1
================================================================================
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 MARCH 31, 2001
COMMISSION FILE NUMBER 0-19829
UMBRELLA BANCORP, INC. (FORMERLY, ARGO BANCORP, INC.)
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 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 1,657,313 shares outstanding as of May 11, 2001.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
================================================================================
2
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2001
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2001, and
December 31, 2000 (unaudited)......................................... 3
Consolidated Statements of Income For the Three
Months Ended March 31, 2001, and 2001 (unaudited)..................... 4
Consolidated Statement of Comprehensive Income For
the Three Months Ended March 31, 2001 and 2000 (unaudited)............ 5
Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 2001,
and 2000 (unaudited) ................................................. 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001
and 2000 (unaudited) ................................................. 7
Notes to Consolidated Financial Statements ........................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk............ 21
PART II - OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 23
Item 2 Changes in Securities ................................................ 23
Item 3 Default Upon Senior Securities ....................................... 23
Item 4 Submission of Matters to a Vote
of Security Holders ................................................ 23
Item 5 Other Information .................................................... 23
Item 6 Exhibits and Reports on Form 8-K ..................................... 24
Form 10Q Signature Page ....................................................... 25
2
3
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
March 31, December 31,
ASSETS 2001 2000
---- ----
(Unaudited)
Cash ............................................................ $ 17,100 $ 19,885
Interest-earning deposits ...................................... 131,167 74,132
--------- ---------
Total Cash and Cash Equivalents................................ 148,267 94,017
Stock in Federal Home Loan Bank of Chicago ...................... 2,667 2,615
Trading account securities ...................................... 1,297 1,099
Securities available-for-sale ................................... 38,203 14,574
Securities held-to-maturity ..................................... 17,229 26,523
Loans receivable, net ........................................... 275,932 279,420
Discounted loans receivable, net ................................ 6,780 7,103
Accrued interest receivable ..................................... 3,707 3,988
Foreclosed real estate, net ..................................... 2,063 2,498
Premises and equipment, net ..................................... 9,946 9,823
Mortgage loan servicing rights, net ............................. 397 397
Investment in limited partnership ............................... 4,476 4,387
Investment in GFS preferred stock ............................... - 4,000
Debt issuance costs related to junior subordinated debt, net .... 1,758 1,774
Prepaid expenses and other assets ............................... 16,961 10,875
--------- ---------
Total Assets .............................................. $ 529,681 $ 463,093
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ...................................................... $ 456,833 $ 388,537
Borrowed money ................................................ 16,228 18,708
Advance payments by borrowers for taxes and insurance ......... 589 846
Accrued interest payable ...................................... 2,178 2,156
Custodial escrow balances for loans serviced .................. 8,330 7,519
Other liabilities ............................................. 4,870 4,966
Junior subordinated debt ...................................... 16,587 16,587
Stockholders' Equity
Preferred stock ............................................... 3 3
Common stock .................................................. 20 20
Additional paid-in-capital .................................... 8,893 8,893
Retained earnings - substantially restricted .................. 16,469 16,189
Employee Stock Ownership Plan loan ............................ (391) (405)
Accumulated other comprehensive loss .......................... (685) (678)
Unearned stock awards ......................................... (243) (248)
--------- ---------
Total Stockholders' Equity ................................ 24,066 23,774
--------- ---------
Total Liabilities and Stockholders' Equity ................ $ 529,681 $ 463,093
========= =========
See notes to accompanying unaudited consolidated financial statements
3
4
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Three Months Ended March 31,
2001 2000
---- ----
(Unaudited)
Interest income
Loans receivable ................................................ $ 6,042 $ 5,499
Discounted loans receivable ..................................... 162 296
Securities available-for-sale ................................... 429 364
Securities held-to-maturity ..................................... 385 474
Interest-earning deposits ....................................... 1,738 556
------- -------
Total interest income ........................................ 8,756 7,189
------- -------
Interest expense:
Deposits ........................................................ 6,528 4,024
Borrowed money .................................................. 341 528
Junior subordinated debt ........................................ 443 480
------- -------
Total interest expense ....................................... 7,312 5,032
------- -------
Net interest income .......................................... 1,444 2,157
Provision for loan losses ....................................... 75 60
------- -------
Net interest income after provision
for loan losses .............................................. 1,369 2,097
------- -------
Non-interest income:
Loan servicing income ........................................... 89 46
Mortgage banking ................................................ 5 5
Gain on sale of loans receivable, discounted loans receivable,
securities available for sale, trading account securities
and foreclosed real estate, branch deposits .................. 641 182
Fees and service charges ........................................ 638 260
Other ........................................................... 32 10
------- -------
Total non-interest income .................................... 1,405 503
------- -------
Non-interest expense:
Compensation and benefits ....................................... 843 841
Occupancy and equipment ......................................... 622 469
Federal deposit insurance premiums .............................. 20 16
Other general and administrative fees ........................... 1,101 696
------- -------
Total non-interest expense ................................... 2,586 2,022
------- -------
Income before income taxes ......................................... 188 578
Income tax expense (benefit) ....................................... (192) 133
------- -------
Net Income ...................................................... $ 380 $ 445
======= =======
Per Share Amounts
Basic ........................................................... $ .19 $ .22
Diluted ......................................................... .17 .20
See notes to accompanying unaudited consolidated financial statements
4
5
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Three Months Ended March 31,
2001 2000
---- ----
(Unaudited)
Net income ............................................... $ 380 $ 445
Other comprehensive income:
Unrealized losses on available-for sale securities:
Unrealized holding losses arising
during period, net of tax
benefit of $4 in 2001 and $68 in 2000 ............. (7) (111)
----- -----
Comprehensive income ..................................... $ 373 $ 334
===== =====
See notes to accompanying unaudited consolidated financial statements
5
6
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated
Additional Other
Preferred Common paid-in Retained Comprehensive
Stock Stock Capital earnings ESOP Loan Income/(Loss)
-----------------------------------------------------------------------
Three months ended March 31, 2000
Balance at December 31, 1999........................ $ 3 $ 20 $8,829 $12,260 $ (426) $ (850)
Net income.......................................... --- --- --- 445 --- ---
Other comprehensive loss, net of tax................ --- --- --- --- --- (111)
Amortization of purchase price of MRP stock......... --- --- --- --- --- ---
Cash dividends...................................... --- --- --- (100) --- ---
------ ------ ------ ------- ------- -------
Balance at March 31, 2000........................... $ 3 $ 20 $8,829 $12,605 $ (426) $ (961)
====== ====== ====== ======= ======= =======
Three months ended March 31, 2001
Balance at December 31, 2000........................ $ 3 $ 20 $8,893 $16,189 $ (405) $ (678)
Net income.......................................... --- --- --- 380 --- ---
Other comprehensive loss, net of tax................ --- --- --- --- --- (7)
ESOP Loan principal reduction...................... --- --- --- --- 14 ---
Amortization of purchase price of MRP stock......... --- --- --- --- --- ---
Cash dividends...................................... --- --- --- (100) --- ---
------ ------ ------ ------- ------- -------
Balance at March 31, 2001........................... $ 3 $ 20 $8,893 $16,469 $ (391) $ (685)
====== ====== ====== ======= ======= =======
Total
Unearned Stockholders'
Stock Awards Equity
------------------------------
Three months ended March 31, 2000
Balance at December 31, 1999........................ $ (248) $19,588
Net income.......................................... --- 445
Other comprehensive loss, net of tax................ --- 111
Amortization of purchase price of MRP stock......... 4 4
Cash dividends...................................... --- (100)
------- -------
Balance at March 31, 2000........................... (244) $19,826
======= =======
Three months ended March 31, 2001
Balance at December 31, 2000........................ $ (248) $23,774
Net income.......................................... --- 380
Other comprehensive loss, net of tax................ --- (7)
ESOP Loan principal reduction...................... --- 14
Amortization of purchase price of MRP stock......... 5 5
Cash dividends...................................... --- (100)
------- -------
Balance at March 31, 2001........................... $ (243) $24,066
======= =======
See accompanying notes to unaudited consolidated financial statements.
6
7
UMBRELLA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31,
2001 2000
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income from continuing operations ..................................................... $ 380 $ 445
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation ............................................................................ 405 210
Accretion of discounts and deferred loan fees ........................................... (68) (174)
Provision for loan losses ............................................................... 75 60
(Gain) loss on sale of:
Securities available for sale ........................................................... (61) (80)
Trading account securities .............................................................. (287) (61)
Loans receivable ........................................................................ --- (64)
Branch location ......................................................................... --- (40)
Branch Deposits ......................................................................... (265) ---
Foreclosed real estate .................................................................. (28) 63
Net change in trading account activity .................................................... 198 489
Loans originated and purchased for sale ................................................... (29,568) (15,000)
Proceeds from sale of loans receivable .................................................... 32,906 20,719
(Increase) decrease in purchased mortgage servicing rights ............................... (89) (46)
Amortization of purchase price of MRP and ESOP stock ...................................... 5 4
Decrease in accrued interest receivable, prepaid
expenses, and other assets .............................................................. (6,009) 1,785
Increase (Decrease) in accrued interest payable and other liabilities ..................... (74) (2,039)
--------- ---------
Net cash (used in) provided by operating activities ..................................... (2,480) 6,271
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio .............................................. (105,603) (34,500)
Principal repayments on:
Loans receivable and discounted loans receivable ......................................... 106,094 27,229
Securities-available-for sale ............................................................ 29 36
Proceeds from sale, maturity, or call of:
Foreclosed real estate .................................................................. 932 817
Securities held-to-maturity ............................................................. 9,294 ---
Securities available for sale ........................................................... 764 ---
Premises and equipment .................................................................. --- 500
Investment in GFS preferred stock ....................................................... 3,900 ---
Purchase of:
Securities available for sale ........................................................... (24,422) (869)
Premises and equipment .................................................................. (528) (191)
--------- ---------
Net cash used in investing activities .............................................. (9,540) (6,978)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ................................................................ 68,296 10,515
Proceeds from borrowed funds ............................................................ 720 281
Repayment of borrowed funds ............................................................. (3,200) (5,600)
Dividends paid .......................................................................... (100) (100)
Net increase (decrease) in advance payments by borrowers for taxes and insurance ........ (257) 277
Net increase (decrease) in custodial escrow balances for loans serviced ................. 811 (810)
--------- ---------
Net cash provided by financing activities ............................................. 66,270 4,563
--------- ---------
Net increase in cash and cash equivalents ............................................... 54,250 3,856
Cash and cash equivalents at beginning of period .......................................... 94,017 37,672
--------- ---------
Cash and cash equivalents at end of period ................................................ $ 148,267 $ 41,528
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense .......................................................................... $ 7,290 $ 4,984
Income taxes .............................................................................. $ 1,500 $ 900
Non-cash investing activity - transfer of loans to foreclosed real estate .................... $ 497 $ 880
See accompanying notes to unaudited consolidated financial statements.
7
8
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 generally accepted accounting principles ("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 generally accepted accounting principles 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 months ended March 31, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
The March 31, 2001 unaudited consolidated financial statements include Umbrella
Bancorp, Inc. (formerly, Argo Bancorp, Inc.) (Umbrella Bancorp or the Company)
and its wholly owned subsidiaries, Argo Federal Savings Bank, FSB (Argo Savings
or the Savings Bank); Argo Redemption Corp., Inc. (Argo Redemption), and the
Savings Bank's wholly owned subsidiary, Dolton-Riverdale Savings Service
Corporation (Dolton-Riverdale). Effective June 1, 2001, the Savings Bank will
effectuate a name change to UmbrellaBank, fsb. Intercompany transactions and
balances are eliminated in consolidation.
The Company, through its subsidiaries, provides a full range of financial
services through its locations in Cook County, Illinois and an Internet site.
The Savings Bank'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 real as well as commercial estate. In addition,
the Savings Bank sells mortgage loans on a service-released basis into the
secondary market, has an ATM network, and has investments in a partnership which
owns purchased mortgage servicing rights. In addition, and on a limited basis,
the Company is involved in the purchase and disposition of discounted loans.
Through a nonbank affiliate, the Savings Bank also provides mortgage banking
activities that focus on the purchase and sale of mortgage loans into the
secondary market.
On April 18, 2001 the Company repurchased 365,796 shares of common stock from
the Deltec Banking Corporation Ltd.
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 March 31, 2001, ARC had acquired 66,293
shares of Argo Capital Trust Preferred securities at an average price of $8.61
per share.
8
9
On July 9, 2000, Argo Savings established an internet banking division of the
Savings Bank, which is marketed as "umbrellabank.com, a division of Argo Federal
Savings Bank, FSB" ("umbrellabank.com"). Umbrellabank.com allows consumers to
conduct online financial transactions with the Savings Bank, including but not
limited to opening account relationships, transferring funds, accessing account
information, processing bill payments, and applying for or obtaining loan
products, including but not limited to credit cards and residential mortgage
secured loans. At March 31, 2001, umbrellabank.com deposits totaled $210.5
million and represented 46.1% of total Savings Bank deposits of $456.8 million.
On December 1, 2000, Argo Savings sold combined deposits of $113,585,000 from
three (3) of its five (5) branch banking locations for a premium of $9,216,000.
Expenses attributable to the transaction aggregated the approximate amount of
$1.2 million resulting in a gain of $8.0 million. In conjunction with the
deposit sale, Argo Savings assigned the leases to the Summit and Bridgeview
facilities sold in 1999, together with the leased facility not subject to the
1999 sale located at 47 W. Polk Street, Chicago, to the deposit acquirer. The
Savings Bank funded the transaction through short-term liquid investments,
including deposits raised through the umbrellabank.com Internet retail banking
division.
NOTE B - STOCK BENEFIT PLANS
The Company's stock benefit plans are described in detail in Note 11 to the
December 31, 2000 Consolidated Financial Statements.
There were no new awards or shares exercised or forfeited during the three
months ended March 31, 2001.
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements.
The following table summarizes, as of March 31, 2001 and at December 31, 2000,
Argo Savings' capital requirements under OTS regulations and its actual capital
ratios at those dates:
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
MARCH 31, 2001 PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
- -------------- ---------- ---------- ------- ------- -------
(Dollars in Thousands)
Risk-based 8.0% 11.08% $22,704 $29,567 $ 6,863
Core 4.0 5.28 20,537 27,127 6,590
Tangible 1.5 5.28 7,702 27,127 19,425
DECEMBER 31, 2000
- -----------------
Risk-based 8.0% 12.29% $18,617 $28,912 $10,295
Core 4.0 5.95 17,784 26,448 8,664
Tangible 1.5 5.95 6,669 26,448 19,779
9
10
NOTE D - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share:
Three months ended
March 31,
-------------------------
2001 2000
---------- ----------
Net Income from continuing operations (Numerator) ............ $ 380,118 $ 445,058
Basic earnings per share
weighted average common shares outstanding ........... 2,023,109 2,004,896
Additional dilutive shares ................................... 157,290 168,911
---------- ----------
Total weighted average common shares and
Equivalents outstanding for diluted computation
(Denominator) .............................................. 2,180,399 2,173,807
========== ==========
Basic earnings per shares..................................... $ .19 $ .22
Diluted earnings per share.................................... $ .17 $ .20
NOTE E - COMMITMENTS AND CONTINGENCIES
At March 31, 2001 Argo Savings had loan commitments totaling $7.6 million.
Commitments to fund loans 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. Argo Savings also had Community Reinvestment Act ("CRA")
investment commitments outstanding of $2.5 million. In addition, the Savings
Bank also had at March 31, 2001 a commitment to purchase an office building at
220-222 W Huron in downtown Chicago, Illinois for $4.5 million.
10
11
NOTE F- SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, and
mortgage banking. Loans, investments, and deposits provide the revenues in the
banking operation, fee income provides the primary revenue for mortgage banking
and discount accretion provides the primary revenue for discount loan workout,
all operations are domestic.
Information reported internally for performance assessment follows. The column
for other information primarily includes activity between segments which is
being eliminated.
Discount Mortgage Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
(In Thousands)
March 31, 2001
- --------------
Net interest income $ 1,554 $ 162 $ --- $ (272) $ 1,444
Provision for loan losses 75 --- --- --- 75
Other revenue 1,198 (34) 5 235 1,405
Other expenses 2,374 71 --- 141 2,586
Income tax expense (120) --- --- (73) (192)
Segment profit (loss) 423 57 5 (105) 380
Segment assets 535,620 11,577 40 (17,556) 529,681
Discount Mortgage Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
(In Thousands)
March 31, 2000
- --------------
Net interest income $ 2,139 $ 296 $ --- $ (278) $ 2,157
Provision for loan losses 40 20 --- --- 60
Other revenue 463 (45) 5 80 503
Other expenses 1,774 54 --- 194 2,022
Income tax expense 290 --- --- (157) 133
Segment profit (loss) 498 178 5 (236) 445
Segment assets 396,652 12,075 43 (13,114) 395,656
11
12
UMBRELLA BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 10-Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from management expectations.
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 words such as "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 cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Bank's loan and investment portfolios, changes in accounting principles,
policies or guidelines and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 2000 Form
10-K.
GENERAL
Umbrella Bancorp, Inc. ("Umbrella Bancorp" or "Company") was incorporated in
Delaware in August 1987, for the purpose of acquiring Argo Federal Savings Bank,
FSB ("Argo Savings" or "Savings Bank"). The 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"). Subsequent to March 31, 2001 on
April 30, 2001 the Delaware Secretary of State approved an Amendment to the
Certificate of Incorporation of the Registrant changing its name to Umbrella
Bancorp, Inc. This Amendment to the Certificate of Incorporation was approved by
the shareholders of the Company at its Annual Meeting of Shareholders held April
26, 2001. The Savings Bank has made an application to its primary federal
regulator, the Office of Thrift Supervision, to change its name to UmbrellaBank,
FSB. It is anticipated that the OTS approval changing the name of the Company's
subsidiary will be effective on or about June 1, 2001.
12
13
On December 31, 1996, the Company entered into a Stock Purchase Agreement (the
"Purchase Agreement") with The Deltec Banking Corporation Limited, a banking
corporation organized under the laws of the Commonwealth of the Bahamas
("Deltec") whereby Deltec acquired 25% of the issued and outstanding shares of
the Company as of that date. Pursuant to the Purchase Agreement, the Company and
Deltec also entered into a stockholder agreement (the "Stockholder Agreement").
The Stockholder Agreement provides to Deltec, among other matters, the right to
acquire additional shares (or sell back owned shares) from the Company when the
Company issues or sells additional shares (or repurchases shares) to third
parties in order that Deltec may maintain 25% ownership in the Company's common
stock. The Stockholder Agreement also granted Deltec registration rights in
respect of any shares of Common Stock owned by Deltec should it decide to sell
its interest in the Company. In 2000, Deltec advised the Company it no longer
intended to maintain its ownership position of 25% of the issued and outstanding
shares of the Company, in accordance with the plan of liquidation and
dissolution of Deltec. In connection therewith and in furtherance of the
exercise of its registration rights, the Company has filed a Registration
Statement with the Securities and Exchange Commission, in part to register such
shares. On April 18, 2001 the Company completed a negotiated repurchase of
365,796 shares of its common stock for an aggregate purchase price of $5,121,144
from Deltec, at a purchase price of $14.00 per share. The repurchased shares
represent 18.08% of the issued and outstanding common stock of the Company prior
to the repurchase. The Company, in funding the repurchase, utilized cash on hand
and the proceeds of a $5 million loan at market terms and conditions from a
third party institutional lender. An additional 135,428 shares were purchased
from Deltec at the same price per share by officers and directors of the
Registrant. After completion of the transaction 1,657,313 common shares of the
Registrant are issued and outstanding. Additionally, the Purchase Agreement and
Stockholders Agreements were terminated by reason of the sale.
On June 9, 2000, Argo Federal established an Internet banking division of the
Savings Bank, which is marketed as "Umbrellabank.com, a division of Argo Federal
Savings Bank, FSB" ("umbrellabank.com"). Umbrellabank.com is accessible via the
Internet at http://www.umbrellabank.com and allows consumers to conduct online
financial transactions with the Savings Bank, including but not limited to
opening account relationships, transferring funds, accessing account
information, processing bill payments, and applying for or obtaining loan
products, including but not limited to credit cards and residential mortgage
secured loans. At March 31, 2001, umbrellabank.com deposits totaled $210.5
million and represented 46.1% of consolidated total deposits of $456.8 million.
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 March 31, 2001, ARC had acquired 66,293
shares of Argo Capital Trust Preferred securities at an average price of $8.61
per share.
13
14
During the twelve months ended December 31, 2000 the Savings Bank through its
wholly owned subsidiary, Dolton Service, purchased 2,500 shares or 23.7% of the
issued and outstanding stock of Commercial Loan Corporation ("CLC") at a
purchase price of $125,000. CLC, which is owned by Chicagoland financial
institutions, through its management processes, underwrites, documents and
services commercial loans for financial institution investors. The services
performed by CLC include monitoring post closing performance of the loan,
preparation of the loan summaries, ongoing analysis of the performance of the
loan and the borrower including review of financial and operating statements of
the borrower and collection and remittance of all loan payments. CLC entered
into a master loans participation agreement with each of its shareholders or
their affiliates, whereunder the same would purchase participations in pools
offered by CLC. At March 31, 2001, CLC originated 156 loans aggregating $41.3
million, which were funded through pools. The rates paid on the pools to the
investors including the Savings Bank ranged from 7.50% to 9.50% and consisted of
both fixed and variable rates. As of March 31, 2001, the Savings Bank had
purchased interest in 33 pools aggregating $16.1 million.
SALE OF SUBSIDIARY
On March 31, 1999 the Company sold its wholly owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois ("On-Line"), to GFS Holdings,
Co. of Palm Beach Gardens, Florida ("Purchaser"). Under the terms of the
transaction, in exchange for all of the outstanding stock of On-Line, the
Company received $11.3 million consisting of $6.7 million in cash together with
4,600 shares of GFS Holdings Co. Series B Preferred Stock, valued at $4.6
million.
On January 31, 2000, six hundred (600) shares of the Preferred Stock were
redeemed by the Purchaser at $1,000 per share for a total redemption price of
$600,000. In January 2001, the Company received cash of $3.9 million for
redemption of the preferred stock and additional consideration of an $8,025 per
month credit to offset future data processing expenses for a period not to
exceed 48 months.
14
15
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' 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 $148.3
million at March 31, 2001.
The primary investment activity of Argo Savings is the origination and purchase
of single family mortgage loans, commercial real estate and commercial loans,
and to lesser extent consumer loans. During the three months ended March 31,
2001, and 2000, the Savings Bank originated and purchased loans receivable and
discounted loans receivable in the principal amounts of $135.2 million and $49.5
million, respectively. During the three months ended March 31, 2001, and 2000,
these investing activities were primarily funded by principal repayments on
loans receivable and discounted loans receivable and securities
available-for-sale of $139.0 million and $27.2 million, respectively. There were
no sales of loans during the three months ended March 31, 2001 compared to sales
of $21.5 million for the same period last year. During the three months ended
March 31, 2001, additional funding was provided by the increase in deposits of
$68.3 million, partially offset by a $2.5 million decrease in borrowings. During
the three months ended March 31, 2000, additional funding was provided by the
increase in deposits of $10.5 million, partially offset by a $5.3 million
decrease in borrowings.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At March 31, 2001, Argo Savings liquid assets represented
19.7% of its liquidity base as compared to the required level of 5.0%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and the current
loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Savings Bank's senior management. Argo Savings' 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.
At March 31, 2001, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 5.28%, 5.28%, and
11.08%, respectively.
15
16
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At March 31, 2001, the
Savings Bank met each of its capital requirements, and it is anticipated that
Argo Savings will not be subject to the interest rate risk component.
16
17
CHANGES IN FINANCIAL CONDITION
Total assets increased $66.6 million to $529.7 million at March 31, 2001, from
$463.1 million at December 31, 2000. The growth in assets was the result of a
$68.3 million increase in deposits which were primarily invested in short-term
interest earning assets and other investment securities. Interest-earning assets
include $47.5 million of ATM cash, on which the Savings Bank earns a return of
200 basis point over the overnight FHLB rate.
Cash and interest-earning deposits increased by $54.3 million to $148.3 million
at March 31, 2001 from $94.0 million at December 31, 2000 primarily as a result
of deposit inflows which have been temporarily invested in short term interest
earning deposits and the addition of 300 ATM's which utilized an additional
$12.6 million in cash.
Securities available-for-sale increased by $23.6 million during the three months
ended March 31, 2001 as a result of increased deposit inflows and a decline in
net loans outstanding.
Loans receivable and discounted loans receivable declined by $3.8 million to
$282.7 million at March 31, 2001 from $286.5 million at December 31, 2000. Loan
originations and purchases totaled $135.2 million offset by principal repayments
totaling $138.5 million, and transfers of loans to foreclosed real estate of
$497,000.
Deposits increased $68.3 million to $456.8 million at March 31, 2001, from
$388.5 million at December 31, 2000. The increase can be attributed to the
success of the internet banking division, umbrellabank.com, which had net
deposit inflows totaling $61.2 million for the three months ended March 31,
2001.
Borrowings decreased $2.5 million to $16.2 million at March 31, 2001, from $18.7
million at December 31, 2000. The decrease was due to Management's decision to
repay $2.5 million of short-term borrowings at Umbrella Bancorp.
Stockholders' equity increased $292,000 to $24.1 million at March 31, 2001, from
$23.8 million at December 31, 2000. The increase was primarily the result of net
income of $380,000 partially offset by cash dividends of $100,000.
17
18
ASSET QUALITY
Umbrella Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
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.
At March 31, 2001, Argo Savings had forty-five (45) properties, totaling $2.0
million classified as foreclosed real estate, as compared to forty-one (41)
properties also totaling $2.5 million at December 31, 2000. The underlying
properties on March 31, 2001, consisted primarily of single family residences.
The foreclosed real estate has been written down to estimated fair value at
March 31, 2001. The total amount of loans receivable ninety (90) days or more
past due at March 31, 2001, was $4.7 million or 1.69% of total loans receivable
compared to $4.4 million or 1.56% of total loans on December 31, 2000. Loans
ninety (90) days or more past due are primarily secured by one-to-four family
residences. Total non-performing assets at March 31, 2001, totaled $7.2 million
or 1.35% of total assets compared to $6.9 million or 1.50% of total assets at
December 31, 2000. Excluded from these totals are $907,000 of discounted loans
ninety (90) days or more contractually past due at March 31, 2001, and $1.0
million at December 31, 2000. Discounted loans that are often purchased with the
intent to foreclose and sell the underlying property are excluded from
non-performing loans.
18
19
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 2001, AND 2000.
GENERAL
Net income for the three months ended March 31, 2001 was $380,000 or $.17 per
diluted share compared to net income of $445,000 or $.20 per diluted share for
the same period last year. The decline in net income was the result of a reduced
interest margin and higher operating expenses.
INTEREST INCOME
Interest income for the three months ended March 31, 2001, totaled $8.8 million,
as compared to $7.2 million for the comparable 2000 period. The $1.6 million
increase was primarily the result of a $85.1 million increase in average
interest-earning assets, which was partially offset by and despite a 15 basis
point decrease in the yield on earning assets to 7.97% from 8.12%. The decline
in yield is in part the result of the $97.7 million increase in short-term
interest earning deposits which will generally earn less than longer term
assets.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2001, totaled $7.3 million
as compared to $5.0 million for the comparable 2000 period. The $2.3 million
increase was primarily the result of a $90.5 million rise in average interest
bearing liabilities and a 95 basis point increase in the weighted average cost
of interest-bearing liabilities to 6.62% for the three-months ended March 31,
2001 as compared to 5.67% for the same period last year. Interest-bearing
liabilities include $16.7 million of 11.0% junior subordinated debt securities
which the Company issued in November, 1998.
NET INTEREST INCOME
Net interest income declined to $1.4 million for the three months ended March
31, 2001, a decrease of $713,000 from the amount recorded in the comparable 2000
period. The decrease in net interest income for the three months ended March 31,
2001, resulted from a 110 basis point decline in the effective net spread to
1.35% from 2.45% for the comparable 2000 period.
19
20
PROVISION FOR LOAN LOSSES
Provision for loan losses totaling $75,000 was recorded for the three months
ended March 31, 2001, as compared to $60,000 for the same period in 2000. Loan
loss reserves totaled $2.5 million or .87% of net loans outstanding at March 31,
2001 compared to $1.6 million or .57% of net loans outstanding at March 31,
2000. Despite lower delinquencies Management chose to increase reserve levels
over the last twelve months due to the Savings Bank's increased commercial real
estate and commercial lending activities. Management believes that loan loss
reserves are adequate, and will continue to monitor the loan portfolio and
substandard assets for loss exposure.
NON-INTEREST INCOME
Non-interest income increased $902,000 to $1.4 million for the three months
ended March 31, 2001, as compared to $503,000 for the three months ended March
31, 2000. Customer fee income including ATM fees increased by $378,000 to
$638,000 for the three months ended March 31, 2001 from $260,000 for the same
period last year. Included in customer income were servicing fees charged on the
Savings Bank's purchase/repurchase loan portfolio totaling $130,000. Net gains
on the sale of assets increased by $459,000 to $641,000 for the three months
ended March 31, 2001 from 182,000 for the same period last year. Included in
gains on sale was an additional $210,000 profit on the sale of three banking
centers in December, 2000. Also included here was a net gain of $28,000 on the
sale of Real Estate Owned for the three months ended March 31, 2001 compared to
a $63,000 loss for the same period last year. Profits on the sale of securities
increased by $207,000 to $348,000 from $141,000 for the same period last year.
NON-INTEREST EXPENSE
Non-interest expense increased by $564,000 to $2.6 million or 2.08% of average
assets for the three months ended March 31, 2001 from $2.0 million or 2.07% of
average assets for the same period last year. The increase in operating expenses
was primarily the result of expenses related to the Savings Bank's Internet
banking division, umbrellabank.com, which incurred operating expenses totaling
$1.2 million for the three months ended March 31, 2001. The umbrellabank.com
division incurs variable expenses related to data processing and customer
service expense utilized in the set-up of new accounts. Deposits at
umbrellabank.com increased by $61.2 million to $210.5 million during the three
months ended March 31, 2001 from $149.3 million at December 31, 2000.
INCOME TAX EXPENSE
The Company recorded a tax benefit of $192,000 for the three months ended March
31, 2001 compared to a tax provision of $133,000 for the same period last year.
The year 2001 benefit is based on a 38.0% tax calculated on pre-tax income of
$188,000 minus the utilization of affordable housing tax credits totaling
$264,000 for the three months ended March 31, 2001.
20
21
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 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 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. The Savings Bank, from time to
time, also invests in long-term fixed-rate mortgages provided it is compensated
with an acceptable spread.
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 500 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. There has been no material change in
market risk since December 31, 2000.
21
22
The following table presents the Savings Bank's projected change in NPV for the
various rate shocks as of December 31, 2000 and 1999. December 31, 2000
information is the most recent available.
Estimated Increase
(Decrease) in NPV
Change in Estimate -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2000:
300 basis point rise $ 21,739 $ (3,863) (15)%
200 basis point rise 23,320 (2,283) (9)
100 basis point rise 24,527 (1,075) (4)
Base scenario 25,602 - -
100 basis point decline 25,715 596 2
200 basis point decline 26,805 890 3
300 basis point decline 27,806 1,356 5
Estimated Increase
(Decrease) in NPV
Change in Estimate -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
1999:
300 basis point rise $ 10,005 $ (14,099) (58)%
200 basis point rise 15,915 (8,189) (34)
100 basis point rise 20,893 (3,211) (13)
Base scenario 24,104 - -
100 basis point decline 25,715 1,611 7
200 basis point decline 26,805 2,701 11
300 basis point decline 27,806 3,701 15
The NPV is calculated by Argo Savings 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.
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.
22
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Umbrella Bancorp and Argo Savings 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
Not applicable.
ITEM 5. OTHER INFORMATION
S-3 Registration Statement filed by Deltec Banking Corporation Ltd. and others,
effective March 26, 2001.
23
24
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 D)
B. Reports of Form 8-K
(1) Form 8-k was filed with the Commission on April 18, 2001 announcing
the negotiated repurchase of 365,796 shares of its common stock for an aggregate
price of $5,121,144 from the Deltec Banking Corporation, Ltd.,
(2) Form 8-k filed with the Commission on April 30, 2001 announcing the
name change of the Company to Umbrella Bancorp, Inc.
- --------------------------------------------------------------------------------
* 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.
24
25
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: May 14, 2001 /s/ John G. Yedinak
---------------------- ----------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
25