.7 million of commercial and commercial real estate loans which the Savings Bank had identified as held for sale in conjunction with the Savings Bank's business plan, and $647,000 of loans under its discontinued "purchase repurchase" loan program. During the first quarter of 2003, the Company completed the sale of the $2.1 million one-to-four family mortgage loans and $647,000 "purchase repurchase" loans. Based on the sales prices received, the actual gains on these sales were not significant to operations. NOTE F - INVESTMENT IN LIMITED PARTNERSHIP The balance of investment in limited partnership of $860,000 and $1.2 million at June 30, 2003 and December 31, 2002 represents the Savings Bank's investment in various divisions of a single limited partnership. The investment 10 at June 30, 2003 and December 31, 2002 includes a $790,000 and $910,000 million equity interest in a limited partnership whose business activities are to purchase mortgage servicing rights, and a $70,000 and $288,000 investment in subordinated debentures of the partnership. During the second quarter of 2003, the general partner of the partnership in which the Company has an investment in subordinated debentures, decided to liquidate the partnership. As of June 30, 2003 the Company has recorded its investment in the subordinated debentures at the estimated final distribution amount to be received during the third quarter 2003, which is approximately $70,000. NOTE G - DEPOSITS Deposits totaled $172.8 million and $282.0 million as of June 30, 2003 and December 31, 2002, respectively. As previously disclosed in the Company's Annual Report to Shareholders and as referenced in Note B - Regulatory Compliance and Business Plan and Note C - Premises and Equipment Held for Sale, the Savings Bank has engaged in activities designed to reduce the amount of its deposits in accordance with its business plan. The Savings Bank completed the early redemption of brokered deposits during 2002. On March 28, 2003, the Savings Bank closed the sale of its branch office in Chicago, Illinois ("Madison Branch"), with approximately $8.5 million in deposits on the date of sale. The Savings Bank recorded a gain on the Madison Branch sale of approximately $407,000, including recognition of the deferred gain on the branch building sold in a prior year. On April 26, 2003, the Savings Bank completed a separate sale of its branch office located in Dolton, Illinois ("Dolton Branch"), with approximately $20.2 million in deposits on the date of sale. The Savings Bank recorded an additional gain of approximately $1.0 million, including recognition of the deferred gain on the branch building sold in a prior year. Both transactions included the sale of leasehold improvements and furniture, fixtures and equipment at the locations along with the assumption of the building's lease obligations. In connection with the Madison Branch and Dolton Branch sales, the Savings Bank filed an application with the OTS for the redesignation of its home and branch office to the River North area of Chicago, Illinois ("Huron Branch"). The application was approved by the OTS on February 24, 2003. The Huron Branch home office relocation, as well as the branch opening, was effective April 17, 2003. NOTE H - BORROWINGS AND JUNIOR SUBORDINATED DEBT Borrowings totaled $21.4 million and $22.3 million as of June 30, 2003 and December 31, 2002, respectively while Junior Subordinated Debt totaled $17.2 million and $17.1 million as of June 30, 2003 and December 31, 2002, respectively. As previously disclosed in the Company's Annual Report to Shareholders and as referenced herein, the following transactions have taken place during the first six months of 2003. During first quarter, the Bancorp paid-off an aggregate of $6.3 million of notes payable to a third party with the proceeds from cash contributions from the Company's principal shareholders and the proceeds from the sale of an available-for-sale security. Additionally, on February 28, 2003, the Savings Bank paid-off a $2.8 million Federal Home Loan Bank ("FHLB") Advance due April 20, 2003. The Savings Bank incurred a penalty of $17,600 related to this transaction. During May 2003, the Savings Bank began utilizing its short-term FHLB open line borrowing capabilities, which have more favorable borrowing rates. After these transactions, borrowed money totaled $21.4 million at June 30, 2003 and consisted of the following:

11 During 1998 the Company issued 11% junior subordinated debentures aggregating $17.78 million to Argo Capital Trust Company ("Trust"). The Trust issued 11% capital securities with an aggregate liquidation amount of $17.25 million ($10 per capital security) to third-party investors. The capital securities and cash are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay dividends and distributions, respectively, on a quarterly basis, which are included in interest expense. The Trust is a statutory business trust formed under the laws of the State of Delaware and its common stock is wholly owned by the Company. The junior subordinated debentures will mature on November 6, 2028, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities can be redeemed contemporaneously, in whole or in part, beginning November 6, 2003 at a redemption price of $10 per capital security. The Company has provided a full and unconditional guarantee of the obligations of the Trust under the capital securities in the event of the occurrence of an Event of Default, as defined. Debt issuance costs totaling $1.9 million were capitalized related to the debenture offering and are being amortized over the 30-year life of the junior subordinated debentures. In 2000, Argo Redemption was formed for the purpose of repurchasing a portion of the 11% capital securities. Argo Redemption held 700 shares of the 11% capital securities at a cost basis of $7,000 as of June 30, 2003, as compared to 12,700 shares of the 11% capital securities at a cost basis of $127,000 as of December 31, 2002. The 11% capital securities can be resold. On February 27, 2003 the Company announced its intention to repurchase, from time to time, in open market as well as privately negotiated transactions, shares of the Trust's 11% securities, which trade under the symbol "ATP_P" on the American Stock Exchange. The present authorization does not impose any specific limit on the number of Trust securities which may be repurchased, and is being undertaken in order to reduce debt and debt-like obligations as required by the capital plan as referenced in Note B - Regulatory Compliance and Business Plan. The continuing payment on the Trust securities is dependent on the Company's continuing ability to make payments on the subordinated debenture it issued to the Trust in connection with the 1998 public offering. In the absence of prior written approval, the Savings Bank is currently precluded from making dividend payments to the Company under mutual agreement with the OTS. Consequently, no assurance can be made that the Company will continue to make dividend payments on the Trust securities. In the event that shares are repurchased and retired, the Company will accelerate the amortization of the debt issuance costs attributable to each security. The net book value of the debt issuance costs was $1.6 million as of June 30, 2003. NOTE I - PROVISION FOR LOAN AND LEASE LOSSES The Company did not record a provision for loan and lease losses during the three and six months ended June 30, 2003 as compared to $8.6 million in each of the comparable periods in 2002. As discussed in the Company's 2002 Annual Report to Shareholders, subsequent to March 31, 2002 the Company recorded a provision for loan and lease losses of $9.8 million and net charge-offs of $8.6 million during 2002. The Company's ALLL at June 30, 2003 was $2.6 million or 22.0% of nonperforming loans. Based on the level of allowance for loan losses as compared to nonperforming loans and also considering previous charge-off history, the Company did not deem any provision for loan and lease losses necessary during the first two quarters of 2003. NOTE J - EARNINGS (LOSS) PER SHARE The following table sets forth the components of basic and diluted earnings (loss) per share. Basic and diluted loss per share are the same for 2003 and 2002, as diluted loss per share would be anti-dilutive. 12

NOTE K - STOCK COMPENSATION The Company applies APB Opinion No. 25 in accounting for the stock option plans and, accordingly, compensation cost based on the fair value at grant date has not been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss would have been increased to the pro forma amounts indicated below:

13 NOTE L - CAPITAL TRANSACTIONS On March 31, 2003, the Bancorp made a $1.5 million cash contribution to the Savings Bank in order to increase the Savings Bank's capital ratios. On May 28, 2003 the Board of Directors of the Bancorp approved the termination of the Company's Management Recognition Plan ("MRP"). The 27,332 shares subject to award under the MRP as of May 28, 2003 were cancelled and were treated as treasury stock shares. On May 28, 2003 the Board of Directors of the Bancorp approved the redemption of the Company's Goodwill Convertible Preferred Stock at par which approximates $3,000. On June 26, 2003, the Board of Directors of the Bancorp authorized the issuance of up to 10,000 shares of Series B 8.0% Perpetual Preferred Convertible Preferred Stock ("Series B Stock"). The Series B Stock has a par and face value of $1,000. After March 31, 2003, the holders of record of the Series B Stock on the dates specified below shall be entitled to receive, as and when declared by the Board of Directors and out of assets of the Bancorp which are by law available for payment of dividends, cumulative preferential cash dividends, at the rate of $80.00 per share per annum, payable quarterly on the first day of July, October, January and April in each year. Dividends on the Series B Stock shall be cumulative, whether or not in any dividend period or periods after March 31, 2003 there shall be surplus or net profits of the Company legally available for the payment of such dividends. Dividends on the Series B Stock shall be junior and subordinate to the payment of the Bancorp's obligations for dividends or payments under the Company's 11% Junior Subordinate Deferrable Interest Debentures but pari pasu with the payment of dividends under the Company's Series A 8.0% Perpetual Convertible Preferred Stock. After March 31, 2004, the Bancorp, at the option of the Board of Directors, may at any time or from time to time redeem the whole or any part of the Series B Stock by paying therefore in cash $1,000 per share plus an amount equal to all dividends thereon declared but unpaid on the date fixed for redemption (the "Redemption Price"). After July 31, 2005, the holder of the Series B Stock may elect to require that the Company repurchase the whole or any part of the Series B Stock by paying therefore in cash $1,000 per share plus an amount equal to all dividends thereon declared but unpaid on the date which tender of shares is to be made (the "Repurchase Price"). Until March 31, 2008, each holder of Series B Stock may at any time upon surrender of the certificates therefore, convert any or all of such holder's Series B Stock into fully paid and nonassessable shares of Common Stock of the Bancorp, at the rate of 166 shares of Common Stock for each share of Series B Stock so surrendered for conversion. For the period January 1, 2003 to June 30, 2003, the Company received from three of its principal shareholders, several directors and a shareholder cash totaling $8,642,888 for 6,329.50 shares of Series A Preferred Stock ($6,329,500) and 122,134 shares of common stock ($467,063) related to the exercise of stock options. For the period January 1, 2003 to June 30, 2003 the Company recorded additional paid-in-capital of $987,000 related to the assumption of the Company's lease obligation on one of its corporate locations by the Company's two principal shareholders and $357,000 related to the purchase of available-for-sale securities by the Company's two principal shareholders at an amount which exceeded fair value. For the period July 1, 2003 to August 14, 2003 the Company received from its two principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred Stock. On July 14, 2003 the Company issued 300 shares of the Series B Stock to a third party in exchange for cash of $300,000. NOTE M - REGULATORY CAPITAL REQUIREMENTS Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), savings institutions must meet three separate minimum capital requirements. There are no similar minimum capital requirements for thrift holding companies. The following tables summarize, as of June 30, 2003 and December 31, 2002, the Savings Bank's actual capital amounts and ratios. 14 As of June 30, 2003 and December 31, 2002, the Savings Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Savings Bank must maintain total risk-based, Tier I risk-based, Tier I leverage, and tangible capital ratios as set forth in the following table.

NOTE N - COMMITMENTS AND CONTINGENCIES At June 30, 2003, the Savings Bank had funding commitments totaling $12.5 million. These commitments include $5.3 million for unused lines of credit, $427,000 for the unfunded portion of construction loans, $1.8 million for commitments to originate loans and $5 million for commitments to purchase investment securities. Commitments to fund loans and lines of credit have credit risk essentially the same as that involved in extending loans to customers and are subject to the Savings Bank's normal credit policies. Commitments to purchase investment securities are subject to the Savings Bank's normal investment policies. As of June 30, 2003, the Savings Bank also had an investment commitment of $51,000 to be funded over two years for investment in the Kedzie Limited Partnership, which is a Community Reinvestment Act ("CRA") investment. 15 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse affect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or securities portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, the Company's implementation of new technologies, the Company's ability to develop and maintain secure and reliable electronic systems, accounting principles, policies and guidelines, and limitations imposed on the Savings Bank's operations as a result of the agreed upon enforcement action described in the "Regulatory Compliance" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission including the Company's Form 10-K for the year ended December 31, 2002. OVERVIEW Umbrella Bancorp, Inc. ("Umbrella Bancorp" or "Company") is a unitary savings and loan holding company and is registered as such with the Office of Thrift Supervision ("OTS"), Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). The Company's business activities currently consist of ownership of UmbrellaBank, fsb, ("UmbrellaBank" or "Savings Bank"), and investments in other equity and debt securities. The Company is a Federal Housing Authority approved originator and servicer and an approved Federal National Mortgage Association servicer. In October of 1998, the Company formed Argo Capital Trust Company ("Trust"), a statutory business trust formed under the laws of the State of Delaware. In November 1998, the Company and the Trust offered 11% Capital Securities with a liquidation amount of $10.00 per security. The proceeds from the offering were $17.25 million. The Trust used the gross proceeds from the sale of the Capital Securities to purchase Junior Subordinated Debentures of the Company. The Junior Subordinated Debentures carry an interest rate of 11% paid quarterly in arrears and are scheduled to mature, subject to the Company's right to prepay the debentures under certain circumstances, on November 6, 2028. On June 24, 2000, the Company incorporated a wholly owned subsidiary, Argo Redemption Corporation, an Illinois corporation ("ARC"). ARC was chartered to effectuate, from time to time, purchases of the Company's outstanding Capital Securities by tender, in the open market or by private agreement. Acquisitions through the over-the-counter dealer market are anticipated to comprise the majority of purchase activity. As of June 30, 2003, ARC held 700 shares of the Trust's preferred securities with a cost basis of $7,000. On February 27, 2003 the Company announced its intention to repurchase, from time to time, in open market as well as privately negotiated transactions, shares of the Trust's 11% securities, which trade under the symbol 16 "ATP_P" on the American Stock Exchange. The present authorization does not impose any specific limit on the number of Trust securities which may be purchased, and is being undertaken in order to reduce debt and debt-like obligations as required by the capital plan as discussed following in the "Regulatory Compliance" and "Business Plan" sections. The continuing payment on the Trust securities is dependent on the Company's continuing ability to make payments on the subordinated debenture it issued to the Trust in connection with the 1998 public offering. In the absence of prior written approval, the Savings Bank is currently precluded from making dividend payments to the Company under mutual agreement with the OTS. Consequently, no assurance can be made that the Company will continue to make dividend payments on the Trust securities. UmbrellaBank is a federally chartered savings institution. The Savings Bank operates under the authority of the OTS, its deposits are insured by the FDIC, and it is a member of the Federal Home Loan Bank ("FHLB") system. UmbrellaBank's primary business is the solicitation of savings deposits from the general public, and the purchase or origination of loans secured by one-to-four-family residential and commercial real estate, together with investments in a portfolio of mortgage mutual funds, mortgage backed securities, municipal bonds and other agency securities. UmbrellaBank's retail banking operations have been conducted from two traditional branch facilities, as well as through an Internet banking channel operating under the name umbrellabank.com. Effective April 26, 2003 the Savings Bank reduced the number of traditional branch facilities to one (1). At June 30, 2003, umbrellabank.com deposits totaled $171.4 million and represented 99.2% of total Saving Bank deposits of $172.8 million. Additionally, UmbrellaBank, with its deployment partner, operates a network of approximately 1,500 automated teller machines ("ATMs") in 17 states. The Savings Bank generates interest and fee income from a network of regionally deployed ATMs. Deployment activities have been concentrated primarily in the Midwest and Mid-Atlantic regions of the country, with limited expansion in the southeastern United States and west of the Mississippi. Revenues are derived from interchange and surcharge fees, together with income from related leasing and interest on currency used in operations. During 2003 and in conjunction with its business plan, the Savings Bank intends to originate, purchase, and, where desired, sell fixed-rate and adjustable-rate mortgage loans secured by one-to-four family residences. To a lesser extent, the Savings Bank plans to originate home equity loans, other consumer loans including consumer credit card facilities and overdraft protection lines of credit through the umbrellabank.com Internet channel and, subject to regulatory approval, real estate secured commercial loans. The Savings Bank's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loan and security portfolios, and the interest paid on deposits and borrowed funds. The Savings Bank's operating results are also affected by provisions for loan losses, loan servicing fees, customer service charges and fees, fees from ATM operations, gains (losses) on the sale of securities, loans and other assets and other income. Operating expenses of the Savings Bank include employee compensation and benefits, equipment and occupancy costs, outsourced servicing expenses, federal deposit insurance premiums, professional fees and other general and administrative expenses. The Savings Bank's results of operations are further affected by economic and competitive conditions, particularly changes in market interest rates. Results are also affected by monetary and fiscal policies of federal agencies and actions of regulatory authorities. During 2002 and continuing into 2003, the implementation of certain initiatives under the business plan have had and are anticipated to continue to have a significant effect on the total assets and lending, investing and retail operations of the Savings Bank and the Company. During 2002, total assets of the Savings Bank decreased $186.6 million from $521.8 million to $335.2 at December 31, 2001 and 2002, respectively. Consolidated assets of the Company decreased $192.7 million from $536.6 million to $343.9 million at December 31, 2001 and 2002, respectively. During 2003, total assets of the Savings Bank decreased $109.4 million from $335.2 million to $225.8 million at December 31, 2002 and June 30, 2003, respectively. Consolidated assets of the Company decreased $112.2 million from $343.9 million to $231.7 million at December 31, 2002 and June 30, 2003, respectively. 17 REGULATORY COMPLIANCE As previously set forth in Note B - Regulatory Compliance and Business Plan, and disclosed in greater detail in the Company's 2002 Annual Report to Shareholders, the Bancorp and the Savings Bank separately agreed to enforcement actions that became effective on August 16, 2002 with the OTS. The provisions of the enforcement action between the Bancorp and OTS established, in principal part, that the Bancorp provide the OTS with a plan for raising additional common equity capital and restructuring outstanding debt at the Bancorp and provide the OTS with quarterly cash flow projections for the purpose of identifying the Bancorp's sources and uses of funds for fiscal 2002, fiscal 2003 and fiscal 2004. The Bancorp was placed under various operating restrictions, including a requirement that the Bancorp file notice with the OTS prior to adding or replacing a director or hiring a senior executive officer, as well as being restricted in making "golden parachute" payments to any institution-affiliated party unless authorized by regulation. The subject enforcement action also provides that the Bancorp ensure that all transactions with affiliates comply with applicable statutory and regulatory requirements and that the Bancorp maintain documentation sufficient to evidence such compliance. As discussed in Note H - Borrowings and Junior Subordinated Debt, the Bancorp paid-off an aggregate of $6.3 million of notes payable to a third party at or prior to March 31, 2003 and, as of June 30, 2003 remains in material compliance with the provisions contained within the agreed upon action and continues to maintain regular and open dialogue with representatives of the OTS to ensure continued success. The mutually established terms of the enforcement action between the Savings Bank and the OTS provided, in principal part, for the development and implementation of a plan addressing the level of the Savings Bank's fixed assets, the adoption and implementation of a capital plan for the establishment and maintenance of acceptable capital levels and the submission of a business plan (discussed below). Additionally, in the absence of prior written approval of the OTS, the Savings Bank enforcement action also prohibits any increase in total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter, and prohibits the purchase or origination of new loans other than single-family residential mortgage loans, credit card loans and over draft lines of credit. The mutual agreement also provides for the Savings Bank to take specific actions affecting its lending activities, including regular reviews of its loan portfolio, classified assets and allowances for loans and lease losses ("ALLL"). Operating restrictions on growth, restrictions on capital distributions, contracts, "golden parachute" payments and changes in senior executive positions, as well as the development of and programs related to its internal audit function were also agreed upon. The Board of Directors of the Savings Bank has already taken numerous actions to alleviate many of the issues raised by the OTS and has formalized plans, policies and procedures to address all of the issues raised by OTS and/or contained in the agreed upon enforcement action. To date, the Savings Bank is in full material compliance with the provisions of the agreed upon enforcement action. Furthermore, selected provisions of the enforcement action have been modified, with operational activities expanded by the OTS, at the express request of the Savings Bank. On June 26, 2003, the Board of the Savings Bank met with representatives of the OTS and FDIC to discuss the continued regulatory progress made by the Savings Bank to date, and as a follow-up to a recent review completed by the OTS and FDIC. During the meeting, regulatory officials and representatives of the Savings Bank addressed the Savings Bank's continued compliance with the agreed upon enforcement action, the continued improvement in the overall operations of the Savings Bank, and the Savings Bank's future business plans. BUSINESS PLAN On February 28, 2003, the Savings Bank withdrew its business plan previously submitted to the OTS. Subsequently, on March 24, 2003, the Savings Bank submitted to the OTS a revised business plan which replaced the Savings Bank's previously filed business plan, capital plan and staffing plan. The revised business plan details 18 the Savings Bank's overall operating strategies, in light of current economic conditions, and the intent of the Board of Directors to reformulate and reduce the Savings Bank's overall asset size by December 31, 2003, with reductions in general and administrative expenses continuing as previously established. To achieve the revised business plan objectives, the Savings Bank and the Company will continue to evaluate their business strategies and identify additional assets to be held for sale. Based on the Savings Bank's initial analysis, the fair value of assets to be held for sale at this time exceeds the book value. FINANCIAL CONDITION Total assets decreased by $112.2 million to $231.7 million at June 30, 2003, from $343.9 million at December 31, 2002. A reduction in ATM vault cash, proceeds from the sale of securities available-for-sale, principal repayments on loans receivable, and proceeds from loan sales were used to fund the $109.2 million decrease in deposits, consisting of $28.7 million related to the sales of the Madison and Dolton branches of the Savings Bank, and a decline in other deposit accounts, primarily attributable to the Savings Bank's effort not to renew certificates of deposits ("CDs") yielding higher interest rates and a targeted reduction in other interest-bearing transaction accounts, as the Savings Bank executes its business plan as discussed previously. Interest-earning deposits decreased $42.9 million during the six months ended June 30, 2003 to $26.9 million primarily due to an $11.8 million decrease in ATM cash and a $31.1 million decrease in other interest earning deposits. Interest-earning deposits at June 30, 2003 includes $15.4 million of ATM cash, on which the Savings Bank earns a return of 200 basis points over the overnight FHLB rate, and $11.5 million of other interest earning deposits. Securities available-for-sale decreased by $38.6 million to $67.0 million at June 30, 2003 from $105.6 million at December 31, 2002, as the Savings Bank utilized the proceeds of sales of such securities to fund deposit reductions discussed below. Loans held for sale decreased $2.9 million to $17.5 million at June 30, 2003 from $20.4 million at December 31, 2002. The decrease is primarily due to a bulk sale of $2.1 million of one-to-four-family mortgage loans, pay-downs of approximately $1.2 million related to commercial and commercial real estate loans, and the final pay-off of the $647,000 of loans outstanding under the terminated "purchase repurchase" loan program, offset by a $1 million increase in recently originated one-to-four family mortgage loans. As of June 30, 2003, loans held for sale consisted of the $1 million of recently originated one-to-four family mortgage loans and $16.5 million of commercial and commercial real estate loans which the Savings Bank has identified as held for sale as described previously in the Business Plan section. Based on the bid prices received, anticipated gains on these loan sales are not expected to be significant to future operations. Net loans receivable decreased by $23.6 million to $72.4 million at June 30, 2003, from $96.0 million at December 31, 2002. As funds were received from loan repayments, they were utilized to fund the deposit reductions discussed below. Premises and equipment held for sale decreased $330,000 to $5.1 million at June 30, 2003, from $5.4 million at December 31, 2002. During June 2002, the Savings Bank classified its investment in an office building as held for sale and, as such, it is being carried at the lower of cost or fair value. This building was purchased in April 2001 as a branch location for the Savings Bank. As of June 30, 2003, the net book value of this office building was $4.7 million. On May 29, 2003 the Savings Bank entered into a contract for the sale of the office building at a purchase price of $6 million. The contract is with a third party who is, assuming all contingencies are satisfied, scheduled to close the purchase transaction prior to September 30, 2003. After the closing date, the Savings Bank and/or Company will lease a portion of the building. The June 30, 2003 balance of land, leasehold improvements, furniture, fixtures and equipment held for sale relates to the further consolidation of the Company's corporate locations. The Company currently anticipates that new tenants for its corporate locations will also acquire the land, 19 leasehold improvements and furniture and fixtures at these locations. Accordingly, the Company has recorded no impairment charges for these assets as of June 30, 2003. As of June 30, 2003 and December 31, 2002, the Savings Bank classified $343,000 and $835,000, respectively, of land, leasehold improvements, furniture, fixtures and equipment located in its former two branch and corporate office locations as held for sale. During the first and second quarters of 2003, the Savings Bank sold approximately $200,000 of leasehold improvements and furniture, fixtures and equipment related to the sale of its two branch locations as discussed more fully below, and the consolidation of the Company's corporate locations as discussed below. The sales occurred at net book value, which approximated fair market value. On March 31, 2003, the two principal shareholders of the Company entered into an agreement with the Company and third party owner of one of the Company's corporate locations to assume the obligation under a building lease for corporate office space in Summit, Illinois. The transfer of the lease obligations from the Savings Bank to the principal shareholders allowed the Company to reverse the deferred gain and record additional paid-in capital in the amount of $987,000 related to this corporate location as of March 31, 2003. In conjunction with this lease assumption, the two principal shareholders purchased approximately $200,000 of leasehold improvements at this corporate location, which was funded by loans from the Savings Bank secured by common stock of unrelated entities. Effective July 17, 2003, a first position mortgage lien on residential property was substituted for the common stock collateral securing these loans. The fair value of the leasehold improvements approximated the net book value and the terms of the loans were consistent with the Savings Bank's commercial secured loan terms to unaffiliated parties and in compliance with all related regulatory requirements. Premises and equipment decreased by $3.0 million to $10.5 million at June 30, 2003 from $13.5 million at December 31, 2002. During the first quarter 2003, the Savings Bank entered into and closed on the sale of $1.1 million of automated teller machines ("ATMs"), which were removed from the locations of a bankrupt retailer. The ATMs were sold at net book value to the Saving Bank's ATM network deployment partner. Net depreciation expense reflected in the statement of operations is $980,000 for the six months ended June 30, 2003, which reflects gross depreciation of $2.04 million less $1.06 million reimbursed to the Company through its ATM partnership activities. As of June 30, 2003 and December 31, 2002 deferred tax assets totaled $10.4 million and $9.7 million, respectively. Included in these balances are $18,000 and $95,000 related to securities available-for-sale at June 30, 2003 and December 31, 2002, respectively. The remaining deferred tax asset primarily consists of the tax effects of bad debt deductions, partnership interests, Federal Home Loan Bank stock dividends, the remaining deferred gain on a prior sale of a branch facility, and federal and state net operating loss carry-forwards. During second quarter 2003, the Company discontinued recognizing tax benefits by recording a valuation allowance of $1.1 million against deferred tax assets. Realization of the remaining $10.4 million of deferred tax assets at June 30, 2003 is dependent upon the Company realizing gains on possible sales of certain assets such as the Savings Bank's Internet platform and technology, ATM network and the Huron Street branch, as well as achievement of future taxable income at the Savings Bank and other Company subsidiary businesses currently being evaluated, including but not limited to, a real estate brokerage and property management company. As of the date of filing this Form 10-Q, however, the Company's Board of Directors had not committed to sell all these assets, nor had it committed to acquiring additional subsidiaries such as the real estate brokerage and property management company. Because of this uncertainty, no deferred tax asset benefits were recorded in the second quarter. The Company will continue its efforts to achieve its strategic objectives for restructuring the business activities at the Savings Bank, while exploring capital raising initiatives at the Company. Prepaid expenses and other assets decreased by $1.5 million to $7.2 million at June 30, 2003 from $8.7 million at December 31, 2002. This decrease was primarily the result of the receipt in January 2003 of $800,000 related to the settlement of certain investment transactions and a $700,000 decrease in various accounts receivable as the Savings Bank received funds or settled disputed amounts with vendors during the first six months of 2003. 20 Included in prepaid expenses and other assets at June 30, 2003 and December 31, 2002 is $2.7 million related to tax refunds due from the Internal Revenue Service and Illinois Department of Revenue for previously filed tax returns and amounts previously paid on prior tax returns that were claimed when the December 31, 2001 tax returns were filed and will be claimed when the December 31, 2002 tax returns are filed. Deposits decreased $109.2 million to $172.8 million at June 30, 2003, from $282.0 million at December 31, 2002. As previously disclosed in the Company's 2002 Annual Report to Shareholders and as discussed in the previous Business Plan section, the Savings Bank has engaged in activities designed to reduce the amount of its deposits in accordance with its business plan, which included the sales of its Madison and Dolton branch offices in the first half of 2003, with deposits of $8.5 million and $20.2 million, respectively. Both branch sale contracts included the sale of leasehold improvements and furniture, fixtures and equipment at the locations along with the assumption of the building's lease obligations, and resulted in an aggregate gain on sale of $1.5 million, including recognition of the deferred gains on the branch buildings sold in a prior year. As described above, the decline in other deposit accounts was primarily attributable to the Savings Bank's effort not to renew CDs yielding higher interest rates and a targeted reduction in other interest-bearing transaction accounts. Borrowings decreased by $910,000 to $21.4 million at June 30, 2003, from $22.3 million at December 31, 2002. During the first half of 2003, the Bancorp paid-off an aggregate of $6.25 million of notes payable to a third party with the proceeds from cash contributions from the Company's principal shareholders and the proceeds from the sale of an available-for-sale security. Additionally, on February 28, 2003, the Savings Bank paid-off a $2.76 million FHLB Advance due April 20, 2003. These reductions in borrowings were offset by short-term borrowings on an FHLB open line at the Savings Bank totaling $8.1 million as of June 30, 2003. Other liabilities decreased $4.1 million to $1.5 million at June 30, 2003 from $5.6 million at December 31, 2002. The decrease is primarily attributable to: 1) the Savings Bank funding early its Community Reinvestment Act (CRA) investment commitments to the Chicago Equity Fund and Community Investment Corporation of $1.2 million and $216,000, respectively; 2) a $1.35 million decrease in deferred gain on prior facility sales due to the assumption of the Madison and Dolton branch leases by the respective purchasers and the assumption by the Company's two principal shareholders of one of the Company's corporate leased locations; 3) a $160,000 decrease in real estate taxes payable due to the transactions described in 2) above; and 4) a $1.4 million decrease in accounts payable principally related to the $1.4 million included in accounts payable at December 31, 2002 related to remittances received on loans sold during December 2002 which were remitted to the purchaser of the loans in 2003. These decreases in other liabilities were partially offset by an increase in other accrued expenses of $230,000, primarily related to a contractual dispute with one of the Savings Bank's third party vendors for which expenses have been accrued, but payment withheld pending resolution of such disputes. The Savings Bank anticipates settlement of these disputes during third quarter 2003 and a possible favorable recovery of a portion of these disputed amounts. Stockholders' equity increased $3.6 million to $11.8 million at June 30, 2003 from $8.2 million at December 31, 2002 primarily as a result of receipt by the Company of cash totaling $6.8 million from insiders for the sale of 6,329.50 shares of Series A Preferred Stock ($6,329,500) and 122,134 shares of common stock ($467,063)) related to the exercise of stock options; 2) the recording of $987,000 in additional paid-in-capital related to the assumption of the Company's lease obligation on one of its corporate locations by the Company's two principal shareholders; and 3) the recording of $357,000 in additional paid-in-capital related to the purchase of available-for-sale securities by the Company's two principal shareholders at an amount which exceeded fair value. These increases to stockholders' equity were partially offset by the recording of a net loss of $4.7 million for the six months ended June 30, 2003. For the period July 1, 2003 to August 14, 2003 the Company received from its two principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred Stock. On July 14, 2003 the Company issued 300 shares of the Series B stock to a third party in exchange for cash of $300,000. 21 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds, through the Savings Bank, are deposits, proceeds from principal and interest payments on the loan and securities available-for-sale portfolios, custodial deposit accounts related to loans serviced for others, borrowed money, FHLB advances, and loan and security sales. The most liquid assets are cash and short-term investments. The levels of these assets are dependent on operating, financing, and investing activities during any given period. Cash and interest-earning deposits totaled $29.9 million at June 30, 2003. The Company has adequate alternative funding sources if short-term liquidity needs arise. Legislation repealed the OTS minimum liquidity ratio requirements. OTS regulations now require the Savings Bank to maintain sufficient liquidity to ensure the Savings Bank's safe and sound operation. Liquidity management for the Savings Bank is both a daily and long-term function of the Savings Bank's senior management. Management meets regularly to monitor interest rates, current and projected commitments to originate/purchase/sell loans and the likelihood of funding such commitments, monitor deposit flows and projected cash flows. Excess funds are generally invested in short-term investments. Cash flow projections are updated regularly to assure necessary liquidity. At June 30, 2003, the Savings Bank's capital exceeded all capital requirements of the OTS. The Savings Bank's Tier I capital to adjusted assets, Tier I capital to risk-weighted assets, and risk-based capital ratios were 8.13%, 13.72%, and 17.24%, respectively. On March 31, 2003 the Bancorp paid-off a $4.3 million note payable to a third party with the proceeds from cash contributions from the Company's two principal shareholders. The note payable was secured by all the common stock of the Savings Bank. During January and February the Company paid-off a $2.0 million note payable with the proceeds from the sale of an available-for-sale security and capital contributions from the Company's two principal shareholders. On February 28, 2003, the Savings Bank paid-off a $2.8 million FHLB Advance due April 20, 2003. These reductions in borrowings were offset by short-term borrowings during second quarter 2003 on an FHLB open line at the Savings Bank totaling $8.1 million as of June 30, 2003. On March 31, 2003, the Bancorp made a $1.5 million cash contribution to the Savings Bank in order to increase the Savings Bank's capital ratios. For the period January 1, 2003 to June 30, 2003, the Company received from three of its principal shareholders, several directors and a shareholder cash totaling $8,642,888 for 6,329.50 shares of Series A Preferred Stock ($6,329,500), 122,134 shares of common stock ($467,063) related to the exercise of stock options, and $1,846,325 for available-for-sale securities at the higher of fair market value or amortized cost. For the period January 1, 2003 to June 30, 2003 the Company recorded additional paid-in-capital of $987,000 related to the assumption of the Company's lease obligation on one of its corporate locations by the Company's two principal shareholders and $357,000 related to the purchase of available-for-sale securities by the Company's two principal shareholders at an amount which exceeded fair value. For the period July 1, 2003 to August 14, 2003 the Company received from its two principal shareholders cash totaling $17,000 for 17 shares of Series A Preferred Stock. On July 14, 2003 the Company issued 300 shares of the Series B stock to a third party in exchange for cash of $300,000. At June 30, 2003, the Savings Bank had funding commitments totaling $12.5 million. These commitments include 22 $5.3 million for unused lines of credit, $427,000 for the unfunded portion of construction loans, $1.8 million for commitments to originate loans and $5 million for commitments to purchase investment securities. Commitments to fund loans and lines of credit have credit risk essentially the same as that involved in extending loans to customers and are subject to the Savings Bank's normal credit policies. Commitments to purchase investment securities are subject to the Savings Bank's normal investment policies. As of June 30, 2003, the Savings Bank also had an investment commitment of $51,000 to be funded over two years for investment in the Kedzie Limited Partnership, which is a CRA investment. ASSET QUALITY The Bancorp and the Savings Bank regularly review assets to determine proper valuation. The ALLL is maintained at a level determined to be adequate by management to absorb probable incurred credit losses. Determination of an appropriate level of ALLL necessarily involves a high degree of judgment. Primary considerations in this evaluation are prior loan loss experience, the character and mix of the loan portfolio, adverse situations which may affect a borrower's ability to repay, size of the loan portfolio, peer group information, business and economic conditions and management's estimate of probable incurred losses. While management uses all available information, including the monitoring of the economic conditions in the geographic regions in which the loan portfolio is located, future additions to the allowance may be necessary based on estimates that are susceptible to significant revision as a result of changes in economic conditions and other factors. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review UmbrellaBank's allowance for loan losses. Such agencies may require UmbrellaBank to recognize additions to the allowance based on regulatory judgment of information available to agency personnel at the time of their examination. The Company's consolidated ALLL at June 30, 2003 was $2.6 million as compared to $4.1 million at December 31, 2002. The ALLL as a percentage of consolidated nonperforming loans was 22.0% and 19.9% at June 30, 2003 and December 31, 2002, respectively. The $1.5 million decline in the ALLL is primarily related to $1.4 million of charge-offs and specific reserves during 2003 associated with the Savings Bank's single-family mortgage loan portfolio. Charge-offs occurred at the time delinquent single-family mortgage loans were transferred to a foreclosed real estate classification and specific reserves were established on certain delinquent single-family mortgage loans anticipated for, or in the process of, foreclosure proceedings. Of the $1.5 million decline, $1.3 million consisted of charge-offs on loans in portfolio as a result of the Savings Bank's termination of its "purchase/repurchase" loan program, as discussed further in the Company's 2002 Annual Report to Shareholders. At June 30, 2003, the Savings Bank had fifty (50) properties totaling $4.0 million classified as foreclosed real estate, as compared to fifty-two (52) properties totaling $2.4 million at December 31, 2002. As of June 30, 2003, ten (10) of the properties totaling $1.0 million were related to the Savings Bank's purchase of a distressed loan portfolio during 2002. The portfolio was purchased at a substantial discount with one portion of the exit strategy being converting the properties to foreclosed real estate and realizing a return on the ultimate sale. Based on this strategy, and in conjunction with the Savings Bank's business plan to reduce all non-performing assets, it is likely that the Savings Bank's investment in foreclosed real estate will increase or remain constant over the next twelve (12) months, and is largely dependent on the success of its sales strategies. The underlying properties at June 30, 2003 consisted primarily of single-family residences and included one significant undeveloped land parcel for which the Savings Bank has a contract for sale estimated to close prior to September 30, 2003. The foreclosed real estate has been written down to estimated fair value at June 30, 2003. The Savings Bank's total amount of loans receivable ninety (90) days or more past due at June 30, 2003, was $11.4 million or 12.42% of gross loans receivable compared to $19.9 million or 16.65% of gross loans receivable at December 31, 2002. The $8.5 million decrease was due to the pay-off of certain commercial loans previously delinquent, the transfer of loans to foreclosed real estate, the establishment of specific reserves on delinquent one-to-four family mortgages, and a general improvement in previously delinquent one-to-four family mortgages. 23 Loans ninety (90) days or more past due are primarily secured by one-to-four family residences and, for commercial loans, single and multi-family unit residential property and commercial business assets. During 2003, management anticipates the non-accrual loans will be sold or transferred to foreclosed real estate for their ultimate disposition. Total Savings Bank non-performing assets, including discounted loans receivable, were $15.5 million or 6.7% of total assets compared to $22.3 million or 6.5% of total assets at December 31, 2002. Along with other financial institutions, management shares a concern for the outlook of the economy during the remainder of 2003. A slow down in economic activity beginning in 2002 severely impacted several major industries, as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may be negatively impacted by the recent volatility in equity prices. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Savings Bank could experience increases in problem assets, delinquencies and losses on loans. RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002. GENERAL Net loss for the three months ended June 30, 2003 was $2.5 million or ($1.34) per diluted share as compared to net loss of $8.4 million or ($4.86) per diluted share for the corresponding period in 2002. The $5.9 million decrease in net loss is largely attributable to the $8.6 million provision for loan and lease losses and the $2.5 million valuation allowance on the investment in limited partnership related to the partnership's investment in PMSRs, which were recorded during the three months ended June 30, 2002. The elimination of these first quarter 2002 losses during 2003 was offset by a 130 basis point decrease in the net interest spread to 0.65% for the three months ended June 30, 2003 as compared to 1.95% for the same 2002 period. These changes are discussed in more detail below. In addition, the Company did not record a tax benefit for the three months ended June 30, 2003. Management's analysis of second quarter tax benefits and its deferred tax asset are discussed in the preceding Financial Condition section. Net loss for the six months ended June 30, 2003 was $4.7 million or ($2.59) per diluted share as compared to net loss of $8.9 million or ($5.21) per diluted share for the corresponding period in 2002. The $4.2 million decrease in net loss is largely attributable to the provision for loan and lease losses and the investment in limited partnership valuation allowance recorded during the first half of 2002, as discussed above. The elimination of these first quarter 2002 losses during 2003 was offset by an 88 basis point decrease in the net interest spread to 0.91% as compared to 1.79% for the same 2002 period. These changes are discussed in more detail below. In addition, the Company did not record a tax benefit for the three months ended June 30, 2003. Management's analysis of second quarter tax benefits and its deferred tax asset are discussed in the preceding Financial Condition section. The average outstanding shares increased by 120,900 shares for the three months ended June 30, 2003 and 85,600 shares for the six months ended June 30, 2003, as compared to shares for the same period last year. The increase in average shares is primarily the result of 122,134 shares of common stock ($467,063) related to the exercise of stock options during the first half of 2003, offset by 27,332 shares cancelled and treated as treasury stock shares during second quarter 2003, as a result of the Company terminating its Management Recognition Plan ("MRP"). INTEREST INCOME Interest income for the three months ended June 30, 2003 totaled $2.3 million, as compared to $7.3 million for the 24 comparable 2002 period. The $5 million decrease was partly the result of a 176 basis point decrease in the tax equivalent yield on earning assets to 4.78% from 6.54%. Earning asset yields have declined as a result of re-pricing Prime rate based loans with each change in the Prime lending rate, which also impacts yields on securities available-for-sale and interest earning deposits, as well as a result of the Company's affirmative actions to reduce the amount of assets of the Savings Bank and Bancorp. Average interest earning assets for second quarter 2003 totaled $205.2 million, as compared to $459.3 million for the comparable 2002 period, which is a $254.1 million decline. In addition, during second quarter 2003, the Savings Bank charged-off approximately $315,000 of its capitalized net deferred loan fee balance, which resulted in a corresponding reduction in loan interest income. The average yield on earning assets was 4.81% at the Savings Bank and (2.10%) at the Bancorp, with a consolidated Company average yield of 4.78% for the three months ended June 30, 2003. Interest income for the six months ended June 30, 2003 totaled $5.6 million, as compared to $15.2 million for the comparable 2002 period. The $9.6 million decrease was partly the result of a 158 basis point decrease in the tax equivalent yield on earning assets to 4.86% from 6.44%. Earning asset yields have declined as a result of changes in the Prime lending rate, as discussed above, as well as a result of the Company's affirmative actions to reduce the amount of assets of the Savings Bank and Bancorp. Average interest earning assets for the first half of 2003 totaled $240.3 million as compared to $483.0 million for the comparable 2002 period, which is a $242.7 million decline. In addition, during second quarter 2003, the Savings Bank charged-off approximately $315,000 of its capitalized net deferred loan fee balance, which resulted in a corresponding reduction in loan interest income. Last, the increase in nonperforming assets as a percentage of total assets during the first half of 2003 as compared to the first half of 2002 also had a negative impact on interest income. The average yield on earning assets was 4.84% at the Savings Bank and 8.82% at the Bancorp, with a consolidated Company average yield of 4.86% for the six months ended June 30, 2003. INTEREST EXPENSE Interest expense for the three months ended June 30, 2003 totaled $2.3 million as compared to $5.5 million for the comparable 2002 period. The $3.2 million decrease was partly the result of a 45 basis point decline in the average cost of interest-bearing liabilities to 4.13% for the three months ended June 30, 2003 as compared to 4.58% for the same period last year. In addition, consistent with the Company's affirmative actions to reduce the amount of assets of the Savings Bank and Bancorp, average interest-bearing liabilities for second quarter 2003 totaled $223.9 million, as compared to $477.2 million for the comparable 2002 period, which is a $253.3 million decline. The average cost of interest bearing liabilities was 3.26% at the Savings Bank and 14.31% at the Bancorp, with a consolidated Company average cost of 4.13% for the three months ended June 30, 2003. Interest expense for the six months ended June 30, 2003, totaled $5.1 million as compared to $11.4 million for the comparable 2002 period. The $6.3 million decrease was partly the result of a 70 basis point decline in the average cost of interest-bearing liabilities to 3.95% for the six months ended June 30, 2003 as compared to 4.65% for the same period last year. In addition, consistent with the Company's affirmative actions to reduce the amount of assets of the Savings Bank and Bancorp, average interest-bearing liabilities for the first half of 2003 totaled $257.0, as compared to $491.9 million for the comparable 2002 period, which is a $234.9 million decline. The average cost of interest-bearing liabilities was 3.25% at the Savings Bank and 12.65% at the Bancorp, with a consolidated Company average cost of 3.95% for the six months ended June 30, 2003. Interest-bearing liabilities include $17.2 million of 11.0% junior subordinated debt, which the Bancorp issued in November, 1998. Interest-bearing liabilities also include $3.0 million of subordinated debentures issued by the Savings Bank in November 2001 with an annualized cost of 5.57% for the six months ended June 30, 2003. NET INTEREST INCOME (LOSS) Net interest income (loss) for the three months ended June 30, 2003 totaled $(3,000) as compared to $1.8 million 25 for the comparable 2002 period. The $1.8 million decrease was due to a decrease in average balances during 2003 as compared to 2002, as discussed above, and a 130 basis point decrease in the net interest spread to 0.65% for the three months ended June 30, 2003 as compared to 1.95% for the same 2002 period. In addition, during second quarter 2003, the Savings Bank charged-off approximately $315,000 of its capitalized net deferred loan fee balance, which resulted in a corresponding reduction in loan interest income. The net interest spread was 1.55% at the Savings Bank and (16.40%) at the Bancorp, with a consolidated Company net interest spread of 0.65% for the three months ended June 30, 2003. Net interest income (loss) for the six months ended June 30, 2003 totaled $500,000 as compared to $3.7 million for the comparable 2002 period. The $3.2 million decrease was due to a decrease in average balances during 2003 as compared to 2002, as discussed above, and a 88 basis point decrease in the net interest spread to 0.91% as compared to 1.79% for the same 2002 period. The net interest spread has decreased as earning asset yields have declined with each change in the Prime lending rate, as well as the Company's affirmative actions to reduce its total assets, as discussed in more detail above. In addition, the increase in nonperforming assets as a percentage of total assets during the first half of 2003 as compared to the first half of 2002 had a negative impact on net interest spread. During second quarter 2003, the Savings Bank also charged-off approximately $315,000 of its capitalized net deferred loan fee balance, which resulted in a corresponding reduction in loan interest income. The net interest spread was 1.58% at the Savings Bank and (3.83)% at the Bancorp, with a consolidated Company net interest spread of 0.91% for the six months ended June 30, 2003. PROVISION FOR LOAN AND LEASE LOSSES The Company did not record a provision for loan and lease losses during the three and six months ended June 30, 2003 as compared to $8.6 million in each of the comparable periods in 2002. As discussed in the Company's 2002 Annual Report to Shareholders, subsequent to March 31, 2002 the Company recorded a provision for loan and lease losses of $9.8 million and net charge-offs of $8.6 million during 2002. As disclosed previously in the Asset Quality section, the Company's ALLL at June 30, 2003 was $2.6 million or 22.0% of nonperforming loans. Based on the level of ALLL as compared to nonperforming loans, the Company did not deem any provision for loan and lease losses necessary during the first two quarters of 2003. NON-INTEREST INCOME Total non-interest income (expense) increased $3.9 million to $1.3 million of income for the three months ended June 30, 2003, as compared to a loss of $2.6 million for the three months ended June 30, 2002. The increase was primarily the result of: 1) recording a $2.5 million valuation allowance during the second quarter of 2002, as opposed to a $300,000 valuation allowance during the second quarter of 2003, taken against the Company's interest in the limited partnership and resulting from the declines in interest rates during these periods and the adverse effect of increased loan prepayment speeds on the value of PMSRs; 2) recording a $1.04 million gain on sale of the Dolton branch operations during second quarter 2003; and 3) a $520,000 decline in trading account profits during second quarter 2003, as compared to the same period in 2002, due to the elimination of trading account activities. Total non-interest income (expense) increased $3.9 million to $1.2 million of income for the six months ended June 30, 2003, as compared to a loss of $2.7 million for the six months ended June 30, 2002. The increase was primarily the result of: 1) recording a $2.5 million valuation allowance during the first half of 2002, as opposed to a $300,000 valuation allowance during the first half of 2003, taken against the Company's interest in the limited partnership, as discussed above; 2) recording $1.45 million of gains on sales of the Madison and Dolton branch operations; 3) recording a $225,000 gain on sale of an investment by the Savings Bank subsidiary; 4) a $342,000 decrease in loss on the sale of available-for-sale securities during the first half of 2003, as compared to the same period in 2002; and 6) a $202,000 increase in gains on loans held for sale during the first half of 2003, as compared to the same period in 2002. These changes were offset by a $67,000 decrease in loan servicing income 26 due to the Company's reduction in loans receivable, a $159,000 increase in loss on the sale of foreclosed real estate, and a $153,000 decrease in other fees and service charges due to the Company's reduction in loans and deposits, all occurring during the first half of 2003, as compared to the first half of 2002. NON-INTEREST EXPENSE Non-interest expense decreased by $568,000 to $3.8 million or 6.10% of average assets for the three months ended June 30, 2003 from $4.3 million or 3.35% of average assets for the same period last year. The decrease in operating expenses was primarily the result of targeted expense reductions commensurate with the Savings Bank's business plan, as discussed in the Business Plan section above, including sale of the Savings Bank's Madison and Dolton branch locations, consolidation of the Company corporate offices, and other resulting reductions associated with the Company's $225.4 million reduction in total assets to $231.7 million as of June 30, 2003, as compared to $457.1 million as of June 30, 2002. Consistent with the Savings Bank's business plan, throughout the remainder of 2003, the Company will continue to focus on targeted reductions in general and administrative expenses, with focus on, but not limited to, reductions in general insurance premiums, federal deposit insurance premiums, data processing fees, legal fees resulting from the agreed upon enforcement actions discussed in the preceding Regulatory Compliance section, and other professional fees. In addition, second quarter non-interest expense included approximately $365,000 of expense associated with a one-time write-off of capitalized conversion costs, which resulted from removal of ATMs from the locations of a bankrupt retailer. These ATMs are currently maintained in a secure storage facility and the Savings Bank, along with its ATM network deployment partner, is in the process of redeploying these ATMs to other locations. Second quarter non-interest expense also included approximately $90,000 of expense associated with an Internet banking software platform conversion at the Savings Bank during June 2003. Non-interest expense decreased by $390,000 to $7.2 million or 5.08% of average assets for the six months ended June 30, 2003 from $7.6 million or 2.88% of average assets for the same period last year. The decrease in operating expenses was primarily the result of targeted expense reductions commensurate with the Savings Bank's business plan, offset by second quarter one-time expenses associated with the Savings Bank's ATM network and Internet banking software platform, as discussed immediately above. INCOME TAX EXPENSE The Company did not record a tax benefit for the three months ended June 30, 2003, as compared to a tax benefit of $5.3 million for the same period last year. During second quarter 2003, the Company discontinued recognizing tax benefits. Management's analysis of second quarter tax benefits and its deferred tax asset are discussed in the preceding Financial Condition section. The Company recorded a tax benefit of $797,000 for the six months ended June 30, 2003, as compared to a tax benefit of $6.2 million for the same period last year. The 2003 benefit is based on a tax rate of approximately 39% calculated on the pre-tax loss of $3 million for the three months ended March 31, 2003, plus tax benefits derived from tax-exempt municipal securities and tax-exempt charter school loans, plus utilization of affordable housing tax credits. In addition, the Company's tax benefit, as well as its deferred tax asset, was reduced by approximately $520,000 related to the lease assumption and purchase of available-for-sale security transactions between the Company and its two principal shareholders as previously discussed. During second quarter 2003, the Company discontinued recognizing tax benefits. Management's analysis of second quarter tax benefits and its deferred tax asset are discussed in the preceding Financial Condition section. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", and Statement 150, 27 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities", both of which generally become effective in the quarter beginning July 1, 2003. The Company is evaluating the impact of these new accounting standards on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As part of its normal operations, the Savings Bank is subject to interest-rate risk on the interest-sensitive assets it invests in and the interest-sensitive liabilities it borrows. The Investment Committee, which includes members of senior management and directors, monitors and determines the strategy of managing the rate and sensitivity repricing characteristics of the individual asset and liability portfolios the Savings Bank maintains. The overall goal is to manage this interest rate risk to most efficiently utilize the Savings Bank's capital, as well as to maintain an acceptable level of change to its net portfolio value ("NPV") and net interest income. The Savings Bank's strategy is to minimize the impact of sudden and sustained changes in interest rates on NPV and its net interest margin. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Savings Bank's change in NPV in the event of hypothetical changes in interest rates, as well as interest rate sensitivity gap analysis, which monitors the repricing characteristics of the Savings Bank's interest-earning assets and interest-bearing liabilities. The Board of Directors has established limits to changes in NPV and net interest income across a range of hypothetical interest rate changes. If estimated changes to NPV and net interest income are not within these limits, the Board may direct management to adjust its asset/liability mix to bring its interest rate risk within established limits. In an effort to reduce its interest rate risk, the Savings Bank has focused on strategies limiting the average maturity of its assets by emphasizing the origination of adjustable-rate mortgage loans. The Savings Bank, from time to time, also invests in long-term, fixed-rate mortgages provided it is compensated with an acceptable spread. None of these strategies are prohibited or otherwise restricted by the Savings Bank agreed upon enforcement action discussed previously. Interest rate sensitivity analysis is used to measure the Savings Bank's interest rate risk by calculating the estimated change in the NPV of its cash flows from interest sensitive assets and liabilities, as well as certain off-balance-sheet items, in the event of a series of sudden and sustained changes in interest rates ranging from 100 to 300 basis points. Management assumes that a 200 basis point movement up or down is considered reasonable and plausible for purposes of managing its interest-rate risk on a day-to-day basis. NPV is the market value of portfolio equity and is computed as the difference between the market value of assets and the market value of liabilities, adjusted for the value of off-balance-sheet items. The following table presents the Saving Bank's projected change in NPV for the various rate shocks as of March 31, 2003 which is the most recent available.

Due to the level of interest rates at March 31, 2003, the Company is not able to model an additional 200 or 300 basis point decrease in rates. 28 The NPV is calculated by the Savings Bank using guidelines established by the OTS related to interest rates, loan prepayment rates, deposit decay rates, and market values of certain assets under the various interest rate scenarios. These assumptions should not be relied upon as indicative of actual results due to the inherent shortcomings of the NPV analysis. These shortcomings include: (i) the possibility that actual market conditions could vary from the assumptions used in the computation of NPV; (ii) certain assets, including adjustable-rate loans, have features which affect the potential repricing of such instruments, which may vary from the assumptions used; and (iii) the likelihood that as interest rates are changing, the Investment Committee would likely be changing strategies to limit the indicated changes in NPV as part of its management process. In addition, as the Company executes its business plan to reduce assets and liabilities and restructure its balance sheet, the Company could experience significant changes in NPV at various points in time during 2003 and the Investment Committee would likely be changing strategies to address these changes. The Savings Bank does not use derivative instruments to control interest rate risk. In addition, interest rate risk is the most significant market risk affecting the Savings Bank. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company's business activities and operations. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Principal Accounting and Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer along with the Company's Principal Accounting and Financial Officer have concluded that the Company's disclosure controls and procedures are effective for timely alerting of material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors, which could have a significant adverse effect on these controls subsequent to the date the Company carried out its evaluation. Management's responsibility related to establishing and maintaining effective disclosure controls and procedures includes maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting policies generally accepted in the United States of America and produce reports submitted under the Exchange Act which are in accordance with the SEC's rules and forms. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 29 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bancorp and the Savings Bank are not engaged in any legal proceedings of a material nature at the present time. ITEM 2. CHANGES IN SECURITIES On June 26, 2003, the Board of Directors of the Bancorp authorized the issuance of up to 10,000 shares of Series B 8.0% Perpetual Preferred Convertible Preferred Stock ("Series B Stock"). The Series B Stock has a par and face value of $1,000. After March 31, 2003, the holders of record of the Series B Stock on the dates specified below shall be entitled to receive, as and when declared by the Board of Directors and out of assets of the Bancorp which are by law available for payment of dividends, cumulative preferential cash dividends, at the rate of $80.00 per share per annum, payable quarterly on the first day of July, October, January and April in each year. Dividends on the Series B Stock shall be cumulative, whether or not in any dividend period or periods after March 31, 2003 there shall be surplus or net profits of the Company legally available for the payment of such dividends. Dividends on the Series B Stock shall be junior and subordinate to the payment of the Bancorp's obligations for dividends or payments under the Company's 11% Junior Subordinate Deferrable Interest Debentures but pari pasu with the payment of dividends under the Company's Series A 8.0% Perpetual Convertible Preferred Stock. After March 31, 2004, the Bancorp, at the option of the Board of Directors, may at any time or from time to time redeem the whole or any part of the Series B Stock by paying therefore in cash $1,000 per share plus an amount equal to all dividends thereon declared but unpaid on the date fixed for redemption (the "Redemption Price"). After July 31, 2005, the holder of the Series B Stock may elect to require that the Company repurchase the whole or any part of the Series B Stock by paying therefore in cash $1,000 per share plus an amount equal to all dividends thereon declared but unpaid on the date which tender of shares is to be made (the "Repurchase Price"). Until March 31, 2008, each holder of Series B Stock may at any time upon surrender of the certificates therefore, convert any or all of such holder's Series B Stock into fully paid and nonassessable shares of Common Stock of the Bancorp, at the rate of 166 shares of Common Stock for each share of Series B Stock so surrendered for conversion. ITEM 3. DEFAULT UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held May 28, 2003, with the following resolutions ratified and approved in all respects: I. Election of Directors: The election of Arthur E. Byrnes for a three (3) year term For: 1,577,584 Votes Withheld: 62,498 Votes Election of Directors: The election of Frances M. Pitts for a three (3) year term For: 1,598,098 Votes Withheld: 41,984 Votes

In addition, the following directors continue in office: John G. Yedinak, Chairman, President and Chief Executive Officer of the Company, Vice Chairman and Chief Executive Officer of the Savings Bank 30 Sergio Martinucci, Vice President of the Company and Chairman of the Savings Bank, Senior Vice President of Coldwell Banker Residential Donald G. Wittmer, President and owner of Wittmer Financial Services, Ltd. Dennis G. Carroll, Chief Executive Officer and owner of Carroll Brothers Real Estate Appraisals, Detective Chicago Police Department II. Ratification of Appointment of Crowe, Chizek and Company LLC as Independent Auditors: For: 1,635,578 Votes Against: 4,500 Votes ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits The following exhibits are incorporated herein by reference: (3) The Certificate of Incorporation and By-Laws. 3.1 Amended Certificate of Incorporation of Umbrella Bancorp, Inc.* 3.2 By-Laws of Umbrella Bancorp, Inc.* 4.0 Stock Certificate of Umbrella Bancorp, Inc.* 11.0 Statement Regarding Computation of Earnings Per Share (See Note J) 31.0 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.0 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. Reports of Form 8-K Not applicable * Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, and filed on January 28, 1992, any amendments thereto, Registration No. 33-45222. 31 SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UMBRELLA BANCORP, INC. Date: August 14, 2003 /s/ John G. Yedinak ------------------ -------------------------------------- John G. Yedinak, Chairman, President and Chief Executive Officer Date: August 14, 2003 /s/ Colleen A. Kitch ------------------ -------------------------------------- Colleen A. Kitch Principal Accounting and Financial Officer 32

UMBRELLA BANCORP INC 10-Q