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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
COMMISSION FILE NUMBER 0-19829
ARGO BANCORP, INC.
-------------------
(Exact name of small business issuer as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 308,519 shares outstanding as of April 30, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE NO.
- - ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1996, (unaudited) and
December 31, 1995 .............................. 3
Consolidated Statements of Income for the Three
Months ended March 31, 1996, and 1995
(unaudited)..................................... 4
Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1996,
and 1995 (unaudited) ........................... 5
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1996
and 1995 (unaudited) ........................... 6
Notes to Consolidated Financial Statements ..... 7
Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations ............ 11
PART II - OTHER INFORMATION
- - ---------------------------
Item 1 Legal Proceedings .............................. 19
Item 2 Changes in Securities .......................... 19
Item 3 Default Upon Senior Securities ................. 19
Item 4 Submission of Matters to a Vote
of Security Holders .......................... 19
Item 5 Other Information .............................. 20
Item 6 Exhibits and Reports on Form 8-K ............... 20
Signature Page ................................. 21
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<TABLE>
<CAPTION>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS: 3/31/96 12/31/95
------- --------
(Unaudited)
<S> <C> <C>
Cash.................................................. $ 8,668 7,224
Interest-earning deposits............................ 2,781 3,837
FHLB of Chicago Stock................................. 2,679 2,669
Securities Available for Sale......................... 6,874 7,573
Loans receivable, net................................. 136,982 143,141
Loans held for sale (market value of $8,647 in 1996).. 8,647 ---
Accrued interest receivable........................... 1,727 1,709
Foreclosed real estate................................ 1,536 1,473
Premises and equipment, net........................... 6,824 6,684
Goodwill.............................................. 480 507
Purchased mortgage servicing rights................... 4,138 4,033
Prepaid expenses and other assets..................... 6,175 7,618
-------- -------
$187,511 186,468
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits............................................ $123,295 122,758
Borrowed money...................................... 39,544 38,181
Interest-bearing custodial escrow balances
for loans serviced................................ 2,996 2,623
Custodial escrow balances for loans serviced........ 5,738 7,073
Advance payments by borrowers for taxes and
insurance......................................... 164 167
Other liabilities................................... 4,080 4,336
-------- -------
Total liabilities................................. $175,817 175,138
-------- -------
Stockholders' Equity:
Preferred stock, $0.01 par value;
Authorized 500,000 shares; none issued or
outstanding...................................... --- ---
Common Stock:
Class A, $0.01 par value; Authorized
3,020,000 shares; issued and outstanding
308,519 shares................................. 3 3
Class B, $0.01 par value; Authorized
340,000 shares; none issued or outstanding...... --- ---
Class C, $0.01 par value; Authorized
340,000 shares; none issued or outstanding...... --- ---
Class D, $0.01 par value; Authorized
800,000 shares; none issued or outstanding...... --- ---
Additional paid-in capital.......................... 2,748 2,739
Retained earnings - substantially restricted........ 9,186 8,773
Net unrealized gain on securities available for sale,
net of tax........................................ 54 42
Common stock acquired by:
Employee Stock Ownership Plan..................... (162) (177)
Management Recognition Plan....................... (135) (50)
-------- -------
Total stockholders' equity...................... 11,694 11,330
-------- -------
Commitments and contingencies (Note E)
$187,511 186,468
======== =======
See Notes to accompanying unaudited consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Three Months Ended March 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable.............................. $ 3,376 2,865
Mortgage-backed securities.................... 96 105
Interest-earning deposits..................... 159 123
-------- --------
Total interest income....................... 3,631 3,093
-------- --------
Interest expense:
Deposits...................................... 1,517 1,194
Custodial escrow balances for
loans serviced.............................. 33 94
Borrowed money................................ 604 588
------- --------
Total interest expense...................... 2,154 1,876
------- --------
Net interest income before provision
for loan losses........................... 1,477 1,217
Provision for loan losses....................... 25 10
------- --------
Net interest income after provision
for loan losses............................... 1,452 1,207
------- --------
Non-interest income:
Purchased mortgage servicing income, net...... 112 82
Mortgage banking................................ 13 20
Gain on sale of mortgage servicing rights,
loans receivable, securities available
for sale and mortgage-backed securities..... 405 245
Fees for other customer services.............. 85 87
Data processing............................... 2,729 ---
Other......................................... 80 43
------- --------
Total non-interest income................... 3,424 477
------- --------
Non-interest expense:
Compensation and benefits..................... 2,116 619
Occupancy and equipment....................... 1,071 231
Federal deposit insurance premiums............ 73 64
Data processing cost of services.............. 326 ---
Other general and administrative fees......... 573 449
Amortization of goodwill...................... 27 25
-------- --------
Total non-interest expense.................. 4,186 1,388
-------- --------
Earnings before provision for income tax
expense and cumulative effect of
accounting change........................... 690 296
Income tax expense.............................. 225 93
-------- --------
Net earnings............................. 465 203
======== ========
Primary earnings per share...................... $ 1.30 $ .59
======== ========
Fully diluted earnings per share................ $ 1.27 $ .59
========= ========
See notes to accompanying unaudited consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Net
Unrealized
Gain (loss) Common
Common Additional on Securities Stock Stock Total
Stock paid-in Retained Available acquired acquired Stockholders'
Class A Capital earnings for Sale by ESOP by MRP Equity
--------------------------------------------------------------------------------------------
Three months ended March 31, 1995
- - ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ $ 3 2,664 7,240 (224) (237) (21) 9,425
Net income ......................... --- --- 203 --- --- --- 203
Change in unrealized loss on
securities available for
sale, net......................... --- --- --- 138 --- --- 138
Principal payments on ESOP loan..... --- --- --- --- 15 --- 15
Amortization of purchase price
of MRP stock..................... --- --- --- --- --- 12 12
Proceeds from exercise of
stock options.................... --- 6 --- --- --- --- 6
Fair value adjustment for committed
ESOP shares....................... --- 6 --- --- --- --- 6
Cash dividends...................... --- --- (51) --- --- --- (51)
------ ------ ------ ------ ------ ------ ------
Balance at March 31, 1995........... $ 3 2,676 7,392 (86) (222) (9) 9,754
====== ====== ====== ==== ===== ==== ======
Three months ended March 31, 1996
- - ---------------------------------
Balance at December 31, 1995........ $ 3 2,739 8,773 42 (177) (50) 11,330
Net income.......................... --- --- 465 --- --- --- 465
Change in unrealized gain on
securities available for
sale, net......................... --- --- --- 12 --- --- 12
Principal payments on ESOP
loan.............................. --- --- --- --- 15 --- 15
Purchase of MRP stock............... --- --- --- --- --- (85) (85)
Amortization of purchase price
of MRP stock...................... --- --- --- --- --- --- ---
Proceeds from exercise of stock
options........................... --- --- --- --- --- --- ---
Fair value adjustment for
committed ESOP shares............. --- 9 --- --- --- --- 9
Cash dividends...................... --- --- (52) --- --- --- (52)
----- ----- ------ ----- ------ ------ ------
Balance at March 31, 1996........... $ 3 2,748 9,186 54 (162) (135) 11,694
====== ====== ====== ===== ====== ======= =======
- - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31,
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 465 $ 203
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation................................................... 411 121
Accretion of discounts and deferred loan fees.................. (232) (50)
Provision for loan losses...................................... 25 10
Provision for losses on foreclosed real estate................. 25 ---
(Gain) loss on sale of:
Securities available for sale................................ --- (15)
Loans receivable............................................. (405) (232)
Foreclosed real estate....................................... 7 2
Loans originated and purchased for sale........................ (18,598) (18,358)
Proceeds from sale of loans receivable......................... 19,241 13,619
Amortization of goodwill....................................... 27 25
Amortization of purchase price of MRP and ESOP stock........... 15 27
Recognition of fair value of ESOP shares scheduled to be
released...................................................... 9 6
(Increase) decrease in accrued interest receivable, prepaid
expenses, and other assets................................... 1,418 575
Increase (decrease) in accrued interest payable and other
liabilities.................................................. (756) (21)
---------- ---------
Net cash provided by (used in) operating activities.................. 1,652 (4,088)
---------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio....................... (14,670) (24,397)
Principal repayments on:
Loans receivable................................................. 11,940 5,601
Mortgage-backed securities....................................... 113 227
Proceeds from maturities of securities available for sale........ 600 ---
Proceeds from sale of:
Foreclosed real estate........................................... 121 15
Securities held for sale......................................... --- 134
Purchase of:
Stock in Federal Home loan Bank of Chicago....................... (10) ---
Loan servicing rights............................................ (105) (132)
Securities available for sale.................................... --- (121)
Premises and equipment........................................... (551) (63)
Contribution to MRP.............................................. (85) ---
-------- ---------
Net cash provided by (used in) investing activities........ (2,647) (18,736)
Cash flows from financing activities: -------- -------
Net increase (decrease) in deposits................................ 537 11,774
Proceeds from borrowed funds....................................... 33,600 49,252
Repayment of borrowed funds........................................ (31,737) (38,698)
Proceeds from exercise of stock options............................ --- 6
Dividends paid..................................................... (52) (51)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance........................................... (3) (6)
Net increase (decrease) in custodial escrow balances for loans
serviced.......................................................... (962) (4,369)
--------- --------
Net cash provided by financing activities...................... 1,383 17,908
---------- ---------
Net increase (decrease) in cash and cash equivalents........... 388 (4,916)
Cash and cash equivalents at beginning of year..................... 11,061 9,286
---------- ---------
Cash and cash equivalents at end of year........................... $ 11,499 4,370
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense................................................. $ 21 $ 1,877
Non-cash investing activity - transfer of loans to
foreclosed real estate............................................ $ 216 443
========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
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ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments including normal
recurring accruals, considered necessary for fair presentation have been
included. The results of operations for the three months ended March 31, 1996,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or "Holding Company") and its
wholly owned subsidiaries, On-Line Financial Services, Inc. ("On-Line"), Argo
Federal Savings Bank, FSB ("Argo Savings" or "Savings Bank") and Argo Savings'
wholly owned subsidiaries, Argo Mortgage Corporation, and Dolton-Riverdale
Savings Service Corporation. The statements also include Argo Bancorp's majority
owned limited liability corporation, Argo / Empire Mortgage LLC. Significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE B - STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants may
make contributions to the Plan from 1.0% to 12.0% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $15,000 and $12,000, to
the Plan for the three months ended March 31, 1996, and 1995. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
On-Line has a 401(k) Plan covering all employees who have completed one or more
years of service. Participants may make contributions to the Plan from 1.0% to
12.0% of their earnings, subject to Internal Revenue Service limitations.
Matching contributions of 50.0% of each participant's contribution up to 3.0% of
gross income are made at On-Line's discretion each year. On-Line made
contributions of $18,400 to the Plan in 1996.
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In conformity with Internal Revenue Service (IRS) rules governing separate lines
of business, the 401(k) Plan for On-Line will continue to be operated separately
from the 401(k) Plan for the Savings Bank.
In connection with the Merger Conversion, Argo Savings formed an Employee Stock
Ownership Plan ("ESOP") for eligible employees. The ESOP borrowed funds from an
unrelated third party lender in the amount of $60,180 in order to purchase 7.0%
of the Common Stock to be issued in the Merger Conversion (5,233 shares at
$11.50 per share). The ESOP has subsequently borrowed additional funds from the
same third party lender in the amount of $245,000 in order to purchase
additional shares. The ESOP has purchased an additional 13,020 shares at an
average price of $18.79 per share. Argo Savings will make scheduled
discretionary cash contributions to the ESOP sufficient to service the amounts
borrowed. The unpaid balance of the ESOP has been included in borrowed funds on
the unaudited consolidated statement of condition and stockholders' equity has
been reduced by a similar amount.
Contributions of $19,000 and $20,000 were made to the ESOP to fund principal and
interest for the three-months ended March 31, 1996, and 1995, respectively.
On January 1, 1994, Argo Bancorp adopted the provisions of Statement of Position
93-6, ("SOP 93-6"). "Employer's Accounting for Employee Stock Ownership Plans,"
issued by the American Institute of Certified Public Accountants. SOP 93-6
requires Argo Bancorp to consider outstanding only those shares of the ESOP that
are committed to be released when calculating both primary and fully diluted
earnings per share. SOP 93-6 also requires the Savings Bank to record the
difference between the fair value of the shares committed to be released and the
cost of those shares to the ESOP as a charge to additional paid-in-capital with
the corresponding increase or decrease to compensation expense. The adoption of
SOP 93-6 had the effect of increasing additional paid in capital by $9,000 for
the three months ended March 31, 1996.
On-Line does not offer an ESOP for On-Line employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
The Board of Directors of Argo Savings formed a Management Recognition Plan and
Trust ("MRP") effective October 31, 1991, which purchased 6.8% or 15,400 shares,
of the Corporation's authorized but unissued common stock in December 1991. In
addition, Argo Savings contributed $34,385 to allow the MRP to purchase 2,990
shares in the merger conversion or on the open market. All initial MRP shares
have been awarded to employees in key management positions with the Savings Bank
and are fully vested.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 24,498. As of March
31, 1996, an additional 1,907 shares have been purchased under the MRP and none
have been awarded. The awards are earned by employees over a three-year period.
Once awarded the aggregate purchase price of the shares will be amortized to
expense as a portion of annual compensation as the employees become vested in
their stock awards and the amortized cost is reflected as a reduction of
stockholders' equity. Amortization expense amounted to $15,000 and $13,000 for
the three-months ended March 31, 1996, and 1995, respectively.
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Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 107,450 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. All 107,450 options were awarded by Argo
Bancorp under the 1991 Stock Option Plan. The exercise price for the options
awarded was equal to the fair market value of the common stock at the date of
grant. To date there have been 6,869 options exercised and no options exercised
during the three months ended March 31, 1996. At March 31, 1996, options to
purchase 100,581 shares were outstanding.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 107,450
shares of Argo Bancorp's common stock were reserved for issuance by Argo Bancorp
upon exercise of non-incentive stock options to be granted to non-employee
directors of the Corporation and its subsidiaries from time to time. At March
31, 1996, 47,100 options for shares have been awarded by Argo Bancorp under the
Non-Qualified Stock Option Plan. To date, options to acquire 1,500 shares have
been exercised of which none were exercised during the three months ended March
31, 1996. The exercise price for the options awarded was equal to the fair
market value of the common stock at the date of grant. At March 31, 1996,
options to purchase 45,600 shares were outstanding under the Non-Qualified Stock
Option Plan.
On-Line does not offer a stock option plan for On-Line employees. On-Line
employees are not eligible for participation under Argo Bancorp's Stock Option
Plan.
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements:
(1) a risk-based capital requirement of 8.0% of risk-weighted assets, (2) a
leverage ratio of 3.0% core capital to total adjusted assets, and (3) a tangible
capital requirement of 1.5% tangible core capital to total assets. Although the
minimum capital requirement is 3.0%, the OTS Regulations provide that an
institution with less than 4.0% core capital is deemed to be
"under-capitalized." The following table summarizes, as of March 31, 1996, Argo
Savings' capital requirements under OTS regulations and its actual capital
ratios at that date:
<TABLE>
<CAPTION>
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
---------- ---------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Risk-based 8.0% 12.01% $ 7,672 $11,517 $ 3,845
Core 3.0 6.09 5,375 10,905 5,530
Tangible 1.5 6.09 2,688 10,905 8,217
</TABLE>
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NOTE D - EARNINGS PER SHARE
Primary earnings per share is based on a weighted average number of shares of
outstanding of 358,872 and 343,456 for the three months ended March 31, 1996,
and 1995, respectively. Fully diluted earnings per share for the three months
ended March 31, 1996, and 1995, is based upon 367,116 and 344,739, respectively.
NOTE E - COMMITMENTS AND CONTINGENCIES
At March 31, 1996, Argo Savings had loan commitments totaling $907,000, and $3.9
million in unused lines of credit. Commitments to fund loans have credit risk
essentially the same as that involved in extending loans to customers and are
subject to Argo Savings' normal credit policies. Argo Savings also had community
reinvestment act ("CRA") investment commitments outstanding of $1.8 million.
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ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Argo Bancorp was incorporated in August 1987, for the sole purpose of acquiring
Argo Savings. Argo Bancorp was originally capitalized through the sale of 300
shares (which split in December of 1991 at 700/1) of common stock to three
investors for total proceeds of $60,000. Argo Bancorp acquired Argo Savings on
November 17, 1987 for a capital infusion of $1.1 million. On May 26, 1992, the
Corporation completed a merger conversion whereby Dolton-Riverdale Savings
converted from a state chartered mutual association to a federally chartered
stock association and simultaneously merged with and into Argo Savings with Argo
Savings as the surviving entity. The transaction was accounted for under the
pooling of interests method. There was no goodwill or other intangible assets
recorded as a result of the transaction. As part of the merger conversion with
Dolton-Riverdale Savings, the Corporation sold an additional 74,750 shares of
common stock at an issuance price of $11.50. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Corporation retained 50.0% of the net proceeds from the merger conversion and
injected the remaining 50.0% into Argo Savings. All proceeds were used for
general business uses.
Argo Bancorp is a unitary savings and loan company and is registered as such
with the OTS. The Corporation is an active holding company with assets
consisting of Argo Savings stock, On-Line stock, marketable securities,
interest-earning deposits and a majority interest in Argo/Empire Mortgage LLC, a
limited liability corporation which engages in the purchase and disposition of
loans. Argo Bancorp is a Federal Housing Authority ("FHA") approved originator
and servicer, a licensed Illinois mortgage banker and an approved Federal
National Mortgage Association ("FNMA") servicer.
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with custodial escrow
accounts associated with purchased mortgage servicing rights and funds generated
internally, primarily in one-to-four family mortgage loans. Argo Savings is a
member of the Federal Home Loan Bank ("FHLB") System, and its deposits are
insured to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC").
Argo Savings operates one (1) wholly-owned service corporation subsidiary.
Dolton-Riverdale Savings Service Corporation is a wholly owned subsidiary which
offers life insurance annuities to the customer base of Argo Savings. Argo
Savings also operates one (1) wholly-owned operating subsidiary. Argo Mortgage
Corporation engages in mortgage brokerage activities that focus on origination
and sale of mortgage loans into the secondary market.
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Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows and borrowings. Argo Savings' operating results are also affected by the
fees generated by its investment in purchased mortgage servicing rights and, to
a lesser extent, the profit recognized on the sale of mortgage loans, customer
service charges and other income. Argo Savings' operating expenses consist of
employee compensation, occupancy expenses, federal insurance premiums,
amortization of goodwill, and other general and administrative expenses. Results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
On October 31, 1995, Argo Bancorp acquired On-Line, an Oak Brook, Illinois based
computer services bureau, serving bank and thrift clients throughout the
Midwest. The purchase transaction was consummated through the use of a
wholly-owned subsidiary, OLF Acquisition Corporation, which acquired shares of
three separate state chartered savings and loan services corporations which
owned, in the aggregate, 98.9% of the outstanding shares of On-Line. Sale of the
remaining 1.1% of On-Line shares was made by a single institutional stockholder
which held shares in On-Line directly. The intervening acquisition subsidiary
and state chartered savings and loan service corporation shells will be
liquidated and merged by Argo Bancorp during 1996.
Financial terms of the transaction included a cash sweep to shareholders of
On-Line funds on hand on the closing date, less amounts necessary to establish
certain agreed-upon escrow balances, a two (2) year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a
twenty-six (26) month escrow note in the amount of $460,000, representing funds
held for future performance under a third party computer lease; and a structured
schedule of contingent payments based on future revenues of On-Line over the
next seven (7) years. The total transaction value, including asset notes and
contingent payments, will not exceed $10.0 million.
On-Line is a third party provider of on-line, real-time, electronic data
processing services to financial institutions located throughout the Midwest.
On-Line currently provides data processing services to thrifts, community banks,
savings banks, and mortgage brokers representing over 1.5 million customer
accounts in six Midwestern states. On-Line has historically marketed its
services to institutions with assets of less than $1.0 billion, where the
company's orientation toward superior customer service and specialized products
allows it to effectively compete. The acquisition by Argo Bancorp will promote
the development and sale of technological advances in the systems, programs, and
services offered by On-Line, which includes resale of software produced by
Information Technology Incorporated, integrated check and document imaging
systems, and computer output laser disc storage technology. These services are
in addition to new offerings by On-Line in the planning and deployment of wide
area and local area network systems, the sale of all related hardware and
services, expanded technical and communications support, consultation and
training, and the
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maintenance of in-house systems. On-Line's business plans included aggressive
marketing to small to mid-size commercial and community banks, as well as other
corporate users of advanced technology, as it moves to expand beyond its
traditional thrift institution client base.
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolio,
custodial deposit accounts related to loans serviced for others, and the sale of
newly originated fixed rate long-term mortgage loans. The most liquid assets are
cash and short-term investments. The levels of these assets are dependent on the
operating, financing and investing activities during any given period. Cash and
interest-earning deposits totaled $11.5 million at March 31, 1996.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the three-months ended March 31, 1996, and 1995, Argo
Savings originated and purchased mortgage loans in the principal amounts of
$33.3 million and $42.8 million, respectively. During the three-months ended
March 31, 1996, and 1995, these investing activities were primarily funded by
principal repayments on loans and mortgage-backed securities of $12.1 million
and $5.8 million, respectively, and the proceeds from the sale of loans and
securities available for sale of $19.2 million and $13.8 million, respectively.
During the three-months ended March 31, 1996, additional funding was provided by
the increase in deposits of $537,000 and the increase in borrowings of $1.9
million. During the three months ended March 31, 1995, additional funding was
provided by the increase in deposits of $11.8 million and the increase in
borrowings of $10.6 million.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At March 31, 1996, Argo Savings liquid assets represented
5.9% of its liquidity base as compared to the required level of 5.0%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and the current
loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At March 31, 1996, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 6.09%, 6.09%, and
12.01%, respectively.
13
<PAGE> 14
The Office of Thrift Supervision has adopted a final rule that requires every
savings association with more than normal interest rate risk exposure to deduct
from its total capital, for purposes of determining compliance with such
requirement, an amount equal to 50.0% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a measure of the
potential decline in the net portfolio value of a savings association, greater
than 2.0% of the present value of its assets, based upon a hypothetical 200
basis point increase or decrease in interest rates (whichever results in a
greater decline). Net portfolio value is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The rule
provides for a two (2) quarter lag between calculating interest rate risk and
recognizing any deduction from capital. The rule will not become effective until
the OTS evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain as to when this
evaluation may be completed. Any savings association with less than $300.0
million in assets and a total capital ratio in excess of 12.0% is exempt from
this requirement unless the OTS determines otherwise.
CHANGES IN FINANCIAL CONDITION
Total assets increased $1.0 million to $187.5 million at March 31, 1996, from
$186.5 million at December 31, 1995. The increase in total assets is due
primarily to the increase of $2.5 million in loans offset by the $1.5 million
decrease in other assets. This increase was funded through an increase in
deposits and short-term borrowings of $537,000 and $1.9 million, respectively,
partially offset by a $962,000 decrease in custodial escrow balances.
Cash and interest-earning deposits increased $392,000 to $11.5 million at March
31, 1996, primarily due to liquidity management.
Net loans receivable and loans held for sale increased $2.5 million to $145.6
million at March 31, 1996, primarily due to the origination and purchase of
$33.3 million of loans partially offset by principal repayments of $11.9 million
and the sale of $19.2 million of loans.
Deposits increased $537,000 to $123.3 million at March 31, 1996, from $122.8
million at December 31, 1995. The increase can be attributed to interest
credited of $1.5 million for the three months ended March 31, 1996.
Borrowings increased $1.9 million to $40.0 million at March 31, 1996, from $38.2
million at December 31, 1995. The increase is primarily due to proceeds from
short-term advances from the Federal Home Loan Bank. The increase in advances
were used to fund loan purchases and as an additional source of liquidity.
Custodial escrow balances for loans serviced decreased $962,000 to $9.7 million
at March 31, 1996. The custodial accounts pertain to escrowed payments of taxes
and insurance and the float on principal and interest payments on loans serviced
either for Argo Savings or on behalf of others by an independent mortgage
servicing operation. The
14
<PAGE> 15
custodial accounts related to loans serviced by others are maintained at Argo
Savings in interest-bearing accounts. The custodial accounts associated with
loans or purchased mortgage servicing rights serviced for Argo Savings are
maintained in non-interest bearing accounts. At March 31, 1996, and 1995, $3.0
million and $6.4 million, respectively, of all custodial escrow balances pertain
to loans subserviced on behalf of Argo Savings for portfolio loans, servicing
retained loans and purchased mortgage servicing rights. Due to the nature of
custodial escrow deposits, balances fluctuate widely on a day-to-day basis.
Currently, management does not anticipate a material increase or decrease of
custodial escrow balances over the current balance.
Stockholders' equity increased $364,000 to $11.7 million at March 31, 1996, from
$11.3 million at December 31, 1995, primarily due to net income of $465,000
partially offset by dividends paid.
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the investment in purchased mortgage servicing rights which provide a
source of non-interest income and also act as a hedge against the decline in the
value of fixed rate mortgages in a rising interest rate environment; (v) the
increase of non-interest bearing custodial accounts related to the purchased
mortgage servicing rights; and (vi) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo Savings
does not use any artificial hedge products to reduce its exposure to interest
rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15.0% of
total assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities which mature or
reprice within one year over interest sensitive assets of $26.6 million or 14.9%
of total assets at March 31, 1996. As a result of the excess of interest
sensitive liabilities over interest sensitive assets, Argo Savings is "Net
Liability Sensitive" which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest gap analysis
report. The assumptions used, although standardized, may not be indicative of
the actual withdrawals experienced by Argo
15
<PAGE> 16
Savings. Fixed maturity deposits reprice at maturity. The combined effect of
these assumptions on passbook, NOW, money market accounts and interest-bearing
escrows assumes 17.0% of these accounts withdrawn within three years, and 15.0%
per year, thereafter. Management believes that these decay rate assumptions are
reasonable.
IMPACT OF PENDING LEGISLATION
Legislative initiatives regarding the recapitalization of the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"), deposit insurance premiums, FICO bond interest payments, the merger of
SAIF and Bank Insurance Fund ("BIF"), financial industry regulatory structure,
bad debt recapture and revision of thrift and bank charters are still pending
before Congress. Management cannot predict the ultimate impact any final
legislation or regulatory actions may have on the operations of the Company.
Without passage of legislation addressing the FDIC insurance premium disparity,
the Savings Bank, like other thrifts, will continue to pay deposit insurance
premiums significantly higher than banks. As long as such premium differential
continues, it may have adverse consequences on the Company's earnings and the
Company may be placed at a substantial competitive disadvantage to commercial
banking organizations insured by the BIF.
ACCOUNTING DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 prescribes the accounting for the impairment of long-lived
assets and goodwill related to those assets. The new rules specify when assets
should be reviewed for impairment, how to determine whether an asset is
impaired, how to measure an impairment loss, and what financial statement
disclosures are necessary. Also prescribed is the accounting for long-lived
assets and identifiable intangibles that a company plans to dispose of, other
than those that are a part of a discontinued operation. Any impairment of a
long-lived asset resulting from management's review is to be recognized as a
component of non-interest expense. The Company adopted SFAS No. 121 on January
1, 1996, and it has not had a material effect on the Corporation's financial
statements.
In May 1995, FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122, an amendment of SFAS No. 65, requires the recognition of
rights to service loans for others as separate assets, however those servicing
rights are acquired. SFAS No. 122 also requires that a mortgage banking
enterprise assess its capitalized servicing rights for impairment based on the
fair value of those rights, using a disaggregated approach for mortgage
servicing rights capitalized after adoption of the new standard. Mortgage
servicing rights are amortized on an accelerated basis over the estimated period
of net servicing revenue. Adjustments to reduce amortized cost to estimated fair
value are included in non-interest income or non-interest expense, as
appropriate. The Company adopted SFAS No. 122 on January 1, 1996, and it has not
had a material effect on the Corporation's financial statement.
16
<PAGE> 17
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective in 1996. SFAS No. 123 requires that a fair
value-based method be used to value employee compensation plans that include
stock-based awards. The statement permits a company to recognize compensation
expense under SFAS No. 123 or continue to use the prior accounting rules which
did not consider the market value of stock in certain award plans. If adoption
of the statement's fair value procedures are not used in computation of
compensation expense in the income statement. The Company must disclose in a
footnote to the financial statements the pro forma impact of adoption. The
Company will be adopting the disclosure method of the statement.
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest and the collectibility of the loan's
principal and interest becomes doubtful.
At March 31, 1996, Argo Savings had twenty-one (21) properties, for $1,536,000
classified as foreclosed real estate, as compared to twenty-one (21) properties
for $1,473,000 at December 31, 1995. The underlying properties on March 31,
1996, consisted of one (1) multi-family and twenty (20) single family
residences. The foreclosed real estate has been written down to it estimated
fair value at March 31, 1996. The total amount of loans ninety (90) days or more
past due at March 31, 1996, was $2.1 million or 1.5% of total loans as compared
to $2.0 million or 1.5% of total loans on December 31, 1995. At March 31, 1996,
loans ninety (90) days or more past due totaling $2.1 million were secured by
one-to-four family residences. Total non-performing assets at March 31, 1996,
totaled $3.7 million or 1.96% of total assets compared to $3.5 million or 1.86%
of total assets at December 31, 1995.
There were no restructured loans within the meaning of Financial Accounting
Standards Board statement 15 for any of the indicated periods.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND 1995.
GENERAL
Net income for the three months ended March 31, 1996, was $465,000 or $1.30 per
share compared to net income of $203,000 or $.59 per share for the three months
ended March 31, 1995. The $262,000 increase in comparable three month earnings
resulted primarily from increases in net interest income and the data processing
income of On-Line partially offset by increases in non-interest expense.
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<PAGE> 18
INTEREST INCOME
Interest income for the three months ended March 31, 1996, totaled $3.6 million,
as compared to $3.1 million for the comparable 1995 period. The $580,000
increase was caused by the $10.1 million increase in average interest-earning
assets to $155.6 million for the quarter ended March 31, 1996, and the 77 basis
point increase in the weighted average yield on interest-earning assets to 9.33%
for the three months ended March 31, 1996. These increases are primarily
attributable to the purchase of higher yielding seasoned loan products.
INTEREST EXPENSES
Interest expense for the three months ended March 31, 1996, totaled $2.2 million
as compared to $1.9 million for the comparable 1995 period. The $277,000
increase was caused by the $15.9 million increase in average interest-bearing
liabilities to $162.3 million for the three months ended March 31, 1996, and the
18 basis point increase in the weighted average cost of interest-bearing
liabilities to 5.31% for the three months ended March 31, 1996.
NET INTEREST INCOME
Net interest income totaled $1.5 million for the three months ended March 31,
1996, reflecting an increase of $288,000 from the amount recorded in the
comparable 1995 period. The increase in net interest income for the three months
ended March 31, 1996, resulted from an increase of $10.1 million in the average
interest-earning assets and a 77 basis point increase in the effective net
spread to 4.03% from 3.26% for the comparable 1995 period offset by a $15.9
million increase in the average dollar amount of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
A general loan loss provision of $25,000 was recorded during the three months
ended March 31, 1996, as compared to $10,000 for the three months ended March
31, 1995. Management believes that loan loss provisions are adequate and will
continue to monitor the mortgage portfolio and substandard assets for loss
exposure. Loss experience in the past has been minimal.
NON-INTEREST INCOME
Non-interest income increased $3.0 million to $3.4 million for the three months
ended March 31, 1996, as compared to $477,000 for the three months ended March
31, 1995. The increase was the result of $2.7 million in data processing
revenue and a $160,000 increase in gain on sale of mortgage servicing rights,
loans receivable, securities available for sale, and mortgage-backed securities.
18
<PAGE> 19
NON-INTEREST EXPENSE
Non-interest expense increased $2.9 million primarily due to a $1.5 millio
increase in compensation, a $941,000 increase in occupancy and a $326,000
increase in data processing cost of services. These increases were the result
of the acquisition of On-Line and the addition of a fourth branch late in fiscal
1995.
INCOME TAX EXPENSE
The provision for income tax expense increased $132,000 to $225,000 or 33.0% of
pre-tax earnings for the three months ended March 31, 1996, as compared to
$93,000 or 38.0% of pre-tax earnings for the comparable period. The increase is
due to the changes in pre-tax earnings offset by the utilization of affordable
housing tax credits.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held April 29, 1996, with the following
resolutions ratified and approved in all respects:
I. Election of Directors: The election of Richard B. Duffner for a three (3)
year term:
FOR: 277,585 votes 90.0% WITHHELD: 1,088 votes 0.3% BROKER NON-VOTES:
0 votes 0%
II. Election of Directors: The election of Donald G. Wittmer for a three (3
year term:
FOR: 277,585 votes 90.0% WITHHELD: 1,088 votes 0.3% BROKER NON-VOTES:
0 votes 0%
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<PAGE> 20
In addition, the following directors continue in office:
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer President and Owner, Coldwell Banker
Chairman of the Board Stanmeyer Realtors
Vice President and Director
Charles E. Shomo, IV
First Vice President, Robert R. Baird Frances M. Pitts
& Co. Incorporated Executive Vice President, Secretary
Director and Director
III. The ratification of the appointment of KPMG Peat Marwick, LLP as
independent auditors of Argo Bancorp, Inc. for the fiscal year ending
December 31, 1996:
FOR: 278,673 votes 90.3% AGAINST: 0 votes 0%
ABSTAIN: 0 votes 0% BROKER NON-VOTES: 0 votes 0%
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Computation of Earnings Per Share. See Note D to Notes to
Consolidated Financial Statements
27.0 Financial Data Schedule (filed herewith)
B. Reports of Form 8-K
None.
- - -------------------------------
* Incorporated herein by reference into this document from Exhibits to Form S-1,
Registration Statement, and filed on January 28, 1992, any amendments thereto,
Registration No. 33-45222.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: May 9, 1996 /S/ John G. Yedinak
--------------- ---------------------------------------
John G. Yedinak, President of the Board
and Chief Executive Officer
Date: May 9, 1996 /S/ Carol J. Delgado
--------------- ---------------------------------------
Carol J. Delgado, Senior Vice President
and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000883502
<NAME> ARGO BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 8,668
<INT-BEARING-DEPOSITS> 2,781
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,874
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 146,241
<ALLOWANCE> 612
<TOTAL-ASSETS> 187,511
<DEPOSITS> 123,295
<SHORT-TERM> 39,544
<LIABILITIES-OTHER> 12,978
<LONG-TERM> 0
0
0
<COMMON> 3
<OTHER-SE> 11,691
<TOTAL-LIABILITIES-AND-EQUITY> 187,511
<INTEREST-LOAN> 3,376
<INTEREST-INVEST> 96
<INTEREST-OTHER> 159
<INTEREST-TOTAL> 3,631
<INTEREST-DEPOSIT> 1,517
<INTEREST-EXPENSE> 2,154
<INTEREST-INCOME-NET> 1,477
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,186
<INCOME-PRETAX> 690
<INCOME-PRE-EXTRAORDINARY> 690
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 2,100
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0<F1>
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0<F1>
<ALLOWANCE-DOMESTIC> 0<F1>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1> This information is not disclosed in a Form 10-QSB.
</FN>
</TABLE>
