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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
Commission File No.: 0-19829
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
(Address of principal executive offices)
(708) 458-2002 (Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by checkmark if there is disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K and is not contained herein and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, i.e., persons other than directors and
executive officers of the Registrant is $8.1 million and is based upon the last
sales price as quoted on Nasdaq for MARCH 26, 2001.
The Registrant had 2,023,109 shares outstanding as of March 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
2000 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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INDEX
PART I PAGE NO.
- ------ --------
Item 1. Business................................................. 3
Item 2. Properties............................................... 38
Item 3. Legal Proceedings........................................ 38
Item 4. Submission of Matters to a Vote of Security Holders...... 38
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters................................ 39
Item 6. Selected Consolidated Financial Data..................... 39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 39
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................ 39
Item 8. Consolidated Financial Statements and Supplementary
Data................................................... 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 39
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant....... 39
Item 11. Executive Compensation................................... 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 40
Item 13. Certain Relationships and Related Transactions........... 40
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 40
SIGNATURES ......................................................... 43
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PART 1
BUSINESS OF ARGO BANCORP, INC.
ITEM 1. BUSINESS
Argo Bancorp, Inc. ("Argo 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").
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.
In October of 1998, the Company formed Argo Capital Trust Co. ("Argo
Capital Trust"), a statutory business trust formed under the laws of the State
of Delaware. In November 1998, the Company and Argo Capital Trust offered 11%
Capital Securities with a liquidation amount of $10.00 per security. The
proceeds from the offering were $17,250,000. Argo Capital Trust used the gross
proceeds from the sale of the Capital Securities to purchase Junior Subordinated
Debentures of the Company. The Junior Subordinated Debentures carry an interest
rate of 11% paid quarterly in arrears and are scheduled to mature, subject to
the Company's right to prepay the debentures under certain circumstances, on
November 6, 2028.
On September 27, 1999, the Company purchased 16,666 shares of Synergy
Plan Ltd. ("Synergy") Class A Common Stock at $15.00 per share and 16,667 of
Synergy's Convertible Preferred Stock at $15.00 per share. The Company's total
investment was $500,000. On March 31, 2000, the Company exercised an option to
acquire an additional 33,333 shares of Synergy Class A Common Stock for a
purchase price of $15.00 per share. The convertible Preferred Stock owned by the
Company is convertible into 16,667 shares of Class A Common Stock of Synergy on
or before September 30, 2004, subject to Synergy's right to redeem the shares on
September 30, 2002, at a redemption price of $25.00 per share. The Convertible
Preferred Shares have a stated dividend of $.90 per share, per annum, payable
quarterly. The Company owned at December 31, 2000, 2.9% of the Class A Common
Stock and 100% of the Convertible Preferred Stock of Synergy. John G. Yedinak,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
and Donald Wittmer a director of the Company, have been elected and serve on the
Board of Directors of Synergy.
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BUSINESS OF ARGO REDEMPTION CORPORATION
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 December 31, 2000, ARC had acquired 66,293
shares of Argo Capital Trust Preferred securities at an average price of $8.61
per share.
BUSINESS OF ARGO FEDERAL SAVINGS BANK, FSB
The discussion that follows relates primarily to the business of Argo
Savings, a federally chartered depository institution. Argo Savings undertakes
the primary lending activities of the Company and accordingly, the discussion
under the caption "Lending Activities" materially relates only to the Savings
Bank. The Company does, however, have certain investments in loans on an
unconsolidated basis at the holding company level, as well as certain borrowings
unrelated to the activities of Argo Savings. Accordingly, there are certain
references to the Company's activities under the section captioned "Sources of
Funds and Borrowings." Unless otherwise stated, however, all other descriptions
of the business of the Company that follow relate to the business of Argo
Savings.
Argo Savings is a federally chartered savings institution and was
acquired by the Company on November 17, 1987. The Savings Bank operates under
the authority of the OTS, its deposits are insured by the FDIC, and it is a
member of the FHLB System. The principal executive offices of the Company and
administrative headquarters of the Savings Bank are located at 5818 South Archer
Road, Summit, Illinois. Argo Savings has two banking facilities in Cook County,
Illinois. Argo Savings' primary business is the solicitation of savings deposits
from the general public and the purchase or origination of both conventional and
portfolio loans secured by one-to-four-family residential and commercial real
estate.
Argo Savings engages in lending activities that focus on the
origination, purchase and sale of mortgage loans in the secondary market.
Marketed under the name Margo Financial Services, LLC ("Margo"), the Savings
Bank operates a wholesale mortgage banking operation using a network of brokers,
correspondents and conduits. Loans originated through the Margo conduit include
loans resold in the secondary market and, to a lesser extent, portfolio
adjustable rate mortgage ("ARM") loans and Expanded Criteria Loans. Expanded
Criteria Loans consist of one-to-four-family mortgage loans which are generally
not Agency qualified, due to the borrower's credit profile, and are not as
readily saleable in the secondary market as conventional loans. The Expanded
Criteria Loans are retained by the Savings Bank.
The Savings Bank also offers 'purchase/repurchase' mortgage loan
facilities ("Warehouse Lines") to a number of third party mortgage banking
firms. Savings Bank Warehouse Lines are used to originate one-to-four-family
secured mortgage loans held for sale by Argo Savings, with mortgage loans
acquired by Argo Savings generally delivered for sale to third party investors,
pursuant to commitments to purchase, within 60 days of closing. In 2000,
outstanding Warehouse Lines averaged $30.8 million with approximately $52.4
million of loans acquired during the period. Earnings on Warehouse Line
facilities are tied to the prime rate of interest, and generate fee revenue on
each purchase and sale transaction.
During the period, Argo Savings also increased its commercial lending
activities. Through its investment in Commercial Loan Corporation, the Savings
Bank invests in commercial loan and commercial real estate loan participations
in the Chicago metropolitan area. Argo Savings has also
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directly originated or participated in commercial real estate development loans,
primarily in the Chicagoland area. The Savings Bank has also acquired interests
in charter school lease transactions, and diversified its commercial loan
portfolio by acquisition of participations in commercial real estate and
development loans in the greater Denver, Colorado area. Commercial loans and
commercial real estate loans comprised approximately 16.8% of Argo Savings'
total loans at December 31, 2000.
In addition to its lending activities, Argo Savings also generates fee
income from an expanding network of regionally deployed ATMs. Deployment
activities have been concentrated primarily in the Midwest and mid-Atlantic
regions of the country, with current expansion into the southeastern United
States underway, and deployments west of the Mississippi River planned during
2001. Revenues are derived from interchange and surcharge fees, together with
income from related leasing and interest on currency used in operations. At
December 31, 2000, the Savings Bank had 776 ATMs deployed in 17 states.
Since 1999, the Savings Bank has undertaken a number a steps, designed
to restructure and change the way Argo Savings conducts banking activities in
its marketplace. The most significant of these changes was the establishment, on
July 9, 2000, of an Internet banking division operating under the name
'umbrellabank.com, a division of Argo Federal Savings Bank, FSB'
("umbrellabank.com"). The umbrellabank.com Internet delivery channel was created
to capitalize upon the three and one half years of experience gained by the
Company in the turn-around, operation and successful sale of its former
subsidiary, On-Line Financial Services, Inc., a mid-size computer service bureau
providing data processing services to more than 80 Midwest banks and thrift
institutions. Umbrellabank.com is accessible via the Internet at
'HTTP://WWW.UMBRELLABANK.COM' and allows consumers to conduct online financial
transactions with Argo Savings, 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 December 31,
2000, umbrellabank.com deposits totaled $149.3 million and represented 38.4% of
total Savings Bank deposits of $388.5 million.
Prior to the establishment of the umbrellabank.com division, the
Savings Bank operated as a traditional savings and loan institution from five
(5) physical branch locations located in Chicago and suburban Cook County,
Illinois. On June 29, 1999, Argo Savings sold its five operating properties
located at 7600 West 63rd Street and 5818 South Archer Road, Summit, Illinois;
8267 South Roberts Road, Bridgeview, Illinois; 2154 West Madison Street,
Chicago, Illinois; and 14076 Lincoln Avenue, Dolton, Illinois, to a
non-affiliated third party for an aggregate contractual purchase price of
$5,850,000 and simultaneously entered into a 14 year, 2-month operating lease
for each of the properties with the new purchaser. Under the terms of the lease,
the Savings Bank paid an initial monthly rental of $48,000 per month or $576,000
per year, which increased at the rate of 1% each year commencing January 1,
2000. After deducting customary closing costs including broker's commissions,
title charges, environmental studies, surveys and legal fees, the sale resulted
in a profit of $2,400,000 to the Savings Bank. The profit, under generally
accepted accounting principles, is being included in income by the Savings Bank
over the lease term. As a result of this sale and leaseback transaction, Argo
Savings rents, as opposed to owns, the properties from which it transacts
business.
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 Company recorded income, before tax effects, of $591,000
in the fourth quarter of 2000, attributable to the deferred gain on the sale of
the Summit and Bridgeview branch office
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buildings that were sold in June 1999. Argo funded the transaction through
short-term liquid investments, including deposits raised through the
Umbrellabank.com Internet retail banking division.
MARKET AREA
Argo Savings considers its current primary market area to be the
greater Chicago metropolitan area (hereinafter referred to as its "primary
market area"). Argo Savings maintains its retail banking headquarters at 2154
West Madison Street, in Chicago, Illinois, and operates one branch banking
facility in Dolton, Illinois. The primary market area supporting traditional
operations by the Savings Bank is urban and is comprised of high-density
residential neighborhoods interspersed with mixed-use and heavily industrialized
areas. The current primary market area is fully developed with a relatively
large number of generally older homes. In recent periods, however, Argo Savings
has expanded the origination of loans outside of its primary market area, by the
operation of the Margo residential mortgage loan conduit and its expanding
commercial loan and participation activities.
As the Savings Bank experiences continued growth in its Internet
operations, the Company anticipates that Argo Savings' primary market area may
include more regional delineations or encompass a number of individual cities or
areas. The future primary market area or areas is dependent on the growth of the
umbrellabank.com division of the Savings Bank, and the location of consumers
utilizing its retail deposit and lending services. Argo Savings will continue to
analyze the geographic spread of deposits and loans generated from
umbrellabank.com operations, and adjust the definition of the Savings Banks'
primary market area as concentrations of customers are determined.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following tables set forth selected consolidated historical
financial data for the Company during the periods ended and at the dates
indicated. This information should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto in the 2000 Annual Report
to Stockholders, portions of which are incorporated herein by reference.
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SELECTED CONSOLIDATED FINANCIAL DATA
At and for the Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
CONSOLIDATED FINANCIAL CONDITION DATA:
Loans receivable, net $ 286,523 $ 277,460 $ 245,189 $ 184,358 $ 173,429
Stock in Federal Home Loan Bank of Chicago 2,615 2,303 1,911 3,271 3,428
Securities 42,196 40,891 7,901 4,974 5,788
Cash and cash equivalents 94,017 37,672 10,096 8,579 13,240
Mortgage loan servicing rights 4,784 4,958 5,062 6,706 5,264
Foreclosed real estate 2,498 2,280 3,875 4,251 3,913
Net assets of discontinued operation - - 6,545 5,114 3,546
Investment in GFS preferred stock 4,000 4,600 - - -
Other assets 26,460 22,066 19,963 12,991 13,310
---------- ---------- ---------- ---------- ----------
Total assets $ 463,093 $ 392,230 $ 300,542 $ 230,244 $ 221,918
========== ========== ========== ========== ==========
Deposits $ 388,537 $ 301,673 $ 232,980 $ 172,469 $ 150,627
Borrowed money 18,708 40,336 21,051 29,497 45,013
Custodial escrow balances for loans serviced 7,519 5,476 5,340 6,400 5,782
Other liabilities 7,968 7,907 5,507 3,774 3,936
Junior subordinated debt 16,587 17,250 17,250 - -
Stockholders' equity 23,774 19,588 18,414 18,104 16,560
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 463,093 $ 392,230 $ 300,542 $ 230,244 $ 221,918
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
Interest income $ 30,071 $ 23,896 $ 17,625 $ 18,263 $ 16,050
Interest expense 22,750 16,014 11,367 10,807 8,741
---------- ---------- ---------- ---------- ----------
Net interest income 7,321 7,882 6,258 7,456 7,309
Provision for loan losses 1,218 965 355 210 248
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 6,103 6,917 5,903 7,246 7,061
Noninterest income 10,091 2,340 3,810 3,151 2,897
Noninterest expense 10,636 9,079 9,851 9,648 9,311
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 5,558 178 (138) 749 647
Income tax expense (benefit) 1,227 (336) (383) 51 49
---------- ---------- ---------- ---------- ----------
Income from continuing operations 4,331 514 245 698 598
Discontinued operations:
Income from discontinued operation
(net of tax) - 135 286 125 736
Gain on sale of discontinued operation
(net of tax) - 1,928 - - -
---------- ---------- ---------- ---------- ----------
NET INCOME $ 4,331 $ 2,577 $ 531 $ 823 $ 1,334
========== ========== ========== ========== ==========
Income from continuing operations
Basic $ 2.16 $ .26 $ .12 $ .36 $ .48
Diluted 2.00 .25 .12 .33 .40
Net income
Basic $ 2.16 $ 1.32 $ .27 $ .43 $ .48
Diluted 2.00 1.25 .26 .39 .40
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At and for the Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA (1) (Dollars in thousands, except per share data)
Return from continuing operations on average
assets (4) 1.05% 0.15% 0.10% 0.31% 0.32%
Return from continuing operations on average
equity (4) 20.93 2.68 1.34 3.92 4.88
Average equity to average assets (4) 5.00 5.54 7.58 7.94 6.55
Stockholders' equity to total assets (4) 5.13 5.09 6.12 7.86 7.45
Interest rate spread 2.34 2.54 3.15 4.03 4.62
Net interest margin 2.00 2.53 2.95 3.78 4.29
Noninterest expense to average assets (4) 2.57 3.77 3.80 4.28 4.99
Non-performing loans to net loans receivable (2) 1.59 2.25 2.80 3.57 3.12
Non-performing assets to total assets (3) (4) 1.50 2.12 3.45 4.25 3.53
Allowance for loan losses to non-performing loans (2) 54.98 25.61 14.42 14.73 16.87
Allowance for loan losses to net loans receivable (3) .87 .58 .40 .53 .53
Ratio of net charge-offs to average loans outstanding,
excluding discounted loans .12 .03 .01 .01 .08
Average interest-earning assets to average
interest-bearing liabilities .94x 1.01x .96x .95x .94x
Book value per share $ 11.75 $ 9.75 $ 9.18 $ 9.25 $ 9.28
Full-service customer service facilities 2 5 5 5 5
- -------------------------
(1) Average balances are derived from month end balances.
(2) The formula used to calculate the ratios excludes balances related to the
$7.1 million portfolio of discounted loans receivable from both the
numerator and the denominator. Discounted loans are excluded since they
historically have a higher delinquency rate and are priced or discounted
accordingly. At December 31, 2000 $1.0 million or 14.50% of the discounted
loan portfolio were 90 days or more delinquent.
(3) The formulas used to calculate the ratios excludes the portfolio of
discounted loans receivable.
(4) Restated to remove results of discontinued operations for years prior to
2000.
LENDING ACTIVITIES
General. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and discounted loans receivable, totaled
$286.5 million at December 31, 2000, representing 61.89% of consolidated total
assets. On that date, $217.4 million of total loans outstanding, or 75.0% of its
total loan portfolio, consisted of loans secured by first mortgages on
one-to-four-family residential properties, $41.9 million, or 14.4% consisted of
loans secured by commercial real estate, $18.4 million or 6.4%, consisted of
direct financing leases, and $6.8 million, or 2.3% consisted of other commercial
secured loans. In addition, at December 31, 2000, $5.3 million, or 1.8% of its
loan portfolio consisted of other loans, primarily comprised of home equity,
second mortgage and other consumer loans.
The Company has focused lending activities on the generation of profits
from the sale of mortgage loans. The Savings Bank's conduit mortgage banking
activities marketed under the Margo brand, together with the Warehouse Line
program, generates origination of long-term, fixed-rate mortgage loans with 15-
and 30-year maturities for immediate sale in the secondary mortgage market. Argo
Savings' lending activity also includes the origination of adjustable rate
mortgage ("ARM") loans, primarily through the offering of portfolio ARM products
through the Margo conduit, although the Savings Bank has purchased ARM loans in
the secondary market in prior periods. Additionally, a significant portion of
the growth in the Argo Savings' loan balances in the current year is due to
origination and participation activities relating to commercial real estate
loans and commercial lending. The Savings Bank originated and purchased
approximately $428.6 million of loans both for portfolio and for sale during
2000.
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Analysis of Loan Portfolio. The following table sets forth the composition of
the Company's loan portfolio, including loans held for sale, in dollar amounts
and in percentages of the portfolio at the dates indicated.
At December 31,
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2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage loans:
One- to four-family (3): .....$217,444 75.02% $249,542 88.99% $233,461 93.64% $177,521 92.20% $177,345 92.50%
Commercial real estate ....... 41,872 14.44 13,887 4.95 2,179 .87 3,203 1.66 6,750 3.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ....... 259,316 89.46 263,429 93.94 235,640 94.51 180,724 93.86 184,095 96.02
Other loans
Commercial ................... 6,779 2.34 2,416 .86 75 .04 450 .23 526 .27
Home equity .................. 4,436 1.53 4,738 1.69 4,013 1.61 4,497 2.34 6,035 3.15
Direct financing leases (1)... 18,456 6.37 8,671 3.09 7,709 3.09 - - - -
Other ........................ 856 1,168 .42 1,864 .75 6,862 3.57 1,074 .56
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
.30
Total other loans .......... 30,527 10.54 16,993 6.06 13,661 5.49 11,809 6.14 7,635 3.98
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable (2).. 289,843 100.00% 280,422 100.00% 249,301 100.00% 192,533 100.00% 191,730 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts and
premiums and deferred loan
fees, net .................. 880 1,411 3,172 7,361 17,636
Allowance for loan losses .... 2,440 1,551 940 814 665
-------- -------- -------- -------- --------
Loans receivable, net ......$286,523 $277,460 $245,189 $184,358 $173,429
======== ======== ======== ======== ========
- ----------------------------
(1) Consists primarily of $17.0 million and $8.4 million in Charter School
loans at December 31, 2000 and 1999.
(2) Includes loans receivable and discounted loans receivable.
(3) Includes loans held for sale of $38.9 million, $18.9 million, $31.0
million, $6.5 million, and $82 million at December 31, 2000, 1999,
1998, 1997 and 1996.
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Loan Originations, Purchases and Sales. Set forth below is a table showing Argo
Savings' loan originations and loan purchases and sales for the years indicated:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Loans originated:
One-to-four-family (1) $ 342,109 $ 292,842 $ 80,511
Commercial real estate 5,236 6,615 -
Commercial 3,586 1,926 167
Home equity 2,729 1,653 1,648
Direct financing leases 1,465 - -
Other 5,327 588 321
------------ ------------ ------------
Total mortgage loans originated 360,452 303,624 82,647
Loans purchased:
One-to-four-family 5,764 70,113 78,251
Commercial real estate 26,290 7,152 2,000
Commercial 1,359 - -
Direct financing leases 18,962 14,355 12,122
------------ ------------ ------------
Total loans purchased 52,375 91,620 92,373
------------ ------------ ------------
Total loans originated and purchased $ 412,827 $ 395,244 $ 175,020
============ ============ ============
Loans sold:
One-to-four-family (1) $ 308,211 $ 279,864 $ 37,401
Discounted loans (2) - 2,162 11,893
Other loans - - 1,067
------------ ------------ ------------
Total loans sold $ 308,211 $ 282,026 $ 50,361
============ ============ ============
- -----------------------
(1) Originations and sales exclude $15.8 million, $103.0 million, and $90.1
million for the years ended December 31, 2000, 1999, and 1998 of loans
originated and immediately sold directly to third party investors.
(2) Gains related to these sales were $0, $188,000, and $695,000 for the years
ended December 31, 2000, 1999, and 1998.
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Loan Maturity and Repricing. The following table shows the remaining maturities
or period to repricing of Argo Savings' loan portfolio at December 31, 2000.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. Prepayments and scheduled
principal amortization on mortgage loans totaled $77.1 million, $95.6 million,
and $48.2 million for the years ended December 31, 2000, 1999, and 1998.
LOANS
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial Direct
One-to- Real Commercial Home Financing
Four-Family Estate Loan Equity Leases Other Total
----------- ------ ---- ------ ------ ----- -----
AMOUNTS DUE:
Within one year $ 125,711 $ 34,825 $ 6,779 $ 4,436 $ 18,456 $ 564 $ 190,771
After one year:
One to three years 486 - - - - 28 514
Three to five years 28,955 7,047 - - - - 36,002
Five to ten years 8,995 - - - - - 8,995
Ten to twenty years 17,582 - - - - 264 17,846
Over 20 years 35,715 - - - - - 35,715
--------- --------- -------- -------- -------- -------- ---------
Total due after one year 91,733 7,047 - - - 292 99,072
--------- --------- -------- -------- -------- -------- ---------
Total amounts due 217,444 41,872 6,779 4,436 18,456 856 289,843
Less:
Unearned discounts, premiums
and deferred loan fees, net 880 - - - - - 880
Allowance for loan losses 1,678 440 71 47 194 10 2,440
--------- --------- -------- -------- -------- -------- ---------
Loans receivable, net $ 214,886 $ 41,432 $ 6,708 $ 4,389 $ 18,262 $ 846 $ 286,523
========= ========= ======== ======== ======== ======== =========
The following table sets forth at December 31, 2000, the dollar amount of all
loans due after December 31, 2001, and whether such loans have fixed or
adjustable interest rates.
At December 31, 2000
---------------------------------------------
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
Mortgage loans:
One-to-four-family $ 69,042 $ 22,691 $ 91,733
Commercial real estate 7,047 - 7,047
Other 264 28 292
------------ ------------ ------------
Total $ 76,353 $ 22,719 $ 99,072
============ ============ ============
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Loan Originations and Purchases. Argo Savings' primary business is the
solicitation of savings deposits from the general public and the purchase or
origination of both conventional and portfolio loans secured by
one-to-four-family residential and commercial properties. To a lesser extent,
the Savings Bank also originates commercial loans, home equity loans, and other
consumer loans, including consumer credit card facilities, initiated in the
current period through the umbrellabank.com Internet banking division. In prior
periods and in limited amounts, the Savings Bank has also purchased discounted
loans. Discounted loans are residential real estate secured loans for which the
borrowers may not be current as to payment of principal and interest, or which
may be comprised of incomplete or non-standard documentation loans. Discounted
loans were purchased with a view toward bringing such loans current for the
Savings Bank's portfolio, for resale in the secondary market, or for foreclosure
and liquidation. New investments in discounted loans were discontinued by the
Savings Bank in 1998. Primarily as a result of its discounted loan activities,
the Savings Bank's level of non-performing loans to total loans has been
historically higher than that of its peers. The Savings Bank continues to
purchase performing seasoned one-to-four-family mortgage loans. For the year
ended December 31, 2000, $5.8 million of such loans were purchased by the
Savings Bank.
One-to-Four-Family Residential Loans. Argo Savings originates,
purchases, and sells fixed-rate and ARM loans secured by one-to-four-family
residences. At December 31, 2000, the Savings Bank's one-to-four-family loan
portfolio totaled $217.4 million, or 75.0% of Argo Savings' total loan
portfolio. The loans generally fall into three categories: (1) Conventional
Loans--loans which conform to all of the underwriting guidelines of Fannie Mae
and Freddie Mac ("Agency Qualified"); (2) Expanded Criteria Loans--loans which
are (a) not Agency Qualified, generally due to the borrower's credit profile,
(b) not as readily saleable in the secondary market as Conventional Loans and
(c) generally fixed-rate loans which are originated at interest rates higher
than those of fixed-rate Conventional Loans; and (3) Portfolio ARM loans which
are (a) not Agency Qualified, (b) originated under specific criteria set forth
by Argo Savings and (c) not Conventional or Expanded Criteria Loans.
Portfolio loans are adjustable rate and, to a lesser extent, fixed rate
mortgage loans with principal balances that range from $10,000 to $275,000 and
which are not necessarily Agency Qualified. The yield on these loans is
generally 100 basis points higher than the yield on Agency Qualified loans.
Portfolio loans are generally retained by Argo Savings. From time to time,
however, the Savings Bank has made strategic sales of such loans. Argo Savings
also originates portfolio loans which are jumbo residential mortgage loans.
Jumbo loans have principal balances that generally range between $300,000 and
$650,000. Jumbo ARM loans under $600,000 are generally held in Argo Savings'
loan portfolio, while other jumbo mortgage loans are originated for sale. The
yield on jumbo loans is generally between 125 and 375 basis points higher than
the yield on Agency Qualified loans. Origination of portfolio loans is conducted
through the Margo conduit.
Since September 1996, Argo Savings has expanded its portfolio loan
product offerings to include the origination of Expanded Criteria Loans. These
loans are originated, in many instances, when the borrower's credit profile, or
some aspect of the loan, does not adhere to the Agency underwriting guidelines.
Expanded Criteria Loans are perceived by management as being advantageous to the
Savings Bank because they have generally lower loan-to-value ratios, higher
origination and servicing fees and can be offered at generally higher rates of
interest than Agency Qualified loans. In addition, management believes that it
has the necessary resources to adequately service Expanded Criteria Loans as
well as the experience to resolve loans that may become non-performing.
The Savings Bank requires title insurance to insure the priority of its
lien on all of its mortgage loans. It also requires fire, flood, and casualty
insurance on all its properties securing loans provided by Argo Savings and
mortgage insurance on all loans with a loan-to-value of greater than 80%.
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Commercial Real Estate Lending and Commercial Loans. Since 1999, Argo
Savings has significantly increased its commercial loan and commercial real
estate lending activities. Historically, the Savings Bank has originated and
purchased small numbers of real estate secured commercial loans for the
acquisition or refinance of existing multifamily (5-12 unit), small office
building and income producing commercial properties, located within the Savings
Banks' primary market area.
Beginning in 1999, however, Argo Savings began to expand its commercial
lending activities. Working with primarily local developers in its market area,
and often participating with other local lenders, the Savings Bank has increased
its commercial real estate secured loan portfolio, concentrating new credit
facilities in residential development and construction loans. Commercial
residential development and construction loans are generally first lien secured
revolving credit facilities, provided on a short-term (less than two years)
basis at rates tied to the prime rate of interest. Repayment occurs as units are
sold, with the Savings Bank requiring up to 100% of the net proceeds of closing
be paid prior to partial release, after provision for agreed upon customary sale
expenses. Loans generally require the full personal guarantees of the
principals, are subject to pre-sale and other project success criteria before
disbursements are authorized, are subject to interim inspection and are fully
insured with all disbursements made through title company escrows. Argo Savings'
underwriting requirements must be fully satisfied prior to loan approval, and
include Phase I environmental testing, FIRREA appraisals and pro-forma project
financials and appropriate market studies and absorption analysis.
In addition to commercial residential development and construction
loans originated in the Savings Bank's primary market area, Argo Federal has
also participated in a number of similarly structured, larger bank originated
commercial real estate loans secured by properties outside the Chicagoland area.
These commercial real estate secured loans are also primarily residential
development and construction loans, principally concentrated in the greater
Denver, Colorado area. Lead lending institutions generally make loan
disbursements for acquisition and development expenses prior to disbursements by
Argo Savings, which seeks to structure the majority of these revolving credit
participations on a 'last-in, first-out' basis. Out of territory commercial
residential development and construction loans are subject to all of the Savings
Bank's underwriting and lending policies, and are periodically inspected by
management during on-site due diligence review.
Argo Savings' believes that prudent commercial lending operations can
provide the Savings Bank with shorter term, higher yielding assets, facilitating
portfolio diversification and improved interest rate risk management. Toward
this end, the Savings Bank together with three Illinois-based lending
institutions, organized a non-majority owned Illinois corporation ("Commercial
Loan Corporation") for the origination and distribution of participation
interests in commercial credit facilities, concentrated primarily in the greater
Chicago and suburban area. Through this venture, Argo Savings' expanded
commercial real estate lending activities have also included the origination of
and participation in permanent financing credits secured by small office
facilities and user owned commercial properties, primarily in the Chicagoland
market area. In certain instances and to a lesser extent, non-real secured
commercial loans have also been granted, financing the acquisition of equipment
and receivables and providing working capital loans. The Savings Bank has also
acquired interests in portfolios of charter school lease transactions ("Direct
Financing Leases"), which are primarily non-real estate secured commercial loans
used for the acquisition of equipment and development of educational facilities,
primarily in the southeastern and southwestern United States. Direct Financing
Leases are generally short-term in nature, provide returns to the Savings Bank
tied to the prime rate of interest, are often tax-qualified exempting interest
earned from federal taxation, and are fully guaranteed from loss of principal by
originating institutions.
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Commercial real estate lending and commercial loans often entail
significant additional risks as compared with one-to-four-family residential
property lending. Commercial real estate loans typically involve larger loan
balances to a single borrower or groups of affiliated borrowers. The payment
experience on such loans is typically dependent on the successful sale or
operation of the real estate project. These risks can be significantly impacted
by supply and demand conditions in the market for housing, office and retail
space, and as such may be subject to a greater extent to adverse conditions in
the economy generally. At December 31, 2000, Argo Savings' commercial and
commercial real estate loan portfolio totaled $48.7 million, or 16.8% of Argo
Savings' total loan portfolio, which included $41.9 million of commercial real
estate secured loans and $6.8 million of other secured commercial loans. The
Savings Bank also had $18.4 million of direct financing leases at December 31,
2000, which represented 6.4% of the total portfolio.
Consumer Lending. Argo Savings generates various types of consumer
loans, primarily home equity secured loans and, most recently, credit card loans
offered through the umbrellabank.com division of the Savings Bank. Portfolio
home equity loans are typically revolving credit facilities requiring monthly
payment of interest only tied to the prime rate of interest for terms of up to
seven years, and are generally secured by the borrower's primary residence at
loan-to value ratios not exceeding 80% after deduction for any superior lien.
Credit card facilities are offered by the Savings Bank through its Internet
division, in amounts and at rates determined after qualitative analysis of the
consumer 's credit report and previous credit use, patterns and history. Credit
card offerings include Platinum, gold and basic card products, as well as
secured credit card accounts, with rates and fees that vary with the product
chosen. At December 31, 2000, Argo Savings' consumer loan portfolio totaled $5.3
million, or 1.83% of Argo Savings' total loan portfolio, which included $4.4
million of home equity loans, $465,000 in outstanding credit card facilities,
and $391,000 of other consumer loans.
Loan Approval and Underwriting. Upon receipt of a loan application,
credit reports are ordered to verify specific information relating to a loan
applicant's employment, income, assets and credit standing, and for independent
verification of all credit, income and liability information provided by the
applicant. In the case of a request for a real estate secured loan, an appraisal
of the real estate intended to secure the proposed loan is undertaken by an
independent appraiser approved by the Savings Bank's Board of Directors, with
commercial development projects and loans also requiring the submission of,
among other criteria, Phase I environmental reports, pro-forma project
financials, appropriate market studies and absorption analysis, operating or
construction budgets, leases, and may be subject to pre-sale and other project
success criteria. Upon completion of the loan application processing activities,
all loan files are presented to the Savings Bank's loan underwriters if the loan
is originated on behalf of the Savings Bank, or to third party investors if the
loan is originated for immediate sale. Loan applicants are promptly notified in
writing of the final determination of the loan request.
Statistics regarding loan applications, including those both denied and
approved, are retained by Argo Savings, and reported annually under the Home
Mortgage Disclosure Act. Quality control procedures verifying data obtained
through loan processing activities are in place at the Savings Bank.
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Loan Origination and Other Fees. In addition to interest earned on
loans and commitments for making loans, the Savings Bank earns fees in
connection with originating loans. Origination fees are a percentage of the
principal amount of the mortgage loan charged to the borrower for the granting
of the loan. Loan fees are accounted for by deferring all loan origination fees
and certain direct costs associated with originations. Net deferred fees or
costs are amortized as yield adjustments over the life of the related loans
using the interest method, adjusted for estimated prepayment based on the
Savings Bank's historical prepayment experience. At December 31, 2000, Argo
Savings had $880,000 in net deferred loan fees that will be recognized in future
periods.
Problem Assets and Asset Classification. In accordance with Federal
regulations, loans and other assets are reviewed by the Savings Bank on a
regular basis for a determination of need to classify such assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor, or of the current realizable value of the collateral pledged.
"Substandard" assets include those characterized by the "distinct possibility"
that Argo Savings will sustain "some loss" if the deficiencies noted are not
corrected. Assets classified as "Doubtful" have all the weaknesses inherent in
those classified as "Substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
"currently existing facts, conditions and values," "highly questionable and
improbable." Assets classified as "Loss" are those with weaknesses and
characteristics considered "uncollectable" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. An allowance for losses is established in amounts deemed prudent
by management. When an asset is classified as "Loss," the Savings Bank is
required to establish a specific allowance for such losses equal to 100% of the
amount of the asset so classified, or to charge-off such amount. Argo Savings'
policy is to stop accruing interest for any loan in excess of 90 days delinquent
separate from management's analysis as to the future collectibility of interest.
At December 31, 2000, Argo Savings had $4.4 million of loans classified
as Substandard or Doubtful and $2.5 million of real estate acquired through
foreclosure or deed in lieu of foreclosure ("REO"). At December 31, 2000, Argo
Savings had no assets classified as Loss. Excluded from the loans information is
the $1.0 million of discounted loans ninety days or more past due. Management
does not consider these loans non-performing and thus excludes them from all
non-performing loan analyses and from all general valuation allowance analyses.
Management evaluates collectibility of discounted loans receivable on an
aggregate pool basis.
REO or real estate in judgment is carried at the lower of the fair
market value less cost to dispose or the related loan balance at the date of
foreclosure. An allowance for loss is established by a charge to operations or a
transfer from the allowance for loan losses if the carrying value of REO exceeds
its fair value less cost to dispose. The disposition of REO is generally
outsourced by Argo Savings, with agents of the Savings Bank contracting for
security and maintenance of REO, listing REO with real estate brokers for sale,
submitting offers to purchase to Argo Savings for review and approval, and
arranging for final sale of REO utilizing attorneys and title companies licensed
in the jurisdiction where REO is located. The disposition of REO related to
discounted loans is managed by employees of the Savings Bank.
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The following table sets forth information with respect to the Savings
Bank's non-performing assets as of the dates indicated. As of the dates shown,
the Savings Bank had no restructured loans.
At December 31,
---------------------------------------------------------
(Dollars in Thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Non-performing loans (1)(2) $ 4,438 $ 6,039 $ 6,518 $ 5,525 $ 3,942
Foreclosed real estate, net (3) 2,498 2,280 3,875 4,251 3,913
--------- --------- --------- --------- --------
Total non-performing assets $ 6,936 $ 8,319 $ 10,393 $ 9,776 $ 7,855
========= ========= ========= ========= ========
Allowance for loan losses as a
percentage of net loans receivable (1) .87% .58% .40% .53% .53%
========= ========= ========== ========== =========
Allowance for loan losses to non-performing
loans (1) 54.98% 25.68% 14.42% 14.73% 16.87%
========= ========= ========== ========== =========
Non-performing loans as a percentage of
loans receivable (1) 1.59% 2.25% 2.80% 3.57% 3.12%
========= ========= ========== ========== =========
Non-performing assets as a percentage of
total assets (4) 1.50% 2.12% 3.45% 4.25% 3.53%
========= ========= ========== ========== =========
(1) All non-performing loan totals exclude discounted loans receivable ninety
days or more past due which at December 31, 2000, 1999, 1998, 1997, and
1996 amounted to $1.0 million, $1.7 million, $3.0 million, $6.2 million,
and $15.5 million. All net loan totals exclude discounted loans receivable,
which at December 31, 2000, 1999, 1998, 1997, and 1996 amounted to $7.1
million, $9.1 million, $12.4 million, $30.6 million, and $47.7 million.
(2) At December 31, 2000, $446,000 or 10.1% of the $4.4 million in
non-performing loans represent loans originated by the Savings Bank. The
remaining loans represent loans purchased by the Savings Bank.
(3) Includes $582,000 of REO related to the discounted loans receivable
portfolio at December 31, 2000.
(4) Restated to reflect impact reduction in total assets for assets of
discontinued operations.
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
At December 31, 2000 At December 31, 1999
30-89 Days 90 Days or More 30-89 Days 90 Days or More
Loans Loans Loans Loans
Number Receivable, Number Receivable, Number Receivable, Number Receivable,
of Loans Net of Loans Net of Loans Net of Loans Net
-------- --- -------- --- -------- --- -------- ---
(Dollars in Thousands)
Mortgage loans:
One- to four-family....... 69 $ 3,551 66 $ 4,257 78 $3,364 86 $ 6,039
Commercial real estate.... - - - - - - - -
--- ------ ------ ------ ------ ------- ----- ------
Total mortgage loans...... 69 3,551 66 4,257 78 3,364 86 6,039
Home equity 6 179 1 74 - - - -
Commercial loans - - - - - - - -
Direct financing leases - - - - - - - -
Other loans............. - - 4 107 - - - -
------ -------- -------- ------ ------- ------ ------- -----
Total................. 75 $ 3,730 71 $ 4,438 78 $ 3,364 86 $ 6,039
====== ======= ======= ======= ====== ======= ===== =======
Delinquent loans to total
loans receivable (1)...... 1.33% 1.59% 1.25% 2.25%
==== ==== ==== ====
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At December 31, 1998
----------------------------------------------------
30-89 Days 90 Days or More
--------------------- ----------------------
Loans Loans
Number Receivable, Number Receivable,
of Loans Net of Loans Net
---------- ------------- ----------- ---------------
(Dollars in Thousands)
Mortgage loans:
One-to-four-family.......... 114 $ 6,042 100 $6,128
Commercial real estate 1 112 2 225
------- ------ ---- ------
Total mortgage loans........ 115 6,154 102 6,353
Commercial - - - -
Home equity 5 248 1 89
Direct financing leases - - - -
Other 2 25 2 76
---- ------ ---- ------
Total................... 122 $ 6,427 105 $ 6,518
==== ======= ==== =======
Delinquent loans to total
loans receivable (1)........ 2.76% 2.80%
===== ====
- ----------------------
(1) Excludes balances related to portfolio of discounted loans receivable.
Analysis of Allowance for Loan Losses. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb
charge-offs of loans deemed uncollectible. At December 31, 2000, the Savings
Bank experienced a decrease in the percentage of net loans 90 days or more
delinquent from 2.25% of total loans receivable and loans held for sale
(excluding discounted loans) at December 31, 1999 to 1.59% of total loans
receivable and loans held for sale (excluding discounted loans) at December 31,
2000. The allowance for loan losses balance at December 31, 2000 was $2.4
million or .87% of loans receivable excluding discounted loans receivable. The
increase in the allowance for loan losses was primarily due to growth in the
Savings Bank's commercial real estate and commercial loan portfolios. The
commercial real estate and commercial loan balances totaled $48.7 million at
December 31, 2000 compared to $16.3 million at December 31, 1999.
Determination of an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and mix of the loan
portfolio, adverse situations which may affect a borrower's ability to repay,
size of the loan portfolio, business and economic conditions and management's
estimate of probable losses. While management uses all available information,
including the monitoring of the economic conditions in the geographic regions in
which the loan portfolio is located, future additions to the allowance may be
necessary based on estimates that are susceptible to significant revision as a
result of changes in economic conditions and other factors. Additionally,
various regulatory agencies, as an integral part of their examination process,
periodically review Argo Savings' allowance for loan losses. Such agencies may
require Argo Savings to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
The allowance was increased in the fourth quarter of 2000 due to
purchases in the fourth quarter of direct finance leases and commercial and
commercial real estate loans, which are considered of higher risk than the
Bank's traditional loan products primarily secured by residential real estate.
The allowance was also increased to bring the ratio of the allowance to gross
loans closer to that of peer financial institutions, as recommended by the
Savings Bank's primary regulator.
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The following table sets forth information with respect to Argo Savings'
allowance for loan losses by loan category for the years and at the dates
indicated.
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Balance at beginning of year:
Mortgage loans:
One-to-four-family........................ $ 1,298 $ 687 $ 561 $ 412 $ 330
Commercial real estate.................... 14 14 14 14 14
Commercial.................................. 216 216 216 216 216
Direct finance leases....................... - - - - -
Home equity................................. - - - - -
Other....................................... 23 23 23 23 27
-------- ------- ------- ------- --------
Total..................................... 1,551 940 814 665 587
Provision Reallocation for loan losses:
Mortgage loans:
One-to-four-family........................ 709 965 355 210 248
Commercial real estate.................... 426 - - - -
Commercial.................................. (145) - - - -
Direct finance leases....................... 194 - - - -
Home equity................................. 47 - - - -
Other....................................... (13) - - - -
---------- ------- ------- ---------- ----------
Total..................................... 1,218 965 355 210 248
Purchased allowance on one-to-four-family loans - - 30 - -
Charge-offs:
Mortgage loans:
One-to-four-family........................ (329) (354) (259) (61) (166)
Commercial real estate.................... - - - - -
Commercial.................................. - - - - -
Direct finance leases....................... - - - - -
Home equity................................. - - - - -
Other....................................... - - - - (4)
-------- ------- ------- ------- --------
Total..................................... (329) (354) (259) (61) (170)
-------- ------- ------- ------- --------
Balance at end of year:
Mortgage loans:
One-to-four-family........................ 1,678 1,298 687 561 412
Commercial real estate.................... 440 14 14 14 14
Commercial ................................. 71 216 216 216 216
Direct finance leases....................... 194 - - - -
Home equity................................. 47 - - - -
Others...................................... 10 23 23 23 23
-------- ------- ------- ------- --------
Total..................................... $ 2,440 $ 1,551 $ 940 $ 814 $ 665
======== ======== ======== ======== ========
Ratio of net charge-offs during the period to net
loans receivable, excluding discounted loans .12% .03% .01% .01% .08%
======== ======== ======== ======= ========
Ratio of allowance for loan losses to net loans
receivable, excluding discounted loans...... .87% .58% .40% .53% .53%
======== ======= ======== ======= ========
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PURCHASED MORTGAGE SERVICING RIGHTS
Argo Savings' principal investment in purchased mortgage servicing
rights is through a $3.2 million equity interest in a limited partnership whose
business activities are to purchase mortgage servicing rights ("PMSRs") and a
$1.2 million investment in subordinated debentures of the partnership. The MSRs
were acquired in prior periods, for a purchase price based on the present value
of the expected future stream of cash flows, computed by using a discount rate
that management considered to approximately reflect the risk associated with the
investment, and using a loan prepayment assumption. Management did not purchase
PMSRs with recourse servicing, thus the Company is not subject to the risk of
and costs (including foreclosure costs) associated with borrower default on the
underlying loans.
The value of PMSRs generally decreases in a declining interest rate
environment and increases in a rising interest rate environment, due to changes
in prepayment speeds. The value of mortgage loans, comprising the majority of
the Savings Bank's assets, decreases in a rising interest rate environment and
increases in a declining interest rate environment. Thus, the value of PMSRs act
as a hedge against the value of mortgage loans in Argo Savings' portfolio in a
changing interest rate environment. A secondary benefit derived from the PMSRs
is the associated interest free custodial accounts comprised of the borrowers'
taxes and insurance escrows and, for a short time period, the float on their
principal and interest payments. The custodial balances are maintained in
non-interest-bearing accounts and are not affected by changes in interest rates.
The custodial balances relating to the servicing owned at December 31, 2000,
were $5.0 million.
There are several unaffiliated equity investors in the limited
partnership. The purchase of the PMSRs is leveraged, allowing the limited
partnership to purchase PMSRs equaling one to three times the equity investment
by its partners. The cost of the borrowings, as well as the servicing income and
expense and related amortization, is recorded at the limited partnership level.
Subject to approval by the limited partners, the task of finding and acquiring
the PMSRs controlled by the limited partnership, as well as all associated
administrative duties, is assigned to Dovenmuehle Mortgage, Inc. ("DMI"), the
general partner of the limited partnership. DMI also sub-services the PMSRs in
the partnership. At the end of five years, or at such time as the investors may
agree, the PMSRs will be sold and the proceeds divided pro-rata among the
investors.
Mortgage servicing activities have interest rate and prepayment risk.
The amount of servicing fees earned and the amortization of servicing rights
fluctuate based on changes in market interest rates, which effect of the average
life of the underlying residential mortgage loans. Prepayment of the mortgage
loans may be influenced by a variety of economic, geographic, social, and other
factors and, most importantly, the difference between interest rates on the
mortgage loans underlying the PMSRs and prevailing mortgage rates available for
comparable mortgages.
Each quarter, financial statements are issued to the limited
partnership by DMI, and the pro-rata share of the income for each investor is
calculated by DMI. Argo Savings records its share of income or loss on the
equity method for the partnership investment. The limited partnership is audited
annually by an independent auditor and an independent third party valuation of
the partnership's PMSR is performed quarterly. In addition, unaudited financial
statements of the limited partnership are distributed quarterly by DMI to each
investor. The audited financial statements, the unaudited quarterly financial
statements and the quarterly valuations are sent directly to each equity
investor.
At December 31, 1998, the independent valuation showed an appraised
value lower than the current book value. The general partner recorded a
valuation allowance. Argo Savings' proportionate
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20
share of the writedown was $1.4 million which Argo Savings recorded based upon
information received from DMI. During 1999, $1.2 million of Argo's investment
was converted to subordinated debentures which yield interest at 30%. Although
the latest independent appraisal dated November 30, 2000 supported the carrying
value at that date, management chose to increase its valuation reserve on the
PMSRs by $300,000 during the fourth quarter of 2000 due to the effects of the
rapidly declining interest rate environment in December 2000.
In addition to its investment in the limited partnerships, at December
31, 2000, the Savings Bank had a $397,000 investment in a PMSR portfolio that it
owns directly. At December 31, 2000, this directly owned PMSR portfolio
consisted of 771 mortgage loans having an outstanding principal balance of $29.3
million.
INVESTMENT ACTIVITIES
The Savings Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Savings Bank
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 2000, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 19.7%
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Savings Bank is to invest funds
among various categories of investments and maturities based upon the Savings
Bank's asset/liability management policies, liquidity needs and performance
objectives, and investment quality and marketability. It is the Savings Bank's
general policy to invest in certificates of deposit, overnight funds, and
securities of government sponsored entities and federal agency obligations, and
other issues that are rated investment grade. At December 31, 2000, the Company
had $15.6 million of securities available-for-sale with an aggregate fair value
of $14.6 million and $26.5 million of securities held-to-maturity with an
aggregate fair value of $26.3 million.
The Company maintains a portfolio of marketable equity securities,
generally comprised the securities of government-sponsored entities, and trust
preferred securities, generally comprised of securities of the holding companies
for local, regional and national banks, savings banks and savings and loan
associations. Generally, the Company has acquired non-control positions in
financial institution equities which management believe, after analysis of
market pricing, business practices, and earnings potential, were under-valued
and represent an opportunity for profit from sales of such securities. At
December 31, 2000, the Company and the Savings Bank had $5.6 million in these
securities, which are included in the available-for-sale totals above.
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21
In addition, the Company has been actively trading various marketable
equity securities, primarily FNMA and FHLMC stock. These securities are
classified as trading and totaled $1.1 million at December 31, 2000, with market
value approximately equal to cost.
The Company owned as of December 31, 2000 $4.0 million of Series B
preferred stock issued by GFS Holdings Company in connection with the
acquisition of On-Line by GFS. The preferred stock bears interest at 8.625% per
annum payable semi-annually. In January 2001, the Company received $3.9 million
of cash and a monthly credit of $8,025 against future data processing expenses
for a period not to exceed 40 months. The cash and the present value of the
monthly data processing credits redeemed the $4 million of the Series B
preferred stock outstanding.
The following table sets forth the composition of the Company's
available-for-sale portfolio in dollar amounts and percentages at the dates
indicated.
The following table sets forth the composition of the Company's
available-for-sale portfolio in dollar amounts and percentages at the dates
indicated.
At December 31,
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
DEBT SECURITIES:
U.S. government agency obligations $ 5,419 37.18% $ 5,157 35.90% $ 2,088 28.97%
Municipal bonds 375 2.57 378 2.63 380 5.27
Corporate bonds 1,623 11.14 393 2.74 - -
--------- ------- ------- ------- ------- ------
Total debt securities 7,417 50.89 5,928 41.27 2,468 34.24
Equity securities 2,914 19.99 3,163 22.02 2,441 33.87
Trust preferred securities 2,650 18.18 3,591 25.00 368 5.10
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 80 0.55 87 0.61 109 1.51
Federal National Mortgage
Association Fannie Mae 1,502 10.31 1,620 11.28 1,797 24.93
--------- ------- ------- ------- ------- -------
Total mortgage-backed securities 1,582 10.86 1,707 11.89 1,906 26.44
Net premium (discount) 25 0.17 28 0.19 32 .44
Unrealized loss on securities
available-for-sale (14) (0.09) (53) (0.37) (7) (0.09)
--------- ------- ------- ------- ------- -------
Net mortgage-backed securities 1,593 10.94 1,682 11.71 1,931 26.79
--------- ------- ------- ------- ------- -------
Total securities available-for-sale $ 14,574 100.00% $14,364 100.00% $ 7,208 100.00%
========= ======= ======= ======= ======= =======
FHLB of Chicago stock $ 2,615 100.00% $ 2,303 100.00% $ 1,911 100.00%
========= ======= ======= ======= ======= =======
21
22
The following table sets forth the composition of the Company's
held-to-maturity securities portfolio in dollar amounts and percentages at
December 31, 2000 and 1999. The Company held no held-to-maturity securities at
December 31, 1998.
2000 1999
------------------------- -------------------------
Amortized % of Amortized % of
Cost Total Cost Total
--------- ---------- --------- ----------
Corporate bonds $ 778 2.93% $ 726 2.81%
U.S. agency securities 24,451 92.19 24,157 93.42
Collateralized mortgage obligations 1,294 4.88 976 3.77
--------- ---------- --------- ----------
Total securities held-to-maturity $ 26,523 100.00% $ 25,859 100.00%
========= ========== ========= ==========
The following table sets forth the amortized cost and fair values of the
Company's available-for-sale and held-to-maturity securities at the dates
indicated.
At December 31,
--------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------------------------------------------------------------------
Securities available-for-sale:
U.S. government agency
obligations $ 5,500 $ 5,419 $ 5,500 $ 5,157 $ 2,091 $ 2,088
Municipal bonds 370 375 370 378 370 380
Corporate bonds 1,908 1,623 411 393 - -
Equity securities 3,252 2,914 3,761 3,163 2,828 2,441
Trust preferred securities 3,033 2,650 3,960 3,591 367 368
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 81 79 88 85 110 109
Federal National Mortgage
Association Fannie Mae 1,526 1,514 1,647 1,597 1,827 1,822
-------- -------- -------- -------- --------- --------
Total mortgage-backed securities 1,607 1,593 1,735 1,682 1,937 1,931
-------- -------- -------- -------- --------- --------
Total securities available-for-sale $ 15,670 $ 14,574 $ 15,737 $ 14,364 $ 7,593 $ 7,208
======== ======== ======== ======== ========= ========
FHLB of Chicago stock $ 2,615 $ 2,615 $ 2,303 $ 2,303 $ 1,911 $ 1,911
======== ======== ======== ======== ========= ========
Securities held-to-maturity:
Corporate bonds $ 778 $ 773 $ 726 $ 561 $ - $ -
U.S. agency securities 24,451 24,180 24,157 22,545 - -
Collateralized mortgage obligations 1,294 1,300 976 976 - -
-------- -------- -------- -------- --------- --------
Total securities held-to-maturity $ 26,523 $ 26,253 $ 25,859 $ 24,082 $ - $ -
======== ======== ======== ======== ========= ========
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The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of securities as of December
31, 2000.
More than One Year More than Five Years More than Ten
One Year or Less to Five Years to Ten Years Years Total
----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
----------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. government and
agency obligations $ - -% $ - -% $1,500 7.50% $ 4,000 7.02% $ 5,500 7.10%
Municipal bonds (2) - - - - 370 14.39 - - 370 14.39
Corporate bonds - - 1,747 11.50 161 8.97 - - 1,908 10.95
Trust preferred
securities 3,033 8.86 - - - - - - 3,033 8.86
Mortgage-backed
securities
Federal Home Loan
Mortgage Corporation
Freddie Mac 81 5.87 - - - - - - 81 5.87
Federal National
Mortgage Association
Fannie Mae 1,526 6.90 - - - - - - 1,526 6.90
------- ------ ------ -------- -------
Total mortgage-
backed securities 1,607 6.85 - - - - - - 1,607 6.85
Equity securities (1) 3,252 - - - - - - - 3,252 -
------- ------ ------ ----- ------ ----- -------- ----- ------ -----
Total available-
for-sale $ 7,892 8.15% $1,747 11.50% $2,031 9.27% $ 4,000 7.02% $15,670 8.22%
======== ====== ====== ======== =======
HELD-TO-MATURITY:
Corporate bonds $ - -% $ - -% $ - -% $ 778 7.61% $ 778 7.61%
U.S. agency securities - - 4,000 6.96 3,000 7.25 17,451 7.10 24,451 7.10
Collateralized mortgage
obligations 1,294 7.19 - - - - - - 1,294 7.19
------- ------ ------ -------- -------
Total held-to-
maturity $ 1,294 7.19% $4,000 6.96% $3,000 7.25% $ 18,229 7.12%$ 26,523 7.17%
======== ====== ====== ======== =======
- --------------
(1) Weighted average yield does not include equity securities.
(2) Computed on tax equivalent basis for non-taxable securities (34% statutory
tax rate).
SOURCES OF FUNDS AND BORROWINGS
General. Deposits are the major source of Argo Savings' funds for
lending and other investment purposes. In addition to deposits, Argo Savings
derives funds from loan principal repayments, proceeds from sales of loans,
borrowings, and the custodial balances associated with MSRs. Loan repayments are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and market conditions.
Additionally, the Company's sources of funds include borrowed money, which
includes advances from the FHLB, a margin account and federal funds purchased.
In addition, the Company has issued junior subordinated debentures. Borrowings
may be used to compensate for reductions in the availability of other sources of
funds. They may also be used on a longer-term basis for general business
purposes.
23
24
Deposits. Argo Savings offers a number of deposit accounts, including
tiered passbook accounts, NOW accounts, money market accounts and certificate
accounts currently ranging in maturity from seven days to five years. Deposit
accounts vary as to terms, with the principal differences being the minimum
balance required, the period the funds must remain on deposit and the interest
rate. Argo Savings in the past has utilized brokered deposits, and will continue
to use this source of funds as needed in the future. Argo Savings had $154.3
million in brokered deposits at December 31, 2000. Argo Savings has
traditionally priced its deposit products at or near market rates in its primary
markets.
24
25
Deposit Flow. The following table sets forth the composition of and the
change in dollar amount of deposit accounts offered by Argo Savings between the
dates indicated.
Amount at Percent Amount at Percent Amount at Percent
December 31, of Total Increase December 31, of Total Increase December 31, of Total Increase
2000 Deposits (Decrease) 1999 Deposits (Decrease) 1998 Deposits (Decrease)
----------- -------- --------- ----------- -------- ---------- ----------- -------- --------
(Dollars in thousands)
Non-interest bearing accounts $ 9,744 2.5% $ 3,672 $ 6,072 2.0% $(12,172) $ 18,244 7.8% $13,748
Passbook accounts 5,291 1.4 (14,582) 19,873 6.6 (1,434) 21,307 9.1 3,700
NOW accounts 4,918 1.3 (5,694) 10,612 3.5 1,567 9,045 3.9 316
Money market accounts 69,035 17.7 64,609 4,426 1.5 (280) 4,706 2.0 (1,517)
--------- ------- --------- ---------- ------ -------- ------- ---- -------
Total 88,988 22.9 48,005 40,983 13.6 (12,319) 53,302 22.8 16,247
--------- ------- --------- ---------- ------ -------- ------- ---- -------
Certificate accounts:
4.00% to 4.99% 9,779 2.5 (38,113) 47,892 15.9 19,401 28,491 12.2 27,617
5.00% to 5.99% 32,494 8.4 (86,311) 118,805 39.4 (20,234) 139,039 59.7 76,104
6.00% to 6.99% 107,869 27.8 14,327 93,542 31.0 81,877 11,665 5.0 (58,297)
7.00% to 7.99% 149,407 38.4 148,964 443 .1 (32) 475 0.3 (1,038)
8.00% to 8.99% - - (8) 8 - - 8 - (122)
--------- ------ --------- ---------- ------ -------- -------- ----- -------
Total 299,549 77.1 38,859 260,690 86.4 81,012 179,678 77.2 4,264
--------- ------ --------- ---------- ------ -------- -------- ----- -------
Total deposits $ 388,537 100.0% $ 86,864 $ 301,673 100.0% $ 68,693 $232,980 100.0% $60,511
========= ====== ========= ========== ====== ======== ======== ===== =======
Weighted average rate 6.48% 5.16% 4.60%
========= ========== ========
25
26
Certificate Accounts. The following table presents the amount of
certificate accounts outstanding at December 31, 2000, and the periods to
maturity or repricing.
Weighted
Average
Amount Rate
----------- ----------
(In thousands)
Within one year (1).................................... $ 177,566 6.99%
One to three years..................................... 95,286 6.90
Thereafter............................................. 26,697 7.29
----------
Total.................................................. $ 299,549 6.74%
==========
(1) Includes a $13.1 million certificate that will mature on May 21, 2001, and
can be renewed at that time.
At December 31, 2000, Argo Savings had outstandon of
certificate of deposit accounts in amounts of $100,000 o or
repricing as follows:
Weighted
Amount Average Rate
-------------- ------------
(In thousands)
Three months or less.................................... $ 4,271 5.98%
Over three through six months........................... 23,063 6.56
Over six through 12 months.............................. 22,254 6.79
Over 12 months.......................................... 32,344 7.02
----------
Total................................................... $ 81,932 6.77%
==========
Argo Savings had pledged securities with principal balances totaling
approximately $345,000 and $3.3 million at December 31, 2000 and 1999, as
collateral to secure certain public deposits. In addition to securities pledged
at December 31, 2000 and 1999, the Savings Bank also had letters of credit
totaling $14.3 million as collateral to secure several State of Illinois
certificates. The total State of Illinois certificates secured by letters of
credit and securities totaled approximately $13.1 million and $15.5 million in
at December 31, 2000 and 1999.
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the years indicated.
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------ -------------
(In thousands)
Deposits in excess of withdrawals........... $ 181,360 $ 56,151 $ 77,287
Sale of branch deposits..................... (113,585) - (12,941)
Interest credited........................... 19,089 12,542 9,414
--------- --------- ----------
Net increase in deposits.................. $ 86,864 $ 68,693 $ 73,760
========= ========= ==========
26
27
Although savings deposits are the primary source of funds for Argo
Savings' lending and investment activities and for its general business
purposes, Argo Savings can also borrow funds from the FHLB. As an FHLB member,
Argo Savings is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities that are obligations of, or
guaranteed by, the United States Government or its agencies) provided certain
standards related to creditworthiness have been met. At December 31, 2000, Argo
Savings had $12.8 million of fixed rate advances from the FHLB with interest
rates ranging from 6.13% to 8.43% and a weighted rate of 6.49%.
The margin account loans are from third-party securities brokers. The
rate of interest on the loans is negotiated with the brokers. The margin account
loans were secured at December 31, 2000 by securities held by the brokers having
market values of $9.9 million.
The following table sets forth information regarding borrowings by the
Company on a consolidated basis at the end of and during the year indicated. The
borrowings at and during the year consisted of FHLB advances, junior
subordinated debt, promissory notes and federal funds purchased. The weighted
average was computed on a monthly average basis.
At December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ---------
(Dollars in thousands)
Weighted average interest rate at end of year on:
FHLB advances........................................ 6.49% 5.56% 6.10%
Junior subordinated debt............................. 11.00 11.00 11.00
Other borrowings..................................... 8.92 7.79 7.71
Maximum amount of borrowings outstanding at any month end:
FHLB advances........................................ $29,732 $34,932 $20,132
Junior subordinated debt............................. 17,250 17,250 17,250
Other borrowings..................................... 5,930 5,404 14,658
Average borrowings outstanding with respect to:
FHLB advances........................................ $19,611 $34,432 $18,987
Junior subordinated debt............................. 17,180 17,250 2,680
Other borrowings..................................... 6,162 3,388 12,624
------- ------- -------
Total .......................................... $42,953 $55,070 $34,291
======= ======= =======
Weighted average interest rate during the year paid on:
FHLB advances........................................ 6.55% 5.35% 5.69%
Junior subordinated debt............................. 11.11 11.04 11.00
Other borrowings.................................... 7.59 8.67 8.60
Total Weighted Average.......................... 8.52 7.35 7.18
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28
SUBSIDIARIES
Argo Savings has a wholly owned subsidiary, Dolton-Riverdale Savings
Service Corp. ("Dolton-Service"). At December 31, 2000, Argo Savings had an
equity investment in Dolton-Service of $1,284,000, the assets of Dolton-Service
include 50,000 shares of Synergy Class A common stock valued at $15.00 per
share, 16,666 shares of Synergy Convertible Preferred Stock also at $15.00 per
share, 11,630 shares of FBA Bancorp, Inc., the Parent Company of the First Bank
of the Americas, S.S.B., valued in total at $125,000. In addition, during the
twelve months ended December 31, 2000, Dolton-Service purchased 2,500 shares of
Commercial Loan Corporation ("CLC") at a total purchase price of $125,000. CLC,
which is owned by Chicagoland financial institutions, underwrites, documents,
and services commercial loans for financial institution investors and such
loans. At December 31, 2000, CLC originated 122 loans aggregating $36.0 million,
which were funded through 48 pools. The rates paid on the pools to the
investors, including the Bank, ranged from 7.50% to 9.50% and consisted of both
fixed and variable rates. As of December 31, 2000, the Bank had purchased
interest in twenty-five (25) pools aggregating $14.8 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 December 31, 2000, ARC had acquired 66,293
shares of Argo Capital Trust Preferred securities at an average price of $8.61
per share.
COMPETITION
Argo Savings faces strong competition in attracting deposits and in
originating loans. Its most direct competition for deposits has historically
come from other savings institutions, credit unions and community banks, as well
as from commercial banks located in its primary market area. Particularly in
times of high interest rates, the Savings Bank also faces additional significant
competition for investor funds from short-term money market securities and other
corporate and government securities. Argo Savings' competition for loans comes
principally from other thrift institutions, commercial banks and mortgage
banking companies. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions, as well as
the expansion of retail banking services into the Internet.
The Savings Bank competes for loans principally through the interest
rates and loan fees it charges, extensive mortgage product offerings, and the
efficiency and quality of the services it provides borrowers, real estate
brokers and home builders. It competes for deposits by offering consumers a wide
variety of savings, checking, money market and certificate of deposit accounts,
and expanded convenience of branch office facilities, a network of ATM machines
and the 24/7 availability of its umbrellabank.com Internet retail delivery
channel.
Argo Savings competes with many financial institutions in its current
primary market area, most of which have assets which are significantly larger
than the assets of the Savings Bank. Management considers the Savings Bank's
reputation for financial strength and customer service as a major competitive
advantage in attracting and retaining customers in its market area. The Savings
Bank also believes it benefits from its use of available technologies to provide
low cost, accessible banking services, reflected by its growing core deposit
base in both the retail banking facilities it currently operates, as well as the
umbrellabank.com Internet division of Argo Savings.
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29
PERSONNEL
Effective October 1, 1999 the Company entered into a Client Services
Agreement with Synergy, a professional employer organization. Under the Client
Services Agreement, all employees of the Company were transferred to Synergy
with Synergy assigning employees to the Company as the workplace employer. At
December 31, 2000, 47 employees of Synergy were assigned to the Company.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Savings Bank, are governed by
the HOLA and the Federal Deposit Insurance Act ("FDI Act").
Argo Savings is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Savings Bank is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Savings Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Savings Bank's safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors.
The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Savings Bank and their operations. Certain of
the regulatory requirements applicable to the Savings Bank and to the Company
are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on Argo Savings
and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Savings
Bank continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation, and no multiple savings and loan
holding company may acquire more than 5% the voting stock of a company engaged
in impermissible activities.
29
30
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. Argo Savings must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
RECENT REGULATORY DEVELOPMENTS
The Gramm Leach-Bliley Act (the "Act"), which was enacted in November,
1999, allows eligible bank holding companies to engage in a wider range of
non-banking activities, including greater authority to engage in securities and
insurance activities. Under the Act, an eligible bank holding company that
elects to become a financial holding company may engage in any activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines
by regulation or order is financial in nature, incidental to any such financial
activity, or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. National banks are also authorized by the Act to
engage, through "financial subsidiaries", in certain activity that is
permissible for financial holding companies (as described above) and certain
activity that the Secretary of the Treasury, in consultation with the Federal
Reserve, determines is financial in nature or incidental to any such financial
activity.
The Act limits the non-banking activities of unitary savings and loan
holding companies by generally prohibiting any savings and loan holding company
from engaging in any activity other than activities that are currently permitted
for multiple savings and loan holding companies or are permissible for financial
holding companies (as described above) (collectively "permissible activities").
The Act also generally prohibits any company from acquiring control of a savings
association or savings and loan holding company unless the acquiring company
engages solely in permissible activities. The Act creates an exemption from the
general prohibitions for unitary savings and loan holding companies in
existence, or formed pursuant to an application pending before the OTS, on or
before May 4, 1999.
Although various bank regulatory agencies have issued regulations as
mandated by the Act, except for the jointly issued privacy regulations, the Act
and its implementing regulations have had little impact on the daily operations
of the Company and the Bank and, at this time, it is not possible to predict the
impact the Act and its implementing regulations may have on the Company or the
Savings Bank.
30
31
The OTS is currently proposing to require certain savings and loan
holding companies to notify the OTS before engaging in, or committing to engage
in, a limited set of debt transactions, transactions that reduce capital,
certain asset acquisitions, and other transactions. The proposal would generally
exclude savings and loan holding companies whose subsidiary savings
associations' assets represent a small percent of consolidated assets and
holding companies that would have consolidated tangible capital of 10% or
greater following the transaction. The OTS is also currently seeking comment on
its proposal to codify its current practices for reviewing the capital adequacy
of savings and loan holding companies and, when necessary, requiring additional
capital on a case-by-case basis.
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities that are
not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS
capital regulation based on the risks the OTS believes are inherent in the type
of asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
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, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two-quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings institution with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
Director of the OTS may waive or defer a savings institution's interest rate
risk component on a case-by-case basis. For the present time, the OTS has
deferred implementation of the interest rate risk component. At December 31,
2000, Argo Savings met each of its capital requirements.
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32
The following table presents Argo Savings' capital position, amounts
and ratios at December 31, 2000:
(Dollars in thousands)
Actual Required Excess Actual Required
Amount Amount Amount Percent Percent
Tangible.................... $ 26,448 $ 6,669 $19,779 5.95% 1.5%
Risk-based:
Tier I (core)............. 26,448 9,409 17,039 11.24 4.0
Total..................... 28,912 18,617 10,295 12.29 8.0
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Deposits of the Savings Bank are
presently insured by SAIF. The FDIC maintains a risk-based assessment system by
which institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
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In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments
for SAIF members approximated 6.10 basis points, while Bank Insurance Fund
("BIF" -- the deposit insurance fund that covers most commercial bank deposits)
members paid 1.22 basis points. Between January 1, 2000, and the final maturity
of the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of interest on the FICO bonds on a pro rata basis. During the
year ended December 31, 2000, the FICO assessment rate for SAIF members ranged
between approximately 21 basis points and approximately 59 basis points, while
the FICO assessment rate for BIF members ranged between approximately 12 basis
points and approximately 21 basis points. Argo Savings' assessment rate for the
year ended December 31, 2000 was 6.1 basis points and the premium paid for this
period was $62,000, which was applied toward the payment of FICO bonds. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Savings Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of Argo Savings does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
APPLICABLE LEGISLATION.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 2000, Argo Savings' limit on loans to one borrower was $3.8
million. At December 31, 2000, Argo Savings had no loans to one borrower that
exceeded this limit. The Savings Bank's authority to approve loans in excess of
the regulatory Loan to One Borrower limitation was approved by the OTS under
Section 563.93(d)(3) of OTS Regulations for Insured Institutions, relating to
loans provided for the construction of housing units. All other borrowers have
aggregate balances below the Savings Bank's limit to one borrower.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities, as well as, recently, education loans,
credit card loans and small business loans) in at least 9 months out of each 12
month period. A savings institution that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
2000, Argo Savings maintained 88% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
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obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Savings Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Savings Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. At December 31, 2000, Argo Savings was classified as
a Tier 1 Bank.
Effective April 1, 1999, the OTS' capital distribution regulation
changed. Under the current regulation, an application to and the prior approval
of the OTS is required before any distribution if the institution does not meet
the criteria for "expedited treatment" of applications under OTS regulations
(generally, compliance with all capital requirements and examination ratings in
one of two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with OTS. If an application is not required, the
institution must still give advance notice to OTS of the capital distribution.
Liquidity. The Savings Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Savings Bank's average liquidity ratio
for the year ended December 31, 2000 was 19.79%, which exceeded the applicable
requirements. The Savings Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Savings Bank's latest
quarterly thrift financial report. The assessments paid by the Savings Bank for
the fiscal year ended December 31, 2000 totaled $78,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Savings Bank's authority to
engage in transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and its non-savings institution subsidiaries) is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally requires that certain transactions with affiliates,
including loans and asset purchases, be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
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Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement was $1.395 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Savings Bank maintained
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following is a discussion of material tax matters and does
not purport to be a comprehensive description of the tax rules applicable to
Argo Savings or Argo Bancorp. The Company has not been audited by the IRS during
the last ten (10) years. For federal income tax purposes Argo Bancorp and its
subsidiaries (except Margo) file consolidated income tax returns and report
their income on a calendar year basis using the accrual method of accounting and
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the tax reserve for bad debts, discussed
below. Margo Financial Services, LLC files a separate partnership income tax
return.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as Argo Savings, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specific limitations, be
deducted in arriving at their taxable income. Argo Savings' deduction with
respect to "qualifying loans", which are generally loans secured by certain
interests in real property, could be computed using an amount based on a six (6)
year moving average of Argo Savings' actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of Argo Savings' taxable income (the
"PTI Method"), computed without regard to this deduction and with additional
modifications and reduced by the amounts of any permitted addition to the
non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and Argo
Savings is required to use the Experience Method of computing additions to its
bad debt reserve for taxable years beginning after December 31, 1995. In
addition, Argo Savings will be required to recapture (i.e., take into taxable
income) over a six (6) year period, beginning with the Savings Bank's taxable
year beginning January 1, 1998, the excess of the balance of its bad debt
reserves (other than the supplemental reserve) as of December 31, 1995, over the
greater of (s) its "base year reserve," i.e., the balance of such reserves as of
December 31, 1987, or (b) an amount that would have been the balance of such
reserves as of December 31, 1995, had Argo Savings always computed the additions
to its reserves using the Experience Method.
Distributions. To the extent that Argo Savings makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from Argo Savings base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Savings Bank's taxable income.
Nondividend distributions include distributions in excess of Argo Savings'
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute nondividend
distributions and, therefore, will not be included in Argo Savings' income.
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The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, in certain instances,
approximately one and one-half times the nondividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34.0%
federal corporate income tax rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20.0%. Only 90.0% of AMTI can be offset by net
operating loss carryovers. AMTI is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Thus, Argo Savings'
AMTI is increased by an amount equal to 75.0% of the amount by which the Savings
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this adjustment and prior to reduction for net operating losses). AMT cannot be
reduced by tax credits, other than foreign tax credits. Accordingly, the Savings
Bank's low income housing tax credits may not be used to reduce AMT. The AMT has
limited the utilization of these tax credits in 2000, 1999, and 1998.
Elimination of Dividends: Dividends Received Deduction. The Company may
exclude from its income 100.0% of dividends received from Argo Savings as a
member of the same affiliated group of corporations. A 70.0% dividends received
deduction generally applies with respect to dividends received from domestic
corporations that are not members of such affiliated group, except that an 80.0%
dividends received deduction applies if the Company and Argo Savings own more
than 20.0% of the stock of the corporation paying a dividend.
STATE AND LOCAL TAXATION
State of Illinois. The Company and Argo Savings file Illinois income
tax returns. For Illinois income tax purposes, the Company and Argo Savings are
taxed at an effective rate equal to 7.18% of Illinois Taxable Income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing the Illinois taxable income of the
Savings Bank.
As a Delaware holding company, the Company has registered as a foreign
corporation authorized to transact business in Illinois. As such, it files an
Illinois Foreign Corporation Annual Report and pays an annual franchise tax to
the State of Illinois.
State of Delaware. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but files
an annual report with and pays an annual franchise tax to the State of Delaware.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards (Statement) No. 133 on
derivatives was adopted on January 1, 2001, and requires all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value charged
or credited to income. If derivatives are documented and effective as hedges,
the change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item, even if the fair value of the hedged item is not
otherwise recorded. Adoption of this standard on January 1, 2001 did not have a
material effect on the Company.
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ITEM 2. PROPERTIES
The Company is located and conducts its business at its home office in
Chicago, Illinois, located at 2154 West Madison Street, Chicago. The Savings
Bank conducts its business through its home office and one additional branch
office located in Dolton, Illinois.
On June 29, 1999, Argo Savings sold its five operating properties
located at 7600 West 63rd Street and 5818 South Archer Road, Summit, Illinois;
8267 South Roberts Road, Bridgeview, Illinois; 2154 West Madison Street,
Chicago, Illinois; and 14076 Lincoln Avenue, Dolton, Illinois, to a
nonaffiliated third party for an aggregate contractual purchase price of
$5,850,000 and simultaneously entered into a 14-year, 2-month operating lease
for each of the properties with the new purchaser. Under the terms of the lease,
the Savings Bank paid an initial monthly rental of $48,000 per month or $576,000
per year, which increases at the rate of 1% each year commencing January 1,
2000. The sale resulted in a profit of $2,400,000 to the Savings Bank. The
profit, under generally accepted accounting principles, was deferred and
included into income by the Savings Bank over the lease term. As a result of
this sale and leaseback transaction, Agro Savings rents, as opposed to owns, the
properties from which it transacts business.
On November 17, 2000, Argo Savings sold the deposits of three (3) of
its five (5) branch banking locations. In conjunction with the deposit sale,
the Savings Bank 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 West Polk Street, Chicago, to the deposit acquirer. The Company
recorded income, before tax effects, of $591,000 in the fourth quarter of 2000,
attributable to the deferred gain on the sale of the Summit and Bridgeview
branch office buildings that were sold in June 1999.
The Company believes that the Argo Savings' current facilities are
adequate to meet the present and immediate foreseeable needs of the Company. See
Note 6 to the notes to the consolidated financial statements for the net book
value of the property of the Company.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2000,
no matters were submitted to a vote of security holders through a solicitation
of proxies or otherwise.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under the caption "Shareholder Information"
in the Registrant's 2000 Annual Report to Stockholders on page 61 and is
incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data appears under the caption
"Selected Consolidated Financial Condition and other Data of the Corporation" in
the Registrant's 2000 Annual Report to Stockholders on pages 4 and 5 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 2000 Annual Report to Stockholders on pages 6 through 18 and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above-captioned information appears under the caption "Quantitative
and Qualitative Disclosures about Market Risk" of the 2000 Annual Report to
Stockholders on pages 19 through 20 and is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 2000, 1999, and 1998 together with the report
thereon by Crowe, Chizek and Company LLP, appears in the Registrant's 2000
Annual Report to Stockholders, on pages 21 through 60 and is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2001
under "Information with respect to the Nominee, Continuing Directors and Certain
Executive Officers."
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ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held on April 26, 2001 under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 26,
2001 under "Security Ownership of Certain Beneficial Owners" and "Information
with respect to the Nominee, Continuing Directors and Certain Executive
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2001
under "Indebtedness of Management and Transactions with Certain Related
Persons."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and
its subsidiaries, together with the Report of Independent Auditors,
appearing in the 2000 Annual Report to Stockholders are incorporated
herein by reference.
Report of Independent Auditors.
Consolidated Statements of Financial Condition as of December 31, 2000
and 1999.
Consolidated Statements of Operations for the years ended December 31,
2000, 1999, and 1998.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999, and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999, and 1998.
Notes to the Consolidated Financial Statements.
The remaining information appearing in the 2000 Annual Report to
Stockholders is not deemed to be filed as a part of this report, except
as expressly provided herein.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
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(a)(3) EXHIBITS
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and Bylaws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.**
3.2 By-Laws of Argo Bancorp, Inc.**
Exhibit No. 4.
4.1 Stock Certificate of Argo Bancorp, Inc.**
4.2 Indenture of Argo Bancorp, Inc. relating to the Junior
Subordinated Debentures *
4.3 Certificate of Junior Subordinated Debenture *
4.4 Certificate of Trust of ARGO Capital Trust Company *
4.5 Capital Security Certificate of ARGO Capital Trust Company *
4.6 Guarantee of Argo Bancorp, Inc. relating to Capital
Securities *
4.7 Amended and Restated Declaration of Trust of ARGO Capital
Trust Company *
4.8 Form of Goodwill Convertible Preferred Stock Certificate of
Argo Bancorp, Inc.*
Exhibit No. 10. Material Contracts.
10.1 Stockholder Agreement dated as of December 31, 1996,
between Argo Bancorp, Inc., The Deltec Corporation Limited,
and John G. Yedinak. ***
10.2 Argo Bancorp, Inc. 1998 Incentive Stock Option Plan.*
10.3 1996 Argo Bancorp, Inc. Management Recognition and Retention
Plan. *
10.4 Amended and Restated Employment Agreement between Argo
Bancorp, Inc. and John G. Yedinak. *
10.5 Amended and Restated Employment Agreement between Argo
Bancorp, Inc. and Frances M. Pitts. *
10.6 Employment Agreement between Argo Bancorp, Inc. and
Colleen A. Kitch*
Exhibit No. 11.
11.1 Computation of earnings per share (included in Note 18 to the
Company's audited financial statements).
Exhibit No. 13.
13.1 Portions of the 2000 Annual Report to Stockholders.
Exhibit No. 21.
21.1 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries."
Exhibit No. 23.
23.1 Consent of Crowe, Chizek and Company LLP (filed herewith).
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* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on July 20,
1998 and any amendments, Registration No. 333-59435.
(a)(4) REPORTS ON FORM 8-K
Form 8-k was filed with the Commission on December 8, 2000
announcing completion of the Registrant's wholly owned
subsidiary, Argo Federal Savings Bank, sale of deposits and
assignment of leases for three (3) of its branch banking
facilities for a deposit premium of $9,216,000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARGO BANCORP, INC.
------------------
(Registrant)
Date: March 30, 2001 By: /s/ John G. Yedinak
--------------------------------
John G. Yedinak, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
Date: March 30, 2001 By: /s/ John G. Yedinak
--------------------------------
John G. Yedinak, Chief Executive
Officer and Director (Principle
Executive Officer)
Date: March 30, 2001 By: /s/ Sergio Martinucci
--------------------------------
Sergio Martinucci,
Vice President and Director
Date: March 30, 2001 By: /s/ Arthur Byrnes
--------------------------------
Arthur Byrnes, Director
Date: March 30, 2001 By: /s/ Donald G. Wittmer
--------------------------------
Donald G. Wittmer, Director
Date: March 30, 2001 By: /s/ Frances M. Pitts
--------------------------------
Frances M. Pitts,
Secretary and Director
Date: March 30, 2001 By: /s/ Dominic M. Fejer
--------------------------------
Dominic M. Fejer
(Principal Accounting and
Financial Officer)
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