UMBRELLA BANCORP INC - 10-Q Quarterly Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

COMMISSION FILE NUMBER 0-19829

UMBRELLA BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)

Maryland 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.}

5818 South Archer Road, Summit, Illinois 60501-1830
(Address of principal executive offices)

(708) 458-4800
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----

The Registrant had 1,724,038 shares outstanding as of August 14, 2002.

Transitional Small Business Disclosure Format (check one): Yes No X
----- -----

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UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2002

INDEX

PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------

Item 1 Financial Statements

Consolidated Statements of Financial Condition
as of June 30, 2002 and December 31, 2001 (unaudited)................. 3

Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2002 and 2001 (unaudited)....................... 4

Consolidated Statements of Comprehensive Income for the Three
and Six Months Ended June 30, 2002 and 2001 (unaudited)............... 5

Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 2002 and 2001 (unaudited) .................. 6

Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited) ............................. 7

Notes to Consolidated Financial Statements ........................... 8

Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 13

Item 3 Quantitative and Qualitative Disclosures about Market Risk............ 23

PART II - OTHER INFORMATION
- ---------------------------

Item 1 Legal Proceedings .................................................... 25

Item 2 Changes in Securities ................................................ 25

Item 3 Default Upon Senior Securities ....................................... 25

Item 4 Submission of Matters to a Vote of Security Holders .................. 25

Item 5 Other Information .................................................... 25

Item 6 Exhibits and Reports on Form 8-K ..................................... 26

Form 10-Q Signature Page ....................................................... 27

2

PART 1 - FINANCIAL INFORMATION

UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in Thousands)

June 30, December 31,
ASSETS 2002 2001
--------- ----------

Cash $ 5,509 $ 647
Interest-earning deposits 48,259 37,002
--------- ---------
Total Cash & Cash Equivalents 53,768 37,649

Trading account securities 4,651 6,053
Securities available-for-sale 78,644 123,118
Securities held-to-maturity -- 1,859
Loans held for sale 30,308 65,056
Loans receivable, net 239,227 250,353
Mortgage loan servicing rights, net 200 337
Investment in limited partnership 1,308 3,743
Stock in Federal Home Loan Bank of Chicago 2,875 2,800
Foreclosed real estate, net 1,766 730
Premises and equipment, net 15,985 20,609
Premises and equipment held for sale 4,539 --
Debt issuance costs, net 1,795 1,831
Accrued interest receivable 3,215 5,272
Receivable from loan servicers 2,950 4,479
Prepaid expenses and other assets 15,863 12,746
--------- ---------
Total Assets $ 457,094 $ 536,635
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits $ 392,469 $ 458,147
Borrowed money 22,904 28,343
Custodial escrow balances for loans serviced by others 8,910 9,499
Accrued interest payable 1,891 1,707
Other liabilities 4,561 4,759
Junior subordinated debt 17,005 16,603

Stockholders' Equity
Preferred stock 3 3
Common stock 21 21
Additional paid-in-capital 9,332 9,214
Retained earnings - substantially restricted 6,037 15,181
Treasury stock - common, at cost (5,121) (5,121)
Employee Stock Ownership Plan loan (301) (341)
Unearned stock awards (248) (248)
Accumulated other comprehensive loss (369) (1,132)
--------- ---------
Total Stockholders' Equity 9,354 17,577
--------- ---------
Total Liabilities and Stockholders' Equity $ 457,094 $ 536,635
========= =========

See notes to accompanying unaudited consolidated financial statements.

3

UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)

For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited)

Interest income:
Loans receivable $ 4,834 $ 6,293 $ 9,911 $ 12,497
Securities available-for-sale 1,276 1,244 2,439 1,673
Securities held-to-maturity 19 462 61 847
Interest-earning deposits 1,157 1,675 2,760 3,413
-------- -------- -------- --------
Total interest income 7,286 9,674 15,171 18,430
-------- -------- -------- --------

Interest expense:
Deposits 4,396 6,917 9,315 13,445
Borrowed money 588 426 1,154 767
Junior subordinated debt 484 443 966 886
-------- -------- -------- --------
Total interest expense 5,468 7,786 11,435 15,098
-------- -------- -------- --------
Net interest income 1,818 1,888 3,736 3,332
Provision for loan and lease losses 8,559 31 8,594 106
-------- -------- -------- --------
Net interest income (expense) after provision
for loan and lease losses (6,741) 1,857 (4,858) 3,226
-------- -------- -------- --------

Non-interest income:
Loan servicing income 67 124 140 213
Mortgage banking -- 2 -- 6
Gain (loss) on sale of loans receivable, securities
available for sale, trading account securities and
foreclosed real estate (399) 457 (840) 1,098
Fees and service charges 173 312 379 950
Net loss on investment in limited partnership (2,463) -- (2,463) --
Other income 46 275 62 308
-------- -------- -------- --------
Total non-interest income (expense) (2,576) 1,170 (2,722) 2,575

Non-interest expense:
Compensation and benefits 1,047 760 1,975 1,603
Occupancy and equipment 548 753 1,046 1,375
Federal deposit insurance premium 14 20 36 40
Other general and administrative fees 2,721 1,355 4,520 2,456
-------- -------- -------- --------
Total non-interest expense 4,330 2,888 7,577 5,474
-------- -------- -------- --------

Income (loss) before income taxes (13,647) 139 (15,157) 327
Income tax benefit 5,272 68 6,221 260
-------- -------- -------- --------
Net income (loss) $ (8,375) $ 207 $ (8,936) $ 587
======== ======== ======== ========

Per Share Amounts:
Basic $ (4.86) $ 0.12 $ (5.21) $ 0.31
Diluted $ (4.86) $ 0.11 $ (5.21) $ 0.29

See notes to accompanying consolidated unaudited financial statements.

4

UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)

For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
-------- ------- -------- -------
(Unaudited)

Net income (loss) $ (8,375) $ 207 $ (8,936) $ 587

Other comprehensive income
Unrealized holding gains (losses) on securities available-for-sale 1,176 579 429 606

Less reclassification adjustment for gains (losses) recognized in income 113 273 (801) 311
-------- ----- -------- -----

Net unrealized gains 1,063 306 1,230 295

Tax expense 404 116 467 112
-------- ----- -------- -----

Other comprehensive income 659 190 763 183
-------- ----- -------- -----
Comprehensive income (loss) $ (7,716) $ 397 $ (8,173) $ 770
======== ===== ======== =====

See notes to accompanying consolidated unaudited financial statements.

5

UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)

6

UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

Six Months Ended
June 30,
2002 2001
--------- ---------
(Unaudited)

Cash flows from operating activities:
Net income (loss) $ (8,936) $ 587
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 1,757 1,128
Accretion of discounts and deferred loan fees 79 (72)
Provision for loan and lease losses 8,594 106
(Gain) loss on sale of:
Securities available-for-sale 801 (502)
Trading account securities 10 (328)
Loans receivable 115 --
Branch facilities (64) --
Foreclosed real estate (22) 3
Net change in trading account activity 1,392 (578)
Net change in investment in limited partnership 2,435 (165)
Loans originated and purchased for sale (303,785) (30,442)
Proceeds from sale of loans held for sale 338,418 32,906
FHLB Stock dividend (75) (52)
Decrease in purchased mortgage servicing rights 137 60
Net change in debt issuance costs 36 29
Amortization of purchase price of MRP and ESOP stock 40 30
Increase (decrease) in accrued interest receivable, prepaid expenses and other assets (1,527) 866
Increase in accrued interest payable and other liabilities 50 2,665
--------- ---------
Net cash provided by (used in) operating activities 39,455 6,241
Cash flows from investing activities:
Loans originated and purchased for portfolio (34,329) (250,905)
Principal repayments on:
Loans receivable 36,766 223,131
Securities-available-for-sale 6,603 54
Securities held to maturity 292 --
Proceeds from sale, maturity, or call of:
Foreclosed real estate 531 1,849
Securities held-to-maturity 1,567 11,009
Securities available-for-sale 80,438 5,000
Investment in GFS preferred stock -- 4,000
Purchase of:
Securities available-for-sale (42,138) (64,002)
Premises and equipment (1,672) (4,495)
--------- ---------
Net cash provided by (used in) investing activities 48,058 (74,359)
Cash flows from financing activities:
Net increase (decrease) in deposits (65,678) 87,435
Proceeds from borrowed funds 213,900 7,404
Repayment of borrowed funds (219,339) (3,272)
Purchase of Treasury Stock -- (5,121)
Reissuance of junior subordinated debentures 1,065 --
Repurchase of junior subordinated debentures (663) --
Dividends paid (208) (200)
Proceeds from exercise of stock options 118 --
Net increase (decrease) in custodial escrow balances for loans serviced (589) 2,092
--------- ---------
Net cash provided by (used in) financing activities (71,394) 88,338
--------- ---------
Net increase in cash and cash equivalents 16,119 20,220
Cash and cash equivalents at beginning of period 37,649 94,017
--------- ---------
Cash and cash equivalents at end of period $ 53,768 $ 114,237
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,251 $ 13,423
Income taxes (453) 1,100
Non-cash investing activity - transfer of loans to foreclosed real estate 1,545 840
Non-cash investing activity - ending receivable from loan servicers 2,950 4,172
Non-cash investing activity - transfer of premises and equipment held for sale 4,539 --

See accompanying notes to unaudited consolidated financial statements.

7

UMBRELLA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

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, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.

Certain reclassifications have been made to prior period amounts in the
financial statements in order to conform to the current period presentation.

The unaudited consolidated financial statements include Umbrella Bancorp, Inc.
(the "Bancorp" or the "Company") and its wholly owned subsidiaries,
UmbrellaBank, fsb, (the "Savings Bank"), Argo Redemption Corp., Inc. ("Argo
Redemption" or "ARC"), and the Savings Bank's wholly owned subsidiary,
Dolton-Riverdale Savings Service Corporation (Dolton-Riverdale).

The Bancorp, through its subsidiaries, provides a full range of financial
services through its Internet banking delivery channel at
http://www.umbrellabank.com and two retail banking facilities in Cook County,
Illinois.

NOTE B - PREMISES AND EQUIPMENT HELD FOR SALE

During June 2002, the Savings Bank classified its investment in an office
building as held for sale and, as such, it is being carried at the lower of cost
or fair value. This building was purchased in April 2001 as a possible branch
location for the Savings Bank. As of June 30, 2002, the net book value of this
office building was $4.5 million. During the six month period ended June 30,
2002, occupancy and equipment expense was reduced by approximately $315,000
related to rental income from the building and included approximately $155,000
of expenses from the building.

NOTE C - ALLOWANCE FOR LOAN AND LEASE LOSSES

During the three and six month periods ended June 30, 2002, the Company recorded
provisions for loan and lease losses of approximately $8.6 million as compared
to $31,000 and $106,000 during the three and six months periods ended June 30,
2001. As of June 30, 2002 and December 31, 2001, the allowance for loan and
lease losses (ALLL) recorded in the statement of condition was $5.9 million and
$3.0 million, respectively. An analysis of the ALLL for the six month period
ended June 30, 2002 is as follows:

Savings
Bank Bancorp Total
------------------------------------------

ALLL as of December 31, 2001 $ 2,484,000 $ 500,000 $ 2,984,000
Provisions 6,755,000 1,839,000 8,594,000
Charge-offs (3,861,000) (1,839,000) (5,700,000)
----------- ----------- -----------
ALLL as of June 30, 2002 $ 5,378,000 $ 500,000 $ 5,878,000
=========== =========== ===========

8

ALLL as a percentage of Gross Loans (including loans held for sale and
discounted loans):

December 31, 2001 .79% 15.73% .95%

June 30, 2002 1.96% 37.29% 2.18%

The significant provisions recorded during the second quarter 2002 can be
attributable to several internal and external factors, as described below:

During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Although management continues to investigate the
existence of such supporting documentation, including contacting lead banks on
participation loans and contacting borrowers directly, management downgraded any
loans where documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current payment
status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.

In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it is anticipated
that they will likely declare, bankruptcy. Although some of these loans had been
previously classified, management downgraded these loans in the second quarter
of 2002 due to the actual and likely bankruptcy filings and recorded a provision
related to these loans totaling $1.9 million, of which $1.6 million was
subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance
of $1.6 million, with an allowance allocation of $240,000. This loan is secured
by leases on consumer "photo center" equipment deployed in a national retailer.
The second is a loan with a remaining balance of $364,000, with an allowance
allocation of $55,000, and is secured by single family real estate. The Company
also provided for and charged off $2.5 million related to one loan relationship
during the second quarter of 2002. Based upon financial information received
during the second quarter 2002 related to this borrower, updated information
received related to the collateral for certain of these loans, and updated
information related to the borrower's business as a whole, the Company charged
off the entire relationship balance in question and is pursuing recovery.
Management intends to actively seek recovery of charged off loan assets through
legal proceedings. Management also increased its allowance factors within all
commercial loan classifications, based on current economic factors.

Finally, during the second quarter 2002, delinquencies increased in the
single-family mortgage loan portfolio. The total amount of single-family
mortgage loans ninety (90) days or more past due at December 31, 2001, March 31,
2002 and June 30, 2002 were $7.6 million, $10.6 million and $14.6 million,
respectively. Management believes these increases are attributable to a
declining economy and higher unemployment levels. To address this situation, the
Savings Bank lowered the classification on certain pools of loans and also
increased its allowance factors within certain single-family loan
classifications.

As discussed more fully in the Regulatory Compliance section of the Management
Discussion and Analysis ("MD&A"), during May 2002, the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC") began
a joint Field Visit examination in preparation for a joint risk-focused
examination of the Savings Bank and the Bancorp, which commenced on July 1,
2002, and is still in progress. This examination follows the safety and
soundness examinations by the OTS of the Savings Bank and Bancorp completed
January 2002, for which the Reports of Examinations were delivered, as
appropriate to the Savings Bank and Bancorp in March 2002 and in which no loans
were classified as "loss" assets.

9

During the current joint OTS/FDIC safety and soundness examination, management
has met with the OTS/FDIC representatives numerous times. Based on these
meetings, management believes that all loans have been properly graded by
management and the Company's analysis of its ALLL, as of June 30, 2002, has
properly considered all the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of June 30, 2002 is adequate.

Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: 1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (origination date, interest rate, maturity date, payment
dates, etc.) was re-verified to source documents such as the original note or
payment tickets; and 2) during July 2002, the Savings Bank hired a new senior
loan credit administrator and several mid-level managers to effectively monitor
and evaluate the commercial loan portfolio.

NOTE D - INVESTMENT IN LIMITED PARTNERSHIP

The balance of investment in limited partnership of $1.3 million and $3.7
million at June 30, 2002 and December 31, 2001 represents the Savings Bank's
investment in two divisions of a single limited partnership. The investment at
June 30, 2002 includes a $1.0 million equity interest in a division of a limited
partnership whose business activities are to purchase mortgage servicing rights
("PMSRs"), and a $0.3 million investment in subordinated debentures of another
division of the limited partnership. The debentures have an interest rate of
30%. As of December 31, 2001, the investment included $3.0 million in equity
interests and $0.7 million in subordinated debentures. During the second quarter
2002 the Company recorded a $2.5 million valuation allowance against its
interest in the limited partnership due to the impact of the recent declines in
interest rates and the adverse effect of increased loan prepayment speeds on the
value of PMSRs.

NOTE E - EARNINGS (LOSS) PER SHARE

The following table sets forth the components of basic and diluted earnings
(loss) per share. Basic and diluted loss per share are the same for 2002, as
diluted loss per share would be anti-dilutive.

10

Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------- -------- --------
Dollar and shares in thousands,
except per share data

Numerator

Net income (loss) $(8,375) $ 207 $(8,936) $ 587
======= ======= ======= =======

Denominator
Basic earnings (loss) per share -
weighted average shares outstanding 1,723 1,726 1,716 1,875

Effect of dilutive stock options outstanding -- 157 -- 157
------- ------- ------- -------
Diluted earnings (loss) per share -
weighted average shares outstanding 1,723 1,883 1,716 2,032
======= ======= ======= =======

Basic earnings (loss) per share $ (4.86) $ 0.12 $ (5.21) $ 0.31
======= ======= ======= =======
Diluted earnings (loss) per share $ (4.86) $ 0.11 $ (5.21) $ 0.29
======= ======= ======= =======

NOTE F - 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, 2002 and
December 31, 2001, the Savings Bank's actual capital amounts and ratios.

As of June 30, 2002, the Savings Bank was adequately capitalized under the
regulatory framework for prompt corrective action. Requirements for the
`well-capitalized' and `adequately capitalized' categories, with respect to the
ratio of total risk-based, Tier I risk-based, Tier I leverage, and tangible
capital ratios, are set forth in the following table. Additionally, as a result
of regulatory actions arising from the October 29, 2001 OTS Report of
Examination of the Savings Bank, as described further in the Regulatory
Compliance section of the MD&A, the Savings Bank is restricted from increasing
assets during any quarter in excess of an amount equal to net interest credited
on deposit liabilities during the quarter, without prior written approval of the
OTS.

As of December 31, 2001, the Savings Bank was categorized as 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.

On November 28, 2001, the Savings Bank issued and sold $3.0 million subordinated
debentures in a pooled security offering. On December 5, 2001, the Savings Bank
filed an application with the OTS seeking inclusion of the proceeds of the sale
of the debentures in regulatory "Tier II" (risk weighted) capital. As of June
28, 2002, the OTS approved the application. Thus, the Savings Bank's "Tier II"
ratios below reflect the $3.0 million of subordinated debentures as of June 30,
2002 and the "Tier II" ratios do not reflect the subordinated debentures as of
December 31, 2001.

11

NOTE G - COMMITMENTS AND CONTINGENCIES

At June 30, 2002, the Savings Bank had commitments relating to loans, lines of
credit and letters of credit totaling $26.8 million. Commitments to fund loans,
lines of credit and letters of credit have credit risk essentially the same as
that involved in extending loans to customers and are subject to the Savings
Bank's normal credit policies. The Savings Bank also had Community Reinvestment
Act ("CRA") investment commitments outstanding of $900,000.

12

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiary include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan
and securities portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area, the Company's
implementation of new technologies, the Company's ability to develop and
maintain secure and reliable information systems and accounting principles,
policies and guidelines and limitations imposed on the Savings Bank's operations
as a result of the agreed upon enforcement action described in the Regulatory
Compliance section following. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission. Further description of the risks and
uncertainties to the business are included in detail in Item 1, "Business" of
the Company's 2001 Form 10-K.

OVERVIEW

Umbrella Bancorp, Inc. (the "Bancorp" or the "Company") is a unitary savings and
loan holding company and is registered as such with the Office of Thrift
Supervision ("OTS"). The Company is an active holding company with assets
consisting of investments in UmbrellaBank, fsb (the "Savings Bank"), marketable
securities, loans receivable, and interest-earning deposits. The Company is a
Federal Housing Authority ("FHA") approved originator and servicer and an
approved Federal National Mortgage Association ("Fannie Mae") servicer.

The Savings Bank's principal business consists of attracting deposits from the
public through its Internet banking delivery channel at
http://www.umbrellabank.com and its two traditional branch locations and
investing these deposits primarily in residential and commercial real estate
secured loans. The Savings Bank also invests, to a lesser extent, in
purchase/repurchase loan facilities ("purchase/repurchase loan program"), for
which it offers for sale to a number of mortgage banking firms; however, the
Company is currently evaluating the viability and profitability of the
purchase/repurchase loan program, as a result of regulatory dissatisfaction
with, and criticisms of, the program. These purchase/repurchase loans are, and
historically have been, classified as held for sale on the consolidated
statement of financial condition.

Additionally, the Savings Bank maintains a portfolio of bank qualified
securities and operates a network of more than 1,900 ATM machines. The Savings
Bank's deposit accounts are insured to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC").

The Savings Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities portfolios, and the interest paid on deposits and borrowed funds. The
Savings Bank's operating results are also affected by provisions for loan and
lease losses, loan servicing fees, customer service charges and fees, fees from
ATM operations, gains (losses) on the sale of securities and other assets and
other income. Operating expenses of the Savings Bank include employee
compensation and benefits, equipment and occupancy costs, outsourced servicing
expenses, federal deposit insurance premiums and other administrative expenses.

13

The Savings Bank's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates. Results
are also affected by monetary and fiscal policies of federal agencies, and
actions of regulatory authorities.

REGULATORY COMPLIANCE

The OTS commenced risk-focused safety and soundness examinations of the Savings
Bank and the Bancorp on October 29, 2001 and November 14, 2001, respectively.
The OTS Reports of Examinations, which were primarily based on financial
information as of September 30, 2001, were transmitted to the Savings Bank and
Bancorp in March 2002.

The November 14, 2001 Holding Company Report of Examination ("Bancorp ROE") was
not limited to any one area, but focused on the risk factors of Transactions
with Affiliates, Funds Distribution, Financial Effect and Management Quality.
During the course of the OTS examination, the Bancorp addressed the specific
regulatory violations identified and developed and implemented policies and
procedures to ensure future regulatory compliance. The OTS commented in the
Bancorp ROE on the Bancorp's level of operating losses, debt service
requirements and capital position. As a result of the findings contained in the
Bancorp ROE, the Bancorp was required to provide OTS with a quarterly financial
cash flow projection report and quarterly monitoring reports. The Bancorp was
also required to take actions to ensure future regulatory compliance, and take
actions sufficient to ensure safe and sound operations. In addition, the Bancorp
was placed under various operating restrictions, including a requirement that
the Bancorp file notice with the OTS prior to adding or replacing a director or
hiring a senior executive officer. The Bancorp was also restricted in making
"golden parachute" payments to any institution-affiliated party unless
authorized by regulation. The Bancorp is currently in compliance with the
requirements set forth by the OTS, as a result of the findings contained in the
Bancorp ROE.

The October 29, 2001, Report of Examination of the Savings Bank ("Savings Bank
ROE") focused on Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk. The OTS identified various regulatory
deficiencies resulting, in part, in supervisory imposed operating restrictions
on growth and lending activities, as well as restrictions on capital
distributions, contracts, "golden parachute" payments and changes in senior
executive positions. In addition, the Savings Bank was required to provide
reports to the OTS detailing corrective actions taken, identification of
policies and procedures adopted and implemented to remedy areas of criticism and
ensure future regulatory compliance. Management and the Board of Directors have
responded to the Savings Bank ROE, and have provided OTS with either assurance
of compliance with the material exceptions noted in the Savings Bank ROE or the
current status of efforts to correct matters requiring on-going remediation.

On May 20, 2002, the OTS and FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank. According
to the OTS/FDIC regulators, the purpose of the Field Visit was, in part, to
obtain an initial assessment of the asset quality and capital levels of the
Savings Bank to determine the effectiveness of corrective actions taken by the
Board of Directors and management since the issuance of the Savings Bank ROE,
and establish the scope for the full joint risk-focused examination of the
Savings Bank, which commenced on July 1, 2002, and is still in progress.

Since completion of the Bancorp ROE and Savings Bank ROE, management officials
and the Boards of Directors of both the Bancorp and the Savings Bank have
engaged in active discussions with the OTS to develop a mutually agreeable
business framework that will strengthen the regulatory foundation of the Bancorp
and the Saving Bank. As a result, in the spirit of regulatory cooperation, the
Board of Directors of both the Bancorp and the Savings Bank, without admitting
or denying that such grounds exist, or the accuracy of the OTS findings,
opinions and/or conclusions, separately agreed to enforcement actions that
became effective on August 16, 2002.

14

The provisions of the enforcement action between the Bancorp and OTS establish,
in principal part, that the Bancorp will provide the OTS with a plan for raising
additional common equity capital and restructuring outstanding debt at the
Bancorp, recognizing that economic and market conditions are outside of the
control of the Bancorp. In addition to the operating restrictions previously
placed on the Bancorp by the OTS, pursuant to the Bancorp ROE, the agreed upon
action requires the Bancorp to provide OTS with quarterly cash flow projections
for the purpose of identifying the Bancorp's sources and uses of funds for the
remainder of fiscal 2002, fiscal 2003 and fiscal 2004. The subject enforcement
action also provides assurance that Bancorp will maintain documentation
sufficient to evidence that all transactions with affiliates and insiders are in
compliance with statutory and regulatory requirements.

The agreed upon language in the enforcement action between the Savings Bank and
the OTS provides, in principal part, for a plan addressing the level of the
Savings Bank's fixed assets, as well as the adoption and implementation of a
capital plan for the establishment and maintenance of acceptable capital levels.
In conjunction with the capital plan, the Savings Bank will develop a business
plan that details the Savings Bank's overall operating strategies, in light of
current economic conditions. The agreed upon language also (without prior
written approval of the OTS); prohibits any increase in the Savings Bank's total
assets during any quarter in excess of an amount equal to net interest credited
on deposit liabilities during the quarter; and prohibits the purchase or
origination of new loans other than single-family residential mortgage loans,
credit card loans and over draft lines of credit. The Board of Directors has
already initiated action to alleviate many of the issues raised by the OTS and
has agreed to formalize plans, policies and procedures concerning the Savings
Bank's staffing levels, internal audit function, overall lending programs,
including loan administration, and refine its Allowance for Loan and Lease
Losses ("ALLL") policy and practices. In addition to the operating restrictions
previously imposed on the Savings Bank, as a result of the findings contained in
the Savings Bank ROE, the Savings Bank will develop and implement policies and
procedures to: i) ensure compliance with its loans to one borrower limitation;
ii) address its classified assets; iii) monitor its interest rate risk; and iv)
ensure continued accurate thrift financial reports. Furthermore, the Savings
Bank has agreed not to accept, renew or roll over any brokered deposits without
the prior consent of the OTS. Beginning no later than fourth quarter 2001,
management of the Savings Bank had already initiated a plan not to renew
maturing public and brokered deposits. Additionally, the agreed upon action
provides for an independent loan review of the Saving Bank's construction,
commercial real estate, commercial, direct lease financing and broker
purchase/repurchase lending programs. Of additional note, the Savings Bank will
continue to utilize its recently formed Board of Directors Oversight Committee
for the purpose of reviewing and approving new lending and investment
initiatives.

As part of the regulatory spirit of cooperation and the mutual desire for future
success, both the Bancorp and the Savings Bank will report to, and consult with,
the OTS on all matters addressed under the agreed upon enforcement actions.

FINANCIAL CONDITION

Total assets decreased by $79.5 million to $457.1 million at June 30, 2002, from
$536.6 million at December 31, 2001. The decrease in assets was primarily the
result of a $65.7 million decrease in deposits, consisting mostly of a $42.7
million decrease attributable to the Savings Bank's effort not to renew maturing
public and brokered certificates of deposit (CDs) yielding higher interest
rates, and a $21.5 million decrease in other interest-bearing transaction
accounts. In addition, the Company recorded an $8.6 million provision for loan
and lease losses and a $2.5 million valuation reserve on its purchased mortgage
servicing rights ("PMSRs") during the second quarter of 2002, as described in
the Results of Operations section following. Borrowed money also decreased by
$5.4 million at June 30, 2002, as compared to December 31, 2001.

Interest-earning deposits increased $11.3 million during the six months ended
June 30, 2002 to $48.3 million as the Savings Bank invested the proceeds from
the sale of securities available-for-sale and loans held for sale into
interest-earning deposits. Interest-earning deposits at June 30, 2002 includes
$32.4 million of ATM cash, on which the Savings Bank earns a return of 200 basis
points over the overnight FHLB rate, and $15.9 million of other interest earning
deposits with an annualized yield of 6.95% at June 30, 2002.

15

Securities available-for-sale decreased by $44.5 million to $78.6 million at
June 30, 2002 from $123.1 million at December 31, 2001, as the Company utilized
such proceeds to fund its initiatives to reduce public and brokered CDs at the
Savings Bank and to payoff borrowings at the Bancorp, as described below. In
addition, during the first quarter 2002, the Company sold approximately $27.0
million of its Trust Preferred Securities ("TPS"), for regulatory compliance
purposes in conjunction with the Savings Bank's ROE that is described in the
preceding Regulatory Compliance section.

Loans held for sale decreased by $34.8 million to $30.3 million at June 30, 2002
from $65.1 million at December 31, 2001 as the Savings Bank implemented a
planned approach to reduce its purchase/repurchase loan program. Throughout the
remainder of 2002, the Company will be evaluating the viability and
profitability of this program, as a result of current regulatory dissatisfaction
with, and criticisms of, the program.

Net loans receivable decreased by $11.1 million to $239.2 million at June 30,
2002, from $250.3 million at December 31, 2001, primarily due to the recording
of an $8.6 million provision for loan and leases losses consisting of a $2.9
million increase in the allowance for loan and lease losses and $5.7 million in
loan and lease charge-offs, as described further in the Results from Operations
- - Provision and Allowance for Loan and Lease Losses section that follows.

Premises and equipment decreased by $4.6 million to $16.0 million at June 30,
2002 from $20.6 million at December 31, 2001. The decrease is attributable to
$1.8 million in gross depreciation expense for the six months ended June 30,
2002, offset by additions of $1.7 million. Additions include an investment of
$1.4 million in 217 ATMs during May 2002. Net depreciation expense reflected in
the statement of operations is $700,000, which reflects gross depreciation of
$1.8 million less $1.1 million reimbursed to the Company through its ATM
partnership activities. In addition, during June 2002, the Savings Bank
classified its investment in an office building as held for sale and as such the
net book value of $4.5 was transferred to premises and equipment held for sale.
Premises and equipment held for sale is being carried at the lower of cost or
fair value. This building was purchased in April 2001 as a possible branch
location for the Savings Bank. As of June 30, 2002, the net book value of this
office building was $4.5 million. During the six month period ending June 30,
2002, occupancy and equipment expense was reduced by approximately $315,000
related to rental income from this building and included approximately $155,000
of expenses from this building.

Prepaid expenses and other assets increased by $3.2 million to $15.9 million at
June 30, 2002 from $12.7 million at December 31, 2001. This increase was
primarily the result of a $5.9 million increase in current and deferred tax
assets, offset by a $1.1 million decrease in prepaid expenses and a $1.5 million
decrease in receivables from third-party loan servicers. The current tax asset
at June 30, 2002 was approximately $3.2 million, and related to tax refunds due
from the Internal Revenue Service and Illinois Department of Revenue for
previously filed tax returns and amounts previously paid on prior tax returns
that will be claimed when the December 31, 2001 and December 31, 2002 tax
returns are filed. The deferred tax asset at June 30, 2002 totaled approximately
$7.0 million, of which $225,000 related to securities available-for-sale. The
remaining deferred tax asset primarily consists of the tax effects of bad debt
deductions, partnership interests, Federal Home Loan Bank stock dividends, the
deferred gain on a prior sales of facilities, and federal and state net
operating loss carry-forwards. Based upon the Company's prior history of paying
taxes and management's projections of future taxable income, no valuation
allowance is recorded against the deferred tax asset.

Deposits decreased $65.7 million to $392.5 million at June 30, 2002, from $458.2
million at December 31, 2001. This decrease was primarily the result of a $42.7
million decrease attributable to the Savings Bank's effort not to renew maturing
public and brokered CDs yielding higher interest rates, and a $21.5 million
decrease in other interest-bearing transaction accounts. The Savings Bank's
deposit composition at June 30, 2002 includes approximately 38%
personal/business CDs, 15% brokered CDs, 33% money market and savings accounts
and 14% demand deposit and NOW accounts. In addition, deposits include $291.8
million, or 74.3%, of deposits attracted via its Internet delivery channel, as
compared to $296.3 million, or 64.7%, at December 31, 2001. All deposits
attracted via the Internet are consumer deposits.

16

Borrowings decreased by $5.4 million to $22.9 million at June 30, 2002, from
$28.3 million at December 31, 2001, primarily due to the repayment of $2.4
million in federal funds purchased using the proceeds from the sale of
securities available-for-sale and loans held for sale at the Savings Bank and
the repayment of $1.8 million in notes payable and $1.2 million in margin
account open lines using the proceeds from the sale of securities
available-for-sale at the Bancorp.

Stockholders' equity declined by $8.2 million to $9.4 million at June 30, 2002,
from $17.6 million at December 31, 2001 primarily as a result of the $8.9
million after-tax net loss for the six months ended June 30, 2002, which
includes the pre-tax $8.6 million provision for loan and lease losses and $2.5
million valuation allowance for PMSRs during the second quarter of 2002. In
addition, the Company paid dividends of $208,000, received $118,000 through the
exercise of stock options and had other comprehensive income of $763,000 through
increased unrealized gains on its securities available-for-sale portfolio.

LIQUIDITY

The Savings Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on the loan and securities available-for-sale
portfolios, custodial deposit accounts related to loans serviced for others, and
the sale of discounted loans receivable and newly originated fixed rate
long-term mortgage loans. The most liquid assets are cash and short-term
investments. The levels of these assets are dependent on the operating,
financing and investing activities during any given period. Cash and
interest-earning deposits totaled $53.8 million at June 30, 2002.

Recent legislation repealed the OTS minimum liquidity ratio requirements. OTS
regulations now require the Savings Bank to maintain sufficient liquidity to
ensure the Savings Bank's safe and sound operation.

Liquidity management for the Savings Bank is both a daily and long-term function
of the Savings Bank's senior management. Management meets on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments such as federal funds.
Cash flow projections are updated regularly to assure necessary liquidity.

ASSET QUALITY

The Bancorp and the Savings Bank regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for loan
losses is established when, in the opinion of management, the net realizable
value of the property collateralizing the loan is less than the outstanding
principal and interest and the collectibility of the loan's principal and
interest becomes doubtful. See further discussion in Provision and Allowance for
Loan and Lease Losses section following.

At June 30, 2002, the Company had forty (40) properties, totaling $1.8 million
classified as foreclosed real estate, as compared to twenty-seven (27)
properties totaling $730,000 at December 31, 2001. The underlying properties at
June 30, 2002 consisted primarily of single-family residences. The foreclosed
real estate has been written down to estimated fair value at June 30, 2002. The
total amount of loans receivable ninety (90) days or more past due at June 30,
2002, was $20.1 million or 7.44% of total loans receivable compared to $11.0
million or 3.90% of total loans at March 31, 2002 and $9.0 million or 2.82% of
total loans at December 31, 2001. The $11.1 million increase is comprised of a
$7.0 million increase in delinquent one-to-four family loans and a $4.1 million
increase in other commercial delinquent loans. Loans ninety (90) days or more
past due are primarily secured by one-to-four family residences, and, for
commercial loans, single and multi-family unit residential property and
commercial business assets. Total non-performing assets at June 30, 2002,
totaled $21.9 million or 4.79% of total assets compared to $9.7 million or 1.81%
of total assets at December 31, 2001. Excluded from these totals are $810,000 of
discounted loans ninety (90) days or more contractually past due at June 30,
2002, and $901,000 at December 31, 2001.

17

Along with other financial institutions, management shares a concern for the
outlook of the economy during the remainder of 2002. A slow down in economic
activity beginning in 2002 severely impacted several major industries, as well
as the economy as a whole. Even though there are numerous indications of
emerging strength, it is not certain that this strength is sustainable. In
addition, consumer confidence may be negatively impacted by the recent
volatility in equity prices. These events could still adversely affect cash
flows for both commercial and individual borrowers, as a result of which, the
Savings Bank could experience increases in problem assets, delinquencies and
losses on loans.

RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2002 AND 2001.

GENERAL

Net loss for the three months ended June 30, 2002 was $8.4 million or ($4.86)
per diluted share as compared to net income of $207,000 or $.11 per diluted
share for the corresponding period in 2001. The operating results were
significantly impacted by 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. In addition,
non-interest income, exclusive of the valuation allowance on investment in
partnership, for the three month period ended June 30, 2002, declined to a net
loss of $113,000 as compared to non-interest income of $1.2 million during the
three month period ended June 30, 2001. Non-interest expense increased to $4.3
million for the three month period ended June 30, 2002 as compared to $2.9
million for the three month period ended June 30, 2001.

Net loss for the six months ended June 30, 2002 was $8.9 million or ($5.21) per
diluted share as compared to net income of $587,000 or $.29 per diluted share
for the corresponding period in 2001. The operating results were significantly
impacted by the provision for loan and lease losses and the investment in
limited partnership valuation allowance discussed above. In addition,
non-interest income, exclusive of the valuation allowance on investment in
partnership, for the six month period ended June 30 2002, declined to a net loss
of $300,000 as compared to non-interest income of $2.6 million during the six
month period ended June 30, 2001. Non-interest expense increased to $7.6 million
for the six month period ended June 30, 2002 as compared to $5.5 million for the
six month period ended June 30, 2001.

The average outstanding shares declined by 160,000 shares for the three months
ended June 30, 2002 and declined by 316,000 shares for the six months ended June
30, 2002, as compared to shares for the same period last year. The decline in
average shares is primarily the result of the Company repurchasing 365,796 of
its shares from Deltec Banking Corporation Limited ("Deltec") in April 2001.

INTEREST INCOME

Interest income for the three months ended June 30, 2002, totaled $7.3 million,
as compared to $9.7 million for the comparable 2001 period. The $2.4 million
decrease was primarily the result of a 130 basis point decrease in the tax
equivalent yield on earning assets to 6.54% from 7.84%. Earning asset yields
have declined as a result of re-pricing Prime rate based loans with each change
in the Prime lending rate, as well as a result of the Company's affirmative
actions to reduce the amount of assets of the Savings Bank and Bancorp. The
average yield on earning assets was 6.49% at the Savings Bank and 8.77% at the
Bancorp, with a consolidated Company average yield of 6.54% for the three months
ended June 30, 2002.

For the six months ended June 30, 2002, interest income decreased by $3.3
million to $15.2 million from $18.4 million for the same period last year. The
$3.3 million decrease was primarily the result of a 152 basis point

18

decrease in the tax equivalent yield on earning assets to 6.44% from 7.96%.
Earning asset yields have declined primarily as a result of re-pricing Prime
rate based loans with each change in the Prime lending rate, as well as a result
of the Company's affirmative actions to reduce the amount of assets of the
Savings Bank and Bancorp. The average yield on earning assets was 6.35% at the
Savings Bank and 10.81% at the Bancorp, with a consolidated Company average
yield of 6.44% for the six months ended June 30, 2002.

INTEREST EXPENSE

Interest expense for the three months ended June, 2002 totaled $5.5 million as
compared to $7.8 million for the comparable 2001 period. The $2.3 million
decrease was primarily the result of a 156 basis point decline in the average
cost of interest-bearing liabilities to 4.58% for the three months ended June
30, 2002 as compared to 6.14% for the same period last year. The average cost of
interest-bearing liabilities was 4.27% at the Savings Bank and 10.26% at the
Bancorp, with a consolidated Company average cost of 4.58% for the three months
ended June 30, 2002.

For the six month period ended June 30, 2002 interest expense decreased by $3.7
million to $11.4 million from $15.1 million for the same period last year. The
$3.7 million decrease was primarily the result of a 169 basis point decline in
the average cost of interest-bearing liabilities to 4.65% for the six months
ended June 30, 2002 as compared to 6.34% for the same period last year. The
average cost of interest-bearing liabilities was 4.35% at the Savings Bank and
10.09% at the Bancorp, with a consolidated Company average cost of 4.65% for the
six months ended June 30, 2002.

Interest-bearing liabilities include $17.0 million of 11.0% junior subordinated
debt, which the Company 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 6.28% for the three months ended
June 30, 2002 and an annualized cost of 6.37% for six months ended June 30,
2002.

NET INTEREST INCOME

Net interest income for the three months ended June 30, 2002 totaled $1.8
million as compared to $1.9 million for the comparable 2001 period. The $100,000
decrease was due to a decrease in average balances during 2002 as compared to
2001, offset by a 26 basis point increase in the net interest spread to 1.95%
for the three months ended June 30, 2002 as compared to 1.70% for the comparable
2001 period. The net interest spread was 2.22% at the Savings Bank and (1.49%)
at the Bancorp, with a consolidated Company net interest spread of 1.95%.

For the six month period ended June 30, 2002 net interest income increased by
$400,000 to $3.7 million from $3.3 million for the same period last year. The
$400,000 increase was primarily the result of a 17 basis point increase in the
net interest spread to 1.79% for the six months ended June 30, 2002 as compared
to 1.62% for the comparable 2001 period. The net interest spread was 2.00% at
the Savings Bank and 0.72% at the Bancorp, with a consolidated Company net
interest spread of 1.79%.

PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES

During the three and six month periods ended June 30, 2002, the Company recorded
provisions for loan and lease losses of approximately $8.6 million as compared
to $31,000 and $106,000 during the three and six months periods ended June 30,
2001. As of June 30, 2002 and December 31, 2001, the allowance for loan and
lease losses (ALLL) recorded in the statement of condition was $5.9 million and
$3.0 million, respectively. An analysis of the ALLL for the six month period
ended June 30, 2002 is as follows:

19

Savings
Bank Bancorp Total
-----------------------------------------------

ALLL as of December 31, 2001 $ 2,484,000 $ 500,000 $ 2,984,000
Provisions 6,755,000 1,839,000 8,594,000
Charge-offs (3,861,000) (1,839,000) (5,700,000)
----------- ----------- -----------
ALLL as of June 30, 2002 $ 5,378,000 $ 500,000 $ 5,878,000
=========== =========== ===========

ALLL as a percentage of Gross Loans (including loans held for sale and
discounted loans):

December 31, 2001 .79% 15.73% .95%

June 30, 2002 1.96% 37.29% 2.18%

The significant provisions recorded during the second quarter 2002 can be
attributable to several internal and external factors, as described below:

During the second quarter 2002, the Savings Bank started and completed the
conversion of its commercial loan portfolio, which totaled $126.6 million as of
March 31, 2002, to a new loan software subsidiary ledger system. As part of that
conversion, the Savings Bank performed an extensive review of its loan files,
payment histories, delinquency reporting and its loan classification reporting
(e.g. special mention, substandard, doubtful and loss). The results of these
procedures indicated that the Savings Bank's loan files related to certain loans
were missing required documentation in accordance with the Savings Bank's
underwriting standards. Although management continues to investigate the
existence of such supporting documentation, including contacting lead banks on
participation loans and contacting borrowers directly, management downgraded any
loans where documentation was not currently in the loan file. In addition,
certain payment histories did not accurately reflect the loan's current payment
status, and as such, the Savings Bank's delinquency reporting and loan
classification reporting excluded certain loans. Accordingly, these loans were
either classified for the first time or downgraded during the quarter ended June
30, 2002.

In addition, during the second quarter of 2002, commercial loan borrowers with
loans totaling approximately $3.6 million either declared, or it is anticipated
that they will likely declare, bankruptcy. Although some of these loans had been
previously classified, management downgraded these loans in the second quarter
of 2002 due to the actual and likely bankruptcy filings and recorded a provision
related to these loans totaling $1.9 million, of which $1.6 million was
subsequently charged-off. The remaining $2.0 million of loans that were not
charged off consist of two loans. The first is a loan with a remaining balance
of $1.6 million, with an allowance allocation of $240,000. This loan is secured
by leases on consumer "photo center" equipment deployed in a national retailer.
The second loan is a loan with a remaining balance of $364,000, with an
allowance allocation of $55,000,is secured by single family real estate. The
Company also provided for and charged off $2.5 million related to one loan
relationship during the second quarter of 2002. Based upon financial information
received during the second quarter 2002 related to this borrower, updated
information received related to the collateral for certain of these loans, and
updated information related to the borrower's business as a whole, the Company
charged off the entire relationship balance in question and is pursuing
recovery. Management intends to actively seek recovery of all charged off loan
assets through legal proceedings. Management also increased its allowance
factors within all commercial loan classifications, based on current economic
factors.

Finally, during the second quarter 2002, delinquencies increased in the
single-family mortgage loan portfolio. The total amount of single-family
mortgage loans ninety (90) days or more past due at December 31, 2001, March 31,
2002 and June 30, 2002 were $7.6 million, $10.6 million and $14.6 million,
respectively. Management believes these increases are attributable to a
declining economy and higher unemployment levels. To address this situation, the
Savings Bank lowered the classification on certain pools of loans and also
increased its allowance factors within certain single-family loan
classifications.

As discussed more fully in the preceding Regulatory Compliance section, during
May 2002, the OTS and the FDIC began a joint Field Visit examination in
preparation for a joint risk-focused examination of the Savings Bank and the
Bancorp, which commenced on July 1, 2002, and is still in progress. This
examination follows the safety and soundness examinations by the OTS of the
Savings Bank and Bancorp completed in January 2002, for which the Reports of
Examinations were delivered, as appropriate to the Savings Bank and Bancorp in
March 2002 and in which no loans were classified as "loss" assets.

20

During the current joint OTS/FDIC safety and soundness examination, management
has met with the OTS/FDIC representatives numerous times. Based on these
meetings, management believes that all loans have been properly graded by
management and the Company's analysis of its ALLL, as of June 30, 2002, has
properly considered all the concerns conveyed by the OTS/FDIC representatives
related to the status of the Savings Bank's loan files, delinquency reporting,
and loan classification reporting. Based on these factors, management believes
that the ALLL as of June 30, 2002 is adequate.

Management has taken the following steps to improve its ALLL reporting,
delinquent loan reporting and its loan classification reporting: 1) as
previously discussed, the Savings Bank completed the conversion of its
commercial loan portfolio to a new loan software subsidiary ledger system; as
part of that conversion, all commercial loans were re-amortized to determine
that the principal and accrued interest balances were accurate (requiring
minimal adjustment to either the principal or accrued interest), and all other
significant information (origination date, interest rate, maturity date, payment
dates, etc.) was re-verified to source documents such as the original note or
payment tickets; and 2) during July 2002, the Savings Bank hired a new senior
loan credit administrator and several mid-level managers to effectively monitor
and evaluate the commercial loan portfolio.

NON-INTEREST INCOME

Total non-interest income (expense) decreased $3.8 million to a loss of $2.6
million for the three months ended June 30, 2002, as compared to $1.2 million of
income for the three months ended June 30, 2001. The decline was primarily the
result of recording a $2.5 million valuation allowance during the second quarter
of 2002, taken against the Company's interest in the limited partnership and
resulting from recent declines in interest rates and the adverse effect of
increased loan prepayment speeds on the value of PMSRs. In addition, net gains
on the sale of assets declined by $900,000 to a net loss of $400,000 as compared
to a net gain of $500,000 for the comparable period in 2001. Included in the
$900,000 decrease in gain on sale of assets is a decrease of $300,000 related to
securities available for sale and $600,000 related to trading securities. Due to
declining market conditions in the second quarter, the Company's equity
securities in its trading portfolio declined in value and securities sold from
the available for sale portfolio also had declines.

Total non-interest income (expense) decreased $5.3 million to a loss of $2.7
million for the six months ended June 30, 2002, as compared to $2.6 million for
the six months ended June 30, 2001. The decline was primarily the result of
recording a $2.5 million valuation allowance during the second quarter of 2002,
taken against the Company's interest in the limited partnership and resulting
from recent declines in interest rates and the negative adverse effect of
increased loan prepayment speeds on the value of PMSRs. In addition, net gains
on the sale of assets declined by $1.9 million to a net loss of $840,000 as
compared to a net gain of $1.1 million for the comparable period in 2001.
Included in the $1.9 million decline in gain on sale of assets is a decline of
$1.3 million related to securities available-for-sale and $300,000 related to
trading account securities. Of the $1.3 million pre-tax loss on the sale of
securities available-for-sale, $770,000 was related to the Company selling its
excess investment in TPS, for regulatory compliance purposes, and in conjunction
with the Savings Bank's ROE that is described in the preceding Regulatory
Compliance section. Due to declining market conditions in the second quarter,
the Company's equity securities in its trading portfolio declined in value and
securities sold from the available for sale portfolio also had declines. In
addition, fees and service charges decreased approximately $600,000 primarily
due to $130,000 of one-time purchase/repurchase loan fees during the first
quarter of 2001 and a decrease of approximately $300,000 of income related to
the Savings Bank's ATM network during first quarter 2002.

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NON-INTEREST EXPENSE

Non-interest expense increased by $1.4 million to $4.3 million or 3.35% of
average assets for the three months ended June 30, 2002 from $2.9 million or
2.27% of average assets for the same period last year. The increase in operating
expenses was primarily the result of increases in: (i) professional fees of
approximately $675,000, consisting of legal, consulting and internal audit
related fees, and resulting, in part, from the Bancorp ROE and Savings Bank ROE
discussed in the preceding Regulatory Compliance section; (ii) data processing
expense of approximately $80,000 due to the Savings Bank's increased volume of
Internet transaction processing; (iii) loan servicing expense of approximately
$280,000 due to the Savings Bank's increase in non-performing assets; (iv)
insurance expense of approximately $40,000; (v) net ATM overages / shortages of
approximately $150,000; and (vi) general administrative expenses of
approximately $200,000.

Non-interest expense increased by $2.1 million to $7.6 million or 2.88% of
average assets for the six months ended June 30, 2002 from $5.5 million for the
same period last year. The increase in operating expenses was primarily the
result of increases in: (i) professional fees of approximately $960,000,
consisting of legal, consulting and internal audit related fees, and resulting,
in part, from the Bancorp ROE and Savings Bank ROE discussed in the preceding
Regulatory Compliance section; (ii) data processing expense of approximately
$200,000 due to the Savings Bank's increased volume of Internet transaction
processing; (iii) loan servicing expense of approximately $300,000 due to the
Savings Bank's increase in non-performing assets; (iv) insurance expense of
approximately $100,000; (v) net ATM overages / shortages of approximately
$150,000; and (vi) general administrative expenses of approximately $400,000.

INCOME TAX EXPENSE

The Company recorded a tax benefit of $5.3 million for the three months ended
June 30, 2002 compared to a tax benefit of $68,000 for the same period last
year. The 2002 benefit is based on a tax rate of approximately 39% calculated on
the pre-tax loss of $13.6 million, plus tax benefits derived from tax-exempt
municipal securities and tax-exempt charter school loans, plus utilization of
affordable housing tax credits.

The Company recorded a tax benefit of $6.2 million for the six months ended June
30, 2002 compared to a tax benefit of $260,000 for the same period last year.
The 2002 benefit is based on a tax rate of approximately 39% calculated on the
pre-tax loss of $15.2 million, plus tax benefits derived from tax-exempt
municipal securities and tax-exempt charter school loans, plus the utilization
of affordable housing tax credits.

Management's analysis of the deferred tax asset at June 30, 2002 is discussed in
the preceding Financial Condition section.

ACCOUNTING DEVELOPMENTS

The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141 "Business Combinations" in June 2001. SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interest method. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001. The adoption of SFAS No. 141 will only impact the Company's
financial statements if it enters into a business combination.

The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which
addresses the accounting for such assets arising from prior and future business
combinations, in June 2001. Under SFAS No. 142, goodwill arising from business
combinations will no longer be amortized, but rather will be assessed regularly
for impairment, with any such impairment recognized as a reduction of earnings
in the period identified. Other identified intangible assets, such as core
deposit intangible assets, will continue to be amortized over their

22

estimated useful lives. The Company adopted SFAS No. 142 on January 1, 2002. The
adoption of SFAS No. 142 did not have any impact on the Company's financial
statements at that date as the Company had no recorded goodwill at December 31,
2001.

Effective January 1, 2003, SFAS 143, "Accounting for Asset Retirement
Obligations" will apply. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
incurred. The effect of this statement on the financial position and operations
of the Company is not anticipated to have a material affect.

The Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. The statement requires that the Company
recognize an impairment loss on long-lived assets when the carrying amount is
not recoverable and the measurement of the impairment loss is the difference
between the carrying amount and the fair value of the asset. This pronouncement
did not have a material effect on the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Investment Committee, which includes members of
senior management and directors, monitors and determines the strategy of
managing the rate and sensitivity re-pricing characteristics of the individual
asset and liability portfolios the Savings Bank maintains. The overall goal is
to manage this interest rate risk to most efficiently utilize the Savings Bank's
capital, as well as to maintain an acceptable level of change to its net
portfolio value ("NPV") and net interest income. The Savings Bank's strategy is
to minimize the impact of sudden and sustained changes in interest rates and NPV
and its net interest margin.

Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank's change in NPV in the event of hypothetical
changes in interest rates, as well as interest rate sensitivity gap analysis,
which monitors the re-pricing characteristics of the Saving Bank's
interest-earning assets and interest-bearing liabilities. The Board of Directors
has established limits to changes in NPV and net interest income across a range
of hypothetical interest rate changes. If estimated changes to NPV and net
interest income are not within these limits, the Board may direct management to
adjust its asset/liability mix to bring its interest rate risk within Board
limits.

In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans and the purchase of adjustable
rate/floating rate U.S. agency issued mortgage backed securities and
collateralized mortgage obligations. The Savings Bank, from time to time, also
invests in long-term, fixed-rate mortgages provided it is compensated with an
acceptable spread. None of these strategies are prohibited or otherwise
restricted by the Savings Bank ROE discussed previously.

Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain
off-balance-sheet items, in the event of a series of sudden and sustained
changes in interest rates ranging from 100 to 300 basis points. Management
assumes that a 200 basis point movement up or down is considered reasonable and
plausible for purposes of managing its interest-rate risk on a day to day basis.
NPV is the market value of portfolio equity and is computed as the difference
between market value of assets and the market value of liabilities, adjusted for
the value of off-balance-sheet items. The following table presents the Saving
Bank's projected change in NPV for the various rate shocks as of March 31, 2002
which is the most recent available.

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Estimated Increase
(Decrease) in NPV
Change in Estimated -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)

300 basis point rise $ 32,976 $ (5,255) (14)%
200 basis point rise 34,737 (3,494) (9)
100 basis point rise 36,599 (1,632) (4)
Base scenario 38,231 --- ---
100 basis point decline 38,630 400 1

Due to the level of interest rates at March 31, 2002, the Company is not able to
model an additional 200 or 300 basis point decrease in rates.

The NPV is calculated by the Savings Bank using guidelines established by the
OTS related to interest rates, loan prepayment rates, deposit decay rates, and
market values of certain assets under the various interest rate scenarios. These
assumptions should not be relied upon as indicative of actual results due to the
inherent shortcomings of the NPV analysis. These shortcomings include: (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV; (ii) certain assets, including adjustable-rate loans,
have features which affect the potential re-pricing of such instruments, which
may very from the assumptions used; and (iii) the likelihood that as interest
rates are changing, the Investment Committee would likely be changing strategies
to limit the indicated changes in NPV as part of its management process.

The Savings bank does not use derivative instruments to control interest rate
risk. In addition, interest rate risk is the most significant market risk
affecting the Savings Bank. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of the
Company's business activities and operations.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Bancorp and the Savings Bank are not engaged in any legal proceedings of a
material nature at the present time.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

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 April 25, 2002, with the following
resolutions ratified and approved in all respects:

I. Election of Directors: The election of Donald G. Wittmer for a three (3)
year term

For: 1,528,026 Votes Withheld: 172 Votes Broker Non-Votes: 0 Votes

Election of Directors: The election of Dennis G. Carroll for a three (3)
year term

For: 1,528,026 Votes Withheld: 172 Votes Broker Non-Votes: 0 Votes

In addition, the following directors continue in office:

John G. Yedinak, Chairman, President and Chief Executive Officer of the
Company, Chairman and Chief Executive Officer of the Savings Bank
Sergio Martinucci, Senior Vice President of Coldwell Banker
Arthur Byrnes, Senior Managing Director, Deltec Asset Management, LLC
Frances M. Pitts, Executive Vice-President and Secretary of the Company,
General Counsel and Secretary of the Savings Bank

II. For approval of a change of the Company's state of incorporation from
Delaware to Maryland

For: 1,146,476 Votes Against: 2,140 Votes Abstain: 252 Votes
Broker Non-Votes: 379,330 Votes

III. Ratification of Appointment of Crowe, Chizek and Company LLP as Independent
Auditors:

For: 1,528,198 Votes Against: O Votes Broker Non-Votes: 0 Votes

ITEM 5. OTHER INFORMATION

Not Applicable

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

Exhibit 99.1 Certificate of Chief Executive Officer

Exhibit 99.2 Certificate of Principal Accounting and Financial Officer

The following exhibits are incorporated herein by reference:

(3) The Certificate of Incorporation and By-Laws.

3.1 Amended Certificate of Incorporation of Umbrella
Bancorp, Inc.*
3.2 By-Laws of Umbrella Bancorp, Inc.*
4.0 Stock Certificate of Umbrella Bancorp, Inc.*
11.0 Statement Regarding Computation of Earnings Per Share
(See Note D)

B. Reports of Form 8-K

A report on Form 8-K was filed on June 6, 2002 relating to the Registrant
completing the change in the state of its incorporation from Delaware to
Maryland.
- --------------------------------------------------------------------------------

* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, and filed on January
28, 1992, any amendments thereto, Registration No. 33-45222.

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SIGNATURES

Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

UMBRELLA BANCORP, INC.

Date: August 26, 2002 /s/ John G. Yedinak
---------------------- -------------------------------------------
John G. Yedinak, Chairman, President, Chief
Executive Officer, and Director

Date: August 26, 2002 /s/ Frank J. Shinnick
---------------------- -------------------------------------------
Frank J. Shinnick, Principal Accounting and
Financial Officer

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