<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-19829
ARGO BANCORP, INC.
(Name of small business issuer 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 60501-1812
(Address of principal executive offices)
(708) 496-6010
(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)
Check whether the issuer (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 _____.
-----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B and no disclosure will 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-KSB or any amendment to
this Form 10-KSB [ ]
-----
Issuer's revenues for its most recent fiscal year was $30,268,000.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, i.e., persons other than directors and executive officers of the
Registrant is $2,066,689 and is based upon the last sales price as quoted on
NASDAQ for March 31, 1997.
The Registrant had 488,250 shares outstanding as of March 31, 1997.
Transitional Small Business Disclosure Format (check one): Yes_____ No X .
----
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DOCUMENTS INCORPORATED BY REFERENCE
THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996, ARE
INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE 1996 ANNUAL MEETING OF STOCKHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE NO.
- ------ --------
<S> <C>
Item 1. Description of Business.................. 1
Item 2. Description of Property.................. 45
Item 3. Legal Proceedings........................ 45
Item 4. Submission of Matters to a Vote
of Security Holders...................... 45
PART II
-------
Item 5. Market for Registrant's Common
Equity and Related Stockholders Matters.. 46
Item 6. Management's Discussion and Analysis
or Plan Operations....................... 46
Item 7. Financial Statements..................... 46
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure..................... 46
PART III
--------
Item 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance with
Section 16(a) of the Exchange Act........ 46
Item 10. Executive Compensation................... 47
Item 11. Security Ownership of Certain
Beneficial Owners and Management......... 47
Item 12. Certain Relationships and Related
Transactions............................. 47
Item 13. Exhibits, Financial Statement
Schedules and Reports on Form 8-K........ 47
SIGNATURES............................... 50
</TABLE>
<PAGE>
BUSINESS OF ARGO BANCORP, INC.
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
Argo Bancorp, Inc. ("Argo Bancorp", "Holding Company", or "Company") was
incorporated in August 1987, for the purpose of acquiring Argo Federal Savings
Bank, FSB ("Argo Savings", or the "Savings Bank"). 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 August 29, 1991, the Board of Directors of Dolton-Riverdale
Savings and Loan Association ("Dolton", or "Dolton-Riverdale Savings") and Argo
Savings adopted a Plan of Merger Conversion ("Plan"), whereby Dolton agreed to
convert from a state-chartered mutual association to a federally-chartered stock
association and merge with and into Argo Savings with Argo Savings as the
surviving entity. Pursuant to the Plan, shares of common stock of Argo Bancorp
were first sold to the members of Dolton in a Subscription Offering and the
shares not subscribed were then offered to the public in a Community Offering.
The Subscription and Community Offering were held concurrently and were
completed on April 27, 1992. Final regulatory approval was received on May 26,
1992, at which time the merger conversion was completed. The transaction was
accounted for under a 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 Company sold an additional
74,750 shares of common stock at a issuance price of $11.50. Net proceeds from
the merger conversion were $326,000 after the deduction of the conversion
expenses. The Company retained 50.0% of the net proceeds from the merger
conversion and injected the remaining 50.0% into Argo Savings. Prior to the
merger conversion, the Management Recognition Plan ("MRP") purchased 15,400
shares of Argo Bancorp's authorized but unissued common stock. 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 October 31, 1995, Argo Bancorp acquired On-Line Financial Services, Inc.
("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 service corporations which owned, in the aggregate, 98.90% of the
outstanding shares of On-Line. Sale of the remaining 1.10% of On-Line shares
was made by a single institutional stockholder which held shares in the Company
directly. The intervening acquisition subsidiary and state chartered savings
and loan service corporations shells were liquidated and merged by Argo Bancorp
during June, 1996.
Financial terms of the transaction included a cash sweep of On-Line funds
on hand to shareholders, less amounts necessary to establish certain agreed upon
escrows; a two (2) year asset note of $1,026,000, representing the closing date
net book value of On-Line assets; a twenty-six (26) month escrow note in the
amount of $460,000, representing funds held for future performance
1
<PAGE>
under a third party computer lease; and a structured schedule of contingent
payments based on future revenues of On-Line over the next seven years. The
total transaction value, including asset notes and contingent payments, will not
exceed $10.0 million.
On May 29, l996, Argo Savings incorporated a Tier I subsidiary, Margo
Financial Services, LLC ("Margo"). Margo is an Illinois chartered limited
liability corporation whose members are Argo Savings and Nip'n Tuck, Inc., an
Illinois corporation. Margo's primary objectives are to increase loan
origination volume within the Savings Bank's branch network and to serve as a
mortgage banking operation using a network of brokers, correspondents and
conduits. Argo Savings has a 50.l% interest in Margo.
On December 31, l996, Argo Bancorp entered into a stock purchase agreement
with The Deltec Banking Corporation Limited ("Deltec"), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms of
the agreement, Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$38.00 per share. Total proceeds from this transaction were approximately
$4,239,000. A five (5.0%) percent investment advisory fee totaling $212,000 was
paid to Charles E. Webb and Company reducing the net proceeds of the transaction
to $4,027,000.
Unlike many savings and loan holding companies, Argo Bancorp is an active
holding company with only a portion of its future anticipated operating income
dependent upon the earnings of Argo Savings. As an operating company, Argo
Bancorp has assets, liabilities and income that are unrelated to the operations
of Argo Savings. Among the assets of Argo Bancorp is its investment in the
Empire/Argo Mortgage LLC, which engages in the purchase and disposition of
deeply discounted mortgage loans. Argo Bancorp's assets at December 31, 1996,
on an unconsolidated basis consisted of its investment in Argo Savings of $12.8
million, its investment in On-Line of $3.5 million, its investment in the
majority owned Empire/Argo Mortgage LLC of $2.4 million, securities available
for sale of $282,000, cash and other interest-earning deposits of $854,000, and
other assets of $1.1 million. Argo Bancorp also had outstanding borrowings on
an unconsolidated basis in the amount of $3.5 million at December 31, 1996,
incurred in connection with capital infusions to its subsidiaries. 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.
Income for the fourth quarter of 1996 totaled $404,000, representing a
decrease of $353,000 from 1995 net income of $757,000. Results for the fourth
quarter of 1996 include adjustments made to the previously reported results for
the year ended December 31, 1996. The adjustments impacted various accounts,
including the following: loan interest income, the gain on sale of assets and
data processing revenue were decreased by $280,000, $44,000, and $38,000,
respectively; compensation expense and other non-interest expense increased by
$118,000, and $451,000, respectively; interest expense on borrowings decreased
by $40,000; other data processing income increased by $98,000. The related tax
impact of these adjustments totaled $367,000, resulting in a net decrease to net
income of $426,000.
2
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BUSINESS OF ON-LINE FINANCIAL SERVICES, INC.
On-Line is a third party provider of 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 On-Line's orientation
toward superior customer service and specialized products allows it to
effectively compete. On-Line's customer base includes institutions with total
assets ranging from $13.0 million to $850.0 million, with an average of
approximately $95.0 million. The acquisition by Argo Bancorp has promoted the
development and sale of technological advances in the systems, programs, and
services offered by On-Line, which include 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 maintenance of in-house systems. On-Line's strategy to
implement and offer computer output laser disc storage technology and a full
line of document imaging services has been realized and is now being marketed to
a wide array of users of advanced technology. Together with aggressive
marketing to small and mid-size commercial and community banks, On-Line's
business plan to expand its traditional thrift institution client base is being
implemented.
BUSINESS OF ARGO/(R)/ FEDERAL SAVINGS BANK, FSB
The discussion that follows relates primarily to the business of Argo
Savings, a federally chartered depository institution. The primary lending
activities of Argo Bancorp are undertaken by Argo Savings, accordingly, the
discussion under the caption "Lending Activities" materially relates only to
Argo Savings. Argo Bancorp 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 Argo Bancorp's activities under the section caption
"Sources of Funds and Borrowings." Unless otherwise stated, all other
descriptions of the business of Argo Bancorp that follow relate to the business
of Argo Savings.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois. Argo Savings converted to a federal stock
charter in 1982 and was determined to be insolvent by the Federal Savings and
Loan Insurance Corporation ("FSLIC") in 1987. On November 17, 1987, the FSLIC
placed Argo Savings into receivership, whereupon Argo Bancorp acquired one
hundred percent of Argo Savings' issued and outstanding common stock (10,000
shares) in exchange for an injection of capital in the amount of $1.1 million
bringing Argo Savings into capital compliance. In June 1989, Argo Bancorp
infused an additional $1.5 million of capital into Argo Savings in order to
facilitate the acquisition of Federal National Mortgage Association ("FNMA")
mortgage servicing rights in July 1989. Argo Savings is a member of the Federal
Home Loan Bank ("FHLB") System and its deposits are insured by the FDIC under
the Savings
3
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Association Insurance Fund ("SAIF"). The principal executive offices of Argo
Bancorp and home office of Argo Savings are located at 7600 West 63rd Street,
Summit, Illinois. Argo Savings has four branch offices, located in Cook and
Lake County, Illinois.
Argo Savings' primary business is the solicitation of savings deposits from
the general public and the purchase or origination of loans secured by
residential real estate. Through its subsidiaries Argo Mortgage Corporation and
Margo Financial Services, LLC, Argo Savings has engaged in mortgage brokerage
activities that focus on the origination and sale of mortgage loans in the
secondary market. Argo Savings generates income by the sale of these mortgage
loans on a "servicing released" basis into the secondary market and through
investment in partnerships in Purchased Mortgage Servicing Rights ("PMSRs"). To
a lesser extent, Argo Savings invests funds in securities approved for
investment by federal regulations, including obligations of the United States
Government and its agencies. Argo Savings continues to expand its operations to
include consumer lending, limited commercial real estate lending, commercial
checking, money market deposit accounts and additional consumer investment
products. The expansion into consumer lending and limited commercial real
estate lending has allowed Argo Savings to remain competitive in its primary
market area. Such lending, however, involves greater risk than one-to-four
family residential mortgage lending.
Through activities conducted by its Argo Mortgage Corporation subsidiary,
in recent years Argo Savings has acquired mortgage loans at a deep discount for
which the borrowers are either not current as to principal and interest payments
or there is doubt to the borrower's ability to pay in full the contractual
principal and interest outstanding. In determining the amount it will bid to
acquire such loans at private sales and auctions, the Company estimates the
amounts it will realize through foreclosure, collection efforts, or other
resolution of each loan and the length of time required to complete the
collection process. Investment in these assets has resulted in higher then
market interest yields and significant gains as a result of the ultimate sale of
properties acquired through these purchases. However, losses have also been
incurred from certain properties through other real estate owned activity.
As a result of the Company's business strategy, the balance of the
Company's discounted loans receivable portfolio increased from $13.5 million or
7.3% of total assets at December 31, 1995, to $47.7 million or 20.8% of total
assets at December 31, 1996.
The growth in the Company's discounted loan acquisitions has substantially
contributed to the Company's profitability in recent periods. Additionally,
income is derived from interest and fees generated in connection with Argo
Savings' lending and mortgage activities, as well as net fees generated from
investments in PMSRs. Argo Savings' principal expenses are interest paid on
savings deposits, borrowing and operating costs.
4
<PAGE>
MARKET AREA
Argo Savings considers its primary market area to be the greater Chicago
metropolitan area (hereinafter referred to as its "primary market area"). Argo
Savings maintains its headquarters in Summit with four branch offices in
Bridgeview, the near West side of Chicago, Dolton, and Gurnee, Illinois.
Argo Savings' primary market area is urban and is comprised of high density
residential neighborhoods interspersed with mixed-use and heavily industrialized
areas. The primary market area is fully developed with a relatively large
number of generally older homes. Argo Savings' newest branch is located in
Gurnee, which is currently undergoing rapid growth and residential expansion.
All branch locations have excellent access to major transportation routes,
including Interstates 290, 294, 94 and 55, as well as public transportation,
both rail and bus.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following tables set forth selected consolidated historical financial
data for Argo Bancorp during the periods ended and at the dates indicated. This
information should be read in conjunction with the Consolidated Financial
Statements of Argo Bancorp and notes thereto in the 1996 Annual Report to
Shareholders, which is incorporated herein by reference.
5
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA Year Ended December 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ---------- ------------ -----------
FINANCIAL CONDITION DATA: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net.................................. $173,429 $142,380 $118,063 $ 90,139 $ 74,477
FHLB of Chicago Stock.................................. 3,428 2,669 2,576 2,756 1,632
Securities............................................. 5,788 7,573 12,491 15,009 28,178
Cash equivalents....................................... 13,276 11,061 9,286 6,905 4,740
Excess cost over fair value of net assets acquired..... 333 507 455 555 675
Purchased loan servicing rights........................ 5,264 4,033 3,641 2,508 2,644
Foreclosed real estate................................. 3,913 2,234 359 554 453
Other assets........................................... 23,853 16,011 9,146 7,483 5,166
-------- -------- -------- -------- --------
Total assets........................................... $229,284 $186,468 $156,017 $125,729 $117,965
Deposits............................................... 150,627 123,484 100,697 88,220 72,850
Borrowed money......................................... 50,879 38,181 30,820 9,064 11,793
Custodial escrow balances for loans serviced........... 5,782 9,696 14,691 20,031 25,735
Other liabilities...................................... 5,436 4,228 835 619 1,505
-------- -------- -------- -------- --------
Stockholders' equity................................... $ 16,560 $ 10,879 $ 8,974 $ 7,795 $ 6,082
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 October 31
-------------------------------------------------- ----------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA: (Dollars in Thousands)
Interest income........................................ $ 16,074 $ 13,987 $ 10,282 $ 9,477 $ 8,029
Interest expense....................................... 9,083 8,341 5,012 3,822 3,881
-------- -------- -------- -------- --------
Net interest income.................................. 6,991 5,646 5,270 5,655 4,148
Provision for loan losses.............................. 248 55 48 270 43
-------- -------- -------- -------- --------
Net interest income after provision for loan losses.. 6,743 5,591 5,222 5,385 4,105
Non-interest income.................................... 14,194 4,479 1,838 1,738 1,507
Non-interest expense................................... 19,260 7,662 5,383 4,587 4,191
-------- -------- -------- -------- --------
Income before income taxes........................... 1,677 2,408 1,677 2,536 1,421
Income tax expense..................................... 343 667 281 952 516
-------- -------- -------- -------- --------
Income before extraordinary item
and cumulative effect of change in
accounting principle................................. 1,334 1,741 1,396 1,584 905
Cumulative effect of change in accounting for
income taxes......................................... --- --- --- 460 ---
Extraordinary item - utilization of tax loss
carryforward......................................... --- --- --- --- 138
-------- -------- -------- -------- --------
Net income............................................. $ 1,334 $ 1,741 $ 1,396 $ 2,044 $ 1,043
-------- ======== ======== ======== --------
Income per share - fully diluted before
extraordinary item................................... $ 3.60 $ 4.96 $ 4.08 $ 4.81 $ ---
-------- ======== ======== ======== --------
Net income per share - fully diluted................... $ 3.60 $ 4.96 $ 4.08 $ 6.21 $ 4.17
-------- ======== ======== ======== --------
</TABLE>
<TABLE>
<CAPTION>
At December 31 October 31
------------------------------------------------ ----------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
SELECTED FINANCIAL RATIOS AND OTHER DATA: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Return on average assets............................... 0.68% 1.00% 1.00% 1.59% 0.99%
Return on average equity............................... 10.89 17.09 16.17 27.88 17.31
Average equity to average assets....................... 6.26 5.85 6.10 5.71 5.69
Equity to total assets................................. 7.22 5.83 5.75 6.20 5.16
Interest rate spread during period..................... 4.61 3.69 4.25 4.82 3.66
Net interest margin.................................... 4.44 3.65 4.24 4.93 4.47
Non-interest expense to average assets................. 9.83 4.40 3.86 3.58 3.96
Non-performing loans, to loans receivable,
and loans held for sale (1).......................... 3.12 1.35 1.93 1.19 2.09
Non-performing assets to total assets (1).............. 3.43 2.26 1.72 1.31 1.12
Allowance for loan losses to non-performing
loans (1)............................................ 16.87 29.54 26.38 55.88 29.79
Average interest-earning assets to average
interest-bearing liabilities......................... .94x .99x 1.00x 1.03x 1.19x
Book value per share................................... 37.11 36.72 30.91 27.38 21.54
Full-service customer service facilities............... 5 5 4 3 3
</TABLE>
(1) Excludes balances related to the portfolio of discounted loans receivable.
6
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LENDING ACTIVITIES
General. Argo Savings' loans receivables, which includes loans held for
-------
sale, portfolio loans receivable, and discounted loans receivable totaled $191.7
million, excluding accrued interest, at December 31, 1996, representing 75.6% of
its total assets. On that date, $177.4 million of total loans outstanding or
92.5% of its total gross loan portfolio, consisted of loans secured by first
mortgages on one-to-four family residential properties and $1.5 million, or .8%,
of total outstanding loans consisting of first lien loans secured by multi-
family properties. At December 31, 1996, Argo Savings had commercial real estate
loans outstanding in the amount of $4.5 million or 2.4% that are secured by
commercial buildings primarily in suburban Cook and Lake County.
Argo Savings has focused its lending activities on the generation of
profits from the sale of loans, as well as increasing the interest-rate
sensitivity of its loan portfolio. Argo Savings originates long-term, fixed-rate
mortgage loans with 15 and 30 year maturities for immediate sale in the
secondary mortgage market. Such loans are originated directly by Argo Savings,
as well as through its mortgage brokerage subsidiaries, Argo Mortgage
Corporation and Margo Financial Services, LLC. See "-- Subsidiaries." Argo
Savings also periodically securitizes its residential mortgage loans into
mortgage-backed securities. Historically, Argo Savings' lending activity has
also included the purchase of adjustable rate mortgage-backed securities. The
majority of the growth in the Argo Savings' loan balances in the current year is
due to the purchase of adjustable rate loans and seasoned fixed rate loans
secured by single family residences located throughout the country. Argo Savings
directly purchased approximately $58.0 million of loans both for portfolio and
for sale, and $41.1 million of discounted loans receivable during 1996. Argo
Savings' policy of purchasing adjustable rate loans and seasoned higher yielding
fixed rate loans is intended to increase the interest rate sensitivity of its
assets without decreasing the yield on its interest-earning assets. See "-- Loan
Origination, Purchases and Sales."
Argo Savings is engaged in numerous community lending and development
activities. Argo Savings created the Heritage Corridor Community Development
Corporation ("CDC"), an Illinois not-for-profit corporation serving southwest
Cook County communities. Two other banks and a local municipality have invested
in CDC. The primary purpose of the CDC is to act as a catalyst to promote local
affordable housing and economic development projects through participation in
approved ventures. The CDC's first, and on-going project is the development and
operation of a loan fund for the revitalization of the Archer Road Business
District in Summit, Illinois. Additionally, Argo Savings is a member of CIC
2000, a revolving loan pool organized by Community Investment Corporation to
fund loans to rehabilitate affordable housing in Chicago and Cook County through
note sales. Single family homeowners in Argo Savings' delineated service areas
are also served under several low down payment mortgage programs including the
FannieMae Community Home Buyers program. Community outreach related to first
time home buyers continues to include educational seminars and individual
counseling on financing a home purchase, in conjunction with local not-for-
profit organizations. Using Community Investment Program advances and
Affordable Housing Program funds from the FHLB, funding has been made available
to expand the availability of funds for single family mortgages and loans to
small business customers within Argo Savings' delineated services areas. Argo
Savings is one of four participating lenders in
7
<PAGE>
a $1.5 million line of credit to Harvey-based New Cities Community Development
Corporation, a not-for-profit corporation, to rehabilitate fifty (50) homes for
low income families in the south suburbs. Argo Savings also participates in the
City of Chicago Mortgage Bond Program, the Illinois League of Financial
Institutions Affordable Housing Grant Program and the Chicago Homeowners Tax
Savings Program to enhance its ability to originate mortgages to low and
moderate income purchasers or targeted census tracts.
Analysis of Loan Portfolio. The following table sets forth the composition
---------------------------
of the mortgage and other loan portfolios and mortgage-backed securities
portfolio in dollar amounts and in percentages at the dates indicated.
8
<PAGE>
<TABLE>
<CAPTION>
At December 31.
- ------------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amt. Total Amt. Total Amt. Total Amt. Total Amt. Total
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in Thousands)
Mortgage Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family........... $62,199 81.33% $80,059 86.92% $112,393 93.57% $144,518 93.49% $177,345 92.50%
Multi-family................. 3,418 4.47 1,799 1.95 1,177 .98 1,180 .76 1,468 .77
Commercial real estate....... 1,730 2.26 1,454 1.59 1,684 1.40 2,552 1.65 4,523 2.36
------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans...... 67,267 88.06 83,312 90.46 115,254 95.95 148,250 95.90 184,398 95.63
Other loans:
Automobile................... 229 .30 102 .11 28 .02 5 .00 4 .00
Mobile home.................. 717 .94 636 .69 472 .39 379 .25 248 .13
Other (1).................... 8,175 10.70 8,052 8.74 4,364 3.64 5,941 3.85 8,142 4.24
------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total other loans......... 9,121 11.94 8,790 9.54 4,864 4.05 6,325 4.10 8,394 4.37
------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable (2) 76,388 100.00% 92,102 100.00% 120,118 100.00% 154,575 100.00% 191,730 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts, premiums
and deferred loan fees, net 1,530 1,350 1,442 10,847 17,636
Allowance for loan losses.... 381 613 613 587 665
------- -------- -------- --------
Loans receivable, net........ 74,477 90,139 118,063 143,141 173,429
======= ======= ======== ======== ========
Mortgage-backed securities:
CMO.......................... 55 .35 23 .27 $ 5 0.08 --- --- --- ---
FHLMC........................ 3,420 22.23 2,069 24.36 1,382 20.95 1,164 20.56 826 16.76
FNMA......................... 11,492 74.71 6,017 70.84 4,901 74.29 4,339 76.65 3,949 80.15
GNMA......................... 417 2.71 385 4.53 309 4.68 158 2.79 152 3.09
------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities............... 15,384 100.00% 8,494 100.00% 6,597 100.00% 5,661 100.00% 4,927 100.00%
====== ====== ====== ====== ======
Net premium (discount).... 166 115 98 78 60
Unrealized loss on
securities available
for sale............... --- --- (300) (27) (83)
------- ------- -------- -------- --------
Net mortgage-backed
securities.............. $15,550 $ 8,609 $ 6,395 $ 5,712 $ 4,904
======= ======= ======== ======== ========
Mortgage-backed securities
held for sale:
GNMA......................... $ 3,075 100.00% --- --- --- --- --- --- --- ---
======= ====== ======= ====== ======== ====== ======== ====== ======== ======
</TABLE>
________________________________________________________________________________
(1) Consists primarily of home equity loans secured by one-to-four family
properties.
(2) Includes loans held for sale, portfolio loans receivable, and discounted
loans receivable.
9
<PAGE>
Loan Maturity and Repricing. The following table shows the maturity or period
- ----------------------------
to repricing of Argo Savings' loans, discounted loans, and mortgage-backed
securities portfolio at December 31, 1996. Loans that have adjustable rates are
shown as being due in the period during which the interest rates are next
subject to change. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
mortgage loans totaled $31.6 million, $35.9 million, and $46.2 million for the
years ended December 31, 1994, 1995, and 1996, respectively.
<TABLE>
<CAPTION>
Loans
----------------------------------------------------------------------------
One-to- Total Mortgage
four Multi- Commercial Other Loans backed
Family Family Real Estate Loans(1) Receivable Securities Total
------ ------ ----------- ------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within one year $ 54,352 $ 456 $ 320 $6,654 $61,782 $3,825 $ 65,607
-------- ------ ------ ------ ------- ------ --------
After one year:
One to three years............................. 11,874 --- 1,059 237 13,170 804 13,974
Three to five years............................ 1,697 998 3,081 271 6,047 --- 5,543
Five to 10 years............................... 2,907 14 --- 1,220 4,141 146 3,225
10 to 20 years................................. 15,087 --- 63 12 15,162 152 15,314
Over 20 years.................................. 91,428 --- --- --- 91,428 --- 92,994
-------- ------ ------ ------ ------- ------ --------
Total due after one year.......................... 122,993 1,012 4,140 678 129,948 1,102 131,050
-------- ------ ------ ------ ------- ------ --------
Total amounts due................................. $177,345 $1,468 $4,523 $8,394 $191,730 $4,927 $196,657
======== ====== ====== ====== ======== ====== ========
LESS:
Unearned discounts, premiums
and deferred loan fees, net..................... (17,636) 60 (17,576)
Unrealized loss on securities available for sale.. --- (83) (83)
Allowance for loan losses......................... (665) --- (665)
-------- ------ --------
Loans receivable, net............................. $173,429 $4,904 $178,333
======== ====== ========
</TABLE>
________________________________________________________________________________
(1) Consists primarily of home equity loans secured by one-to-four-family
properties.
10
<PAGE>
The following table sets forth at December 31, 1996, the dollar amount of all
loans and mortgage-backed securities due after December 31, 1997, and whether
such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------
Fixed Adjustable
Rates Rates Total
----- ---------- -----
<S> <C> <C> <C>
Due after December 31, 1997: (In Thousands)
Mortgage loans:
One-to-four family.............. $116,565 $7,994 $124,559
Multi-family.................... 1,012 --- 1,012
Commercial real estate.......... 2,640 1,059 3,699
Other loans..................... 678 --- 678
-------- ------ --------
Total loans receivable (1)....... 120,895 9,053 129,948
Mortgage-backed securities....... 1,102 --- 1,102
-------- ------ --------
Total loans receivable
and mortgage-backed securities.. $121,997 $9,053 $131,050
======== ====== ========
</TABLE>
________________________________________________________________________________
(1) Includes portfolio loans receivable, loans held for sale, and
discounted loans receivable.
11
<PAGE>
One-to-Four Family Residential Loans. At December 31, 1996, approximately
------------------------------------
92.50% of Argo Savings' loan portfolio was comprised of one-to-four family
residential mortgage loans. Permanent conventional residential mortgage loans
are made for up to 80.0% of the appraised value of the property when the loan is
secured by real estate improved by not more than four family units.
The loan-to-value ratio, maturity and other provisions of the loans made by
Argo Savings have generally reflected a policy of making available to the public
the maximum loan permissible consistent with applicable regulations, market
conditions, and the lending practices and underwriting standards established by
Argo Savings. Mortgage loans made by Argo Savings are generally long-term
loans, amortized on a monthly basis, with principal and interest due each month.
The initial contractual loan payment period for a residential loan is typically
thirty (30) years. Borrowers may refinance or prepay loans at their option.
Interest rates and points charged on loans originated by Argo Savings are
included to be competitive with other savings and institutions and loan
brokerage services in the general market area. Most of Argo Savings' one-to-
four family fixed-rate residential loan originations are sold in the secondary
market. See "-- Loan Origination, Purchases and Sales." All conventional loans
with a loan-to-value ratio in excess of 80.0% are required to have private
mortgage insurance covering that portion of the loan in excess of 80.0% of
appraised value.
Multi-Family Residential Real Estate Lending and Commercial Real Estate
-----------------------------------------------------------------------
Lending. Argo Savings also originates loans for the acquisition of existing
- -------
multi-family residences or refinancing of such properties, such as five to
twelve unit apartment buildings located in the greater Chicago metropolitan
area. At December 31, 1996, Argo Savings had loans secured by multi-family
properties in the amount of $1.5 million, or .77% of the total loan portfolio.
Loans originated on multi-family dwellings are generally 5-year fixed-rate
balloon mortgages amortized over thirty (30) years. An origination fee is
generally charged on such loans. Multi-family residential real estate lending
entails additional risk as compared with one-to-four family residential property
lending. Multi-family real estate loans typically involve large loan balances
to a single borrower or groups of affiliated borrowers. The payment experience
on such loans is typically dependent on the successful operation of the real
estate project. Argo Savings evaluates all aspects of multi-family real estate
loan transactions in order to mitigate risk to the greatest extent possible. To
minimize these risks, Argo Savings generally limits its multi-family lending to
properties used solely for residential purposes. Argo Savings seeks to ensure
that the property securing the loan will generate cash flow to adequately cover
operating expenses and debt service payments. To this end, multi-family real
estate loans generally are made at a loan-to-value ratio no greater than 75.0%
and Argo Savings generally imposes a conservative debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service).
Argo Savings requires title insurance to insure the priority of its lien on
all of its mortgage loans, as well as requires fire and casualty insurance on
all its properties securing loans provided by the Savings Bank.
12
<PAGE>
Commercial Real Estate Lending. The commercial real estate loan portfolio
------------------------------
originated or purchased is primarily secured by office buildings and income-
producing commercial properties and amounted to $4.5 million or 2.4% of the
total loan portfolio at December 31, 1996. Argo Savings does not originate or
purchase out of area commercial real estate loans.
Argo Savings will continue on a limited basis to originate loans secured by
commercial real estate in its primary market area. In underwriting these loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also
includes credit checks and a review of the financial condition of the borrower.
An appraisal report is prepared in accordance with OTS regulation by an outside
appraiser qualified by federal and state law to substantiate property values for
every multi-family and commercial real estate loan. These appraisal reports are
reviewed by Argo Savings prior to the closing of the loan to assure compliance
with OTS appraisal standards and policies and the adequacy of the value of the
security property. Argo Savings also typically obtains full personal loan
guarantees from the borrowers. Argo Savings validates such personal loan
guarantees through an investigation of the borrower's personal finances.
Commercial real estate lending entails 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 operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such may be subject to a greater
extent to adverse conditions in the economy generally.
Consumer and Other Loans. Federal regulations also permit thrift
------------------------
institutions to make secured and unsecured consumer loans for up to 35.0% of the
Savings Bank's assets. Additionally, a federal association has lending authority
above the 35.0% maximum category for certain consumer loans, such as property
improvement loans, mobile home loans, savings account secured loans and other
secured and unsecured personal loans.
Argo Savings makes various types of secured consumer loans, primarily home
equity loans and mobile home loans. The home equity loans are made for terms of
up to ten (10) years, while mobile home loans have terms of up to fifteen (15)
years. At December 31, 1996, Argo Savings' consumer loan portfolio totaled $8.4
million, or 4.37%, of Argo Savings' total loan portfolio.
Management considers consumer loans to involve more credit risk than
secured single family residential mortgage loans and, therefore, consumer loans
generally yield a higher return to Argo Savings and generally provide Argo
Savings with a shorter maturities than single-family residential mortgage loans.
13
<PAGE>
Discounted Loans Receivable. Through activities conducted by its
----------------------------
subsidiary, Argo Mortgage Corporation, Argo Savings has acquired mortgage loans
at a deep discount for which the borrowers are either not current as to
principal and interest payments or there is doubt to the borrower's ability to
pay, in full, the contractual principal and interest outstanding. The purchased
discounted loans are primarily comprised of one-to-four family residential
loans. During the year ended December 31, 1996, Argo Savings purchased $41.1
million of discounted loans receivable, increasing its investment in discounted
loans from $13.5 million at December 31, 1995, to $47.7 million at December 31,
1996. The investment in discounted loans receivable has resulted in $3.7
million and $1.2 million of interest income, and $1.8 million and $1.1 million
of gains on the sale of these assets, for the years ended December 31, 1996, and
1995, respectively.
Loan Solicitation and Processing. Loan originations are derived primarily
--------------------------------
from referrals, existing customers, advertisements and the mortgage broker
network established through Margo. Loan applications are accepted by both Margo
personnel as well as employees of Argo Savings. 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
independent verification of all credit, income and liability information
provided by the applicant is completed. In the case of a real estate loan
originated by Argo Savings, or by Margo for Argo Savings, 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. For loans
originated by Margo for third parties, an independent appraiser approved by the
third party is used.
The loan documentation and processing activities utilized by Argo Savings /
Margo in connection with the origination of real estate loans conforms to
standards imposed by the FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), as well as third party investor guidelines. Loan documentation and
processing activities utilized by Argo Savings / Margo conforms to both FNMA and
FHLMC requirements, as well as standards promulgated by the Federal Housing
Authority ("FHA"), the Department of Housing and Urban Development ("HUD") and
the Veterans Administration ("VA"). Additionally, written policies and
procedures governing the origination of mortgage and other loans conforming to
regulatory guidelines promulgated by the OTS are in place and utilized by Argo
Savings.
Upon completion of loan application processing activities, files are
presented to Argo Savings' loan underwriters if the loan is originated on behalf
of Argo Savings, or to third party investors if the loan is originated for
immediate sale. In the case of Argo Savings, certain senior officers have
lending authority and may approve loans of up to $350,000 after completion of
the underwriting process. Loans in excess of $350,000, as well as multi-family
and commercial real estate loans, are subject to approval by the Board of
Directors or a Committee of the Board of Argo Savings.
14
<PAGE>
Loan applicants are promptly notified in writing of the final determination
of the loan request by both Argo Savings and Margo. If approved, the terms and
conditions of the loan decision including the amount of the loan, interest rate,
amortization term, brief description of the real estate securing the mortgage as
well as all conditions to final closing of the transaction are provided in
writing to the loan applicant. The loan applicant is required to pay all costs
of Argo Savings/Margo, as well as their own costs in connection with the loan
closing. If denied, disclosure of the reasons relating to denial is made
pursuant to the requirements of applicable federal and state law.
Statistics regarding all loan applications, both denied and approved, are
retained by Argo Savings and Margo, and reported annually under the Home
Mortgage Disclosure Act. Quality control procedures verifying data obtained
through loan processing activities are in place at Argo Savings and Margo.
Loan Originations, Purchases, and Sales. Argo Savings purchases loans when
---------------------------------------
its savings inflows exceed the Savings Bank's ability to originate loans or when
Argo Savings determines to restructure its loan portfolio. In recent years, Argo
Savings has purchased seasoned, fixed-rate mortgage loans, and adjustable rate
mortgage loans secured by primary residences, in order to improve Argo Savings'
interest rate sensitivity. Argo Savings purchased a total of approximately
$58.0 million of portfolio loans receivable and loans held for sale, and $41.1
million of discounted loans receivable, during the year ended December 31, 1996.
Currently, most fixed rate, long-term mortgage loans originated are sold in
the secondary mortgage market. These sales have been made to the FNMA, FHLMC,
and other investors. Originated loans sold on a non-recourse basis amounted to
$3.5 million in 1996, $568,300 in 1995 and $3.3 million in 1994.
The success of these secondary mortgage market activities is dependent upon
Argo Savings' ability to originate loans at yields which are competitive with
other loans in the secondary market. The proceeds from the sale of such loans
are reinvested in more liquid, interest-rate sensitive loans and investment
securities.
In an effort to make the yields on its loan portfolio and investments more
responsive to its cost of money, Argo Savings has implemented a number of
policies. Those measures include the origination of long-term, fixed-rate
mortgage loans where such loans can be sold in the secondary market, the
granting of adjustable rate mortgage loans and the origination of consumer,
commercial real estate, and multi-family loans with shorter maturities.
15
<PAGE>
Set forth below is a table showing Argo Savings' loan originations and loan and
mortgage backed securities purchases, sales and principal repayments for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31 December 31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of period............................ $ 44,935 $ 67,267 $ 83,312 $115,254 $147,490
-------- --------- -------- -------- --------
Mortgage loans originated:
One-to-four family................................ 15,944 29,496 11,646 10,292 12,904
Multi-family...................................... 540 --- 179 --- 455
Commercial real estate............................ --- --- 1,100 890 1,440
-------- --------- -------- -------- --------
Total mortgage loans originated................. 16,484 29,496 12,925 11,182 14,799
One-to-four family mortgage loans purchased....... 37,218 155,050 134,444 95,275 99,148
-------- --------- -------- -------- --------
Total mortgage loans originated and purchased.. 53,702 184,546 147,369 106,457 114,719
Transfer of mortgage loans:
to/from foreclosed real estate................... (122) (868) (256) (2,871) (4,422)
to mortgage-backed securities.................... --- (7,679) --- --- ---
Principal repayments............................... (18,101) (27,150) (19,541) (21,885) (27,386)
Mortgage loans sold................................ (29,392) (132,804) (95,630) (49,465) (46,293)
-------- --------- -------- -------- --------
At the end of period............................. $ 51,022 $ 83,312 $115,254 $147,490 $183,336
======== ========= ======== ======== ========
Other loans:
At beginning of period............................ 5,574 9,121 8,790 4,864 6,325
Other loans originated............................ 4,151 11,860 12,385 15,504 20,914
Principal repayments.............................. (1,343) (12,191) (12,395) (14,043) (18,845)
Other loans sold.................................. --- --- (3,916) --- ---
-------- --------- -------- -------- --------
At end of period................................. $ 8,368 $ 8,790 $ 4,864 $ 6,325 $ 8,394
======== ========= ======== ======== ========
Mortgage-backed securities (gross):
At beginning of period............................ 22,805 15,384 8,494 6,597 5,661
Mortgage-backed securities purchased.............. 894 --- --- --- ---
Mortgage-backed securities sold................... --- (10,226) --- --- ---
Mortgage-backed securities transferred............ (3,221) 7,679 --- --- ---
Principal repayments.............................. (4,118) (4,343) (1,897) (936) (734)
-------- --------- -------- -------- --------
At end of period................................. $ 16,357 $ 8,494 $ 6,597 $ 5,661 $ 4,927
======== ========= ======== ======== ========
Mortgage-backed securities held for sale:
At beginning of period........................... --- 3,075 --- --- ---
Securities transferred........................... 3,221 --- --- --- ---
Principal repayments............................. --- --- --- --- ---
Securities sold.................................... --- (3,075) --- --- ---
-------- --------- -------- -------- --------
At end of period................................. $ 3,221 $ --- $ ------ $ ------ $ ---
======== ========= ======== ======== ========
</TABLE>
16
<PAGE>
Loan Origination and Other Fees. In addition to interest earned on loans
-------------------------------
and commitments for making loans, Argo Savings 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 custodial 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, 1996, Argo Savings had
$93,000 in net deferred loan costs that will be recognized in future periods.
Loan origination and commitment fee income vary with the volume and type of
loans and commitments made and purchased and with competitive conditions in
mortgage markets, which in turn tend to vary in response to the demand and
availability of money.
Argo Savings also receives other fees and charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in borrower or other loan modifications.
Problem Assets and Asset Classification. Loans are reviewed on a regular
---------------------------------------
basis and an allowance for loan losses is established when, in the opinion of
management, the net realizable value of the property collateralizing the loan is
less than the outstanding principal, and interest and the collectibility of the
loan's principal and interest becomes doubtful. Argo Savings' procedures
provide that when a loan becomes delinquent fifteen (15) days or more, the
borrower is contacted. Typically, Argo Savings' will initiate foreclosure
action against a borrower when principal and interest become ninety (90) days or
more past due. Argo Savings' policy is to stop accruing interest for any loan in
excess of ninety (90) days delinquent separate from management's analysis as to
the future collectibility of the interest. It is the opinion of management that
this policy is an appropriately conservative approach.
Real estate acquired by Argo Savings as a result of foreclosure is carried
at the lower of cost or fair value, net of estimated selling costs.
The following table sets forth information with respect to the Company's
non-performing assets as of the dates indicated. All non-performing loan totals
exclude discounted loans receivable.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more delinquent............................ $1,078 $1,097 $2,324 $1,987 $3,942
====== ====== ====== ====== ======
Loans 90 days or more delinquent as
a percentage of portfolio loans and loans
held for sale, net of discount............................ 1.41% 1.19% 1.98% 1.54% 3.12%
====== ====== ====== ====== ======
Foreclosed real estate, net of related reserves............ $ 453 $ 554 $ 359 $2,234 $3,913
====== ====== ====== ====== ======
Total loans 90 days or more delinquent and
foreclosed real estate to total assets.................... 1.30% 1.31% 1.72% 2.26% 3.43%
====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
At December 31, 1996, the Company had $3.9 million of portfolio loans
receivable and loans held for sale and $15.5 million of discounted loans
receivable ninety (90) days or more delinquent. Discounted loans which are
often purchased with the intent to foreclose and sell the underlying property
are excluded from non-performing loans. In general, loans greater than ninety
(90) days delinquent are first liens on loans secured by one-to-four family
residences. The Company's policy is to cease accruing interest on loans over
ninety (90) days delinquent. Therefore, there were no loans ninety (90) days
delinquent and accruing interest.
At December 31, 1996, the Company had $3.9 million of foreclosed real
estate which consisted of ninety-five (95) properties. The largest single
balance was $263,000 secured by a single family residence in California. The
increase is primarily the result of an increased investment in discounted loans.
These loans were acquired with the intention of ultimate foreclosure and sale.
OTS regulations require that each insured institution shall classify its
owned assets on a regular basis. Additionally, in connection with examinations
of insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require assets to be classified. There are three
classifications for problem assets: Substandard, Doubtful and Loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuation as an asset of the institution is not warranted. The OTS recently
discontinued classifying assets as "special mention" if such assets possessed
weakness but did not expose the institution to sufficient risk to warrant
classification in the Substandard category. Argo Savings, however, currently
continues to designate assets as special mention.
At December 31, 1996, Argo Savings had $3.0 million of loans and $3.9
million of foreclosed real estate classified as Substandard or Doubtful,
respectively. Excluded from this total is the $15.5 million of discounted loans
ninety (90) days or more past due. Management does not consider these loans
non-performing and thus excludes them from all non-performing loan analysis and
from all general valuation allowance analysis. If an asset or portion thereof
is classified Loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100 percent of the portion of the
asset classified Loss, or charge off such amount. At December 31, 1996, Argo
Savings had no assets classified as Loss. General loss allowances established
to cover possible losses related to assets classified Substandard or Doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. If an institution does not agree with an examiner's classification
of an asset, it may appeal the determination. The OTS, in conjunction with the
other federal banking agencies, has adopted an interagency policy statement on
the allowance for loan and lease losses. The policy statement provides guidance
to financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
allowances. Generally, the policy
18
<PAGE>
statement requires that institutions have effective systems and controls to
identify, monitor and address asset quality problems, have analyzed all
significant factors that affect the collectibility of the loan portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
Analysis of Allowance for Loan Losses. The allowance for loan losses is
-------------------------------------
maintained at a level determined to be adequate by management to absorb future
charge-offs of loans deemed uncollectible. During the year ended December 31,
1996, the Savings Bank experienced an increase in the percentage of loans ninety
(90) days or more delinquent from 1.54% of portfolio loans receivable and loans
held for sale to 3.12% of portfolio loans receivable and loans held for sale at
December 31, 1996. Management believes that the allowances for loan losses are
currently adequate. Currently, management is unaware of any identifiable charge-
offs. In addition to the allowance for loan losses, the Savings Bank maintains
an allowance for losses on foreclosed real estate. The balance at December 31,
1996, represents specific reserves currently in place on foreclosed real estate.
As of December 31, 1996, all of the allowance for loan losses pertains to a
general allowance. Argo Savings had no specific reserves established at
December 31, 1996, other than the reserves against foreclosed real estate. The
allowance is increased by provisions charged to operating expense and by
recoveries on loans previously charged off.
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 potential 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.
19
<PAGE>
The following table sets forth information with respect to the Argo Savings'
allowance for loan losses by loan category for the periods and at the dates
indicated.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:
One-to-four family................................. $128 $138 $313 $315 $330
Multi-family....................................... 14 14 14 14 14
Commercial loans................................... 216 216 216 216 216
Other loans........................................ 000 13 70 68 27
---- ---- ---- ---- ----
Total............................................. 13 381 613 613 587
---- ---- ---- ---- ----
Provision for loan losses
One-to-four family................................ 10 175 48 96 248
Multi-family...................................... --- --- --- --- ---
Commercial loans.................................. --- --- --- --- ---
Other loans....................................... --- 70 --- (41) ---
---- ---- ---- ---- ----
Total............................................ 10 245 48 (55) 248
---- ---- ---- ---- ----
Transfer to allowance for losses on foreclosed
real estate....................................... --- --- (43) (45) (77)
---- ---- ---- ---- ----
Charge-offs
One-to-four family................................ --- --- (5) (36) ---
Multi-family...................................... --- --- --- --- ---
Commercial loans.................................. --- --- --- --- ---
Other loans....................................... --- (13) --- --- (93)
---- ---- ---- ---- ----
Total............................................ --- (13) (5) (36) (93)
---- ---- ---- ---- ----
Balance at end of period
One-to-four family................................. 138 313 315 330 412
Multi-family....................................... 14 14 14 14 14
Commercial loans................................... 216 216 216 216 216
Other loans........................................ 13 70 68 27 23
---- ---- ---- ---- ----
Total............................................. $381 $613 $613 $587 $665
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
loans receivable, excluding discounted loans....... --- .01 .04 .04 .11
==== ==== ==== ==== ====
Ratio of allowance for loan losses to net
loans receivable, excluding discounted loans....... .51 .68 .52 .45 .53
==== ==== ==== ==== ====
</TABLE>
20
<PAGE>
MORTGAGE-BACKED SECURITIES
The Savings Bank has an investment in mortgage-backed securities and has,
at times, utilized such investments as an alternative to mortgage lending. All
of the mortgaged-backed securities are insured or guaranteed by the Government
National Mortgage Association ("GNMA"), FNMA or FHLMC. At December 31, 1996,
gross mortgaged-backed securities, totaled $4.9 million or 2.15% of total
assets.
PURCHASED MORTGAGE SERVICING RIGHTS
PMSRs represent the right to receive a fee for the collection and
administration of the mortgage payments on the loans being serviced for others.
The servicing of mortgages primarily consists of the collection of monthly
principal and interest payments, collection and disbursement of escrow funds for
taxes and insurance, providing various customer services and account
maintenance, reporting, foreclosure processing, and investor notification. For
performing these administrative tasks, the servicer retains a monthly servicing
fee generally calculated as a percentage of the outstanding loan balance, and
holds the escrowed payments for taxes and insurance in non-interest-bearing
custodial accounts. The servicing fee is intended to cover anticipated
operating expenses incurred in servicing the loans and to provide for an
adequate profit margin. Argo Bancorp uses an independent servicing operation to
perform the administrative activities discussed above under a subservicing
agreement. Argo Bancorp's primary administrative task associated with PMSRs is
to review monthly analyses of all servicing and accounting reports prepared by
the subservicer and to perform regular on-site inspections and reviews of the
subservicer's operations.
Prior to completing any acquisition of servicing rights, Argo Bancorp
analyzes a wide range of parameters with respect to each portfolio under
consideration. This review includes the projected revenues and expenses,
geographic distribution, interest rate distribution, loan-to-value ratios,
outstanding balances, delinquency history and other statistics. Due diligence
is either performed by Argo Savings' employees or a designated independent
contractor on a representative sample of the mortgages involved. The purchase
price is based on the present value of the expected future stream of cash flows,
computed by using a discount rate that management considers to appropriately
reflect the risk associated with the investment, and using a loan prepayment
assumption that management considers to be conservative relative to the
characteristics of the serviced loans. Management does not purchase PMSRs with
recourse servicing, thus Argo Bancorp is not subject to the risk of and costs
(including foreclosure costs) associated with borrower default on the underlying
loans.
Mortgage servicing activities carry interest rate risk since the total
amount of servicing fees earned, as well as the amortization of the investment
in the servicing rights, fluctuate based on loan prepayments which generally are
results of changes in market interest rates and the effect of these changes on
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.
21
<PAGE>
The value of PMSRs decreases in a decreasing interest rate environment and
increases in an increasing interest rate environment due to the actual or
anticipated fluctuation in the prepayment speeds of the underlying mortgage
loans. The value of the PMSRs reacts inversely with the other interest-earning
assets of Argo Savings. The value of mortgage loans, comprising the majority of
Argo Savings' assets, decreases in a rising interest rate environment and
increases in a declining interest rate environment. Thus, the PMSRs act as a
natural hedge against the mortgage loans in Argo Savings' portfolio in a
changing interest rate environment.
A portion of Argo Bancorp and Argo Savings' business consists of servicing
loans for others. Mortgage loans serviced for others are an off-balance sheet
item and, therefore, the principal balance of the serviced loans is not included
on Argo Bancorp's Consolidated Statements of Financial Condition. The cost of
acquiring the right to service the mortgage loans is carried as a capitalized
asset. The cost of the acquisition of PMSRs represents the right to receive a
future cash flow. During December of 1996, Argo Savings entered into a contract
to acquire PMSR's with an underlying mortgage, principal balance of
approximately $83.2 million for a purchase price of $1.1 million. The cost of
acquiring servicing rights purchased is amortized in proportion to and over the
period of estimated servicing income based on management's estimate of remaining
loan lives. Other loan servicing costs are netted against servicing income as
incurred.
Argo Savings has invested $4.2 million for an equity interest in two
limited partnerships whose business activity is to purchase current mortgage
servicing rights. There are several equity investors in each partnership. The
purchase of the servicing rights is then leveraged on a 1:1 ratio, allowing the
partnership to purchase rights equal to two times the equity investment by its
partners. The cost of the borrowings, as well as the service fee income and
expense and related amortization, is recorded at the limited partnership level.
Each quarter, financial statements are issued to the investors and the pro-rata
share of the income for each investor is calculated. At the end of five years,
or at such time as the investors may agree, the servicing rights will be sold
and the proceeds divided pro-rata among the investors. As with a direct
investment in PMSRs, the collateral behind the equity investment is the
servicing rights. All limited partnership purchases of servicing rights must be
approved by all equity investors and undergo the same stringent guidelines
outlined previously for direct purchases of servicing. The task of finding and
acquiring the servicing rights controlled by the partnership as well as all
associated administrative duties, is assigned to Dovenmuehle Mortgage, Inc.
("DMI"), the general partner of each limited partnership. DMI also services the
PMSRs in each partnership. Each limited partnership is audited annually by an
independent auditor and an independent third party valuation is performed
annually. The results of both reviews are sent directly to each investor.
Because the servicing rights purchased by the limited partnerships were
purchased in the latter half of 1993, and early 1994, during the lowest interest
rate environment in twenty years, the value of the PMSR investment has not
experienced any significant erosion as of December 31, 1996. The return on the
Savings Bank's PMSRs investment as approximately 8.3%. This investment
constitutes 41.21% of Argo Savings' capital at December 31, 1996, and is well
within the limit allowed by federal regulations. Another benefit derived from
the PMSRs is the interest free custodial accounts comprised of the borrowers'
taxes and insurance escrows and, for a short time
22
<PAGE>
period, the float on their principal and interest payments. The custodial
balances are maintained in interest free accounts and are not affected by
changes in interest rates. The custodial balances relating to the servicing
owned at December 31, 1996, were $5.0 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, 1996, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 6.75%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Sources of Funds and Liquidity and Capital Resources"
in the 1996 Annual Report incorporated by reference herein.
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, investment quality and
marketability, liquidity needs and performance objectives. It is the Savings
Bank's general policy to invest in certificates of deposit, overnight funds, and
securities which are U.S. Government securities and federal agency obligations,
and other issues that are rated investment grade. At December 31, 1996, Argo
Bancorp had $226,000 of investment securities available for sale with an
aggregate market value of $282,000.
23
<PAGE>
The following table sets forth the carrying value of Argo Bancorp's consolidated
investment securities and securities held for sale, and short-term investments,
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1994 1995 1996
---------------------- ------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
------ ------- -------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits:
Certificates of deposit..................... $ 208 $ 208 $ --- $ --- $ --- $ ---
FHLB daily investment....................... 1,910 1,910 2,537 2,537 356 356
Other Investments........................... 130 130 1,300 1,300 402 402
------- ------- ------ ------ ------ ------
Total interest-earning deposits........... $ 2,348 $ 2,348 $3,837 $3,837 $ 758 $ 758
======= ======= ====== ====== ====== ======
Investment Securities:
FHLB-Chicago stock
(investment required by law)............... 2,576 2,576 2,669 2,669 3,428 3,428
------- ------- ------ ------ ------ ------
Investment securities available
for sale:
U.S. Government obligations and
agencies................................. 4,510 4,510 603 603 399 399
Municipal and state Governments
and agencies.............................. 562 562 619 619 203 203
Marketable equity securities................. 1,024 1,024 639 639 282 282
Mortgage-backed securities................... 6,395 6,395 5,712 5,712 4,904 4,904
------- ------- ------ ------ ------ ------
Total investment securities
available for sale....................... $12,491 $12,491 $7,573 $7,573 $5,788 $5,788
======= ======= ====== ====== ====== ======
</TABLE>
24
<PAGE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and maturities of investment securities at December 31,
1996.
<TABLE>
<CAPTION>
Weighted
Amortized Average
Maturing Cost Yield
- -------- --------- ---------
<S> <C> <C>
Within one year.................................... $3,884 6.56%
After one year through five years................. 805 7.79
Due after five through ten years................... 333 7.69
Due after ten years................................ 522 9.57
Marketable equity securities....................... 226 ---
Federal Home Loan Bank of Chicago stock
(investment required by law)..................... 3,428 ---
-------- ------
$ 9,198 ---%
======== ======
</TABLE>
25
<PAGE>
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 on loans serviced for others. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
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.
Deposits. Argo Savings offers a number of deposit accounts, including
--------
tiered passbook, NOW accounts, money market accounts and certificate accounts
currently ranging in maturity from seven days to ten 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 $6.7 million
in brokered deposits at December 31, 1996. Argo Savings has traditionally
priced its deposit products at or near market rates in its primary market.
26
<PAGE>
Deposit Flow. The following table sets forth the change in dollar amount of
- ------------
savings accounts offered by Argo Savings between the dates indicated.
<TABLE>
<CAPTION>
Amount at Percent Amount at Percent Amount at Percent
Dec. 31, of Total Increase Dec. 31, of Total Increase Dec. 31, of Total Increase
1994 Deposits (Decrease) 1995 Deposits (Decrease) 1996 Deposits (Decrease)
--------- --------- ---------- --------- ---------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 21,196 21.0% $ (3,528) $ 18,516 15.0% $ (2,680) $ 18,349 12.2% $ (167)
NOW accounts............ 13,781 13.7 2,178 12,830 10.4 (951) 12,426 8.3 (404)
Money market accounts... 4,083 4.1 639 4,483 3.6 400 4,957 3.3 474
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total................... 39,060 38.8 (711) 35,829 29.0 (3,231) 35,732 23.8 (97)
-------- ----- -------- -------- ----- -------- -------- ----- --------
Certificate accounts:
3.99% or less.......... 6,011 6.0 (24,516) 18 --- (5,993) 52 --- 34
4.00% to 4.99%......... 17,190 17.1 7,770 5,457 4.4 (11,733) 769 0.5 (4,688)
5.00% to 5.99.......... 23,109 22.9 21,035 36,937 30.0 13,828 71,169 47.2 34,232
6.00% to 6.99.......... 12,775 12.7 10,245 30,560 24.7 17,785 39,194 26.0 8,634
7.00% to 7.99.......... 2,252 2.2 (74) 14,550 11.8 12,298 3,612 2.4 (10,938)
8.00% to 8.99.......... 300 .3 (875) 133 .1 (167) 99 .1 (34)
9.00% to 9.99.......... --- --- (397) --- --- --- --- --- ---
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total................. 61,637 61.2 13,188 87,655 71.0 26,018 114,895 76.2 27,240
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total deposits.......... $100,697 100.0% $ 12,477 $123,484 100.0% $ 22,787 $150,627 100.0% $ 27,143
======== ===== ======== ======== ===== ======== ======== ===== ========
Weighted Average Rate... 4.32% 5.17% 5.13%
===== ===== =====
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 9 in the 1996 Annual Report to the Stockholders, incorporated by
reference herein for a weighted average percentage by deposit type.
27
<PAGE>
Certificate Accounts. The following table presents the amount of
--------------------
certificate accounts outstanding at December 31, 1996, and the periods to
maturity or repricing.
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Within one year (1)........................... $ 48,570 5.46%
One to three years............................ 57,111 5.96
Thereafter.................................... 9,214 6.24
-------- ----
Total......................................... $114,895 5.77%
======== ====
</TABLE>
(1) Includes a $13.0 million certificate which reprices annually and matures in
two (2) years.
At December 31, 1996, Argo Savings had outstanding $36.5 million of
certificate of deposit accounts in amounts of $100,000 or more maturing or
repricing as follows:
<TABLE>
<CAPTION>
Amount
--------------
(In thousands)
<S> <C>
Three months or less.......................... $ 239
Over three through six months................. 2,255
Over six through 12 months.................... 20,899
Over 12 months................................ 13,094
-------
Total......................................... $36,487
=======
</TABLE>
Certificate Accounts Classified by Rates. The following table sets forth
----------------------------------------
the certificate accounts of Argo Savings classified by rates as of the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------
Rate 1994 1995 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
3.99% or less................................. 6,011 18 52
4.00% to 4.99%................................ 17,190 5,457 769
5.00% to 5.99:................................ 23,109 36,937 71,169
6.00% to 6.99%................................ 12,775 30,560 39,194
7.00% to 7.99%................................ 2,252 14,550 3,612
8.00% to 8.99%................................ 300 133 99
Total......................................... $61,637 $87,655 $114,895
======= ======= ========
</TABLE>
28
<PAGE>
Deposit Activity. The following table sets forth the savings activities of
----------------
Argo Bancorp for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
December 31
-----------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
(Withdrawals) in excess
of deposits.................................. $ 8,943 $17,177 $18,123
Interest credited............................. 3,534 5,610 9,020
------- ------- -------
Net increase (decrease) in
savings deposits............................ $12,477 $22,787 $27,143
======= ======= =======
</TABLE>
Substantially all of Argo Savings' depositors are residents of Illinois and
Indiana.
Borrowings. Argo Bancorp's borrowings consist of three (3) notes payable.
----------
The first note payable for $1,026,000, matures on October 31, 1997, and is an
unsecured note due to the former shareholders of On-Line. This note payable has
a fixed interest rate of 5.90%. The second note payable for $2,227,000 is drawn
on a $6.0 million open line with a third party financial institution and is
collateralized by Argo Savings' stock. The interest rate on this note adjusts
monthly at prime. The proceeds from this note were used to infuse additional
capital of $1.5 million into Empire/Argo Mortgage, LLC and to pay-off promissory
notes originated in 1994. Also included is On-Line's note payable of $975,000,
which is an open line of credit totaling $1.0 million with a third party
commercial institution. This note adjusts monthly at prime.
Included in other borrowings for the year ended December 31, 1996, is $4.3
million in capital lease obligations for premises and equipment arising from the
acquisition of On-Line.
Savings deposits are the primary source of funds of Argo Savings' lending
and investment activities and for its general business purposes. Argo Savings
can also borrow funds from the FHLB of Chicago to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB has served
as Argo Savings' primary borrowing source. Advances from the FHLB are secured
by Argo Savings' stock in the FHLB and a portion of Argo Savings' portfolio of
first mortgage loans. The rates on these advances vary from time to time in
response to general economic conditions. At December 31, 1996, Argo Savings had
$16.6 million of fixed rate advances from the FHLB with interest rates ranging
from 4.8% to 8.43%. At December 31, 1996, Argo Savings had overnight advances
outstanding of $25.7 million at a weighted interest rate of 5.59%. The
FHLB functions as a central reserve bank providing credit for savings and loan
associations and certain other member financial institutions. As a 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. Advances are made pursuant to several
different
29
<PAGE>
programs. Each credit program has its own interest rate and the amount of
advances is based either on a fixed percentage of an association's net worth or
on the FHLB's assessment of an association's creditworthiness.
The following table sets forth certain information regarding borrowings by
Argo Bancorp on a consolidated basis at the end of and during the periods
indicated. The borrowings at and during the periods consisted of FHLB advances,
reverse repurchase agreements and promissory notes. The weighted average was
computed on a monthly average basis.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average interest rate at end of year paid on:
FHLB advances.......................................... 5.83% 5.85% 5.80%
Other borrowings....................................... 9.28 8.91 8.48
<CAPTION>
During the Year
At December 31,
----------------------------
1994 1995 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
FHLB advances.......................................... $34,566 $38,416 $45,257
Other borrowings....................................... 5,060 8,120 8,760
</TABLE>
<TABLE>
<CAPTION>
During the Year
At December 31,
----------------------------
1994 1995 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Average borrowings outstanding with respect to:
FHLB advances.......................................... $23,856 $32,852 $34,608
Other borrowings....................................... 2,336 5,916 7,669
------- ------- -------
TOTAL................................................. $26,192 $38,768 $42,277
======= ======= =======
Weighted average interest rate during the year
paid on:
FHLB advances.......................................... 4.88% 6.06% 5.69%
Other borrowings....................................... 7.33 7.86 8.60
------- ------- -------
TOTAL WEIGHTED AVERAGE................................ 5.10% 6.34% 6.20%
======= ======= =======
</TABLE>
30
<PAGE>
SUBSIDIARIES
Argo Savings has two wholly-owned subsidiaries, Argo Mortgage Corp. and
Dolton-Riverdale Savings Service Corp. Argo Mortgage Corp. engages in mortgage
brokerage activities that focus on the purchase and sale of deeply discounted
mortgage loans into the secondary market. Dolton-Riverdale Savings Service Corp.
sells insurance annuities to the customer base of Argo Savings. Argo Savings
also has a majority interest in a limited liability corporation, Margo Financial
Services, LLC ("Margo"). The primary activity of Margo is the origination of
mortgage loans for portfolio and sale into the secondary market. At December 31,
1996, Argo Savings' had an equity investment in Argo Mortgage, Dolton-Riverdale
Savings Service Corp., and Margo of $39.6 million, $35,000 and $58,000,
respectively.
COMPETITION
Argo Savings faces strong competition in attracting deposits and in
originating real estate loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions, savings banks
and from commercial banks located in its primary market area. Particularly in
times of high interest rates, Argo Savings also faces additional significant
competition for investor funds from short-term money market securities and other
corporate and government securities. Argo Savings' competition for real estate
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.
Argo Savings competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts, and
convenient office locations.
Argo Savings is a community oriented savings institution and competes with
many financial institutions in its primary market area, most of which have
assets which are significantly larger than the assets of Argo Savings.
Management considers the Savings Bank's reputation for financial strength and
customer service as its major competitive advantage in attracting and retaining
customers in its market area. The Savings Bank also believes it benefits from
its community bank orientation as well as it has a relatively high core deposit
base.
PERSONNEL
As of December 31, 1996, the Savings Bank including its subsidiaries, had
fifty (50) full-time employees and nine (9) part-time employees. On-Line had
eighty (80) full-time employees and two (2) part-time employees. The employees
are not represented by a collective bargaining unit. The Company believes its
relationship with its employees is good.
31
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports, and otherwise comply, with the rules and regulations of the OTS
under the Home Owners' Loan Act, as amended (the "HOLA"). Additionally, the
activities of savings institutions, such as the Savings Bank, are governed by
the HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. Argo Savings 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 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-KSB does not
purport to be a complete description of such statutes and regulations and their
effects on the Savings Bank 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 be restricted under existing laws as to the types
of business activities in which it may engage, provided that Argo Savings
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
activities authorized by OTS regulation. Recently proposed legislation could
restrict the activities of unitary savings and loan holding companies.
32
<PAGE>
The Company's acquisition of On-Line in 1995 was in compliance with
existing laws and did not impact the unitary savings and loan holding company
status.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5.0% of a nonsubsidiary company engaged in activities
other than those permitted by the HOLA; 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. The Savings Bank must notify the OTS
thirty (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.
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 3.0% leverage (core capital) ratio and an 8.0% risk-based capital
ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2.0% tangible capital standard, a 4.0% leverage
(core) capital ratio (3.0% for institutions receiving the highest rating on the
CAMEL financial institution rating system) and, together with the risk-based
capital standard itself, a 4.0% Tier I risk-based capital standard. Core
capital is defined as common stockholder's 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 purchased mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the leverage
ratio, tangible and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
33
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighting
ranging from 0.0% to 100.0%, as assigned by the OTS capital regulation based on
the risks OTS believes are inherent in the type of asset. The components of
Tier I (core) capital are equivalent to those discussed earlier. 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 the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100.0% 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. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Savings Bank met each of its capital requirements, and it is anticipated that
Argo Savings will not be subject to the interest rate risk component.
<TABLE>
<CAPTION>
Capital
----------------------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- -------- ------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible..................................... $12,547 $3,229 $9,318 5.83% 1.5%
Core (Leverage).............................. 12,547 6,457 6,090 5.83 3.0
Risk-based:
Tier I (core).............................. 12,547 8,610 3,937 10.29 4.0
Total...................................... 13,212 9,749 3,463 10.84 8.0
</TABLE>
34
<PAGE>
A reconciliation between regulatory capital and GAAP capital at December 31,
1996, in the accompanying consolidated financial statements is presented below:
<TABLE>
<CAPTION>
Total
Tangible Core Risk-based
Capital Capital Capital
--------- -------- -----------
<S> <C> <C> <C>
(In thousands)
GAAP capital originally reported to regulatory
authorities and on accompanying consolidated
financial statements............................. $12,775 $12,775 $12,775
Regulatory capital adjustments:
Adjustment for net unrealized gains (losses) in
available for sale securities................... (23) (23) (23)
General valuation allowances..................... --- --- 665
Other............................................ $ (205) $ (205) $ (205)
------- ------- -------
Regulatory Capital............................... $12,547 $12,547 $13,212
======= ======= =======
</TABLE>
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 is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6.0%, its ratio of core capital to total assets is at least
5.0% and it is not subject to any order or directive by the OTS to meet a
specific capital level. A savings institution generally is considered
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8.0%, its ratio of Tier I (core) capital to risk-weighted assets is
at least 4.0% and its ratio of core capital to total assets is at least 4.0%
(3.0% if the institution receives the highest CAMEL rating). A savings
institution that has a ratio of total capital to weighted assets of less of than
8.0%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4.0%
or a ratio of core capital to total assets of less than 4.0% (3.0% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6.0%, a Tier I risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized". A savings institution that has a tangible capital to assets
ratio equal to or less than 2.0% 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 forty-five (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. Additionally, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS may 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. The Savings Bank is
considered well capitalized under prompt corrective action regulations.
35
<PAGE>
Insurance of Deposit Accounts. Argo Savings is a member of the SAIF,
-----------------------------
which is administered by the FDIC. Deposits are insured up to applicable limits
by the FDIC and such insurance is backed by the full faith and credit of the
United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of, and require reporting by,
FDIC insured institutions. It also may prohibit any FDIC insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5.0%, a ratio of
Tier I or core capital to risk-weighted assets ("Tier I risk-based capital") of
at least 6.0% and a risk-based capital ratio of at least 10.0%) and considered
healthy pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier I risk-based capital ratios of less than 4.0% or
a risk-based capital ratio of less than 8.0%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first nine (9) months of 1996, the assessment schedule for well
capitalized BIF members and SAIF members was .23% of deposits.
On September 30, l996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act"), which, among other things, imposed a
special one-time assessment on SAIF member institutions, including the Savings
Bank, to recapitalize the SAIF and spread repayment of Financing Corporation
Bonds ("FICO") across all SAIF and BIF members. The FDIC special assessment
levied was 65.7 basis points on the amount of SAIF assessable deposits held as
of March 31, l995. The special assessment was recognized in the third quarter
and is tax deductible. The Savings Bank recognized $789,000 in connection with
the FDIC special assessment. This legislation should eliminate the substantial
disparity between the amount that BIF and SAIF members have been paying in
deposit insurance premiums.
Under legislation, the FDIC estimated that BIF members will be paying a
portion of the FICO payment equal to 1.3 basis points on BIF-insured deposits on
January 1, l997, compared to 6.5 basis points on SAIF-insured deposits, and will
pay a pro rata share of the FICO payment on the earlier of January 1, 2000, or
the date upon which the last savings association ceases to exist. The
legislation also requires the BIF and SAIF to be merged by January 1, l999,
provided that subsequent legislation is adopted to eliminate the savings
association charter and there are no remaining savings associations as of that
date.
36
<PAGE>
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points. Full pro rata sharing of the FICO payments between BIF
and SAIF members will occur on the earlier of January 1, 2000, or the date the
BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
Argo Savings' assessment rate for fiscal 1996 was 23 basis points and the
premium paid for this period was $283,000. 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.
The FDIC has recently proposed to lower SAIF assessments to a range
comparable to that of BIF members, although SAIF members must also make the FICO
payments described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis or whether the BIF and SAIF will eventually be
merged.
Thrift Rechartering Legislation. The Deposit Insurance Funds Act provides
-------------------------------
that the BIF and SAIF will merge on January 1, 1999, if there are no more
savings association as of that date. That legislation also requires that the
Department of Treasury submit a report to Congress by March 31, 1997, that makes
recommendations regarding a common financial institutions charter, including
whether the separate charters for thrifts and banks should be abolished.
Various proposals to eliminate the federal thrift charter, create a uniform
financial institutions charter and abolish the OTS have been introduced in
Congress. The bills would require federal savings institutions to convert to a
national bank or some type of state charter by a specified date (January 1,
1998, in one bill, June 30, 1998, in the other) or they would automatically
become national banks. Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two (2) year
period, subject to two possible one year extensions. State chartered thrifts
would become subject to the same federal
37
<PAGE>
regulation as applies to state commercial banks. Holding companies for savings
institutions would become subject to the same regulation as holding companies
that control commercial banks, with a limited grandfathered provision for
unitary savings and loan holding company activities. Argo Savings is unable to
predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF and SAIF
funds will eventually merge.
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 15.0% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10.0% 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,
1996, the Savings Bank's largest aggregate outstanding balance of loans to one
borrower consisted of a $1.2 million, which does not exceed the Savings Bank's
loan to one borrower limit. All loans to this borrower were current.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
--------
Under the QTL test, a savings and loan association is required to maintain at
least 65.0% of its "portfolio assets" (total assets less (i) specified liquid
assets up to 20.0% 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 securities) in at least nine (9) months out of
each twelve (12) month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Savings Bank maintained 99.0% 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 I Association") and has not been advised by the OTS that it
is in need of more than normal supervision may, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100.0% 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
38
<PAGE>
beginning of the calendar year, or (ii) 75.0% of its net income for the previous
four quarters. Any additional capital distributions 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. The OTS has proposed amendments to its capital distribution regulation
that would generally authorize the payment of capital distributions without OTS
approval provided the payment does not make the institution undercapitalized
within the meaning of the prompt corrective action regulation. However,
institutions in a holding company structure would still have a prior notice
requirement. At December 31, 1996, the Savings Bank was a Tier I Association.
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 of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5.0%, but may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10.0%
depending upon economic conditions and the savings flows of member institutions.
OTS regulations also require each member savings institution to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Savings Bank's liquidity and
short-term liquidity ratios for December 31, 1996, were 6.75% and 6.20%,
respectively, which exceeded the then 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 assessment, paid on a semi-
annual basis, is computed 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, 1996, totaled $52,000.
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.
39
<PAGE>
Transactions with Related Parties. The Savings Bank's authority to engage
---------------------------------
in transactions with related parties or "affiliates" (e.g., 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 limits the aggregate amount of
covered transactions with any individual affiliate to 10.0% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20.0% 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 provides that certain transactions with
affiliates, including loans and asset purchases, must 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. Additionally, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10.0% shareholders ("insiders"), as well as entities controlled by
such persons, is governed by Sections 22(g) and 22(h) of the FRA and Regulation
O thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans the Savings Bank may make to
insiders based, in part, on the Savings Bank's capital position and requires
certain board approval procedures to be followed.
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 placement of an institution into receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and an amount to $25,000 per day, or even $1.0 million per day in
especially severe 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.
40
<PAGE>
Standards for Safety and Soundness. The federal banking agencies have
----------------------------------
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. 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. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. 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 when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Savings Bank is a member of the FHLB System, which consists of twelve
(12) regional FHLBS. The FHLB provides a central credit facility primarily for
member institutions. The Savings Bank, as a member of the FHLB-Chicago, is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20/th/ of its advances (borrowings) from the FHLB-Chicago, whichever
is greater. The Savings Bank was in compliance with this requirement, with an
investment in FHLB-Chicago stock at December 31, 1996, of $3.4 million. FHLB
advances must be secured by specified types of collateral and may be obtained
primarily for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLB
imposing a higher rate of interest on advances to their members. Dividends from
the FHLB-Chicago to the Savings Bank amounted to $188,000 and $175,000 for the
year ended December 31, 1996, and 1995, respectively. If dividends were reduced,
or interest on future advances increased, the Savings Bank's net interest income
might also be reduced.
41
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). Effective December 19, 1995, the
Federal Reserve Board regulations generally required that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$52.0 million or less (subject to adjustment by the Federal Reserve Board), the
reserve requirement is 3.0%; for accounts greater than $52.0 million, the
reserve requirement is $1.56 million plus 10.0% (subject to adjustment by the
Federal Reserve Board between 8.0% and 14.0%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Savings Bank is in
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.
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 Companies have not been audited by the IRS
during the last ten (10) years. For federal income tax purposes Argo Bancorp
and its subsidiaries 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.
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 asset 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.
42
<PAGE>
Under the Small Business Act, the PTI Method was repealed and Argo Savings
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with Argo Savings' taxable year
beginning January 1, 1996. 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, 1996, 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.
However, under the Small Business Act such recapture requirements will be
suspended for each of the two (2) successive taxable years beginning January 1,
1996, in which the Savings Bank originates a minimum amount of certain
residential loans during such years that is not less than the average of the
principal amounts of such loans made by Argo Savings during its six (6) taxable
years preceding January 1, 1996.
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.
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 of which Argo Savings currently has about $374,000. 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
43
<PAGE>
operating losses). In addition, for taxable years beginning after December 31,
1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2.0 million is imposed on corporations,
including Argo Savings, whether or not an AMT is paid. Under pending
legislative proposals, the environmental tax would be extended to taxable years
beginning before January 1, 2007. Argo Savings does not expect to be subject to
the AMT, but may be subject to the environmental tax liability.
Elimination of Dividends: Dividends Received Deduction. Argo Bancorp 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 Argo Bancorp and Argo Savings own more
than 20.0% of the stock of the corporation paying a dividend. Under pending
legislative proposals, the 70.0% dividends received deduction would be reduced
to 50.0% with respect to dividends paid after enactment of such legislation.
STATE AND LOCAL TAXATION
State of Illinois. Argo Bancorp and Argo Savings filed an Illinois income
-----------------
tax return. For Illinois income tax purposes, Argo Bancorp and Argo Savings are
taxed at an effective rate equal to 7.3% 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, Argo Bancorp 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.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
The Financial Accounting Standards Board ("FASB") recently adopted or
issued proposals and guidelines which may have a significant impact on the
accounting practices of commercial enterprises in general and financial
institutions in particular.
44
<PAGE>
In June 1996, the Financial Accounting Standard Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishers of Liabilities." This Statement, among other things, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered, and
derecognizes liabilities when extinguished. In December 1996, the FASB issued
SFAS No. 127 which deferred the effective date on certain components of SFAS No.
125 until January 1, 1998. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after December
31, 1996. The Company does not expect this pronouncement to have a significant
impact on its consolidated financial condition or results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company is located and conducts its business at its home office in
Summit, Illinois, located at 7600 W. 63rd Street, Summit, and four (4) branch
offices located in Bridgeview, the near West Side of Chicago, Dolton, and
Gurnee, Illinois. The Savings Bank conducts its business through its home
office. On-Line is located and conducts its business at its office in Oak Brook,
Illinois located at 900 Commerce Drive. The Company believes that the Argo
Savings' and On-Line's current facilities are adequate to meet the present and
immediately foreseeable needs of the Company. See Note 5 to the Notes to
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, 1996, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
45
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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 "Shareholder Information" in the 1996
Annual Report to Stockholders on pages 52 through 55 is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- -------------------------------------------------------------------
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition" of the 1996 Annual Report to
Stockholders on pages 3 through 15 and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1996, and 1995, together with the report thereon
by KPMG Peat Marwick LLP appears in the Registrant's 1996 Annual Report to
Stockholders, on pages 16 through 51 incorporated herein by reference.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
Information regarding the directors of the Holding Company is omitted from
this Report as the Holding Company intends to file a definitive proxy statement
for the Annual Meeting of Stockholders scheduled to be held on May 28, 1997, and
the information to be included therein under the heading "Information with
respect to the Nominees, Continuing Directors and Certain Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated
herein by reference.
46
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ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
The information relating to executive compensation is omitted from this
Report as the Holding Company intends to file a definitive proxy statement for
the Annual Meeting of Stockholders scheduled to be held on May 28, 1997, and the
information to be included therein under headings "Director's Compensation" and
"Executive Compensation" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is omitted from this Report as the Holding Company intends to
file a definitive proxy statement for the Annual Meeting of Stockholders
scheduled to be held on May 28, 1997, and the information to be included therein
under the headings "Security Ownership of Certain Beneficial Owners" and
"Information with Respect to the Nominees, Continuing Directors and Certain
Executive Officers" is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information relating to certain relationships and related transactions
is omitted from this Report as the Company intends to file a definitive proxy
statement for the Annual Meeting of Stockholders scheduled to be held on May 28,
1997, and the information to be included therein under the heading "Indebtedness
of Management and Transactions with Certain Related Persons" is incorporated
herein by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
- --------------------------------------------------------------------------
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and its
subsidiaries, together with the report thereon of KPMG Peat Marwick LLP
dated April 9, 1997, appearing in the 1996 Annual Report of Stockholders
are incorporated herein by reference.
Consolidated Statements of Financial Condition as of December 31, 1996, and
1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995, and 1994.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994.
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<PAGE>
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
The remaining information appearing in the Annual Report 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.
(a)(3) EXHIBITS
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 2. Acquisition
On-Line Stock Purchase Agreement dated as of October 31, 1995, between Argo
Bancorp, Inc., I.S.C. Incorporated, Savings and Loan Service Bureau of
Indiana, Inc., O and H Services, Inc., Superior Savings Bank, and OLF
Acquisition Corp.*
Exhibit No. 3. Certificate of Incorporation and By-Laws.
(a) Certificate of Incorporation of Argo Bancorp, Inc.**
(b) By-Laws of Argo Bancorp, Inc.**
Exhibit No. 4.
(a) Stockholder Agreement dated as of December 31, 1996, between Argo
Bancorp, Inc., The Deltec Banking Corporation Limited and John G.
Yedinak.***
(b) Stock Certificate of Argo Bancorp, Inc.**
Exhibit No. 10. Material Contracts.
(a) Argo Federal Savings Bank, FSB Employee Stock Ownership Plan and
Trust.**
(b) Argo Federal Savings Bank, FSB Amended and Restated Management
Recognition Plan and Trust.****
(c) Argo Bancorp, Inc. 1990 Incentive Stock Option Plan.**
(d) Argo Bancorp, Inc. 1990 Stock Option Plan for Outside Directors.**
(e) 1996 Argo Bancorp, Inc. Management Recognition and Retention Plan.*****
(f) Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and John G. Yedinak (filed herewith).
(g) Amended and Restated Employment Agreement Between Argo Federal Savings
Bank, FSB and John G. Yedinak (filed herewith).
(h) Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and Frances M. Pitts (filed herewith).
(i) Amended and Restated Employment Agreement between Argo Federal Savings
Bank, FSB and Frances M. Pitts (filed herewith).
(j) Employment Agreement between Argo Bancorp, Inc. and Carol J. Delgado
(filed herewith).
(k) Employment Agreement between Argo Federal Savings Bank, FSB and Carol
J. Delgado (filed herewith).
48
<PAGE>
Exhibit No. 11.
Computation of earnings per share (filed herewith).
Exhibit No. 13.
1996 Annual Report to Stockholders is incorporated herein by reference.
Portions of the Annual Report to Stockholders have been incorporated by
reference into the Form 10-KSB. (filed herewith).
Exhibit No. 21.
Subsidiary information is incorporated herein by reference to "Part I -
Subsidiaries."
Exhibit No. 23.
Consent of KPMG Peat Marwick LLP (filed herewith).
Exhibit No. 27.
(a) Financial Data Schedule (filed herewith)
(b)(1) REPORTS ON FORM 8-K
The Registrant filed a Report on Form 8-K on January 8, 1997, announcing
the sale of 111,563 shares of Argo Bancorp stock to The Deltec Banking
Corporation Limited in a negotiated private offering.
________________________________________________________________________________
* Incorporated herein by reference into this document from the Form 10-K
for the fiscal year ended December 31, 1995.
** Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
*** Incorporated herein by reference into this document from the Form 8-K
dated January 8, 1997.
**** Incorporated herein by reference into this document from the Proxy
Statement for the 1995 Annual Meeting of Stockholders filed on March 29,
1996.
***** Incorporated herein by reference into this document from the Form S-8
filed on September 30, 1996 (Registration No. 333-13047).
49
<PAGE>
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: April 28, 1997 By: /S/ John G. Yedinak
--------------------- ----------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer,
Interim Principal Accounting and
Financial 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: April 28, 1997 By: /S/ John G. Yedinak
---------------------- ----------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer,
Interim Principal Accounting and
Financial Officer, and Director
Date: April 28, 1997 By: /S/ Sergio Martinucci
---------------------- ----------------------------------------
Sergio Martinucci, Vice President and
Director
Date: April 28, 1997 By: /S/ Arthur Byrnes
---------------------- ----------------------------------------
Arthur Byrnes, Director
Date: April 28, 1997 By: /S/ Donald G. Wittmer
---------------------- ----------------------------------------
Donald G. Wittmer, Director
Date: April 28, 1997 By: /S/ Frances M. Pitts
---------------------- ----------------------------------------
Frances M. Pitts, Secretary and Director
50
<PAGE>
Exhibit 10(f)
ARGO BANCORP, INC.
EMPLOYMENT AGREEMENT
AS AMENDED AND RESTATED
This AGREEMENT is made effective as of November 1, 1996, by and between Argo
Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of
Delaware, with its principal administrative office at 7600 West Sixty-third
Street, Summit, Illinois 60501, and John G. Yedinak (the "Executive"). Any
reference to "Bank" herein shall mean Argo Federal Savings Bank, FSB a federally
chartered stock savings bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
President and Chief Executive Officer of the Holding Company. The Executive
shall render administrative and management services to the Holding Company and
shall have such responsibilities and authority over the management and operation
of the Holding Company as Executive had prior to the date hereof. During said
period, Executive also agrees to serve, if elected, as an officer and director
of any subsidiary of the Holding Company. Failure to reelect Executive as
President and Chief Executive Officer of the Holding Company or failure to
reelect Executive as President and Chief Executive Officer of the Bank without
the consent of the Executive shall constitute a breach of this Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written (the "Effective
Date") and shall continue for a period of sixty (60) full calendar months
thereafter. Commencing with the Effective Date, the term of this Agreement
shall be extended for one day each day until such time as the Board of the
Holding Company or the Executive elects not to extend the term of the Agreement
further by giving written notice to the other party in accordance with Section 9
of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the fifth anniversary of
1
<PAGE>
the date of such written notice. The Board will review the Agreement and the
Executive's performance annually for purposes of determining whether to give
notice not to extend the Agreement, and the results thereof shall be included in
the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote such amounts of his business time,
attention, skill, and efforts reasonably required for the faithful performance
of his duties hereunder including activities and services related to the
organization, operation and management of the Holding Company and participation
in community and civic organizations; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the
Holding Company, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary: (i)
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement; and (ii) nothing in this Agreement shall mandate
or prohibit a continuation of Executive's employment following the expiration of
the term of this Agreement upon such terms and conditions as the Board and
Executive may mutually agree.
(d) Upon the termination of Executive's employment with the Holding
Company, the daily extensions provided pursuant to section 2(a), shall cease (if
such extensions have not previously ceased), and, if such termination is under
circumstances described in section 4(a), the term "remaining term of the
Agreement" in section 4(b) shall mean the period of time commencing from the
date of such termination and ending on the last day of the employment period
computed with reference to all extensions prior to such termination.
(e) In the event that Executive's duties and responsibilities with respect
to the Bank are temporarily or permanently terminated pursuant to the
Employment Agreement dated November 1, 1996 (or any successor agreement thereto)
between Executive and the Bank ("Bank Agreement") and the course of conduct upon
which such termination is based would not constitute grounds for Termination for
Cause under Section 8 of this Agreement then Executive shall, to the extent
practicable, assume such duties and responsibilities formerly performed at the
Bank as part of his duties and responsibilities as President and Chief Executive
Officer of the Holding Company. Nothing in this provision shall be interpreted
as restricting the Holding Company's right to remove Executive for Cause in
accordance with Section 8 of this Agreement.
2
<PAGE>
3. COMPENSATION AND REIMBURSEMENT.
(a) The Holding Company shall pay Executive as compensation under this
Agreement a salary of not less than $173,800.00 (including amounts attributable
to duties compensable with respect to On-Line Financial Services) per year. The
compensation specified under this Agreement, together with a portion of that
compensation that otherwise would be paid by the Bank pursuant to the Bank
Agreement ("Base Salary"), shall constitute the consideration paid for the
duties described in Section 1. Base Salary shall also include any amounts of
compensation deferred by Executive under a qualified plan maintained by the
Bank. Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Compensation Committee
designated by the Board, and the Board may increase Executive's Base Salary. An
increase shall become the "Base Salary" for purposes of this Agreement. In no
event shall Executive's annual rate of salary under this Agreement in effect at
a particular time be reduced without his prior written consent. In addition to
the Base Salary provided in this Section 3(a), the Holding Company shall also
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Holding Company and
the Bank.
(b) The Holding Company will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder, provided, however, that the Holding Company may make such
changes to such plans, agreements or perquisites generally provided on a
nondiscriminatory basis to all employees, without the Executive's consent. The
Holding Company may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Holding Company. Upon
an Event of Termination as defined below, the Holding Company shall transfer all
"Key Man" life insurance if any is owned by the Bank or the Holding Company to
Executive. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in and receive
benefits under any employee benefit plans ("Benefit Plans") whether tax
qualified or not, including, but not limited to, stock grants, restricted stock,
stock options (and other option derived benefits), Employee Stock Ownership
Plans ("ESOP"), or any other stock based benefit plan, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health-and-
accident plan, medical coverage or any other Benefit Plan or arrangement made
available by the Holding Company or the Bank in the future to its senior
executives and key management employees, with awards, grants and levels of
benefits for Executive equal to at least levels customary in the industry for
persons of like title, authority and responsibility as
3
<PAGE>
Executive and with levels of Executive's past participation in the Benefit Plans
of the Holding Company or Bank subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Because the Holding Company has determined to pay a portion of Base Salary
that might otherwise be attributable to the Executive's efforts on behalf of the
Bank, in order that the Bank may continue to increase levels of capital while
making available sufficient levels of compensation as are necessary to retain
other senior executives instrumental to the continuing success of the Bank, all
Base Salary earned by the Executive from the Holding Company pursuant to this
Agreement and the Bank pursuant to the Bank Agreement shall be considered when
determining the maximum extent that the Executive can participate under any
Benefit Plan offered by either the Holding Company or the Bank. Executive will
be entitled to incentive compensation and bonuses as provided in any plan of the
Holding Company in which Executive is eligible to participate. Nothing paid to
the Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall provide Executive with a late model automobile
("Automobile"), or Automobile allowance in lieu thereof, and shall pay or
reimburse Executive for all business entertainment expense, travel, Automobile
maintenance, operation and insurance and any other reasonable expenses incurred
by Executive to performing his obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may from
time to time determine.
(d) In the event that Executive assumes additional duties and
responsibilities pursuant to Section 2(c) of this Agreement by reason of one of
the circumstances contained in Section 2(c) of this Agreement, and the Executive
receives or will receive less than the full amount of compensation and benefits
formerly entitled to him under the Bank Agreement, the Holding Company shall
assume the obligation to provide Executive with compensation and benefits in
accordance with the Bank Agreement, less any compensation and benefits received
from the Bank, subject to the terms and conditions of this Agreement including
the Termination for Cause provisions in Section 8.
(e) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to this Executive exclusively, the
Holding Company shall annually award a Fixed Incentive Award to Executive in an
amount equal to two percent (2%) of the pre-tax profit of the Holding Company
and each separately incorporated or organized subsidiary, on an unconsolidated
basis, except to the extent paid under the terms of the Bank Agreement. The
4
<PAGE>
Fixed Incentive Award shall be paid to Executive or his designated beneficiary
upon the earlier of (i) the termination by the Holding Company of his employment
for other than Termination for Cause; (ii) the expiration of this Agreement;
(iii) his death or Disability; or (iv) annually, upon the anniversary of this
Agreement. In the event Executive is subject to Termination for Cause or
voluntarily terminates his employment, Executive shall forfeit all rights to the
Fixed Incentive Award provided under this paragraph.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
The provisions of this Section shall in all respects be subject to the terms
and conditions stated in Section 8.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than for Disability, as defined in Section 6 hereof; upon
Retirement, as defined in Section 7 hereof; or for Cause, as defined in Section
8 hereof; (ii) Executive's resignation from the Holding Company's employ, upon
any (A) failure to elect or reelect or to appoint or reappoint Executive as
President and Chief Executive Officer, or failure to nominate or re-nominate or
elect or re-elect Executive to the Board of Directors, (B) a material change in
Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Section 1, above,
(and any such material adverse change shall be deemed a continuing breach of
this Agreement), (C) a relocation of Executive's principal place of employment
by more than 30 miles from its location at the effective date of this Agreement,
(D) failure to provide the benefits required under Section 3(b) of this
Agreement, or a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
(E) liquidation or dissolution of the Bank or Holding Company, or (F) material
breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A), (B), (C), (D), (E) or (F) above, Executive shall
have the right to elect to terminate his employment under this Agreement by
resignation upon not less than thirty (30) days prior written notice given
within a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Holding Company
shall be obligated to pay Executive, or, in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, the
following payments and benefits:
5
<PAGE>
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per year
("Adjusted Base Salary").
(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
(iii) Continuation for the remaining term of the Agreement of
Executive's and his dependents' participation in any life, medical, health,
disability, dental insurance or any other "welfare plan" (as such is defined
in Section 3 (1) of the Employee Retirement Security Act of 1974 as amended
from time to time ("ERISA") in which Executive participates in on the day
prior to the effective date of this Agreement (each being a "Welfare Plan"),
subject to the same premium contributions on the part of Executive as were
required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified or non-qualified pension plan (as defined in Section 3 (2)(A)
of ERISA) which he would have earned or accrued during the remaining term of
the Agreement assuming such benefit was vested and is calculated using
Adjusted Base Salary and Adjusted Bonus as appropriate in the formula for
Accrued Benefit under the plans and assuming such benefit was calculated
without making any reduction in the Accrued Benefit due to the benefit being
provided prior to the normal retirement age as set out in the pension plan
and (ii) the
6
<PAGE>
accrued benefit Executive is vested in at the time of the Event of
Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank which
Executive would have earned each year within the remaining term of the
Agreement, using compensation values which take into account Adjusted Base
Salary and Adjusted Bonus and further assuming that the qualified plans to
which the SERP refers provide the benefits generally provided to Executive
under their terms during the five year period immediately prior to the Event
of Termination, the limitations on compensation and benefits under the Code
remained fixed at their levels as of the time of the Event of Termination,
and the ESOP continued to allocate unallocated shares according to its loan
amortization schedule in place on the last day of the ESOP Plan Year
immediately prior to the Event of Termination up to the point at which the
ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards are
made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock option
feature of a broader compensation plan which have not already vested shall
be made fully vested and further, at the election of Executive, any stock
options shall be subsequently cancelled by Executive in consideration for a
payment from the Holding Company in an amount equal
7
<PAGE>
to the product of (i) the number of stock options cancelled and (ii) the
difference between (x) the fair market value (at the time of cancellation)
of the stock upon which the option was issued and (y) the exercise price of
the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived benefits) to Executive which have been made under a stock
grant plan or feature of a broader compensation plan which have not already
vested shall be made fully vested and further, at the election of Executive,
any stock awarded under such a plan shall at the election of Executive be
subject to a put option entitling Executive to sell all or some portion of
such stock to the Holding Company at the then fair market value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the form
and calculated as described above. In the event that a benefit otherwise
payable in a stock form cannot be provided in stock, such benefit will be
provided in the form of cash using the greater of the fair market value of
the stock at the time of the distribution of the benefit or the closing
price of the stock on the day prior to the time of distribution or the last
day of trading prior to the time of distribution.
(c) At the election of the Executive, which election must be made prior to
or on the Date of Termination, such payments shall be made in a lump sum or paid
monthly during the remaining term of the Agreement following the Executive's
termination. In the event that no election is made, payment to the Executive
will be made on a monthly basis during the remaining term of the Agreement.
Such payments shall not be reduced in the event the Executive obtains other
employment following termination of employment. In the event that the Executive
is receiving monthly payments pursuant to this Section 4, on an annual basis,
thereafter, between the dates of January 1 and January 31 of each year,
Executive shall elect whether, the balance of the amount payable under the
Agreement at that time shall be paid in a lump sum or on a pro rata basis. Such
election shall be irrevocable for the year for which such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or the Holding Company as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its
8
<PAGE>
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the rules and regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities except for any securities of the Bank
purchased by the Holding Company in connection with the conversion of the Bank
to the stock form and any securities purchased by any Benefit Plan of the Bank,
or (B) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity, or (D) a proxy statement is
distributed soliciting proxies from stockholders of the Holding Company, by
someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Holding Company or Bank with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed, or (E) a
tender offer is made for 20% or more of the voting securities of the Bank or
Holding Company then outstanding.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e) and (f) of this Section 5 upon his subsequent
termination of employment at any time during the term of this Agreement
(regardless of whether such termination results from his dismissal or his
resignation at any time during the term of this Agreement following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or benefits or relocation of his principal
place of employment by more than 30 miles from its location immediately prior to
the Change in Control), unless such termination is because of his death, or
Termination for Cause provided, however, that such payments shall be reduced by
any payment made under Section 4 of this Agreement.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company shall pay Executive, or in the
event of his subsequent
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death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to five (5) times the
average of the three (3) preceding years' (i) Base Salary, (ii) any other
taxable income including but not limited to the vesting of stock grants or
restricted stock, the exercise of stock options, the distribution of previously
deferred compensation, including Fixed Incentive Award, bonuses and any other
cash or deferred compensation paid or to be paid to the Executive during such
years, and (iii) the amount of any contributions made or to be made to any
Benefit Plans whether tax qualified or non-qualified including but not limited
to defined benefit pension plans, defined contribution plans, SERP's, ESOP's,
Welfare Plans, stock option benefits, stock grant benefits, on behalf of the
Executive, maintained by the Bank or the Holding Company during such years. At
the election of the Executive, which election must be made prior to or on the
Date of Termination following a Change in Control, such payment may be made in a
lump sum or paid in equal bi-weekly installments during the sixty (60) months
following the Executive's termination. In the event that no election is made,
payment to the Executive will be made on a bi-weekly basis during the remaining
term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company will cause to be continued life,
medical, dental and disability coverage for Executive and any of his dependents
covered under such plans prior to the Change in Control, substantially identical
to the coverage maintained by the Bank or the Holding Company for Executive and
his dependants prior to his severance. Such coverage and payments shall cease
upon the expiration of sixty (60) months. If Executive or any dependant should
die during this sixty (60) month period, coverage for the remaining parties
shall continue for the remainder of the sixty (60) month period.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
for any taxable year in which the Executive shall be liable, as determined for
the payment of an excise tax under Section 4999 of the Code, with respect to any
payment in the nature of the compensation made by the Company or the Bank to (or
for the benefit of) Executive, the Company shall pay to the Executive an amount
determined under the following formula:
An amount equal to: (E x P) + X
WHERE:
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X = E x P
--------------------------------
1 - [(FI x (1 - SLI)) + SLI + E]
E = the rate at which the excise tax is assessed under Section 4999
of the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 5;
FI = the highest marginal rate of deferral income tax applicable to
Executive under the Code for the taxable year in question; and
SLI = the sum of the highest marginal rates of income, unemployment,
social security, medicare and any other payroll tax applicable to
Executive under applicable state and local laws for the taxable
year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Agreement or otherwise and
on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 5 shall be made to Executive on the
earlier of (i) the date the Company is required to withhold such tax, or (ii)
the date the tax is required to be paid by Executive.
Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is more than the amount determined
as "P", above (such greater amount being hereafter referred to as the
"Determinative Excess Parachute Payment") then the Company's independent
accountants shall determine the amount (the "Adjustment Amount") the Company
must pay to the Executive, in order to put the Executive (or the Company, as the
case may be) in the same position as the Executive (or the Company, as the case
may be) would have been if the amount determined as "P" above had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Company shall pay the Adjustment
Amount to Executive.
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In each calendar year that Executive receives payments or benefits under the
Employment Agreement, Executive shall report on his income tax returns such
information as is consistent with the determination made by the independent
accountants of the Company as described above. The Company shall indemnify and
hold Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney's fees, interest, fines and penalties)
which Executive incurs as a result of so reporting such information. Executive
shall promptly notify the Company in writing whenever the Executive receives
notice of the institution of a judicial or administrative proceeding, formal or
informal, in which the federal tax treatment under Section 4999 of the Code of
any amount paid or payable under this Supplemental Agreement is being reviewed
or is in dispute. The Company shall assume control at its expense over all
legal and accounting matters pertaining to such federal tax treatment (except to
the extent necessary or appropriate for Executive to resolve any such proceeding
with respect to any matter unrelated to amounts paid or payable pursuant to this
Agreement) and Executive shall cooperate fully with the Company in any such
proceeding. The Executive shall not enter into any compromise or settlement or
otherwise prejudice any rights the Company may have in connection therewith
without prior consent to the Company.
6. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Holding
Company, he shall have been absent from his duties with the Holding Company on a
full-time basis for six (6) consecutive months, and within thirty (30) days
after written notice of potential termination is given he shall not have
returned to the full-time performance of his duties, the Holding Company may
terminate Executive's employment for "Disability."
(b) The Holding Company will pay Executive, as disability pay, a bi-weekly
payment equal to one hundred percent (100%) of Executive's bi-weekly rate of
Base Salary on the effective date of such termination. These disability
payments shall commence on the effective date of Executive's termination and
will end on the earlier of (i) the date Executive returns to the full-time
employment of the Holding Company in the same capacity as he was employed prior
to his Termination for Disability and pursuant to an employment agreement
between Executive and the Holding Company; (ii) Executive's full-time employment
by another employer; (iii) Executive attaining the normal age of retirement or
receiving benefits under any Defined Benefit Plan of the Bank or Holding
Company; (iv) Executive's death; or (v) the expiration of the term of this
Agreement. Notwithstanding any other provisions to the contrary, the Holding
Company may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of its
obligations under this Section.
(c) The Holding Company will cause to be continued life, medical, dental
and disability
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coverage substantially identical to the coverage maintained by the Holding
Company for Executive and his dependants prior to his Termination for
Disability. This coverage and payments shall cease upon the earlier of (i) the
date Executive returns to the full-time employment of the Holding Company, in
the same capacity as he was employed prior to his Termination for Disability and
pursuant to an employment agreement between Executive and the Holding Company;
(ii) Executive's full-time employment by another employer; (iii) Executive's
attaining the normal age of retirement or receiving benefits under any Defined
Benefit Plan of the Bank or Holding Company; (iv) the Executive's death; or (v)
the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing his duties hereunder by reason of temporary disability.
7. TERMINATION UPON RETIREMENT.
Termination by the Holding Company of the Executive based on "Retirement"
shall mean termination in accordance with the Holding Company's or Bank's
retirement policy or in accordance with any retirement arrangement established
with Executive's consent with respect to him. Upon termination of Executive
upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Holding Company or the Bank and other plans to which
Executive is a party, and shall be entitled to the benefits, if any, as a former
employee under the Holding Company's or the Bank's Benefit Plans and programs
and compensation plans and programs.
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of personal
dishonesty which results in loss to the Company or one of its affiliates,
intentional failure to perform stated duties, or willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in substantial loss to the Holding Company
or one of its affiliates. For purposes of this Section, no act, or the failure
to act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars
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thereof in detail. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause. Any
stock options and related limited rights granted to Executive under any stock
option plan, or any unvested awards granted to Executive under any RRP of MRP of
the Bank, the Holding Company or any subsidiary or affiliate thereof, shall
become null and void effective upon Executive's receipt of Notice of Termination
for Cause pursuant to Section 9 hereof, and shall not be exercisable by or
delivered to Executive at any time subsequent to such Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) Subject to Section 9(c), "Date of Termination" shall mean (A) if
Executive's employment is terminated for Disability, thirty (30) days after a
Notice of Termination is given (provided that he shall not have returned to the
performance of his duties on a full-time basis during such thirty (30) day
period, and (B) if his employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a Termination for
Cause, shall not be less than thirty (30) days from the date such Notice of
Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
the Executive shall continue as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
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(d) The Holding Company may terminate the Executive's employment at any
time, but any termination by the Holding Company, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement or under any other benefit or compensation plans or
programs maintained by the Holding Company from time to time. Executive shall
not have the right to receive compensation or other benefits for any period
after Termination for Cause as defined in Section 8 hereinabove.
10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party. The Holding Company will reimburse
the Executive for reasonable costs incurred by the Executive in connection with
furnishing such information and assistance to the Holding Company.
11. NON-DISCLOSURE OF HOLDING COMPANY BUSINESS
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Holding Company. Executive will not,
during or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof to any person, firm, corporation, or other entity for any reason or
purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Holding Company. In the event of a breach or threatened
breach by the Executive of the provisions of this Section, the Holding Company
will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Holding Company or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Holding Company
from pursuing any other remedies available to the Holding Company for such
breach or threatened breach, including the recovery of damages from Executive.
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12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 13
hereof. The Holding Company may use insurance proceeds especially obtained
therefore as partial payment in the event of disability.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received by
Executive under the Bank Agreement (or any successor thereto), except to the
extent that Base Salary is paid under the Bank Agreement with respect to duties
performed thereto, such compensation payments and benefits paid by the Bank will
be subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement. Payments pursuant to this Agreement and the Bank
Agreement shall be allocated in proportion to the level of activity and the time
expended on such activities by the Executive as determined by the Holding
Company and the Bank on an annual basis.
15. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
16. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor
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shall there be any estoppel against the enforcement of any provision of this
Agreement, except by written instrument of the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future as to any act other than that specifically waived.
17. SUCCESSOR AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon Executive,
his legal representatives and testate or intestate distributees, and the Holding
Company, its successors and assigns, including any successor by purchase,
merger, consolidation or otherwise or a statutory receiver or any other person
or firm or corporation to which all or substantially all of the assets and
business of the Holding Company may be sold or otherwise transferred. Any such
successor of the Holding Company shall be deemed to have assumed this Agreement
and to have become obligated hereunder to the same extent as the Holding
Company, and Executive's obligations hereunder shall continue in favor of such
successor.
18. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
19. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
21. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Bank, in accordance with the rules of
the American Arbitration Bank then in effect. Judgment may be
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entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed Incentive Award and any other
cash compensation, fringe benefits including those accruing under any Benefit
Plan, and any compensation and benefits due Executive under this Agreement.
22. INDEMNIFICATION AND ATTORNEYS' FEES.
(a) The Holding Company shall indemnify, hold harmless and defend Executive
against reasonable costs, including legal fees, incurred by him in connection
with his consultation with legal counsel or arising out of any action, suit or
proceeding in which he may be involved, as a result of his efforts, in good
faith, to defend or enforce the terms of this Agreement. such reimbursement
shall be made within ten (10) days of Executive providing written documentation
of such expense.
(b) In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed Incentive Award and any other
cash compensation, fringe benefits including those accruing under any Benefit
Plan, and any compensation and benefits due Executive under this Agreement.
(c) The Holding Company shall indemnify, hold harmless and defend Executive
for all acts or omissions taken or not taken by him in good faith while
performing services for the Holding Company to the same extent and upon the same
terms and conditions as other similarly situated officers and directors of the
Holding Company. If and to the extent that the Holding Company maintains, at
any time during the remaining term of this Agreement and for an additional
period of seven (7) years thereafter, an insurance policy covering the other
officers and directors of the Holding Company against law suits, the Holding
Company shall use its best efforts to cause Executive to be covered under such
policy upon the same terms and conditions as other similarly situated officers
and directors.
23. MISCELLANEOUS
Unless otherwise subject to law, all lump sum calculations shall be done
using the methods, rates and assumptions set out in Code Section 1274(d) and the
regulations and statements issued thereunder by the IRS.
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SIGNATURES
IN WITNESS WHEREOF, Argo Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, as amended and restated
on the 1st day of November, 1996.
ATTEST: ARGO BANCORP, INC.
/s/ Frances M. Pitts BY: /s/ Sergio Martinucci
- ------------------------ --------------------------------------
Secretary On Behalf of the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Donna L. Bowling /s/ John G. Yedinak
- ------------------------ ------------------------------------------
Executive
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Exhibit 10(g)
ARGO FEDERAL SAVINGS BANK, FSB
EMPLOYMENT AGREEMENT
AS AMENDED AND RESTATED
This AGREEMENT is made effective as of November 1, 1996, by and among Argo
Federal Savings Bank, FSB (the "Institution"or "Bank"), a federally chartered
savings institution, with its principal administrative office at 7600 West 63rd
Street, Summit, Illinois 60501, Argo Bancorp, Inc., a corporation organized
under the laws of the State of Delaware, the holding company for the Institution
(the "Holding Company"), and John G. Yedinak ("Executive").
WHEREAS, the Institution wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Institution on
a permanent basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as Chief Executive Officer of the Institution. Executive shall render
administrative and management services to the Institution such as are
customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Institution.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) calendar months thereafter. Commencing on the
first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Institution ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three years, unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 9 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the
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rationale and results thereof shall be included in the minutes of the Board's
meeting. The Board shall give notice to the Executive as soon as possible after
such review as to whether the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote such amounts of his
business time, attention, skill, and efforts reasonably required for the
faithful performance of his duties hereunder including activities and services
related to the organization, operation and management of the Institution and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Institution, or materially affect the performance of
Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Institution may be terminated by the Institution or the Executive
during the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Institution shall pay Executive as compensation a salary of not
less than $130,000.00 per year ("Base Salary"). Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or
nonqualified plan maintained by the Institution. Such Base Salary shall be
payable bi-weekly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no later
than one year from the date of this Agreement. Such review shall be conducted
by the Board or by a Committee of the Board, delegated such responsibility by
the Board. The Committee or the Board may increase Executive's Base Salary.
Any increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Institution shall also provide Executive, at no cost to Executive, with all such
other benefits as are provided uniformly to permanent full-time employees of the
Institution.
(b) The Executive shall be entitled to participate in any employee benefit
plans ("Benefit Plans"), arrangements and perquisites substantially equivalent
to those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Institution will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; provided, however,
that the Bank may make such changes to such plans, arrangements or perquisites
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generally provided to all Institution employees on a non-discriminatory basis.
The Bank may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Bank. Upon an Event of
Termination as defined below, the Bank shall transfer all "Key Man" life
insurance, if any is owned by the Bank, to Executive. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under any Benefit Plans
including but not limited to, stock grants, restricted stock, stock options (and
other option derived benefits), Employee Stock Ownership Plans ("ESOP"), or any
other stock-based benefit plan, retirement plans, supplemental retirement plans,
pension plans, profit-sharing plans, health-and-accident plans, medical coverage
or any other employee benefit plan or arrangement made available by the
Institution in the future to its senior executives and key management employees
with awards, grants, levels and benefits for Executive equal at least to levels
customary in the industry for persons of like title, authority and
responsibility as Executive and with levels of Executive's past participation in
the Benefit Plans of the Bank, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Institution in which Executive is eligible to participate.
Nothing paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled under
this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Institution shall pay or reimburse Executive for all travel,
entertainment and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
(d) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to Executive exclusively, the Bank
shall annually award a Fixed Incentive Award to Executive in an amount equal to
two percent (2%) of the Bank's pre-tax profit on an unconsolidated basis. The
Fixed Incentive Award shall be paid to Executive or his designated beneficiary
upon the earlier of (i) the termination by the Bank of his employment for other
than Termination for Cause; (ii) the expiration of this Agreement; (iii) his
death or Disability; or (iv) annually upon the anniversary of this Agreement.
In the event Executive is subject to Termination for Cause or voluntarily
terminates his employment, other than upon an Event of Termination as defined
below, Executive shall forfeit all rights to the Fixed Incentive Award provided
under this paragraph.
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4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Institution or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a), for Disability, as defined in Section 7 hereof, or Termination for Cause,
as defined in Section 8 hereof; (ii) Executive's resignation from the
Institution's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as President and Chief Executive Officer, or failure to
nominate or elect or re-elect Executive to the Board of Directors, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position and
attributes thereof described in Section 1, above, unless consented to by
Executive, (C) a relocation of Executive's principal place of employment by more
than thirty (30) miles from its location at the effective date of this
Agreement, unless consented to by the Executive, (D) a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, unless consented to by the Executive, or (E) a
liquidation or dissolution of the Institution or Holding Company, or (F) breach
of this Agreement by the Institution. Upon the occurrence of any event
described in clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have
the right to elect to terminate his employment under this Agreement by
resignation upon not less than thirty (30) days prior written notice given
within a reasonable period of time not to exceed, except in the case of a
continuing breach, four (4) calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall be
obligated to pay Executive, or, in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, the following
payments and benefits:
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per
year ("Adjusted Base Salary").
(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary, such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
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(iii) Continuation for the remaining term of the Agreement of
Executive's and Executive's dependents' participation in any life, medical,
health, disability, dental insurance or any other "welfare plan" (as such
is defined in Section 3 (1) of the Employee Retirement Security Act of 1974
as amended from time to time ("ERISA") in which Executive participates in
on the day prior to the effective date of this Agreement (each being a
"Welfare Plan"), subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified or non-qualified pension plan (as defined in Section 3 (2)(A)
of ERISA) which he would have earned or accrued during the remaining term
of the Agreement assuming such benefit was vested and is calculated using
Adjusted Base Salary and Adjusted Bonus as appropriate in the formula for
Accrued Benefit under the plans and assuming such benefit was calculated
without making any reduction in the Accrued Benefit due to the benefit
being provided prior to the normal retirement age as set out in the pension
plan and (ii) the accrued benefit Executive is vested in at the time of the
Event of Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank
which Executive would have earned each year within the remaining term of
the Agreement, using compensation values which take into account Adjusted
Base Salary and Adjusted Bonus and further assuming that the qualified
plans to which the SERP refers provide the benefits generally provided to
Executive under their terms during the five year
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period immediately prior to the Event of Termination, the limitations on
compensation and benefits under the Code remained fixed at their levels as
of the time of the Event of Termination, and the ESOP continued to allocate
unallocated shares according to its loan amortization schedule in place on
the last day of the ESOP Plan Year immediately prior to the Event of
Termination up to the point at which the ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards
are made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock
option feature of a broader compensation plan which have not already vested
shall be made fully vested and further, at the election of Executive, any
stock options shall be subsequently cancelled by Executive in consideration
for a payment from the Holding Company in an amount equal to the product of
(i) the number of stock options cancelled and (ii) the difference between
(x) the fair market value (at the time of cancellation) of the stock upon
which the option was issued and (y) the exercise price of the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived benefits) to Executive which have been made under a stock
grant plan or feature of a broader compensation plan which have not already
vested shall be made fully vested and further, at the election of
Executive, any stock awarded under such a
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plan shall at the election of Executive be subject to a put option
entitling Executive to sell all or some portion of such stock to the
Holding Company at the then fair market value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the form
and calculated as described above. In the event that a benefit otherwise
payable in a stock form cannot be provided in stock, such benefit will be
provided in the form of cash using the greater of the fair market value of
the stock at the time of the distribution of the benefit or the closing
price of the stock on the day prior to the time of distribution or the last
day of trading prior to the time of distribution.
(c) At the election of the Executive, which election is to be made prior to
an Event of Termination, such payments shall be made in a lump sum. In the
event that no election is made, payment to Executive will be made on a bi-weekly
basis in approximately equal installments during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment.
(d) No payments pursuant to this subsection shall, in the aggregate, exceed
three times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Institution or such lesser
number of years in the event that Executive shall have been employed by the
Institution for less than five years. For purposes of this subsection 4(b),
"average annual compensation" shall be the average annual compensation as
defined in Section 5(c) of this Agreement. In the event the Institution is not
in compliance with its minimum capital requirements or if such payments pursuant
to this subsection (b) would cause the Institution's capital to be reduced below
its minimum regulatory capital requirements, such payments shall be deferred
until such time as the Institution or successor thereto is in capital
compliance.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof
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(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any Benefit Plan of the Institution or the
Holding Company, or (B) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Institution or the Holding Company or similar transaction occurs
in which the Institution or Holding Company is not the resulting entity;
provided, however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in annual compensation or material
reduction in benefits or relocation of his principal place of employment by more
than thirty (30) miles from its location immediately prior to the Change in
Control, unless such termination is because of his death or Termination for
Cause, provided, however, that such payments shall be reduced by any payment
made under Section 4 of this Agreement.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Institution shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement;
or 2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Institution or
such lesser number of years in the event that Executive shall have been employed
by the Institution for less than five (5) years; provided however, that no
----------------
payments pursuant to this subsection shall exceed three (3) times the
Executive's
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average annual compensation for the five (5) most recent taxable years that the
Executive has been employed by the Institution or such lesser number of years in
the event the Executive shall have been employed by the Institution for less
than five (5) years. For purposes of this Agreement, such average annual
compensation shall include Base Salary, commissions, bonuses (including the
Fixed Incentive Award), contributions on Executive's behalf to any pension
and/or profit sharing plan, severance payments, retirement payments, directors
or committee fees, fringe benefits, and payment of expense items without
accountability or business purpose or that do not meet the IRS requirements for
deductibility by the Institution. In the event the Institution is not in
compliance with its minimum capital requirements or if such payments would cause
the Institution's capital to be reduced below its minimum regulatory capital
requirements, such payments shall be deferred until such time as the Institution
or successor thereto is in capital compliance. At the election of the Executive,
which election is to be made prior to a Change in Control, such payment may be
made in a lump sum. In the event that no election is made, payment to the
Executive will be made on a bi-weekly basis in approximately equal installments
over a period of thirty-six (36) months following the Executive's termination.
Such payments shall not be reduced in the event Executive obtains other
employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Institution will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Institution
for Executive and his dependants prior to his severance at no premium cost to
the Executive, except to the extent that such coverage may be changed in its
application for all Institution employees on a non-discriminatory basis. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Date of Termination.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
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hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Bank, he
shall have been absent from his duties with the Bank on a full-time basis for
six (6) consecutive months, and within thirty (30) days after written notice of
potential termination is given he shall not have returned to the full-time
performance of his duties, the Bank may terminate Executive's employment for
"Disability."
(b) The Bank will pay Executive, as disability pay, a bi-weekly payment
equal to one hundred percent (100%) of Executive's bi-weekly rate of Base Salary
on the effective date of such termination. These disability payments shall
commence on the effective date of Executive's termination and will end on the
earlier of (i) the date Executive returns to the full-time employment of the
Bank in the same capacity as he was employed prior to his termination for
Disability and pursuant to an employment agreement between Executive and the
Bank; (ii) Executive's full-time employment by another employer; (iii) Executive
attaining the normal age of retirement or receiving benefits under any Defined
Benefit Plan of the Bank; (iv) Executive's death; or (v) the expiration of the
term of this Agreement. Notwithstanding any other provisions to the contrary,
the Bank may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of the
Bank's obligations under this Section.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive and his dependants prior to his termination for Disability.
This coverage and payments shall cease upon the earlier of (i) the date
Executive returns to the full-time employment of the Bank, in the same capacity
as he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the normal age of
retirement or receiving benefits under any Defined Benefit Plan of the Bank;
(iv) the Executive's death; or (v) the expiration of the term of this
Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing his duties hereunder by reason of temporary disability.
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8. TERMINATION FOR CAUSE.
(a) The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. Except
as provided in Section 8(b) hereof, Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause except for compensation and benefits already vested. During the period
beginning on the date of the Notice of Termination for Cause pursuant to Section
9 hereof through the Date of Termination, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Institution, the Holding Company or any subsidiary or affiliate thereof
vest. At the Date of Termination, such stock options and related limited rights
and such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Date of Termination
for Cause.
(b) If, within thirty (30) days after Notice of Termination for Cause is
received by Executive, the Executive notifies the Bank that a dispute exists
concerning the termination ("Notice of Dispute"), the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a Notice of
Dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. In
the event the Executive pursues resolution of such dispute through arbitration
in accordance with the rules of the American Arbitration Association then in
effect, the Bank will continue to pay Executive his Base Salary in effect when
the Notice of Dispute notice giving rise to the dispute was given until the
earlier of: 1) the resolution of the dispute pursuant to arbitration in
accordance with this Agreement or 2) six months from the Date of Termination as
specified in the Notice of Termination for Cause.
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9. NOTICE.
(a) Any purported termination by the Institution or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and the Executive
shall continue as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
(d) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement or
under any other benefit or compensation plans or programs maintained by the Bank
from time to time. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 8 hereinabove.
10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
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(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party. The Bank will reimburse the Executive for reasonable costs
incurred by the Executive in connection with furnishing such information and
assistance to the Bank.
11. CONFIDENTIALITY.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Institution and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Institution. Executive will not, during or after
the term of his employment, disclose any knowledge of the past, present, planned
or considered business activities of the Institution or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever, unless expressly authorized by the Board of Directors or required by
law. Notwithstanding the foregoing, Executive may disclose any knowledge of
banking, financial and/or economic principles, concepts or ideas which are not
solely and exclusively derived from the business plans and activities of the
Institution. In the event of a breach or threatened breach by Executive of the
provisions of this Section, the Institution will be entitled to an injunction
restraining Executive from disclosing, in whole or in part, the knowledge of the
past, present, planned or considered business activities of the Institution or
affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Institution from pursuing any other remedies available to the
Institution for such breach or threatened breach, including the recovery of
damages from Executive.
12. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Institution. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the
Institution are not timely paid or provided by the Institution, such amounts and
benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated November 1, 1996,
between Executive and the Holding Company, except to the extent that Base Salary
is paid by the Holding Company under the Holding Company Agreement with respect
to duties performed pursuant thereto, such compensation payments and benefits
paid by the Holding Company will be subtracted
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from any amounts due simultaneously to Executive under similar provisions of
this Agreement.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Institution or any
predecessor of the Institution and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Institution and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. REQUIRED PROVISIONS.
(a) The Institution may terminate Executive's employment at any time, but
any termination by the Institution, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination
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for Cause as defined in Section 8 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. (S)1818(e)(3) or (g)(1); the Institution's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while the respective obligations under this Agreement were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Institution under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
parties hereto shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the
Institution under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Institution under this Agreement shall be
terminated, except to the extent determined that continuation of the Agreement
is necessary for the continued operation of the Institution, (i) by the Director
of the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at
the time the FDIC enters into an agreement to provide assistance to or on behalf
of the Institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS
(or his designee) at the time the Director (or his designee) approves a
supervisory merger to resolve problems related to the operations of the
Institution or when the Institution is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S)545.121 and any rules and regulations promulgated
thereunder.
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17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Illinois, but only to the extent
not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses (including the Fixed Incentive Award) and
all other cash compensation, fringe benefits including those accruing under any
Benefit and any compensation and benefits due Executive under this Agreement.
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21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Institution if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Institution shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and the
Executive's heirs, executors and administrators) to the fullest extent permitted
under federal law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Institution (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 C.F.R.(S) 545.121 and any rules or
regulations promulgated thereunder.
23. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Institution's obligations under this Agreement, in the same manner and to the
same extent that the Institution would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Frances M. Pitts and Sergio Martinucci have caused this
Agreement to be executed and their seals to be affixed hereunto by their duly
authorized officers and directors, and Executive has signed this Agreement, on
the 1st day of November, 1996.
ATTEST: ARGO FEDERAL SAVINGS BANK
/s/ Maria L. Garcia BY: /s/ Frances M. Pitts
- --------------------------- ----------------------------------
Secretary, Assistant
[SEAL]
ATTEST: ARGO BANCORP, INC.
/s/ Maria L. Garcia BY: /s/ Sergio Martinucci
- --------------------------- ----------------------------------
Secretary, Assistant
[SEAL]
WITNESS:
/s/ Donna L. Bowling /s/ John G. Yedinak
- --------------------------- --------------------------------------
Executive
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Exhibit 10(h)
ARGO BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of November 1, 1996, by and between
Argo Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of Delaware, with its principal administrative office at 7600 West Sixty-
third Street, Summit, Illinois 60501, and Frances M. Pitts (the "Executive").
Any reference to "Bank" herein shall mean Argo Federal Savings Bank, F.S.B. a
federally chartered stock savings bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of her employment hereunder, Executive Vice President and
Corporate Counsel agrees to serve as the Holding Company. The Executive shall
render administrative and management services to the Holding Company and shall
have such responsibilities and authority over the management and operation of
the Holding Company as Executive had prior to the date hereof. During said
period, Executive also agrees to serve, if elected, as an officer and director
of any subsidiary of the Holding Company. Failure to reelect Executive as
Executive Vice President and Corporate Counsel of the Holding Company or failure
to reelect Executive as Senior Vice President and General Counsel of the Bank
without the consent of the Executive shall constitute a breach of this
Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written (the "Effective
Date") and shall continue for a period of sixty (60) full calendar months
thereafter. Commencing with the Effective Date, the term of this Agreement
shall be extended for one day each day until such time as the Board of the
Holding Company or the Executive elects not to extend the term of the Agreement
further by giving written notice to the other party in accordance with Section 9
of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the fifth anniversary of the date of such written notice. The
Board will review the Agreement and the Executive's
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performance annually for purposes of determining whether to give notice not to
extend the Agreement, and the results thereof shall be included in the minutes
of the Board's meeting.
(b) During the period of her employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote such amounts of her business time,
attention, skill, and efforts reasonably required for the faithful performance
of her duties hereunder including activities and services related to the
organization, operation and management of the Holding Company and participation
in community and civic organizations; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the
Holding Company, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary: (i)
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement; and (ii) nothing in this Agreement shall mandate
or prohibit a continuation of Executive's employment following the expiration of
the term of this Agreement upon such terms and conditions as the Board and
Executive may mutually agree.
(d) Upon the termination of Executive's employment with the Holding
Company, the daily extensions provided pursuant to section 2(a), shall cease (if
such extensions have not previously ceased), and, if such termination is under
circumstances described in section 4(a), the term "remaining term of the
Agreement" in section 4(b) shall mean the period of time commencing from the
date of such termination and ending on the last day of the employment period
computed with reference to all extensions prior to such termination.
(e) In the event that Executive's duties and responsibilities with respect
to the Bank are temporarily or permanently terminated pursuant to the
Employment Agreement dated November 1, 1996 (or any successor agreement
thereto) between Executive and the Bank ("Bank Agreement") and the course of
conduct upon which such termination is based would not constitute grounds for
Termination for Cause under Section 8 of this Agreement then Executive shall, to
the extent practicable, assume such duties and responsibilities formerly
performed at the Bank as part of her duties and responsibilities as an Executive
Officer of the Holding Company. Nothing in this provision shall be interpreted
as restricting the Holding Company's right to remove Executive for Cause in
accordance with Section 8 of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Holding Company shall pay Executive as compensation under this
Agreement
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a salary of not less than $33,415.00 (including amounts attributable to duties
compensable with respect to On-Line Financial Services) per year. The
compensation specified under this Agreement, together with a portion of that
compensation that otherwise would be paid by the Bank pursuant to the Bank
Agreement ("Base Salary"), shall constitute the consideration paid for the
duties described in Section 1. Base Salary shall also include any amounts of
compensation deferred by Executive under a qualified plan maintained by the
Bank. Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Compensation Committee
designated by the Board, and the Board may increase Executive's Base Salary. An
increase shall become the "Base Salary" for purposes of this Agreement. In no
event shall Executive's annual rate of salary under this Agreement in effect at
a particular time be reduced without her prior written consent. In addition to
the Base Salary provided in this Section 3(a), the Holding Company shall also
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Holding Company and
the Bank.
(b) The Holding Company will provide Executive with employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder, provided, however, that the Holding Company may make such
changes to such plans, agreements or perquisites generally provided on a
nondiscriminatory basis to all employees, without the Executive's consent. The
Holding Company may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Holding Company. Upon
an Event of Termination as defined below, the Holding Company shall transfer all
"Key Man" life insurance if any is owned by the Bank or the Holding Company to
Executive. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in and receive
benefits under any employee benefit plans ("Benefit Plans") whether tax
qualified or not, including, but not limited to, stock grants, restricted stock,
stock options (and other option derived benefits), Employee Stock Ownership
Plans ("ESOP"), or any other stock based benefit plan, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health-and-
accident plan, medical coverage or any other Benefit Plan or arrangement made
available by the Holding Company or the Bank in the future to its senior
executives and key management employees, with awards, grants and levels of
benefits for Executive equal to at least levels customary in the industry for
persons of like title, authority and responsibility as Executive and with levels
of Executive's past participation in the Benefit Plans of the Holding Company or
Bank subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements.
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Because the Holding Company has determined to pay a portion of Base Salary
that might otherwise be attributable to the Executive's efforts on behalf of the
Bank, in order that the Bank may continue to increase levels of capital while
making available sufficient levels of compensation as are necessary to retain
other senior executives instrumental to the continuing success of the Bank, all
Base Salary earned by the Executive from the Holding Company pursuant to this
Agreement and the Bank pursuant to the Bank Agreement shall be considered when
determining the maximum extent that the Executive can participate under any
Benefit Plan offered by either the Holding Company or the Bank. Executive will
be entitled to incentive compensation and bonuses as provided in any plan of the
Holding Company in which Executive is eligible to participate. Nothing paid to
the Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall provide Executive with a late model automobile
("Automobile"), or Automobile allowance in lieu thereof, and shall pay or
reimburse Executive for all business entertainment expense, travel, Automobile
maintenance, operation and insurance and any other reasonable expenses incurred
by Executive to performing his obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may from
time to time determine.
(d) In the event that Executive assumes additional duties and
responsibilities pursuant to Section 2(c) of this Agreement by reason of one of
the circumstances contained in Section 2(c) of this Agreement, and the Executive
receives or will receive less than the full amount of compensation and benefits
formerly entitled to him under the Bank Agreement, the Holding Company shall
assume the obligation to provide Executive with compensation and benefits in
accordance with the Bank Agreement, less any compensation and benefits received
from the Bank, subject to the terms and conditions of this Agreement including
the Termination for Cause provisions in Section 8.
(e) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to this Executive exclusively, the
Holding Company shall annually award a Fixed Incentive Award to Executive in an
amount equal to one percent (1%) of the pre-tax profit of the Holding Company
and each separately incorporated or organized subsidiary, on an unconsolidated
basis, except to the extent paid under the terms of the Bank Agreement. The
Fixed Incentive Award shall be paid to Executive or his designated beneficiary
upon the earlier of (i) the termination by the Holding Company of her employment
for other than Termination for Cause; (ii) the expiration of this Agreement;
(iii) her death or Disability; or (iv) annually, upon the anniversary of this
Agreement. In the event Executive is subject to Termination for Cause or
voluntarily terminates her employment, Executive shall forfeit all rights to the
Fixed
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Incentive Award provided under this paragraph.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Section 8.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than for Disability, as defined in Section 6 hereof; upon
Retirement, as defined in Section 7 hereof; or for Cause, as defined in Section
8 hereof; (ii) Executive's resignation from the Holding Company's employ, upon
any (A) failure to elect or reelect or to appoint or reappoint Executive as
Executive Vice President and Corporate Counsel, or failure to nominate or re-
nominate or elect or re-elect Executive to the Board of Directors, (B) a
material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, (and any such material adverse change shall be deemed a
continuing breach of this Agreement), (C) a relocation of Executive's principal
place of employment by more than 30 miles from its location at the effective
date of this Agreement, (D) failure to provide the benefits required under
Section 3(b) of this Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of the effective date
of this Agreement, (E) liquidation or dissolution of the Bank or Holding
Company, or (F) material breach of this Agreement by the Holding Company. Upon
the occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F)
above, Executive shall have the right to elect to terminate her employment under
this Agreement by resignation upon not less than thirty (30) days prior written
notice given within a reasonable period of time not to exceed, except in case of
a continuing breach, four calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, the Holding Company
shall be obligated to pay Executive, or, in the event of her subsequent death,
his beneficiary or beneficiaries, or her estate, as the case may be, the
following payments and benefits:
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per
year ("Adjusted Base Salary").
(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the
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remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
(iii) Continuation for the remaining term of the Agreement of
Executive's and her dependents' participation in any life, medical, health,
disability, dental insurance or any other "welfare plan" (as such is
defined in Section 3 (1) of the Employee Retirement Security Act of 1974 as
amended from time to time ("ERISA") in which Executive participates in on
the day prior to the effective date of this Agreement (each being a
"Welfare Plan"), subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified or non-qualified pension plan (as defined in Section 3 (2)(A)
of ERISA) which she would have earned or accrued during the remaining term
of the Agreement assuming such benefit was vested and is calculated using
Adjusted Base Salary and Adjusted Bonus as appropriate in the formula for
Accrued Benefit under the plans and assuming such benefit was calculated
without making any reduction in the Accrued Benefit due to the benefit
being provided prior to the normal retirement age as set out in the pension
plan and (ii) the accrued benefit Executive is vested in at the time of the
Event of Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank
which Executive would have earned each year within the remaining term of
the Agreement, using compensation values which take into account Adjusted
Base Salary and Adjusted Bonus and further assuming
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that the qualified plans to which the SERP refers provide the benefits
generally provided to Executive under their terms during the five year
period immediately prior to the Event of Termination, the limitations on
compensation and benefits under the Code remained fixed at their levels as
of the time of the Event of Termination, and the ESOP continued to allocate
unallocated shares according to its loan amortization schedule in place on
the last day of the ESOP Plan Year immediately prior to the Event of
Termination up to the point at which the ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards
are made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock
option feature of a broader compensation plan which have not already vested
shall be made fully vested and further, at the election of Executive, any
stock options shall be subsequently cancelled by Executive in consideration
for a payment from the Holding Company in an amount equal to the product of
(i) the number of stock options cancelled and (ii) the difference between
(x) the fair market value (at the time of cancellation) of the stock upon
which the option was issued and (y) the exercise price of the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived benefits) to Executive which have been made under a stock
grant plan or feature of a
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broader compensation plan which have not already vested shall be made fully
vested and further, at the election of Executive, any stock awarded under
such a plan shall at the election of Executive be subject to a put option
entitling Executive to sell all or some portion of such stock to the
Holding Company at the then fair market value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the
form and calculated as described above. In the event that a benefit
otherwise payable in a stock form cannot be provided in stock, such benefit
will be provided in the form of cash using the greater of the fair market
value of the stock at the time of the distribution of the benefit or the
closing price of the stock on the day prior to the time of distribution or
the last day of trading prior to the time of distribution.
(c) At the election of the Executive, which election must be made prior
to or on the Date of Termination, such payments shall be made in a lump sum or
paid monthly during the remaining term of the Agreement following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment. In the event that
the Executive is receiving monthly payments pursuant to this Section 4, on an
annual basis, thereafter, between the dates of January 1 and January 31 of each
year, Executive shall elect whether, the balance of the amount payable under the
Agreement at that time shall be paid in a lump sum or on a pro rata basis. Such
election shall be irrevocable for the year for which such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or the Holding Company as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's
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outstanding securities except for any securities of the Bank purchased by the
Holding Company in connection with the conversion of the Bank to the stock form
and any securities purchased by any Benefit Plan of the Bank, or (B) individuals
who constitute the Board on the date hereof (the "Incumbent Board") cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity, or (D) a proxy statement is distributed soliciting proxies
from stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed, or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or Holding Company then outstanding.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e) and (f) of this Section 5 upon her subsequent
termination of employment at any time during the term of this Agreement
(regardless of whether such termination results from his dismissal or her
resignation at any time during the term of this Agreement following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or benefits or relocation of her principal
place of employment by more than 30 miles from its location immediately prior to
the Change in Control), unless such termination is because of her death, or
Termination for Cause provided, however, that such payments shall be reduced by
any payment made under Section 4 of this Agreement.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company shall pay Executive, or in the
event of her subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to five (5) times the average of the three (3) preceding years' (i) Base Salary,
(ii) any other taxable income including but not limited to the vesting of stock
grants or restricted stock, the exercise of stock options, the distribution of
previously deferred compensation, including Fixed Incentive Award, bonuses and
any other cash or deferred compensation paid or to be paid to the Executive
during such years, and (iii) the amount of any contributions made or to be made
to any Benefit Plans whether tax qualified or non-qualified including but not
limited to defined benefit pension plans, defined contribution plans, SERP's,
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ESOP's, Welfare Plans, stock option benefits, stock grant benefits, on behalf of
the Executive, maintained by the Bank or the Holding Company during such years.
At the election of the Executive, which election must be made prior to or on the
Date of Termination following a Change in Control, such payment may be made in a
lump sum or paid in equal bi-weekly installments during the sixty (60) months
following the Executive's termination. In the event that no election is made,
payment to the Executive will be made on a bi-weekly basis during the remaining
term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company will cause to be continued life,
medical, dental and disability coverage for Executive and any of her dependents
covered under such plans prior to the Change in Control, substantially identical
to the coverage maintained by the Bank or the Holding Company for Executive and
her dependants prior to her severance. Such coverage and payments shall cease
upon the expiration of sixty (60) months. If Executive or any dependant should
die during this sixty (60) month period, coverage for the remaining parties
shall continue for the remainder of the sixty (60) month period.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
for any taxable year in which the Executive shall be liable, as determined for
the payment of an excise tax under Section 4999 of the Code, with respect to any
payment in the nature of the compensation made by the Company or the Bank to (or
for the benefit of) Executive, the Company shall pay to the Executive an amount
determined under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
--------------------------------
1 - [(FI x (1 - SLI)) + SLI + E]
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E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 5;
FI = the highest marginal rate of deferral income tax applicable to
Executive under the Code for the taxable year in question; and
SLI = the sum of the highest marginal rates of income, unemployment,
social security, medicare and any other payroll tax applicable to
Executive under applicable state and local laws for the taxable
year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Agreement or otherwise and
on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 5 shall be made to Executive on the
earlier of (i) the date the Company is required to withhold such tax, or (ii)
the date the tax is required to be paid by Executive.
Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is more than the amount determined
as "P", above (such greater amount being hereafter referred to as the
"Determinative Excess Parachute Payment") then the Company's independent
accountants shall determine the amount (the "Adjustment Amount") the Company
must pay to the Executive, in order to put the Executive (or the Company, as the
case may be) in the same position as the Executive (or the Company, as the case
may be) would have been if the amount determined as "P" above had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Company shall pay the Adjustment
Amount to Executive.
In each calendar year that Executive receives payments or benefits under
the Employment Agreement, Executive shall report on her income tax returns such
information as is consistent with the determination made by the independent
accountants of the Company as described above. The Company shall indemnify and
hold Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney's fees, interest, fines and penalties)
which Executive incurs as a result of so reporting such information. Executive
shall promptly notify the Company in writing whenever the Executive receives
notice of the institution of a judicial or administrative proceeding, formal or
informal, in which the federal tax treatment under Section 4999 of the Code of
any amount paid or payable under this Supplemental
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Agreement is being reviewed or is in dispute. The Company shall assume control
at its expense over all legal and accounting matters pertaining to such federal
tax treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to this Agreement) and Executive shall cooperate fully with
the Company in any such proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Company may have
in connection therewith without prior consent to the Company.
6. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Holding
Company, she shall have been absent from her duties with the Holding Company on
a full-time basis for six (6) consecutive months, and within thirty (30) days
after written notice of potential termination is given she shall not have
returned to the full-time performance of her duties, the Holding Company may
terminate Executive's employment for "Disability."
(b) The Holding Company will pay Executive, as disability pay, a bi-weekly
payment equal to one hundred percent (100%) of Executive's bi-weekly rate of
Base Salary on the effective date of such termination. These disability
payments shall commence on the effective date of Executive's termination and
will end on the earlier of (i) the date Executive returns to the full-time
employment of the Holding Company in the same capacity as she was employed prior
to her Termination for Disability and pursuant to an employment agreement
between Executive and the Holding Company; (ii) Executive's full-time employment
by another employer; (iii) Executive attaining the normal age of retirement or
receiving benefits under any Defined Benefit Plan of the Bank or Holding
Company; (iv) Executive's death; or (v) the expiration of the term of this
Agreement. Notwithstanding any other provisions to the contrary, the Holding
Company may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of its
obligations under this Section.
(c) The Holding Company will cause to be continued life, medical, dental
and disability coverage substantially identical to the coverage maintained by
the Holding Company for Executive and her dependants prior to his Termination
for Disability. This coverage and payments shall cease upon the earlier of (i)
the date Executive returns to the full-time employment of the Holding Company,
in the same capacity as she was employed prior to his Termination for Disability
and pursuant to an employment agreement between Executive and the Holding
Company; (ii) Executive's full-time employment by another employer; (iii)
Executive's attaining the normal age of retirement or receiving benefits under
any Defined Benefit Plan of the Bank or Holding Company; (iv) the Executive's
death; or (v) the expiration of the term of this Agreement.
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(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing her duties hereunder by reason of temporary disability.
7. TERMINATION UPON RETIREMENT.
Termination by the Holding Company of the Executive based on "Retirement"
shall mean termination in accordance with the Holding Company's or Bank's
retirement policy or in accordance with any retirement arrangement established
with Executive's consent with respect to her. Upon termination of Executive
upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Holding Company or the Bank and other plans to which
Executive is a party, and shall be entitled to the benefits, if any, as a former
employee under the Holding Company's or the Bank's Benefit Plans and programs
and compensation plans and programs.
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of personal
dishonesty which results in loss to the Company or one of its affiliates,
intentional failure to perform stated duties, or willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in substantial loss to the Holding Company
or one of its affiliates. For purposes of this Section, no act, or the failure
to act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to her a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause. Any stock options and related limited rights granted to Executive under
any stock option plan, or any unvested awards granted to Executive under any RRP
of MRP of the Bank, the Holding Company or any subsidiary or affiliate thereof,
shall become null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
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9. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) Subject to Section 9(c), "Date of Termination" shall mean (A) if
Executive's employment is terminated for Disability, thirty (30) days after a
Notice of Termination is given (provided that she shall not have returned to the
performance of her duties on a full-time basis during such thirty (30) day
period, and (B) if her employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a Termination for
Cause, shall not be less than thirty (30) days from the date such Notice of
Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive her full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
the Executive shall continue as a participant in all compensation, benefit and
insurance plans in which she was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
(d) The Holding Company may terminate the Executive's employment at any
time, but any termination by the Holding Company, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement or under any other benefit or compensation plans or
programs maintained by the Holding Company from time to time. Executive shall
not have the right to receive compensation or other benefits for any period
after Termination for Cause as defined in Section 8 hereinabove.
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10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party. The Holding Company will reimburse
the Executive for reasonable costs incurred by the Executive in connection with
furnishing such information and assistance to the Holding Company.
11. NON-DISCLOSURE OF HOLDING COMPANY BUSINESS
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Holding Company. Executive will not,
during or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof to any person, firm, corporation, or other entity for any reason or
purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Holding Company. In the event of a breach or threatened
breach by the Executive of the provisions of this Section, the Holding Company
will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Holding Company or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Holding Company
from pursuing any other remedies available to the Holding Company for such
breach or threatened breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 13
hereof. The Holding Company may use insurance proceeds especially obtained
therefore as partial payment in the event of disability.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and
15
<PAGE>
supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to her without reference to this Agreement.
14. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received by
Executive under the Bank Agreement (or any successor thereto), except to the
extent that Base Salary is paid under the Bank Agreement with respect to duties
performed thereto, such compensation payments and benefits paid by the Bank will
be subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement. Payments pursuant to this Agreement and the Bank
Agreement shall be allocated in proportion to the level of activity and the time
expended on such activities by the Executive as determined by the Holding
Company and the Bank on an annual basis.
15. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
16. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
17. SUCCESSOR AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon Executive,
her legal representatives and testate or intestate distributees, and the Holding
Company, its successors and
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assigns, including any successor by purchase, merger, consolidation or otherwise
or a statutory receiver or any other person or firm or corporation to which all
or substantially all of the assets and business of the Holding Company may be
sold or otherwise transferred. Any such successor of the Holding Company shall
be deemed to have assumed this Agreement and to have become obligated hereunder
to the same extent as the Holding Company, and Executive's obligations hereunder
shall continue in favor of such successor.
18. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
19. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
21. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Bank, in accordance with the rules of
the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed
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Incentive Award and any other cash compensation, fringe benefits including those
accruing under any Benefit Plan, and any compensation and benefits including
those accruing under any Benefit Plan, due Executive under this Agreement.
22. INDEMNIFICATION AND ATTORNEYS' FEES.
(a) The Holding Company shall indemnify, hold harmless and defend
Executive against reasonable costs, including legal fees, incurred by her in
connection with her consultation with legal counsel or arising out of any
action, suit or proceeding in which she may be involved, as a result of his
efforts, in good faith, to defend or enforce the terms of this Agreement. Such
reimbursement shall be made within ten (10) days of Executive providing written
documentation of such expense.
(b) In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed Incentive Award and any other
cash compensation, fringe benefits including those accruing under any Benefit
Plan, and any compensation and benefits due Executive under this Agreement.
(c) The Holding Company shall indemnify, hold harmless and defend
Executive for all acts or omissions taken or not taken by her in good faith
while performing services for the Holding Company to the same extent and upon
the same terms and conditions as other similarly situated officers and directors
of the Holding Company. If and to the extent that the Holding Company
maintains, at any time during the remaining term of this Agreement and for an
additional period of seven (7) years thereafter, an insurance policy covering
the other officers and directors of the Holding Company against law suits, the
Holding Company shall use its best efforts to cause Executive to be covered
under such policy upon the same terms and conditions as other similarly situated
officers and directors.
23. MISCELLANEOUS
Unless otherwise subject to law, all lump sum calculations shall be done
using the methods, rates and assumptions set out in Code Section 1274(d) and the
regulations and statements issued thereunder by the IRS.
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SIGNATURES
IN WITNESS WHEREOF, Argo Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, as amended and restated
on the 1st day of November, 1996.
ATTEST: ARGO BANCORP, INC.
/s/ Maria L. Garcia BY: /s/ Sergio Martinucci
- ----------------------- -------------------------------------
Secretary On Behalf of the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Donna L. Bowling /s/ Frances M. Pitts
- ----------------------- -----------------------------------------
Executive
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Exhibit 10(i)
ARGO FEDERAL SAVINGS BANK, FSB
EMPLOYMENT AGREEMENT
AS AMENDED AND RESTATED
This AGREEMENT is made effective as of November 1, 1996, by and among Argo
Federal Savings Bank, FSB (the "Institution" or "Bank"), a federally chartered
savings institution, with its principal administrative office at 7600 West 63rd
Street, Summit, Illinois 60501, Argo Bancorp, Inc., a corporation organized
under the laws of the State of Delaware, the holding company for the Institution
(the "Holding Company"), and Frances M. Pitts ("Executive").
WHEREAS, the Institution wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Institution on
a permanent basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as Senior Vice President and General Counsel of the Institution.
Executive shall render administrative and management services to the Institution
such as are customarily performed by persons situated in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer and director of the Holding Company or any subsidiary of the
Institution.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) calendar months thereafter. Commencing on the
first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Institution ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three years, unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 9 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the Agreement
is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote such amounts of her
business time, attention, skill, and efforts reasonably
<PAGE>
required for the faithful performance of her duties hereunder including
activities and services related to the organization, operation and management of
the Institution and participation in community and civic organizations;
provided, however, that, with the approval of the Board, as evidenced by a
resolution of such Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment, will not
present any conflict of interest with the Institution, or materially affect the
performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Institution may be terminated by the Institution or the Executive
during the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Institution shall pay Executive as compensation a salary of not
less than $98,000.00 per year ("Base Salary"). Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or
nonqualified plan maintained by the Institution. Such Base Salary shall be
payable bi-weekly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no later
than one year from the date of this Agreement. Such review shall be conducted
by the Board or by a Committee of the Board, delegated such responsibility by
the Board. The Committee or the Board may increase Executive's Base Salary.
Any increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Institution shall also provide Executive, at no cost to Executive, with all such
other benefits as are provided uniformly to permanent full-time employees of the
Institution.
(b) The Executive shall be entitled to participate in any employee benefit
plans ("Benefit Plans"), arrangements and perquisites substantially equivalent
to those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Institution will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; provided, however,
that the Bank may make such changes to such plans, arrangements or perquisites
generally provided to all Institution employees on a non-discriminatory basis.
The Bank may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Bank. Upon an Event of
Termination as defined below, the Bank shall transfer all "Key Man" life
insurance, if any is owned by the Bank, to Executive. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under any Benefit Plans
including but not limited to, stock grants, restricted stock, stock options (and
other option derived benefits), Employee Stock Ownership Plans ("ESOP"), or any
other stock-based benefit plan, retirement plans, supplemental retirement plans,
pension plans, profit-sharing plans, health-and-accident plans, medical coverage
or any other employee benefit plan or arrangement made available by the
Institution in the future to its senior executives and key management employees
with awards, grants, levels and benefits for Executive equal at least to levels
customary in the industry for persons of like title, authority and
<PAGE>
responsibility as Executive and with levels of Executive's past participation in
the Benefit Plans of the Bank, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Institution in which Executive is eligible to participate.
Nothing paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled under
this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Institution shall pay or reimburse Executive for all travel,
entertainment and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
(d) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to Executive exclusively, the Bank
shall annually award a Fixed Incentive Award to Executive in an amount equal to
one percent (1%) of the Bank's pre-tax profit on an unconsolidated basis. The
Fixed Incentive Award shall be paid to Executive or her designated beneficiary
upon the earlier of (i) the termination by the Bank of his employment for other
than Termination for Cause; (ii) the expiration of this Agreement; (iii) her
death or Disability; or (iv) annually upon the anniversary of this Agreement.
In the event Executive is subject to Termination for Cause or voluntarily
terminates her employment, other than upon an Event of Termination as defined
below, Executive shall forfeit all rights to the Fixed Incentive Award provided
under this paragraph.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Institution or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a), for Disability, as defined in Section 7 hereof, or Termination for Cause,
as defined in Section 8 hereof; (ii) Executive's resignation from the
Institution's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as Senior Vice President and General Counsel, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position and
attributes thereof described in Section 1, above, unless consented to by
Executive, (C) a relocation of Executive's principal place of employment by more
than thirty (30) miles from its location at the effective date of this
Agreement, unless consented to by the Executive, (D) a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, unless consented to by the Executive, or (E) a
liquidation or dissolution of the Institution or Holding Company, or (F) breach
of this Agreement by the Institution. Upon the occurrence of any event
described in clauses (A), (B), (C), (D), (E) or (F), above, Executive
<PAGE>
shall have the right to elect to terminate her employment under this Agreement
by resignation upon not less than thirty (30) days prior written notice given
within a reasonable period of time not to exceed, except in the case of a
continuing breach, four (4) calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall be
obligated to pay Executive, or, in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, the following
payments and benefits:
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per
year ("Adjusted Base Salary").
(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary, such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
(iii) Continuation for the remaining term of the Agreement of
Executive's and Executive's dependents' participation in any life, medical,
health, disability, dental insurance or any other "welfare plan" (as such
is defined in Section 3 (1) of the Employee Retirement Security Act of 1974
as amended from time to time ("ERISA") in which Executive participates in
on the day prior to the effective date of this Agreement (each being a
"Welfare Plan"), subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified
<PAGE>
or non-qualified pension plan (as defined in Section 3 (2)(A) of ERISA)
which she would have earned or accrued during the remaining term of the
Agreement assuming such benefit was vested and is calculated using Adjusted
Base Salary and Adjusted Bonus as appropriate in the formula for Accrued
Benefit under the plans and assuming such benefit was calculated without
making any reduction in the Accrued Benefit due to the benefit being
provided prior to the normal retirement age as set out in the pension plan
and (ii) the accrued benefit Executive is vested in at the time of the
Event of Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank
which Executive would have earned each year within the remaining term of
the Agreement, using compensation values which take into account Adjusted
Base Salary and Adjusted Bonus and further assuming that the qualified
plans to which the SERP refers provide the benefits generally provided to
Executive under their terms during the five year period immediately prior
to the Event of Termination, the limitations on compensation and benefits
under the Code remained fixed at their levels as of the time of the Event
of Termination, and the ESOP continued to allocate unallocated shares
according to its loan amortization schedule in place on the last day of the
ESOP Plan Year immediately prior to the Event of Termination up to the
point at which the ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards
are made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock
option feature of a broader compensation plan which have not already vested
shall be made fully vested and further, at the election of Executive, any
stock options shall be subsequently cancelled by
<PAGE>
Executive in consideration for a payment from the Holding Company in an
amount equal to the product of (i) the number of stock options cancelled
and (ii) the difference between (x) the fair market value (at the time of
cancellation) of the stock upon which the option was issued and (y) the
exercise price of the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived benefits) to Executive which have been made under a stock
grant plan or feature of a broader compensation plan which have not already
vested shall be made fully vested and further, at the election of
Executive, any stock awarded under such a plan shall at the election of
Executive be subject to a put option entitling Executive to sell all or
some portion of such stock to the Holding Company at the then fair market
value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the form
and calculated as described above. In the event that a benefit otherwise
payable in a stock form cannot be provided in stock, such benefit will be
provided in the form of cash using the greater of the fair market value of
the stock at the time of the distribution of the benefit or the closing
price of the stock on the day prior to the time of distribution or the last
day of trading prior to the time of distribution.
(c) At the election of the Executive, which election is to be made prior to
an Event of Termination, such payments shall be made in a lump sum. In the
event that no election is made, payment to Executive will be made on a bi-weekly
basis in approximately equal installments during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment.
(d) No payments pursuant to this subsection shall, in the aggregate, exceed
three times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Institution or such lesser
number of years in the event that Executive shall have been employed by the
Institution for less than five years. For purposes of this subsection 4(b),
"average annual compensation" shall be the average annual compensation as
defined in Section 5(c) of this Agreement. In the event the Institution is not
in compliance with its minimum capital requirements or if such payments pursuant
to this subsection (b) would cause the Institution's capital to be reduced below
its minimum regulatory capital requirements, such payments shall be deferred
until such time as the Institution or successor thereto is in capital
compliance.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision
<PAGE>
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Institution or the Holding Company
representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any Benefit Plan of the Institution or the
Holding Company, or (B) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Institution or the Holding Company or similar transaction occurs
in which the Institution or Holding Company is not the resulting entity;
provided, however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in annual compensation or material
reduction in benefits or relocation of her principal place of employment by more
than thirty (30) miles from its location immediately prior to the Change in
Control, unless such termination is because of her death or Termination for
Cause, provided, however, that such payments shall be reduced by any payment
made under Section 4 of this Agreement.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Institution shall pay Executive, or in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement;
or 2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Institution or
such lesser number of years in the event that Executive shall have been employed
by the Institution for less than five (5) years; provided however, that no
----------------
payments pursuant to this subsection shall exceed three (3) times the
Executive's average annual compensation for the five (5) most recent taxable
years that the Executive has been employed by the Institution or such lesser
number of years in the event the Executive shall have been employed by the
Institution for less than five (5) years. For purposes of this Agreement, such
average annual compensation shall include Base Salary, commissions, bonuses
(including the Fixed Incentive Award),
<PAGE>
contributions on Executive's behalf to any pension and/or profit sharing plan,
severance payments, retirement payments, directors or committee fees, fringe
benefits, and payment of expense items without accountability or business
purpose or that do not meet the IRS requirements for deductibility by the
Institution. In the event the Institution is not in compliance with its minimum
capital requirements or if such payments would cause the Institution's capital
to be reduced below its minimum regulatory capital requirements, such payments
shall be deferred until such time as the Institution or successor thereto is in
capital compliance. At the election of the Executive, which election is to be
made prior to a Change in Control, such payment may be made in a lump sum. In
the event that no election is made, payment to the Executive will be made on a
bi-weekly basis in approximately equal installments over a period of thirty-six
(36) months following the Executive's termination. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Institution will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Institution
for Executive and her dependants prior to her severance at no premium cost to
the Executive, except to the extent that such coverage may be changed in its
application for all Institution employees on a non-discriminatory basis. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Date of Termination.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Bank, she
shall have been absent from her duties with the Bank on a full-time basis for
six (6) consecutive months, and within thirty (30) days after written notice of
potential termination is given she shall not have returned to the full-time
performance of her duties, the Bank may terminate Executive's employment for
"Disability."
<PAGE>
(b) The Bank will pay Executive, as disability pay, a bi-weekly payment
equal to one hundred percent (100%) of Executive's bi-weekly rate of Base Salary
on the effective date of such termination. These disability payments shall
commence on the effective date of Executive's termination and will end on the
earlier of (i) the date Executive returns to the full-time employment of the
Bank in the same capacity as she was employed prior to her termination for
Disability and pursuant to an employment agreement between Executive and the
Bank; (ii) Executive's full-time employment by another employer; (iii) Executive
attaining the normal age of retirement or receiving benefits under any Defined
Benefit Plan of the Bank; (iv) Executive's death; or (v) the expiration of the
term of this Agreement. Notwithstanding any other provisions to the contrary,
the Bank may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of the
Bank's obligations under this Section.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive and her dependants prior to her termination for Disability.
This coverage and payments shall cease upon the earlier of (i) the date
Executive returns to the full-time employment of the Bank, in the same capacity
as he was employed prior to her termination for Disability and pursuant to an
employment agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the normal age of
retirement or receiving benefits under any Defined Benefit Plan of the Bank;
(iv) the Executive's death; or (v) the expiration of the term of this
Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing her duties hereunder by reason of temporary disability.
8. TERMINATION FOR CAUSE.
(a) The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to her a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. Except
as provided in Section 8(b) hereof, Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause except for compensation and benefits already vested. During the period
beginning on the date of the Notice of Termination for Cause pursuant to Section
9 hereof through the Date of Termination, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to
<PAGE>
Executive under any stock benefit plan of the Institution, the Holding Company
or any subsidiary or affiliate thereof vest. At the Date of Termination, such
stock options and related limited rights and such unvested awards shall become
null and void and shall not be exercisable by or delivered to Executive at any
time subsequent to such Date of Termination for Cause.
(b) If, within thirty (30) days after Notice of Termination for Cause is
received by Executive, the Executive notifies the Bank that a dispute exists
concerning the termination ("Notice of Dispute"), the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a Notice of
Dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. In
the event the Executive pursues resolution of such dispute through arbitration
in accordance with the rules of the American Arbitration Association then in
effect, the Bank will continue to pay Executive his Base Salary in effect when
the Notice of Dispute notice giving rise to the dispute was given until the
earlier of: 1) the resolution of the dispute pursuant to arbitration in
accordance with this Agreement or 2) six months from the Date of Termination as
specified in the Notice of Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Institution or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive her full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and the Executive
shall continue as a participant in all compensation, benefit and insurance plans
in which she was participating when the notice of dispute was given,
<PAGE>
until the dispute is finally resolved in accordance with this Agreement. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
(d) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement or
under any other benefit or compensation plans or programs maintained by the Bank
from time to time. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 8 hereinabove.
10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party. The Bank will reimburse the Executive for reasonable costs
incurred by the Executive in connection with furnishing such information and
assistance to the Bank.
11. CONFIDENTIALITY.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Institution and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Institution. Executive will not, during or after
the term of her employment, disclose any knowledge of the past, present, planned
or considered business activities of the Institution or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever, unless expressly authorized by the Board of Directors or required by
law. Notwithstanding the foregoing, Executive may disclose any knowledge of
legal, banking, financial and/or economic principles, concepts or ideas which
are not solely and exclusively derived from the business plans and activities of
the Institution. In the event of a breach or threatened breach by Executive of
the provisions of this Section, the Institution will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Institution or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Institution from pursuing any other remedies
available to the Institution for such breach or threatened breach, including the
recovery of damages from Executive.
<PAGE>
12. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Institution. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the
Institution are not timely paid or provided by the Institution, such amounts and
benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated November 1, 1996,
between Executive and the Holding Company, except to the extent that Base Salary
is paid by the Holding Company under the Holding Company Agreement with respect
to duties performed pursuant thereto, such compensation payments and benefits
paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Institution or any
predecessor of the Institution and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to her without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Institution and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a
<PAGE>
waiver of such term or condition for the future as to any act other than that
specifically waived.
16. REQUIRED PROVISIONS.
(a) The Institution may terminate Executive's employment at any time, but
any termination by the Institution, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. (S)1818(e)(3) or (g)(1); the Institution's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while the respective obligations under this Agreement were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Institution under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
parties hereto shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the
Institution under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Institution under this Agreement shall be
terminated, except to the extent determined that continuation of the Agreement
is necessary for the continued operation of the Institution, (i) by the Director
of the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at
the time the FDIC enters into an agreement to provide assistance to or on behalf
of the Institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS
(or his designee) at the time the Director (or his designee) approves a
supervisory merger to resolve problems related to the operations of the
Institution or when the Institution is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S)545.121 and any rules and regulations promulgated
thereunder.
<PAGE>
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Illinois, but only to the extent
not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses (including the Fixed Incentive Award) and
all other cash compensation, fringe benefits including those accruing under any
Benefit and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Institution if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
22. INDEMNIFICATION.
(a) The Institution shall provide Executive (including her heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and the
Executive's heirs, executors and administrators) to the fullest extent permitted
under federal law against all expenses and liabilities reasonably incurred by
her in connection with or arising out of any action, suit or proceeding in which
she may be involved by reason of her having been a director or officer of the
Institution (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 C.F.R.(S) 545.121 and any rules or
regulations promulgated thereunder.
23. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Institution's obligations under this Agreement, in the same manner and to the
same extent that the Institution would be required to perform if no such
succession or assignment had taken place.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, John G. Yedinak and Sergio Martinucci have caused this
Agreement to be executed and their seals to be affixed hereunto by their duly
authorized officers and directors, and Executive has signed this Agreement, on
the 1st day of November, 1996.
ATTEST: ARGO FEDERAL SAVINGS BANK
/s/ Maria L. Garcia BY: /s/ John G. Yedinak
- ---------------------------- ---------------------------------
Secretary, Assistant
[SEAL]
ATTEST: ARGO BANCORP, INC.
/s/ Maria L. Garcia BY: /s/ Sergio Martinucci
- ---------------------------- ---------------------------------
Secretary, Assistant
[SEAL]
WITNESS: EXECUTIVE:
/s/ Donna L. Bowling Frances M. Pitts
- ---------------------------- -------------------------------------
<PAGE>
Exhibit 10(j)
ARGO BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of November 1, 1996, by and between
Argo Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of Delaware, with its principal administrative office at 7600 West Sixty-
third Street, Summit, Illinois 60501, and Carol J. Delgado (the "Executive").
Any reference to "Bank" herein shall mean Argo Federal Savings Bank, F.S.B. a
federally chartered stock savings bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of her employment hereunder, Senior Vice President and
Chief Financial Officer agrees to serve as the Holding Company. The Executive
shall render administrative and management services to the Holding Company and
shall have such responsibilities and authority over the management and operation
of the Holding Company as Executive had prior to the date hereof. During said
period, Executive also agrees to serve, if elected, as an officer and director
of any subsidiary of the Holding Company. Failure to reelect Executive as
Senior Vice President and Chief Financial Officer of the Holding Company or
failure to reelect Senior Vice President Finance and Operations of the Bank
without the consent of the Executive shall constitute a breach of this
Agreement.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written (the "Effective
Date") and shall continue for a period of sixty (60) full calendar months
thereafter. Commencing with the Effective Date, the term of this Agreement
shall be extended for one day each day until such time as the Board of the
Holding Company or the Executive elects not to extend the term of the Agreement
further by giving written notice to the other party in accordance with Section 9
of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the fifth anniversary of
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the date of such written notice. The Board will review the Agreement and the
Executive's performance annually for purposes of determining whether to give
notice not to extend the Agreement, and the results thereof shall be included in
the minutes of the Board's meeting.
(b) During the period of her employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote such amounts of her business time,
attention, skill, and efforts reasonably required for the faithful performance
of her duties hereunder including activities and services related to the
organization, operation and management of the Holding Company and participation
in community and civic organizations; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the
Holding Company, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary: (i)
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement; and (ii) nothing in this Agreement shall mandate
or prohibit a continuation of Executive's employment following the expiration of
the term of this Agreement upon such terms and conditions as the Board and
Executive may mutually agree.
(d) Upon the termination of Executive's employment with the Holding
Company, the daily extensions provided pursuant to section 2(a), shall cease (if
such extensions have not previously ceased), and, if such termination is under
circumstances described in section 4(a), the term "remaining term of the
Agreement" in section 4(b) shall mean the period of time commencing from the
date of such termination and ending on the last day of the employment period
computed with reference to all extensions prior to such termination.
(e) In the event that Executive's duties and responsibilities with respect
to the Bank are temporarily or permanently terminated pursuant to the
Employment Agreement dated November 1, 1996 (or any successor agreement thereto)
between Executive and the Bank ("Bank Agreement") and the course of conduct upon
which such termination is based would not constitute grounds for Termination for
Cause under Section 8 of this Agreement then Executive shall, to the extent
practicable, assume such duties and responsibilities formerly performed at the
Bank as part of her duties and responsibilities as an Executive Officer of the
Holding Company. Nothing in this provision shall be interpreted as restricting
the Holding Company's right to remove Executive for Cause in accordance with
Section 8 of this Agreement.
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3. COMPENSATION AND REIMBURSEMENT.
(a) The Holding Company shall pay Executive as compensation under this
Agreement a salary of not less than $33,415.00 (including amounts attributable
to duties compensable with respect to On-Line Financial Services) per year. The
compensation specified under this Agreement, together with a portion of that
compensation that otherwise would be paid by the Bank pursuant to the Bank
Agreement ("Base Salary"), shall constitute the consideration paid for the
duties described in Section 1. Base Salary shall also include any amounts of
compensation deferred by Executive under a qualified plan maintained by the
Bank. Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Compensation Committee
designated by the Board, and the Board may increase Executive's Base Salary. An
increase shall become the "Base Salary" for purposes of this Agreement. In no
event shall Executive's annual rate of salary under this Agreement in effect at
a particular time be reduced without her prior written consent. In addition to
the Base Salary provided in this Section 3(a), the Holding Company shall also
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Holding Company and
the Bank.
(b) The Holding Company will provide Executive with employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder, provided, however, that the Holding Company may make such
changes to such plans, agreements or perquisites generally provided on a
nondiscriminatory basis to all employees, without the Executive's consent. The
Holding Company may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Holding Company. Upon
an Event of Termination as defined below, the Holding Company shall transfer all
"Key Man" life insurance if any is owned by the Bank or the Holding Company to
Executive. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in and receive
benefits under any employee benefit plans ("Benefit Plans") whether tax
qualified or not, including, but not limited to, stock grants, restricted stock,
stock options (and other option derived benefits), Employee Stock Ownership
Plans ("ESOP"), or any other stock based benefit plan, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health-and-
accident plan, medical coverage or any other Benefit Plan or arrangement made
available by the Holding Company or the Bank in the future to its senior
executives and key management employees, with awards, grants and levels of
benefits for Executive equal to at least levels customary in the industry for
persons of like title, authority and responsibility as Executive and with levels
of Executive's past participation in the Benefit Plans of the Holding
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Company or Bank subject to and on a basis consistent with the terms, conditions
and overall administration of such plans and arrangements.
Because the Holding Company has determined to pay a portion of Base Salary
that might otherwise be attributable to the Executive's efforts on behalf of the
Bank, in order that the Bank may continue to increase levels of capital while
making available sufficient levels of compensation as are necessary to retain
other senior executives instrumental to the continuing success of the Bank, all
Base Salary earned by the Executive from the Holding Company pursuant to this
Agreement and the Bank pursuant to the Bank Agreement shall be considered when
determining the maximum extent that the Executive can participate under any
Benefit Plan offered by either the Holding Company or the Bank. Executive will
be entitled to incentive compensation and bonuses as provided in any plan of the
Holding Company in which Executive is eligible to participate. Nothing paid to
the Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall provide Executive with a late model automobile
("Automobile"), or Automobile allowance in lieu thereof, and shall pay or
reimburse Executive for all business entertainment expense, travel, Automobile
maintenance, operation and insurance and any other reasonable expenses incurred
by Executive to performing his obligations under this Agreement and may provide
such additional compensation in such form and such amounts as the Board may from
time to time determine.
(d) In the event that Executive assumes additional duties and
responsibilities pursuant to Section 2(c) of this Agreement by reason of one of
the circumstances contained in Section 2(c) of this Agreement, and the Executive
receives or will receive less than the full amount of compensation and benefits
formerly entitled to him under the Bank Agreement, the Holding Company shall
assume the obligation to provide Executive with compensation and benefits in
accordance with the Bank Agreement, less any compensation and benefits received
from the Bank, subject to the terms and conditions of this Agreement including
the Termination for Cause provisions in Section 8.
(e) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to this Executive exclusively, the
Holding Company shall annually award a Fixed Incentive Award to Executive in an
amount equal to one percent (1%) of the pre-tax profit of the Holding Company
and each separately incorporated or organized subsidiary, on an unconsolidated
basis, except to the extent paid under the terms of the Bank Agreement. The
Fixed Incentive Award shall be paid to Executive or his designated beneficiary
upon the earlier of (i) the termination by the Holding Company of her employment
for other than Termination
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for Cause; (ii) the expiration of this Agreement; (iii) her death or Disability;
or (iv) annually, upon the anniversary of this Agreement. In the event Executive
is subject to Termination for Cause or voluntarily terminates her employment,
Executive shall forfeit all rights to the Fixed Incentive Award provided under
this paragraph.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Section 8.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than for Disability, as defined in Section 6 hereof; upon
Retirement, as defined in Section 7 hereof; or for Cause, as defined in Section
8 hereof; (ii) Executive's resignation from the Holding Company's employ, upon
any (A) failure to elect or reelect or to appoint or reappoint Executive as
Senior Vice President, Chief Financial Officer, (B) a material change in
Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Section 1, above,
(and any such material adverse change shall be deemed a continuing breach of
this Agreement), (C) a relocation of Executive's principal place of employment
by more than 30 miles from its location at the effective date of this Agreement,
(D) failure to provide the benefits required under Section 3(b) of this
Agreement, or a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
(E) liquidation or dissolution of the Bank or Holding Company, or (F) material
breach of this Agreement by the Holding Company. Upon the occurrence of any
event described in clauses (A), (B), (C), (D), (E) or (F) above, Executive shall
have the right to elect to terminate her employment under this Agreement by
resignation upon not less than thirty (30) days prior written notice given
within a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Holding Company
shall be obligated to pay Executive, or, in the event of her subsequent death,
his beneficiary or beneficiaries, or her estate, as the case may be, the
following payments and benefits:
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per
year ("Adjusted Base Salary").
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(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
(iii) Continuation for the remaining term of the Agreement of
Executive's and her dependents' participation in any life, medical, health,
disability, dental insurance or any other "welfare plan" (as such is
defined in Section 3 (1) of the Employee Retirement Security Act of 1974 as
amended from time to time ("ERISA") in which Executive participates in on
the day prior to the effective date of this Agreement (each being a
"Welfare Plan"), subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified or non-qualified pension plan (as defined in Section 3 (2)(A)
of ERISA) which she would have earned or accrued during the remaining term
of the Agreement assuming such benefit was vested and is calculated using
Adjusted Base Salary and Adjusted Bonus as appropriate in the formula for
Accrued Benefit under the plans and assuming such benefit was calculated
without making any reduction in the Accrued Benefit due to the benefit
being provided prior to the normal retirement age as set out in the pension
plan and (ii) the accrued benefit Executive is vested in at the time of the
Event of Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank
which Executive would have earned each year within the remaining term of
the Agreement, using compensation values
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which take into account Adjusted Base Salary and Adjusted Bonus and further
assuming that the qualified plans to which the SERP refers provide the
benefits generally provided to Executive under their terms during the five
year period immediately prior to the Event of Termination, the limitations
on compensation and benefits under the Code remained fixed at their levels
as of the time of the Event of Termination, and the ESOP continued to
allocate unallocated shares according to its loan amortization schedule in
place on the last day of the ESOP Plan Year immediately prior to the Event
of Termination up to the point at which the ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards
are made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock
option feature of a broader compensation plan which have not already vested
shall be made fully vested and further, at the election of Executive, any
stock options shall be subsequently cancelled by Executive in consideration
for a payment from the Holding Company in an amount equal to the product of
(i) the number of stock options cancelled and (ii) the difference between
(x) the fair market value (at the time of cancellation) of the stock upon
which the option was issued and (y) the exercise price of the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived
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benefits) to Executive which have been made under a stock
grant plan or feature of a broader compensation plan which have not already
vested shall be made fully vested and further, at the election of
Executive, any stock awarded under such a plan shall at the election of
Executive be subject to a put option entitling Executive to sell all or
some portion of such stock to the Holding Company at the then fair market
value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the
form and calculated as described above. In the event that a benefit
otherwise payable in a stock form cannot be provided in stock, such benefit
will be provided in the form of cash using the greater of the fair market
value of the stock at the time of the distribution of the benefit or the
closing price of the stock on the day prior to the time of distribution or
the last day of trading prior to the time of distribution.
(c) At the election of the Executive, which election must be made prior
to or on the Date of Termination, such payments shall be made in a lump sum or
paid monthly during the remaining term of the Agreement following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment. In the event that
the Executive is receiving monthly payments pursuant to this Section 4, on an
annual basis, thereafter, between the dates of January 1 and January 31 of each
year, Executive shall elect whether, the balance of the amount payable under the
Agreement at that time shall be paid in a lump sum or on a pro rata basis. Such
election shall be irrevocable for the year for which such election is made.
5. CHANGE IN CONTROL.
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or the Holding Company as set forth
below. For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office
of Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank
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or the Holding Company representing 20% or more of the Bank's or the Holding
Company's outstanding securities except for any securities of the Bank purchased
by the Holding Company in connection with the conversion of the Bank to the
stock form and any securities purchased by any Benefit Plan of the Bank, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity, or (D) a proxy statement is
distributed soliciting proxies from stockholders of the Holding Company, by
someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Holding Company or Bank with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed, or (E) a
tender offer is made for 20% or more of the voting securities of the Bank or
Holding Company then outstanding.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board has determined that a Change in
Control has occurred, Executive shall be entitled to the benefits provided in
paragraphs (c), (d), (e) and (f) of this Section 5 upon her subsequent
termination of employment at any time during the term of this Agreement
(regardless of whether such termination results from his dismissal or her
resignation at any time during the term of this Agreement following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or benefits or relocation of her principal
place of employment by more than 30 miles from its location immediately prior to
the Change in Control), unless such termination is because of her death, or
Termination for Cause provided, however, that such payments shall be reduced by
any payment made under Section 4 of this Agreement.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company shall pay Executive, or in the
event of her subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to five (5) times the average of the three (3) preceding years' (i) Base Salary,
(ii) any other taxable income including but not limited to the vesting of stock
grants or restricted stock, the exercise of stock options, the distribution of
previously deferred compensation, including Fixed Incentive Award, bonuses and
any other cash or deferred compensation paid or to be paid to the Executive
during such years, and (iii) the amount of any contributions made or to be made
to any Benefit Plans whether tax qualified or non-qualified
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including but not limited to defined benefit pension plans, defined contribution
plans, SERP's, ESOP's, Welfare Plans, stock option benefits, stock grant
benefits, on behalf of the Executive, maintained by the Bank or the Holding
Company during such years. At the election of the Executive, which election must
be made prior to or on the Date of Termination following a Change in Control,
such payment may be made in a lump sum or paid in equal bi-weekly installments
during the sixty (60) months following the Executive's termination. In the event
that no election is made, payment to the Executive will be made on a bi-weekly
basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Holding Company will cause to be continued life,
medical, dental and disability coverage for Executive and any of her dependents
covered under such plans prior to the Change in Control, substantially identical
to the coverage maintained by the Bank or the Holding Company for Executive and
her dependants prior to her severance. Such coverage and payments shall cease
upon the expiration of sixty (60) months. If Executive or any dependant should
die during this sixty (60) month period, coverage for the remaining parties
shall continue for the remainder of the sixty (60) month period.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
for any taxable year in which the Executive shall be liable, as determined for
the payment of an excise tax under Section 4999 of the Code, with respect to any
payment in the nature of the compensation made by the Company or the Bank to (or
for the benefit of) Executive, the Company shall pay to the Executive an amount
determined under the following formula:
An amount equal to: (E x P) + X
WHERE:
X = E x P
--------------------------------
1 - [(FI x (1 - SLI)) + SLI + E]
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E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 5;
FI = the highest marginal rate of deferral income tax applicable to
Executive under the Code for the taxable year in question; and
SLI = the sum of the highest marginal rates of income, unemployment,
social security, medicare and any other payroll tax applicable to
Executive under applicable state and local laws for the taxable
year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Executive under the terms of this Agreement or otherwise and
on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 5 shall be made to Executive on the
earlier of (i) the date the Company is required to withhold such tax, or (ii)
the date the tax is required to be paid by Executive.
Notwithstanding the foregoing, if it shall subsequently be determined in a
final judicial determination or a final administrative settlement to which
Executive is a party that the excess parachute payment as defined in Section
4999 of the Code, reduced as described above, is more than the amount determined
as "P", above (such greater amount being hereafter referred to as the
"Determinative Excess Parachute Payment") then the Company's independent
accountants shall determine the amount (the "Adjustment Amount") the Company
must pay to the Executive, in order to put the Executive (or the Company, as the
case may be) in the same position as the Executive (or the Company, as the case
may be) would have been if the amount determined as "P" above had been equal to
the Determinative Excess Parachute Payment. In determining the Adjustment
Amount, the independent accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for Executive or refunded to
Executive or for Executive's benefit. As soon as practicable after the
Adjustment Amount has been so determined, the Company shall pay the Adjustment
Amount to Executive.
In each calendar year that Executive receives payments or benefits under
the Employment Agreement, Executive shall report on her income tax returns such
information as is consistent with the determination made by the independent
accountants of the Company as described above. The Company shall indemnify and
hold Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney's fees, interest, fines and penalties)
which Executive incurs as a result of so reporting such information. Executive
shall promptly notify the Company in writing whenever the Executive receives
notice of the institution of a judicial or administrative proceeding, formal or
informal, in which the federal tax treatment under Section 4999 of the Code of
any amount paid or payable under this Supplemental
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Agreement is being reviewed or is in dispute. The Company shall assume control
at its expense over all legal and accounting matters pertaining to such federal
tax treatment (except to the extent necessary or appropriate for Executive to
resolve any such proceeding with respect to any matter unrelated to amounts paid
or payable pursuant to this Agreement) and Executive shall cooperate fully with
the Company in any such proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Company may have
in connection therewith without prior consent to the Company.
6. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Holding
Company, she shall have been absent from her duties with the Holding Company on
a full-time basis for six (6) consecutive months, and within thirty (30) days
after written notice of potential termination is given she shall not have
returned to the full-time performance of her duties, the Holding Company may
terminate Executive's employment for "Disability."
(b) The Holding Company will pay Executive, as disability pay, a bi-weekly
payment equal to one hundred percent (100%) of Executive's bi-weekly rate of
Base Salary on the effective date of such termination. These disability
payments shall commence on the effective date of Executive's termination and
will end on the earlier of (i) the date Executive returns to the full-time
employment of the Holding Company in the same capacity as she was employed prior
to her Termination for Disability and pursuant to an employment agreement
between Executive and the Holding Company; (ii) Executive's full-time employment
by another employer; (iii) Executive attaining the normal age of retirement or
receiving benefits under any Defined Benefit Plan of the Bank or Holding
Company; (iv) Executive's death; or (v) the expiration of the term of this
Agreement. Notwithstanding any other provisions to the contrary, the Holding
Company may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of its
obligations under this Section.
(c) The Holding Company will cause to be continued life, medical, dental
and disability coverage substantially identical to the coverage maintained by
the Holding Company for Executive and her dependants prior to his Termination
for Disability. This coverage and payments shall cease upon the earlier of (i)
the date Executive returns to the full-time employment of the Holding Company,
in the same capacity as she was employed prior to his Termination for Disability
and pursuant to an employment agreement between Executive and the Holding
Company; (ii) Executive's full-time employment by another employer; (iii)
Executive's attaining the normal age of retirement or receiving benefits under
any Defined Benefit Plan of the Bank or Holding Company; (iv) the Executive's
death; or (v) the expiration of the term of this Agreement.
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(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing her duties hereunder by reason of temporary disability.
7. TERMINATION UPON RETIREMENT.
Termination by the Holding Company of the Executive based on "Retirement"
shall mean termination in accordance with the Holding Company's or Bank's
retirement policy or in accordance with any retirement arrangement established
with Executive's consent with respect to her. Upon termination of Executive
upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Holding Company or the Bank and other plans to which
Executive is a party, and shall be entitled to the benefits, if any, as a former
employee under the Holding Company's or the Bank's Benefit Plans and programs
and compensation plans and programs.
8. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of personal
dishonesty which results in loss to the Company or one of its affiliates,
intentional failure to perform stated duties, or willful violation of any law,
rule, regulation (other than traffic violations or similar offenses) or final
cease and desist order which results in substantial loss to the Holding Company
or one of its affiliates. For purposes of this Section, no act, or the failure
to act, on Executive's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to her a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause. Any stock options and related limited rights granted to Executive under
any stock option plan, or any unvested awards granted to Executive under any RRP
of MRP of the Bank, the Holding Company or any subsidiary or affiliate thereof,
shall become null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
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9. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) Subject to Section 9(c), "Date of Termination" shall mean (A) if
Executive's employment is terminated for Disability, thirty (30) days after a
Notice of Termination is given (provided that she shall not have returned to the
performance of her duties on a full-time basis during such thirty (30) day
period, and (B) if her employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a Termination for
Cause, shall not be less than thirty (30) days from the date such Notice of
Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive her full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
the Executive shall continue as a participant in all compensation, benefit and
insurance plans in which she was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
(d) The Holding Company may terminate the Executive's employment at any
time, but any termination by the Holding Company, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement or under any other benefit or compensation plans or
programs maintained by the Holding Company from time to time. Executive shall
not have the right to receive compensation or other benefits for any period
after Termination for Cause as defined in Section 8 hereinabove.
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10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party. The Holding Company will reimburse
the Executive for reasonable costs incurred by the Executive in connection with
furnishing such information and assistance to the Holding Company.
11. NON-DISCLOSURE OF HOLDING COMPANY BUSINESS
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Holding Company and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Holding Company. Executive will not,
during or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Bank or affiliates
thereof to any person, firm, corporation, or other entity for any reason or
purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Holding Company. In the event of a breach or threatened
breach by the Executive of the provisions of this Section, the Holding Company
will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Holding Company or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Holding Company
from pursuing any other remedies available to the Holding Company for such
breach or threatened breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 13
hereof. The Holding Company may use insurance proceeds especially obtained
therefore as partial payment in the event of disability.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and
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supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to her without reference to this Agreement.
14. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received by
Executive under the Bank Agreement (or any successor thereto), except to the
extent that Base Salary is paid under the Bank Agreement with respect to duties
performed thereto, such compensation payments and benefits paid by the Bank will
be subtracted from any amount due simultaneously to Executive under similar
provisions of this Agreement. Payments pursuant to this Agreement and the Bank
Agreement shall be allocated in proportion to the level of activity and the time
expended on such activities by the Executive as determined by the Holding
Company and the Bank on an annual basis.
15. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
16. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
17. SUCCESSOR AND ASSIGNS.
This Agreement will inure to the benefit of and be binding upon Executive,
her legal representatives and testate or intestate distributees, and the Holding
Company, its successors and assigns, including any successor by purchase,
merger, consolidation or otherwise or a statutory
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receiver or any other person or firm or corporation to which all or
substantially all of the assets and business of the Holding Company may be sold
or otherwise transferred. Any such successor of the Holding Company shall be
deemed to have assumed this Agreement and to have become obligated hereunder to
the same extent as the Holding Company, and Executive's obligations hereunder
shall continue in favor of such successor.
18. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
19. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
21. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Bank, in accordance with the rules of
the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed Incentive Award and any other
cash compensation, fringe benefits including those accruing under
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any Benefit Plan, and any compensation and benefits including those accruing
under any Benefit Plan, due Executive under this Agreement.
22. INDEMNIFICATION AND ATTORNEYS' FEES.
(a) The Holding Company shall indemnify, hold harmless and defend
Executive against reasonable costs, including legal fees, incurred by her in
connection with her consultation with legal counsel or arising out of any
action, suit or proceeding in which she may be involved, as a result of his
efforts, in good faith, to defend or enforce the terms of this Agreement. Such
reimbursement shall be made within ten (10) days of Executive providing written
documentation of such expense.
(b) In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses, Fixed Incentive Award and any other
cash compensation, fringe benefits including those accruing under any Benefit
Plan, and any compensation and benefits due Executive under this Agreement.
(c) The Holding Company shall indemnify, hold harmless and defend
Executive for all acts or omissions taken or not taken by her in good faith
while performing services for the Holding Company to the same extent and upon
the same terms and conditions as other similarly situated officers and directors
of the Holding Company. If and to the extent that the Holding Company
maintains, at any time during the remaining term of this Agreement and for an
additional period of seven (7) years thereafter, an insurance policy covering
the other officers and directors of the Holding Company against law suits, the
Holding Company shall use its best efforts to cause Executive to be covered
under such policy upon the same terms and conditions as other similarly situated
officers and directors.
23. MISCELLANEOUS
Unless otherwise subject to law, all lump sum calculations shall be done
using the methods, rates and assumptions set out in Code Section 1274(d) and the
regulations and statements issued thereunder by the IRS.
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SIGNATURES
IN WITNESS WHEREOF, Argo Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, as amended and restated
on the 1st day of November, 1996.
ATTEST: ARGO BANCORP, INC.
/s/ Frances M. Pitts BY: /s/ Sergio Martinucci
- ----------------------- --------------------------------------
Secretary On Behalf of the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Donna L. Bowling /s/ Carol J. Delgado
- ----------------------- ------------------------------------------
Executive
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Exhibit 10(k)
ARGO FEDERAL SAVINGS BANK, FSB
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of November 1, 1996, by and among Argo
Federal Savings Bank, FSB (the "Institution"or "Bank"), a federally chartered
savings institution, with its principal administrative office at 7600 West 63rd
Street, Summit, Illinois 60501, Argo Bancorp, Inc., a corporation organized
under the laws of the State of Delaware, the holding company for the Institution
(the "Holding Company"), and Carol J. Delgado ("Executive").
WHEREAS, the Institution wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Institution on
a permanent basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as Senior Vice President, Finance and Operations of the Institution.
Executive shall render administrative and management services to the Institution
such as are customarily performed by persons situated in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer and director of the Holding Company or any subsidiary of the
Institution.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) calendar months thereafter. Commencing on the
first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the
Institution ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three years, unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 9 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the Agreement
is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote such amounts of her
business time, attention, skill, and efforts reasonably required for the
faithful performance of her duties hereunder including activities and services
<PAGE>
related to the organization, operation and management of the Institution and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Institution, or materially affect the performance of
Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Institution may be terminated by the Institution or the Executive
during the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Institution shall pay Executive as compensation a salary of not
less than $90,000.00 per year ("Base Salary"). Base Salary shall include any
amounts of compensation deferred by Executive under any qualified or
nonqualified plan maintained by the Institution. Such Base Salary shall be
payable bi-weekly. During the period of this Agreement, Executive's Base Salary
shall be reviewed at least annually; the first such review will be made no later
than one year from the date of this Agreement. Such review shall be conducted
by the Board or by a Committee of the Board, delegated such responsibility by
the Board. The Committee or the Board may increase Executive's Base Salary.
Any increase in Base Salary shall become the "Base Salary" for purposes of this
Agreement. In addition to the Base Salary provided in this Section 3(a), the
Institution shall also provide Executive, at no cost to Executive, with all such
other benefits as are provided uniformly to permanent full-time employees of the
Institution.
(b) The Executive shall be entitled to participate in any employee benefit
plans ("Benefit Plans"), arrangements and perquisites substantially equivalent
to those in which Executive was participating or otherwise deriving benefit from
immediately prior to the beginning of the term of this Agreement, and the
Institution will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; provided, however,
that the Bank may make such changes to such plans, arrangements or perquisites
generally provided to all Institution employees on a non-discriminatory basis.
The Bank may acquire "Key Man" insurance on Executive upon such terms and
conditions as may be determined from time to time by the Bank. Upon an Event of
Termination as defined below, the Bank shall transfer all "Key Man" life
insurance, if any is owned by the Bank, to Executive. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under any Benefit Plans
including but not limited to, stock grants, restricted stock, stock options (and
other option derived benefits), Employee Stock Ownership Plans ("ESOP"), or any
other stock-based benefit plan, retirement plans, supplemental retirement plans,
pension plans, profit-sharing plans, health-and-accident plans, medical coverage
or any other employee benefit plan or arrangement made available by the
Institution in the future to its senior executives and key management employees
with awards, grants, levels and benefits for Executive equal at least to levels
customary in the industry for persons of like title, authority and
responsibility as Executive and with levels of Executive's past participation in
the Benefit Plans
<PAGE>
of the Bank, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive shall be
entitled to incentive compensation and bonuses as provided in any plan of the
Institution in which Executive is eligible to participate. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Institution shall pay or reimburse Executive for all travel,
entertainment and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
(d) In addition to Executive's Base Salary as provided in paragraph (a) of
this Section 3 and any incentive compensation or discretionary bonus otherwise
paid or payable to other senior executives or to Executive exclusively, the Bank
shall annually award a Fixed Incentive Award to Executive in an amount equal to
one percent (1%) of the Bank's pre-tax profit on an unconsolidated basis. The
Fixed Incentive Award shall be paid to Executive or her designated beneficiary
upon the earlier of (i) the termination by the Bank of her employment for other
than Termination for Cause; (ii) the expiration of this Agreement; (iii) her
death or Disability; or (iv) annually upon the anniversary of this Agreement.
In the event Executive is subject to Termination for Cause or voluntarily
terminates her employment, other than upon an Event of Termination as defined
below, Executive shall forfeit all rights to the Fixed Incentive Award provided
under this paragraph.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Institution or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a), for Disability, as defined in Section 7 hereof, or Termination for Cause,
as defined in Section 8 hereof; (ii) Executive's resignation from the
Institution's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as Senior Vice President and Finance and Operations, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position and
attributes thereof described in Section 1, above, unless consented to by
Executive, (C) a relocation of Executive's principal place of employment by more
than thirty (30) miles from its location at the effective date of this
Agreement, unless consented to by the Executive, (D) a material reduction in the
benefits and perquisites to the Executive from those being provided as of the
effective date of this Agreement, unless consented to by the Executive, or (E) a
liquidation or dissolution of the Institution or Holding Company, or (F) breach
of this Agreement by the Institution. Upon the occurrence of any event
described in clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have
the right to elect to terminate her employment under this
<PAGE>
Agreement by resignation upon not less than thirty (30) days prior written
notice given within a reasonable period of time not to exceed, except in the
case of a continuing breach, four (4) calendar months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall be
obligated to pay Executive, or, in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, the following
payments and benefits:
(i) Base Salary for the remaining term of the Agreement which shall
be the highest annual Base Salary paid prior to Executive's termination of
employment with the Holding Company or Bank, and which shall be increased
annually during the remaining term of the Agreement at a rate of 4% per
year ("Adjusted Base Salary").
(ii) Bonuses, the Fixed Incentive Award and other incentive payments
for the remaining term of the Agreement which shall be calculated as the
highest percentage of Base Salary, such bonuses and incentive payments
represented prior to Executive's termination of employment with the Holding
Company or Bank multiplied by the Adjusted Base Salary each year during the
remaining term of the Agreement ("Adjusted Bonus").
(iii) Continuation for the remaining term of the Agreement of
Executive's and Executive's dependents' participation in any life, medical,
health, disability, dental insurance or any other "welfare plan" (as such
is defined in Section 3 (1) of the Employee Retirement Security Act of 1974
as amended from time to time ("ERISA") in which Executive participates in
on the day prior to the effective date of this Agreement (each being a
"Welfare Plan"), subject to the same premium contributions on the part of
Executive as were required immediately prior to the Event of Termination.
(iv) A benefit equal to the product of (i) the highest annual
allocation of ESOP shares Executive had previously received under the ESOP
and (ii) the lesser of (x) the remaining number of years remaining in the
term of the Agreement or (y) the number of annual allocations scheduled to
be made under the ESOP immediately prior to the Event of Termination.
(v) A benefit equal to the (i) additional employer contributions and
(ii) net return on all contributions, to which Executive would have been
entitled during the remaining term of the Agreement under any other
qualified or non-qualified defined contribution plan offered by the Holding
Company or the Bank assuming that Executive was 100% vested, Executive made
the maximum allowable contributions or deferrals under such plans,
Executive's compensation reflected Adjusted Base Salary and Adjusted Bonus
and assuming the crediting of interest on contributions being equal to the
return provided during the five (5) year period immediately preceding the
Event of Termination.
(vi) A benefit equal to the difference between (i) the benefits under
any qualified or non-qualified pension plan (as defined in Section 3 (2)(A)
of ERISA) which she would
<PAGE>
have earned or accrued during the remaining term of the Agreement assuming
such benefit was vested and is calculated using Adjusted Base Salary and
Adjusted Bonus as appropriate in the formula for Accrued Benefit under the
plans and assuming such benefit was calculated without making any reduction
in the Accrued Benefit due to the benefit being provided prior to the
normal retirement age as set out in the pension plan and (ii) the accrued
benefit Executive is vested in at the time of the Event of Termination.
(vii) A benefit under any non-qualified Supplemental Executive
Retirement Plan ("SERP") maintained by the Holding Company or the Bank
which Executive would have earned each year within the remaining term of
the Agreement, using compensation values which take into account Adjusted
Base Salary and Adjusted Bonus and further assuming that the qualified
plans to which the SERP refers provide the benefits generally provided to
Executive under their terms during the five year period immediately prior
to the Event of Termination, the limitations on compensation and benefits
under the Code remained fixed at their levels as of the time of the Event
of Termination, and the ESOP continued to allocate unallocated shares
according to its loan amortization schedule in place on the last day of the
ESOP Plan Year immediately prior to the Event of Termination up to the
point at which the ESOP would be fully allocated;
(viii) The benefit (net of deferrals) which would have been earned
each year of the remaining term of the Agreement under any other non-
qualified deferred compensation arrangements offered by the Holding Company
or the Bank calculated using compensation values which take into account
Adjusted Base Salary and Adjusted Bonus and which assume a percentage of
deferred compensation equal to the highest percentage of compensation
actually deferred during the five (5) year period immediately preceding the
Event of Termination and assuming the crediting of interest on deferred
monies equal to the return provided during the five (5) year period
immediately preceding the Event of Termination;
(ix) A benefit consisting of the award, allocation or grant of stock,
restricted stock, stock options or any other stock or stock-related benefit
which would have been made to Executive under any and all stock based
qualified or non-qualified compensation plans or arrangements offered by
Holding Company or the Bank immediately prior to or during the term of the
Agreement at either (A) the highest level of award possible for Executive
under the terms of plans which provide awards based upon levels of
individual or group or institutional performance goals, or (B) if awards
are made at the discretion of the Holding Company or Bank, then at a level
consistent with awards made in the industry for persons of similar title,
authority and responsibility and Executive's past level of benefit under
such plans. Such award, allocation or grant as provided herein shall be
deemed 100% vested immediately.
(x) Any award of stock options (or option derived benefits) to
Executive which have been made under a stock option plan or the stock
option feature of a broader compensation plan which have not already vested
shall be made fully vested and further, at the election of Executive, any
stock options shall be subsequently cancelled by Executive in consideration
for a payment from the Holding Company in an amount equal
<PAGE>
to the product of (i) the number of stock options cancelled and (ii) the
difference between (x) the fair market value (at the time of cancellation)
of the stock upon which the option was issued and (y) the exercise price of
the stock option;
(xi) Any award of restricted stock or a stock grant (or award and
grant derived benefits) to Executive which have been made under a stock
grant plan or feature of a broader compensation plan which have not already
vested shall be made fully vested and further, at the election of
Executive, any stock awarded under such a plan shall at the election of
Executive be subject to a put option entitling Executive to sell all or
some portion of such stock to the Holding Company at the then fair market
value.
(xii) For the purpose of calculating benefits to be provided during
the remaining term of the Agreement, benefits shall be provided in the form
and calculated as described above. In the event that a benefit otherwise
payable in a stock form cannot be provided in stock, such benefit will be
provided in the form of cash using the greater of the fair market value of
the stock at the time of the distribution of the benefit or the closing
price of the stock on the day prior to the time of distribution or the last
day of trading prior to the time of distribution.
(c) At the election of the Executive, which election is to be made prior to
an Event of Termination, such payments shall be made in a lump sum. In the
event that no election is made, payment to Executive will be made on a bi-weekly
basis in approximately equal installments during the remaining term of the
Agreement. Such payments shall not be reduced in the event the Executive
obtains other employment following termination of employment.
(d) No payments pursuant to this subsection shall, in the aggregate, exceed
three times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Institution or such lesser
number of years in the event that Executive shall have been employed by the
Institution for less than five years. For purposes of this subsection 4(b),
"average annual compensation" shall be the average annual compensation as
defined in Section 5(c) of this Agreement. In the event the Institution is not
in compliance with its minimum capital requirements or if such payments pursuant
to this subsection (b) would cause the Institution's capital to be reduced below
its minimum regulatory capital requirements, such payments shall be deferred
until such time as the Institution or successor thereto is in capital
compliance.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying
<PAGE>
the definition of change in control as set forth under the rules and regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting
securities of the Institution or the Holding Company representing 20% or more of
the Institution's or the Holding Company's outstanding voting securities or
right to acquire such securities except for any voting securities of the
Institution purchased by the Holding Company and any voting securities purchased
by any Benefit Plan of the Institution or the Holding Company, or (B)
individuals who constitute the Board on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the
Institution or the Holding Company or similar transaction occurs in which the
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in annual compensation or material
reduction in benefits or relocation of her principal place of employment by more
than thirty (30) miles from its location immediately prior to the Change in
Control, unless such termination is because of her death or Termination for
Cause, provided, however, that such payments shall be reduced by any payment
made under Section 4 of this Agreement.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Institution shall pay Executive, or in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement;
or 2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Institution or
such lesser number of years in the event that Executive shall have been employed
by the Institution for less than five (5) years; provided however, that no
-----------------
payments pursuant to this subsection shall exceed three (3) times the
Executive's average annual compensation for the five (5) most recent taxable
years that the Executive has been employed by the Institution or such lesser
number of years in the event the Executive shall have been employed by the
Institution for less than five (5) years. For purposes of this Agreement, such
average annual compensation shall include Base Salary, commissions, bonuses
(including the Fixed Incentive Award), contributions on Executive's behalf to
any pension and/or profit sharing plan, severance
<PAGE>
payments, retirement payments, directors or committee fees, fringe benefits, and
payment of expense items without accountability or business purpose or that do
not meet the IRS requirements for deductibility by the Institution. In the event
the Institution is not in compliance with its minimum capital requirements or if
such payments would cause the Institution's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Institution or successor thereto is in capital compliance. At
the election of the Executive, which election is to be made prior to a Change in
Control, such payment may be made in a lump sum. In the event that no election
is made, payment to the Executive will be made on a bi-weekly basis in
approximately equal installments over a period of thirty-six (36) months
following the Executive's termination. Such payments shall not be reduced in the
event Executive obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Institution will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Institution
for Executive and her dependants prior to her severance at no premium cost to
the Executive, except to the extent that such coverage may be changed in its
application for all Institution employees on a non-discriminatory basis. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Date of Termination.
(e) In the event that the Executive is receiving bi-weekly payments
pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the
dates of January 1 and January 31 of each year, Executive shall elect whether
the balance of the amount payable under the Agreement at that time shall be paid
in a lump sum or on a pro rata basis pursuant to such section. Such election
shall be irrevocable for the year for which such election is made.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the paragraphs of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, such incapacity being determined by a doctor selected by the Bank, she
shall have been absent from her duties with the Bank on a full-time basis for
six (6) consecutive months, and within thirty (30) days after written notice of
potential termination is given she shall not have returned to the full-time
performance of her duties, the Bank may terminate Executive's employment for
"Disability."
<PAGE>
(b) The Bank will pay Executive, as disability pay, a bi-weekly payment
equal to one hundred percent (100%) of Executive's bi-weekly rate of Base Salary
on the effective date of such termination. These disability payments shall
commence on the effective date of Executive's termination and will end on the
earlier of (i) the date Executive returns to the full-time employment of the
Bank in the same capacity as she was employed prior to her termination for
Disability and pursuant to an employment agreement between Executive and the
Bank; (ii) Executive's full-time employment by another employer; (iii) Executive
attaining the normal age of retirement or receiving benefits under any Defined
Benefit Plan of the Bank; (iv) Executive's death; or (v) the expiration of the
term of this Agreement. Notwithstanding any other provisions to the contrary,
the Bank may apply any proceeds from disability income insurance for Executive
which was paid for by the Bank or Holding Company as partial satisfaction of the
Bank's obligations under this Section.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive and her dependants prior to her termination for Disability.
This coverage and payments shall cease upon the earlier of (i) the date
Executive returns to the full-time employment of the Bank, in the same capacity
as he was employed prior to her termination for Disability and pursuant to an
employment agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the normal age of
retirement or receiving benefits under any Defined Benefit Plan of the Bank;
(iv) the Executive's death; or (v) the expiration of the term of this
Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period which Executive is
incapable of performing her duties hereunder by reason of temporary disability.
8. TERMINATION FOR CAUSE.
(a) The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to her a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. Except
as provided in Section 8(b) hereof, Executive shall not have the right to
receive compensation or other benefits for any period after Termination for
Cause except for compensation and benefits already vested. During the period
beginning on the date of the Notice of Termination for Cause pursuant to Section
9 hereof through the Date of Termination, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to
<PAGE>
Executive under any stock benefit plan of the Institution, the Holding Company
or any subsidiary or affiliate thereof vest. At the Date of Termination, such
stock options and related limited rights and such unvested awards shall become
null and void and shall not be exercisable by or delivered to Executive at any
time subsequent to such Date of Termination for Cause.
(b) If, within thirty (30) days after Notice of Termination for Cause is
received by Executive, the Executive notifies the Bank that a dispute exists
concerning the termination ("Notice of Dispute"), the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a Notice of
Dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. In
the event the Executive pursues resolution of such dispute through arbitration
in accordance with the rules of the American Arbitration Association then in
effect, the Bank will continue to pay Executive his Base Salary in effect when
the Notice of Dispute notice giving rise to the dispute was given until the
earlier of: 1) the resolution of the dispute pursuant to arbitration in
accordance with this Agreement or 2) six months from the Date of Termination as
specified in the Notice of Termination for Cause.
9. NOTICE.
(a) Any purported termination by the Institution or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive her full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and the Executive
shall continue as a participant in all compensation, benefit and insurance plans
in which she was participating when the notice of dispute was given,
<PAGE>
until the dispute is finally resolved in accordance with this Agreement. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
(d) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement or
under any other benefit or compensation plans or programs maintained by the Bank
from time to time. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 8 hereinabove.
10. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 10 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party. The Bank will reimburse the Executive for reasonable costs
incurred by the Executive in connection with furnishing such information and
assistance to the Bank.
11. CONFIDENTIALITY.
Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Institution and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Institution. Executive will not, during or after
the term of her employment, disclose any knowledge of the past, present, planned
or considered business activities of the Institution or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever, unless expressly authorized by the Board of Directors or required by
law. Notwithstanding the foregoing, Executive may disclose any knowledge of
legal, banking, financial and/or economic principles, concepts or ideas which
are not solely and exclusively derived from the business plans and activities of
the Institution. In the event of a breach or threatened breach by Executive of
the provisions of this Section, the Institution will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Institution or affiliates thereof, or from rendering any services to any person,
firm, corporation, other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein will be
construed as prohibiting the Institution from pursuing any other remedies
available to the Institution for such breach or threatened breach, including the
recovery of damages from Executive.
<PAGE>
12. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Institution. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the
Institution are not timely paid or provided by the Institution, such amounts and
benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated November 1, 1996,
between Executive and the Holding Company, except to the extent that Base Salary
is paid by the Holding Company under the Holding Company Agreement with respect
to duties performed pursuant thereto, such compensation payments and benefits
paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Institution or any
predecessor of the Institution and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to her without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Institution and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a
<PAGE>
waiver of such term or condition for the future as to any act other than that
specifically waived.
16. REQUIRED PROVISIONS.
(a) The Institution may terminate Executive's employment at any time, but
any termination by the Institution, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. (S)1818(e)(3) or (g)(1); the Institution's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while the respective obligations under this Agreement were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Institution under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
parties hereto shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the
Institution under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Institution under this Agreement shall be
terminated, except to the extent determined that continuation of the Agreement
is necessary for the continued operation of the Institution, (i) by the Director
of the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at
the time the FDIC enters into an agreement to provide assistance to or on behalf
of the Institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS
(or his designee) at the time the Director (or his designee) approves a
supervisory merger to resolve problems related to the operations of the
Institution or when the Institution is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and 12 C.F.R. (S)545.121 and any rules and regulations promulgated
thereunder.
<PAGE>
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Illinois, but only to the extent
not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses (including the Fixed Incentive Award) and
all other cash compensation, fringe benefits including those accruing under any
Benefit and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Institution if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
22. INDEMNIFICATION.
(a) The Institution shall provide Executive (including her heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and the
Executive's heirs, executors and administrators) to the fullest extent permitted
under federal law against all expenses and liabilities reasonably incurred by
her in connection with or arising out of any action, suit or proceeding in which
she may be involved by reason of her having been a director or officer of the
Institution (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 C.F.R.(S) 545.121 and any rules or
regulations promulgated thereunder.
23. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Institution's obligations under this Agreement, in the same manner and to the
same extent that the Institution would be required to perform if no such
succession or assignment had taken place.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Frances M. Pitts and Sergio Martinucci have
caused this Agreement to be executed and their seals to be affixed hereunto by
their duly authorized officers and directors, and Executive has signed this
Agreement, on the 1st day of November, 1996.
ATTEST: ARGO FEDERAL SAVINGS BANK
/s/ Maria L. Garcia BY: /s/ Frances M. Pitts
- ---------------------------- ---------------------------------
Secretary, Assistant
[SEAL]
ATTEST: ARGO BANCORP, INC.
/s/ Maria L. Garcia BY: /s/ Sergio Martinucci
- ---------------------------- ---------------------------------
Secretary, Assistant
[SEAL]
WITNESS: EXECUTIVE:
/s/ Donna L. Bowling /s/ Carol J. Delgado
- ---------------------------- -------------------------------------
<PAGE>
EXHIBIT NO. 11 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net Income................................... $1,334,000
==========
Weighted average shares outstanding.......... 313,256
Common stock equivalents due to dilutive
effect on stock options.................... 53,417
----------
Total weighted average common shares
and equivalents outstanding................ 366,673
==========
Primary earnings per share................... $ 3.64
==========
Total weighted average common shares
and equivalents outstanding................ 366,673
Additional dilutive shares using the
end of period market value versus
the average market value when
applying the treasury stock method......... 4,106
----------
Total weighted average common shares
and equivalents outstanding for fully
diluted computation........................ 370,779
==========
Fully diluted earnings per share............. $ 3.60
==========
</TABLE>
<PAGE>
Exhibit 13
ARGO BANCORP, INC.
AND SUBSIDIARIES
Annual Report
December 31, 1996, 1995, and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
ARGO BANCORP, INC.
Corporate Profile
- --------------------------------------------------------------------------------
Argo Bancorp, Inc. (Argo Bancorp or the Company) is a Delaware corporation
organized in August 1987 for the purpose of acquiring Argo Federal Savings
Bank, FSB (Argo Savings). Argo Bancorp acquired Argo Savings on November
17, 1987 for a capital infusion of $1.1 million. On May 26, 1992 Argo
Bancorp completed a merger conversion with Dolton-Riverdale Savings and
Loan Association (Dolton) and, as part of the conversion, Argo Bancorp sold
an additional 74,750 shares of common stock at an issuance price of $11.50,
which increased the outstanding common stock to 300,150 shares. There were
446,255 shares of common stock outstanding at December 31, 1996. Argo
Bancorp is a unitary savings and loan holding company and is registered as
such with the Office of Thrift Supervision (OTS). Argo Bancorp's common
stock is publicly traded on the Nasdaq Stock Market Over the Counter
Market. The current market makers of the stock are R. W. Baird,
Incorporated, The Chicago Corporation, and Kemper Securities.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois and converted to a federal stock
charter in 1982. Argo Savings is headquartered in Summit, Illinois and
conducts business as a traditional savings and loan from four locations in
Cook County, Illinois and one location in Lake County, Illinois.
On October 31, 1995, Argo Bancorp acquired On-Line Financial Services, Inc.
(On-Line), an Oak Brook, Illinois based third-party provider of on-line,
real-time, electronic data processing services to financial institutions.
The purchase of On-Line was structured as a revenue sharing agreement
covering seven years from the acquisition date, with annual payouts and a
maximum cap of $10 million to be paid to the former shareholders of On-
Line. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the consolidated financial statements include the
results of operations since the date of acquisition.
On December 31, 1996 Argo Bancorp entered into a stock purchase agreement
with The Deltec Banking Corporation Limited, (Deltec), a banking
corporation organized under the laws of the Commonwealth of the Bahamas.
Under the terms of the agreement Argo Bancorp agreed to issue and sell
111,564 shares of the Company's authorized and unissued common stock to
Deltec at a purchase price $38 per share. Total proceeds from this
transaction were approximately $4,239,000. A 5% investment advisory fee
totaling approximately $212,000 was paid to Charles E. Webb & Company
resulting in net proceeds of $4,027,000.
1
<PAGE>
ARGO BANCORP, INC.
Selected Financial Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Loans receivable and discounted loans receivable, net $ 173,429 142,380 118,063 90,139 74,477
FHLB of Chicago stock 3,428 2,669 2,576 2,576 1,632
Securities available for sale 5,788 7,573 12,491 15,009 28,178
Cash and interest-earning deposits 13,276 11,061 9,286 6,905 4,740
Excess cost over fair value of net assets acquired 333 507 455 555 675
Purchased loan servicing rights 5,264 4,033 3,641 2,508 2,644
Foreclosed real estate 3,913 2,234 359 554 453
Other assets 23,853 16,011 9,146 7,483 5,166
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 229,284 186,468 156,017 125,729 117,965
Deposits 150,627 123,484 100,697 88,220 72,850
Borrowed money 50,879 38,181 30,820 9,064 11,793
Custodial escrow balances for loans serviced for others 5,782 9,696 14,691 20,031 25,735
Other liabilities 5,436 4,228 835 619 1,505
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 16,560 10,879 8,974 7,795 6,082
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA: Year ended Year ended
December 31 October 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 16,074 13,987 10,282 9,477 8,029
Interest expense 9,083 8,341 5,012 3,822 3,881
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,991 5,646 5,270 5,655 4,148
Provision for loan losses 248 55 48 270 43
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,743 5,591 5,222 5,385 4,105
Noninterest income 14,194 4,479 1,838 1,738 1,507
Noninterest expense 19,260 7,662 5,383 4,587 4,191
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,677 2,408 1,677 2,536 1,421
Income tax expense 343 667 281 952 516
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative effect of change
in accounting principle 1,334 1,741 1,396 1,584 905
Cumulative effect of change in accounting for income taxes --- --- --- 460 ---
Extraordinary item - utilization of tax loss carryforward --- --- --- --- 138
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,334 1,741 1,396 2,044 1,043
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share - fully diluted $ 3.60 4.96 4.08 6.21 4.17
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended
SELECTED FINANCIAL RATIOS AND OTHER DATA: Year ended December 31 October 31
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.68 % 1.00 1.00 1.59 0.99
Return on average equity 10.89 17.09 16.17 27.88 17.31
Average equity to average assets 6.26 5.85 6.10 5.71 5.69
Equity to total assets 7.22 5.83 5.75 6.20 5.16
Interest rate spread during period 4.61 3.69 4.25 4.82 3.66
Net interest margin 4.44 3.65 4.24 4.93 4.47
Noninterest expense to average assets 9.83 4.40 3.86 3.58 3.96
Nonperforming loans to total loans (1) 3.12 1.54 1.98 1.19 2.09
Nonperforming assets to total assets (1) 3.43 2.26 1.72 1.31 1.12
Allowance for loan losses to nonperforming loans (1) 16.87 29.54 26.38 55.88 29.79
Average interest-earning assets to average interest-bearing liabilities 0.94x .99x 1.00x 1.03x 1.19x
Book value per share $ 37.11 36.72 30.91 27.38 21.54
- ----------------------------------------------------------------------------------------------------------------------------------
Full-service customer service facilities 5 5 4 3 3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes balances related to portfolio of discounted loans receivable.
2
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this Annual Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1996 Form 10-K.
GENERAL
Argo Bancorp was incorporated in August 1987 for the purpose of acquiring Argo
Savings. The Company was originally capitalized through the sale of 300 shares
(which split in December 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 with a capital infusion of $1.1 million. On August 29, 1991 the Board of
Directors of Dolton and Argo Savings adopted a Plan of Merger Conversion (Plan)
whereby Dolton agreed to convert from a state-chartered mutual association to a
federally-chartered stock association and merge with and into Argo Savings, with
Argo Savings as the surviving entity. Pursuant to the Plan, shares of common
stock of Argo Bancorp were first sold to the members of Dolton in a subscription
offering and the shares not subscribed were then offered to the public in a
community offering. The subscription and community offering were held
concurrently and were completed on April 27, 1992. Final regulatory approval
was received on May 26, 1992, at which time the merger conversion was completed.
The transaction was accounted for as a pooling-of-interests. As a result, no
goodwill or other intangible assets were recorded. As part of the merger
conversion with Dolton, the Company sold an additional 74,750 shares of common
stock at an issuance price of $11.50 per share. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Company retained 50% of the net proceeds from the merger conversion and injected
the remaining 50% into Argo Savings.
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Company is an active holding company with assets
consisting of Argo Savings' common stock, On-Line Financial Services Inc. common
stock, marketable securities, interest-earning deposits, and an investment in a
majority-owned limited liability corporation whose primary purpose is to
purchase residential 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 deposits associated
with purchased mortgage servicing rights (PMSRs) 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).
3
<PAGE>
Argo Savings operates two wholly-owned service corporation subsidiaries. Argo
Mortgage Corporation engages in mortgage brokerage activities that focus on the
purchase and sale of deeply discounted mortgage loans into the secondary market.
Dolton-Riverdale Savings Service Corp. offers life insurance annuities to the
customer base of Argo Savings. Argo Savings also has a majority interest in a
limited liability corporation, Margo Financial Services, LLC (Margo). The
primary activity of Margo is the origination of mortgage loans for portfolio and
for sale into the secondary market.
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, and the income generated by its investment in PMSRs.
Argo Savings' operating results are also affected by 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 deposit 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.
DISCOUNTED LOANS RECEIVABLE
In recent years the Company has acquired through private sales and auctions,
mortgage loans at a discount for which the borrowers are either not current as
to principal and interest payments or there is doubt to the borrowers' ability
to pay in full the contractual principal and interest. The Company estimates
the amounts it will realize through foreclosure, collection efforts or other
resolution of each loan and the length of time required to complete the
collection process in determining the amounts it will bid to acquire such loans.
Investment in these assets has generally resulted in higher than market interest
yields and significant gains as a result of the ultimate sale of properties
acquired through these purchases. Losses have also been incurred from certain
properties through other real estate owned activity.
As a result of the Company's business strategy, the balance of the Company's
discounted loans receivable portfolio increased from $13.5 million or 7.3% of
total assets at December 31, 1995, to $47.7 million or 20.8% of total assets at
December 31, 1996. The increase in the Company's discounted loan acquisition
activity has substantially contributed to the Company's profitability in recent
periods.
ON-LINE FINANCIAL SERVICES
On October 31, 1995 Argo Bancorp acquired On-Line Financial Services, Inc. (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 service
corporations which owned, in the aggregate, 98.9% of the outstanding shares on
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 were liquidated and merged by Argo Bancorp in June 1996.
4
<PAGE>
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-year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a 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
years. The total transaction value, including asset notes and contingent
payments, will not exceed $10 million. Management anticipates funding any
required payments with excess funds generated from operations and, to the extent
necessary, earnings and assets of the Company.
On-Line is a third party provider of electronic data processing services,
primarily to financial institutions located throughout the midwest. On-Line
currently provides data processing services to thrifts, community banks and
savings banks, 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 billion, where the company's orientation toward superior
customer service and specialized products allows it to effectively compete. The
acquisition by Argo Bancorp has promoted 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 maintenance of in-
house systems. On-Line's business plans include 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 its traditional thrift institution
client base.
PRIVATE PLACEMENT OF STOCK
On December 31, 1996 Argo Bancorp entered into a Stock Purchase Agreement with
The Deltec Banking Corporation Limited (Deltec), a banking corporation organized
under the laws of the Commonwealth of the Bahamas. Under the terms of the
purchase agreement, Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized but unissued common stock to Deltec at a purchase price of
$38 per share. Total proceeds from this transaction were approximately
$4,239,000. A 5% investment advisory fee totaling $212,000 was paid to Charles
E. Webb & Company resulting in net proceeds of $4,027,000. The Company also
entered into a Stockholder Agreement with Deltec which stipulates, in material
part that on any occasion the Company shall determine to issue additional
shares, Argo Bancorp shall offer to sell to Deltec such number of shares
required to allow Deltec to continue to own 25% of the outstanding common stock
in the Company.
The proceeds from the issuance and sale of stock to Deltec were used to pay down
$2.0 million on the Company's line of credit and to infuse $2.0 million of
capital into Argo Federal Savings Bank. The capital infusion will allow Argo
Federal Savings to pursue its growth goals.
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, maturing
investments and borrowed money. The most liquid assets are cash and short-term
investments. The levels of these assets are dependent on operating, financing,
and investing activities during any given period. Cash and interest-earning
deposits totaled $13.3 million at December 31, 1996. Additional sources of
funds have included FHLB-Chicago advances, reverse repurchase agreements and
loan sales. Argo Savings has adequate alternative funding sources if short-term
liquidity needs arise.
5
<PAGE>
The primary investing activity of Argo Savings is the origination and purchase
of mortgage loans. During the years ended December 31, 1996 and 1995 Argo
Savings originated and purchased $59.6 million and $35.6 million of loans
receivable, respectively, and $41.1 million and $19.9 million of discounted
loans receivable, respectively. Purchases of securities available-for-sale
totaled $152,000 and $830,000 for 1996 and 1995, respectively. Income earned
from limited partnership investments in purchased mortgage servicing rights
totaled $352,000 for the year ended December 31, 1996. These investing
activities were primarily funded by principal repayments on loans and mortgage-
backed securities of $47.0 million and $36.9 million, an increase in deposit
accounts of $27.1 million and $22.8 million for 1996 and 1995, respectively,
and the increase in short-term borrowings of $12.7 million in 1996 and $8.2
million in 1995.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At December 31, 1996 Argo Savings' liquid assets represented
6.75% of its liquidity base as compared to the required level of 5%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and current loan
demand. Cash flow projections are updated regularly to assure necessary
liquidity.
Liquidity management for Argo Savings is both a daily and long-term function of
Argo Savings' 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.
At December 31, 1996 Argo Savings' capital exceeded all capital requirements of
the OTS. Argo Savings' tangible, core, and risk-based capital ratios were
5.82%, 5.82%, and 10.84%, respectively. Argo Savings is considered "well
capitalized" under OTS prompt corrective action regulations.
At December 31, 1996 Argo Savings had outstanding loan commitments and unused
lines of credit of $2.6 million and $5.4 million, respectively. Argo Savings
had no commitments to purchase loans at December 31, 1996. Argo Savings has a
commitment of $651,000 in connection with a contract signed on December 31, 1996
to purchase PMSR's. Argo Savings also had Community Reinvestment Act (CRA)
investment commitments outstanding of $1.7 million. These commitments include
$981,000 to be funded over ten years for investment in the Chicago Equity Fund,
and $320,000 to be funded over six years for investment in the Community
Investment Corporation. Argo Savings has also committed to sell approximately
$570,000 first mortgage loans, at par, over a 60-day commitment period.
FINANCIAL CONDITION
Total assets increased $42.8 million to $229.3 million at December 31, 1996 from
$186.5 million at December 31, 1995. The increase in total assets is due
primarily to an increase of $27.1 million in deposits and $12.7 million in
borrowed money. The increase in total assets of $30.5 million to $186.5 million
at December 31, 1995 from $156.0 million at December 31, 1994 was due primarily
to an increase of $22.8 million in deposits and $6.5 million from the
acquisition of On-Line.
Net loans receivable, which include loans receivable, loans held for sale and
discounted loans receivable, increased $31.0 million or 21.8%, in 1996 to $173.4
million at December 31, 1996. Net loans receivable increased $24.3 million, or
20.6%, in 1995 to $142.4 million at December 31, 1995. The increase in loans
receivable for 1996 and 1995 is due primarily to the purchase of seasoned loan
packages of both fixed and adjustable rate loans secured by single family
residences. The purchases in 1996 totaling $99.1 million included $41.1 million
in discounted loans receivable and $58.0 million in loans receivable. These
purchases were primarily funded by the $27.1 million increase in deposits a
$12.7 million increase in borrowings, and sales of discounted loans. The 1995
purchases of $55.5 million included $19.9 million of discounted loans receivable
and $35.6 million of loans receivable. These additions were funded primarily by
the $22.8 million increase in deposits and the $8.2 million increase in
borrowings.
6
<PAGE>
Securities available for sale, which totaled $5.8 million at December 31, 1996,
are carried at fair value and include $4.9 million of mortgage-backed
securities, $399,000 of U.S. Government obligations, $282,000 of marketable
equity securities and $203,000 of municipal securities. The balance of
mortgage-backed securities decreased during 1996 by $808,000 primarily due to
principal repayments. The remaining securities available for sale decreased by
$1.2 million during 1996 due to the maturity of U.S. Government obligations and
municipal bonds.
Deposits increased $27.1 million to $150.6 million at December 31, 1996, while
deposits increased $22.8 million to $123.5 million at December 31, 1995 from
$100.7 million at December 31, 1994. The increase for both years is
attributable to increased focus on attracting deposits.
Borrowings increased $12.7 million to $50.9 million at December 31, 1996 and
increased $7.4 million to $38.2 million at December 31, 1995. The increase for
both years is primarily attributable to the need for increased funding for the
purchase of seasoned loan packages and loan originations.
Custodial escrow balances for loans serviced decreased $3.9 million to $5.8
million at December 31, 1996. The custodial accounts relate 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 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 noninterest-bearing
accounts. At December 31, 1996 and 1995, $5.7 million and $7.1 million,
respectively, of all custodial escrow balances pertain to loans subserviced on
behalf of Argo Saving for portfolio loans, servicing retained loans, and
purchased mortgage servicing rights. Due to the nature of custodial escrow
deposits, balances may fluctuate widely on a day-to-day basis.
Common shares outstanding increased 137,736 shares to 446,255 at December 31,
1996 from 308,519 shares at December 31, 1995. The increase is due to the
issuance of 111,564 shares under the stock purchase agreement with The Deltec
Banking Corporation Limited and the exercise of 26,172 stock options. The
shares were issued from authorized but unissued common stock.
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by seeking 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 PMSRs, which provide a source of noninterest 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 maintenance of noninterest-bearing custodial accounts
related to the PMSRs; 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 derivatives to reduce its exposure to interest rate risk.
As part of its asset/liability strategy, Argo Savings' objectives are to
maintain its cumulative one-year hedged gap within a range of (15%) to 15% 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 $28.4 million or
12.40% of total assets at December 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.
7
<PAGE>
In determining its gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, and money market accounts are withdrawn based on
industry averages provided by the OTS. The assumptions used, although
standardized, may not be indicative of the actual withdrawals experienced by
Argo Savings. Fixed maturity deposits reprice at maturity. The combined effect
of these assumptions on passbook, NOW, and money market accounts has 27% of
these accounts withdrawn within one year. Management believes that these decay
rate assumptions are reasonable.
8
<PAGE>
The following table presents Argo Bancorp's interest sensitivity gap between
interest-earning assets, excluding premiums and discounts, and interest-bearing
liabilities at December 31, 1996. The information provided in the table below is
based on asset maturity for fixed rate assets and repricing dates for adjustable
rate assets. No prepayment assumptions have been included.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996
-----------------------------------------------------------------------
More Than More Than More Than More Than
1 Year 1 Year 3 Year 5 Year 10 Year
or Less to 3 Years to 5 Years to 10 Years to 20 Years
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) (2) $ 55,128 12,933 5,272 2,921 13,179
Other loans (1) 6,634 237 271 158 12
Interest-earning deposits 758 - - - -
Mortgage-backed securities 3,825 804 - 146 152
Investment securities 226 - - 175 370
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 66,571 13,974 5,543 3,400 13,713
Less unearned discount, premium, and deferred fees (5,348) (1,262) (514) (273) (1,286)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net interest-earning assets 61,223 12,712 5,029 3,127 12,427
Interest-bearing liabilities:
Passbook accounts 3,119 4,587 2,569 4,771 2,385
NOW accounts (3) 4,598 2,485 3,604 821 918
Money market accounts 3,917 544 248 197 34
Certificate accounts 48,570 57,111 9,114 100 -
Custodial escrows 21 15 11 15 11
FHLB advances and other borrowings 29,425 1,197 536 19,721 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 89,650 65,939 16,082 25,625 3,348
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(28,427) (53,227) (11,053) (22,498) 9,079
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(28,427) (81,654) (92,707) (115,205) (106,126)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a percentage of
total assets (12.40)% (35.26) (40.44) (50.25) (46.20)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative net interest-sensitive assets as a percentage
of interest-sensitive liabilities 74.25 51.76 50.14 45.35 51.43
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
---------------------------------------------------------------------
More Than
20 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-earning assets:
Mortgage loans (1) (2) 91,023 180,456
Other loans (1) - 7,312
Interest-earning deposits - 758
Mortgage-backed securities - 4,927
Investment securities 3,428 4,199
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 94,451 197,652
Less unearned discount, premium, and deferred fees (8,882) (17,565)
- ----------------------------------------------------------------------------------------------------------------------------------
Total net interest-earning assets 85,569 180,087
Interest-bearing liabilities:
Passbook accounts 918 18,349
NOW accounts (3) - 12,426
Money market accounts 17 4,957
Certificate accounts - 114,895
Custodial escrows 3 76
FHLB advances and other borrowings - 50,879
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 938 201,582
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 84,631 (21,495)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap (21,495)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a percentage of
total assets (9.30)
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative net interest-sensitive assets as a percentage
of interest-sensitive liabilities 98.05
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purpose of the GAP analysis, mortgage and other loans are not reduced
for allowance for loan losses, but are reduced for nonperforming loans.
(2) Mortgage loans include loans held for sale, portfolio loans receivable and
discount loans receivable.
(3) Does not include noninterest-bearing NOW accounts of $2.9 million and
noninterest-bearing accounts associated with loans serviced for others of
$6.1 million.
9
<PAGE>
The following table sets forth certain information relating to Argo Bancorp's
consolidated average balance sheets and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management believes that the use of month-end balances
instead of daily average balances has not caused a material difference in the
information presented.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ------------------------------ ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (1) $ 151,384 15,057 9.95 % $ 139,194 13,010 9.35 % $ 106,780 9,315 8.72 %
Mortgage-backed securities 5,294 354 6.68 6,108 405 6.63 7,521 479 6.37
Interest-earning deposits 2,103 421 4.84 1,459 67 4.58 1,533 51 3.33
Investment securities 4,176 242 5.80 7,837 505 6.45 8,559 437 5.11
---------------------------- ------------------------------ ----------------------------
Total interest-earning assets 162,957 16,074 9.86 154,598 13,987 9.05 124,393 10,282 8.27
Noninterest-earning assets (2) 32,927 19,444 15,030
--------- --------- ---------
Total assets $ 195,884 $ 174,042 $ 139,423
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits 130,163 6,433 4.94 113,857 5,610 4.93 93,232 3,501 3.76
Custodial escrows 1,209 78 6.45 3,126 224 7.17 7,134 228 3.20
FHLB advances and other borrowings 41,909 2,572 6.14 38,768 2,507 6.47 24,376 1,283 5.26
---------------------------- ------------------------------ ---------------------------
Total interest-bearing liabilities 173,281 9,083 5.24 155,751 8,341 5.36 124,742 5,012 4.02
---------------
Other liabilities 10,340 8,103 6,050
--------- --------- ---------
Total liabilities 183,621 163,854 130,792
Equity 12,253 10,188 8,631
--------- --------- ---------
Total liabilities and equity $ 195,874 174,042 139,423
========= ========= =========
Net interest income/interest rate
spread (3) 6,991 4.62 % 5,646 3.69 % 5,270 4.25 %
================ ================= ===============
Net interest-earning
assets/(liabilities)/net interest
margin (4) $ (10,324) 4.44 % $ (1,153) 3.65 % $ (349) 4.24 %
========= ====== ========= ====== ========= ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 0.94x .99x 1.00x
========= ========= =========
</TABLE>
(1) Loans receivable include loans held for sale, portfolio loans receivable
and discount loans receivable.
(2) Included in the balances are PMSRs of approximately in $4.6, $4.0 million
and $3.5 million in 1996, 1995 and 1994, respectively.
(3) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-
bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
10
<PAGE>
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. The allowance for loan losses totaled
$685,000 and $587,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 Argo Bancorp had 95 properties totaling $3.9 million
classified as foreclosed real estate as compared to 40 properties for $2.2
million on December 31, 1995. The underlying properties at December 31, 1996
consist primarily of single family residences. The foreclosed real estate has
been written down to its estimated fair value at December 31, 1996. The Savings
Bank maintains an allowance for losses on foreclosed real estate. The balance
totaled $189,000 and $412,000 at December 31, 1996 and 1995, respectively. The
provision for losses and chargeoffs totaled $238,000 and $538,000, respectively
during 1996, compared to $59,000 and $91,000 during 1995. The total amount of
loans (excluding discounted loans) 90 days or more past due at December 31, 1996
was $3.9 million or 3.09% of total portfolio loans receivable and loans held for
sale as compared to $2.0 million or 1.5% on December 31, 1995. The total amount
of discounted loans 90 days or more past due at December 31, 1996 was $15.5
million or 32.4% of total discounted loans receivable. The total amount of
discounted loans 90 days or more past due at December 31, 1995 was $8.4 million
or 62.0% of total discounted loans receivable. Currently, management is unaware
of any identifiable charge-offs based on information available.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995
General. Net income for the year ended December 31, 1996 was $1.3 million or
- --------
$3.60 per share (on a fully diluted basis), compared to net income of $1.7
million, or $4.96 per share (on a fully diluted basis), in 1995.
Interest Income. Interest income increased $2.1 million or 14.9% to $16.1
- ----------------
million in 1996 from $14.0 million in 1995. The increase is primarily due to
the increase of $8.4 million in the average balance of interest-earning assets
to $163.0 million in 1996 from $154.6 million in 1995, and an increase in the
average yield on interest-earning assets to 9.86% in 1996 from 9.05% in 1995.
This increase in average yield was primarily due to the significant growth in
the higher yielding discounted loans receivable portfolio during 1996.
Interest Expense. Interest expense increased $742,000 or 8.90% to $9.1 million
- -----------------
in 1996 from $8.3 million in 1995, primarily as a result of a higher average
balance of interest bearing liabilities. The average balance of interest-
bearing liabilities increased $17.5 million to $173.3 million in 1996 from
$155.8 million in 1995. Partially offsetting this increase was a 12 basis point
decrease in the average cost of funds from 5.36% in 1995 to 5.24% in 1996.
Net Interest Income. Net interest income totaled $7.0 million for the year
- --------------------
ended December 31, 1996, reflecting an increase of $1.4 million from the $5.6
million recorded in 1995. The net interest margin increased from 3.65% in 1995
to 4.44% in 1996. The interest rate spread increased to 4.62% in 1996 compared
to 3.69% in 1995, primarily as a result of the purchase of higher yielding
discounted loans.
The table below sets forth certain information regarding changes in interest
income and interest expense of Argo Bancorp for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change
in volume
11
<PAGE>
multiplied by prior rate); (2) changes in rates (change in rate multiplied by
prior volume); and (3) net changes in rate-volume. The change attributable to
the combined impact of volume and rate have been allocated proportionately to
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
-------------------------- --------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $1,220 828 2,048 2,832 863 3,695
Mortgage-backed securities (54) 3 (51) (160) 86 (74)
Interest-earning deposits
and investment securities (84) 174 90 (173) 257 84
- -----------------------------------------------------------------------------------------
Total 1,082 1,005 2,087 2,499 1,206 3,705
- -----------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits 805 18 823 1,018 1,091 2,109
Custodial escrows (124) (22) (146) (287) 283 (4)
FHLB advances and other
borrowings 193 (128) 65 930 294 1,224
- -----------------------------------------------------------------------------------------
Total 874 (132) 742 1,661 1,668 3,329
- -----------------------------------------------------------------------------------------
Net change in interest
income $ 208 1,137 1,345 838 (462) 376
- -----------------------------------------------------------------------------------------
</TABLE>
Provision for Loan Losses. A general loan loss provision of $248,000 was
- --------------------------
recorded during 1996, bringing the allowance for loan losses to $665,000 or .53%
of total loans receivable, excluding discounted loans receivable and 16.87% of
total nonperforming loans, excluding discounted loans receivable, at December
31, 1996. The loan loss provision in 1995 was $55,000 and the allowance for
loan losses balance at December 31, 1995 was $587,000, or .45% of loans
receivable, excluding discounted loans receivable. In the determination of the
provision for loan losses and adequacy of the corresponding allowance for loan
losses, management considers changes in the asset quality, charge off experience
and economic conditions.
Noninterest Income. Noninterest income increased $9.7 million during 1996 to
- -------------------
$14.2 million in 1996 from $4.5 million in 1995. The increase is primarily due
to On-Line Financial Services, Inc., which generated $11.1 million in data
processing revenue for the year ended December 31, 1996 as compared to the $1.8
million generated for the two months ending December 31, 1995. Also
contributing to the increase in noninterest income was a $781,000 increase in
gains on sale of discounted loans receivable. This increase was due to
increased loan sale activity at Argo Mortgage. Offsetting these increases was a
$364,000 increase in losses realized on the sale of foreclosed assets.
Noninterest Expense. Noninterest expense increased $11.5 million to $19.2
- --------------------
million in 1996 from $7.7 million in 1995. This increase was primarily due to
the acquisition of On-Line Financial Services in the fourth quarter of 1995.
The full year of operations of On-Line Financial Services resulted in increases
of $3.8 million in compensation, $2.7 million in occupancy, $1.3 million in data
servicing costs, and $1.3 million in other general and administrative, $586,000
in software expenses, $140,000 in advertising and $194,000 in legal and
professional fees. Also contributing to the increase in noninterest expense in
1996 was the $804,000 increase in Federal deposit insurance premiums. This was
primarily the result of the special recapitalization assessment paid of $789,000
on September 30, 1996.
12
<PAGE>
Income Tax Expense. The provision for income tax expense decreased $324,000 to
- -------------------
$343,000 for the year ended December 31, 1996. The decrease was primarily due
to a decrease of pretax income of $731,000 and the utilization of approximately
$179,000 in available tax credits primarily attributable to the Company's
investment in low-income housing partnerships.
Fourth Quarter 1996 Results. Income for the fourth quarter of 1996 totaled
- ----------------------------
$404,000, representing a decrease of $353,000 from 1995 net income of $757,000.
Results for the fourth quarter of 1996 include adjustments made to the
previously reported results for the year ended December 31, 1996. The
adjustments impacted various accounts, including the following: loan interest
income, the gain on sale of assets and data processing revenue were decreased by
$280,000, $44,000, and 38,000, respectively; compensation expense and other
noninterest expense increased by $118,000 and $451,000, respectively; interest
expense on borrowings decreased by $40,000; other data processing income
increased by $98,000. The related tax impact of these adjustments totaled
$367,000, resulting in a net decrease to net income of $426,000.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, 1994
General. Net income for the year ended December 31, 1995 was $1.7 million or
- --------
$4.96 per share (on a fully diluted basis), compared to net income of $1.4
million, or $4.08 per share (on a fully diluted basis), in 1994.
Interest Income. Interest income increased $3.7 million or 36% to $14.0 million
- ----------------
in 1995 from $10.3 million in 1994. The increase is primarily due to the
increase of $30.2 million in the average balance of interest-earning assets to
$154.6 million in 1995 from $124.4 million in 1994 and an increase in the
average yield on interest-earning assets to 9.05% for 1995 from 8.27% for 1994.
Interest Expense. Interest expense increased $3.3 million or $66.4% to $8.3
- -----------------
million in 1995 from $5.0 million in 1994, primarily as a result of higher
overall market interest rates. The average cost of funds increased 134 basis
points to 5.36% in 1995 from 4.02% in 1994. In addition, the average balance of
interest-bearing liabilities increased $31.1 million to $155.8 million in 1995
from $124.7 million in 1994.
Net Interest Income. Net interest income totaled $5.6 million for the year
- --------------------
ended December 31, 1995, reflecting an increase of $376,000 from the $5.3
million recorded in 1994. The average spread between interest-earning assets
and interest-bearing liabilities increased $376,000 to $5.6 million for 1995
from $5.3 million in 1994. The interest rate spread decreased to 3.69% in 1995
compared to 4.25% in 1994, primarily as a result of the effect of higher overall
market interest rates on interest-bearing liabilities, which adjust more quickly
to changes in interest rates than interest-earning assets.
Provision for Loan Losses. A general loan loss provision of $55,000 was
- --------------------------
recorded during 1995, bringing the allowance for loan losses to $587,000 or .45%
of loans receivable, excluding discounted loans receivable, and 29.54% of total
nonperforming loans at December 31, 1995, excluding discounted loans receivable.
The loan loss provision in 1994 was $48,000 and the allowance for loan losses
balance at December 31, 1994 was $613,000.
Noninterest Income. Noninterest income increased $2.6 million during 1995 as
- -------------------
compared to 1994. The increase was primarily due to the acquisition of On-Line
Financial Services, Inc., which generated $1.8 million in data processing
income. Also contributing to the increase was the $534,000 increase in income
from gain on sale of assets and a $180,000 increase in other income attributable
directly to On-Line.
13
<PAGE>
Noninterest Expense. Noninterest expense increased $2.3 million in 1995
- --------------------
primarily due to acquisition of On-Line Financial Services, Inc., which
contributed to the $1.0 million increase in compensation, the $700,000 increase
in occupancy, the $300,000 increase in other general and administrative, and the
$231,000 of data servicing costs. Also contributing to the increases in
occupancy, compensation, and other administrative during 1995 was the opening of
the new branch in Gurnee.
Income Tax Expense. The provision for income tax expenses increased $386,000 to
- -------------------
$667,000 for the year ended December 31, 1995. The increase was due to the
increase of pretax income of $731,000 from the previous year.
LEGISLATIVE MATTERS
On September 30, 1996 legislation was enacted which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Savings
Bank, to recapitalize the SAIF and spread the payments of Financing Corporation
Bonds ("FICO") across all SAIF and BIF members. The recapitalization assessment
levied was 65.7 basis points on the amount of SAIF assessable deposits held as
of March 31, 1995. The special assessment was recognized in the third quarter
of 1996 and is tax deductible. The Savings Bank paid $789,000 in connection
with the FDIC special assessment.
Under legislation, the FDIC estimated that BIF members will be paying a portion
of the FICO payment equal to 1.3 basis points on BIF-insured deposits on January
1, 1997, compared to 6.5 basis points on SAIF-insured deposits. Pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The
legislation also requires the BIF and SAIF to be merged by January 1, 1999
provided that subsequent legislation is adopted to eliminate the savings
association charter and there are no remaining savings associations as of that
date.
The FDIC also lowered the SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis or whether the BIF and SAIF will eventually be merged.
The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. That
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applied to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
14
<PAGE>
Legislation regarding bad debt recapture was enacted into law on August 20,
1996. The legislation requires recapture of reserves accumulated after 1987.
The recapture tax on post 1987 reserves must be paid over a six year period
starting in 1996. The payment of the tax can be deferred in each of 1996 and
1997 if an institution originates at least the same average annual principal
amount of mortgage loans that it originated in the six years prior to 1996.
Management does not believe that this legislation will have a material impact on
the operations of the Company.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standard Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement, among other things, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered, and
derecognizes liabilities when extinguished. In December 1996, the FASB issued
SFAS No. 127 which deferred the effective date of certain components of SFAS
No. 125 until January 1, 1998. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after
December 31, 1996. The Company does not expect this pronouncement to have a
significant impact on its consolidated financial condition or results of
operations.
15
<PAGE>
[LETTER HEAD OF PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Argo Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Argo Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Argo Bancorp, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
April 9, 1997
16
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash $ 12,518 7,224
Interest-earning deposits 758 3,837
Stock in Federal Home Loan Bank of Chicago, at cost 3,428 2,669
Securities available-for-sale, at fair value 5,788 7,573
Loans receivable, net of allowance for loan losses of
$665 and $587 in 1996 and 1995, respectively 125,704 128,854
Discounted loans receivable 47,725 13,526
Accrued interest receivable 2,089 1,709
Foreclosed real estate, net of allowance for losses of $189 and $412
in 1996 and 1995, respectively 3,913 2,234
Premises and equipment, net 9,856 6,684
Excess cost over fair value of net assets acquired 333 507
Mortgage loan servicing rights 1,089 -
Investment in limited partnerships 4,175 4,033
Software licensing rights 1,663 1,223
Prepaid expenses and other assets 10,245 6,395
- -----------------------------------------------------------------------------------------------------
$229,284 186,468
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Deposits 150,627 123,484
Borrowed money 50,879 38,181
Advance payments by borrowers for taxes and insurance 24 167
Accrued interest payable 267 224
Interest-bearing custodial escrow balances for loans serviced for others 76 2,623
Custodial escrow balances for loans serviced for others 5,706 7,073
Other liabilities 5,145 3,837
- -----------------------------------------------------------------------------------------------------
Total liabilities 212,724 175,589
- -----------------------------------------------------------------------------------------------------
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 446,255 shares in 1996 and 308,519 shares in 1995 4 3
Class B and C, $0.01 par value. Authorized 340,000 shares each;
none issued or outstanding - -
Class D, $0.01 par value. Authorized 800,000 shares; none issued
or outstanding - -
Additional paid-in capital 7,382 2,739
Retained earnings substantially restricted 9,444 8,322
Common stock acquired by:
Employee Stock Ownership Plan (117) (177)
Management Recognition Plan (165) (50)
Net unrealized gain on securities available-for-sale,
net of income taxes 12 42
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 16,560 10,879
Commitments and contingencies
- -----------------------------------------------------------------------------------------------------
$229,284 186,468
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans receivable $11,370 11,836 9,315
Discounted loans receivable 3,687 1,174 -
Mortgage-backed securities available-for-sale 354 405 479
Interest-earning deposits 421 67 51
Securities available-for-sale 242 505 437
- --------------------------------------------------------------------------------------------------------
Total interest income 16,074 13,987 10,282
- --------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 6,433 5,610 3,501
Custodial escrows 78 224 228
Borrowed money 2,572 2,507 1,283
- --------------------------------------------------------------------------------------------------------
Total interest expense 9,083 8,341 5,012
- --------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 6,991 5,646 5,270
Provision for loan losses 248 55 48
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 6,743 5,591 5,222
- --------------------------------------------------------------------------------------------------------
Noninterest income:
Loan servicing income, net 352 361 221
Net gain (loss) on sale of:
Loans held for sale 246 226 492
Discounted loans receivable 1,843 1,062 375
Purchased loan servicing rights - - 13
Foreclosed real estate (366) (2) 12
Securities available-for-sale 235 219 79
Fees and service charges 520 450 499
Data processing income 11,111 1,836 -
Other 253 327 147
- --------------------------------------------------------------------------------------------------------
Total noninterest income 14,194 4,479 1,838
- --------------------------------------------------------------------------------------------------------
</TABLE>
18 (Continued)
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Noninterest expense:
Compensation and benefits $ 8,731 3,648 2,635
Occupancy and equipment 4,260 1,471 771
Federal deposit insurance premiums 1,072 268 250
Professional fees 788 431 304
Advertising and promotion 305 104 111
Amortization of excess cost over fair
value of net assets acquired 108 102 100
Data processing cost of services 1,542 231 --
Computer services -- 181 154
Software expense 705 119 --
Other 1,749 1,107 1,058
- -----------------------------------------------------------------------------------------
Total noninterest expense 19,260 7,662 5,383
- -----------------------------------------------------------------------------------------
Income before income taxes 1,677 2,408 1,677
Income tax expense 343 667 281
- -----------------------------------------------------------------------------------------
Net income $ 1,334 1,741 1,396
- -----------------------------------------------------------------------------------------
Per share amounts:
Primary $ 3.64 4.99 4.20
Fully diluted 3.60 4.96 4.08
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
====================================================================================================================================
Net unrealized
Common Common gain (loss)
Common Additional stock stock on securities Total
stock paid-in Retained acquired acquired available- stockholders'
Class A capital earnings by ESOP by MRP for-sale equity
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as previously reported $3 2,607 6,050 (290) (124) -- 8,246
Cumulative effect of error in
prior periods (note 15) -- -- (451) -- -- -- (451)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993,
as restated 3 2,607 5,599 (290) (124) -- 7,795
Implementation of change in accounting
for investment securities, net of
taxes -- -- -- -- -- 110 110
Net income -- -- 1,396 -- -- -- 1,396
Principal payments on ESOP loan -- -- -- 53 -- -- 53
Amortization of purchase price of
MRP stock -- -- -- -- 103 -- 103
Proceeds from exercise of stock options -- 54 -- -- -- -- 54
Fair value adjustment for committed
ESOP shares 3 -- -- -- -- 3
Cash dividends ($.68 per share) -- -- (206) -- -- -- (206)
Change in unrealized loss on securities
available-for-sale, net of
income taxes -- -- -- -- -- (334) (334)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3 2,664 6,789 (237) (21) (224) 8,974
Net income -- -- 1,741 -- -- -- 1,741
Principal payments on ESOP loan -- -- -- 60 -- -- 60
Amortization of purchase price of
MRP stock -- -- -- -- 21 -- 21
Proceeds from exercise of stock options -- 49 -- -- -- -- 49
Fair value adjustment for committed
ESOP shares -- 26 -- -- -- -- 26
Cash dividends ($.68 per share) -- -- (208) -- -- -- (208)
Purchase of additional MRP shares -- -- -- -- (50) -- (50)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes -- -- -- -- -- 266 266
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3 2,739 8,322 (177) (50) 42 10,879
Net income -- -- 1,334 -- -- -- 1,334
Proceeds from issuance of stock 1 4,026 -- -- -- -- 4,027
Principal payments on ESOP loan -- -- -- 60 -- -- 60
Proceeds from exercise of stock options -- 430 -- -- -- -- 430
Tax benefits of stock options
exercised -- 149 -- -- -- -- 149
Fair value adjustment for committed
ESOP shares -- 38 -- -- -- -- 38
Cash dividends ($.68 per share) -- -- (212) -- -- -- (212)
Purchase of additional MRP shares -- -- -- -- (115) -- (115)
Change in unrealized gain on securities
available-for-sale, net of income
taxes -- -- -- -- -- (30) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $4 7,382 9,444 (117) (165) 12 16,560
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,334 1,741 1,396
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,435 708 425
Accretion of discounts and deferred loan fees (774) (1,440) (357)
Deferred income tax expense (benefit) 261 545 (328)
Provision for losses on loans receivable and foreclosed real estate 487 114 48
Loss (gain) on sale of:
Loans held for sale (246) (226) (492)
Discounted loans receivable (1,843) (1,062) (375)
Purchased loan servicing rights -- -- (13)
Securities available-for-sale (235) (219) (79)
Foreclosed real estate 366 2 (12)
Loans originated and purchased for sale (23,681) (57,769) (81,979)
Proceeds from sale of loans held for sale 36,040 45,850 98,682
Proceeds from sale of discounted loans receivable 9,358 6,494 1,347
Amortization of excess cost over fair value of net assets acquired 108 102 100
Amortization of purchased loan servicing rights -- -- 36
Amortization of purchase price of MRP and ESOP stock 60 81 156
Recognition of fair value of ESOP shares committed to be released 38 26 3
FHLB stock dividends -- (40) --
Increase in accrued interest receivable and
prepaid expenses and other assets (3,871) (3,985) (815)
Increase in accrued interest payable and other liabilities 1,500 2,865 425
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 20,337 (6,213) 18,168
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated and purchased for portfolio (59,552) (35,633) (75,495)
Discounted loans receivable purchased (41,061) (19,904) (1,436)
Principal repayments on:
Loans receivable and discounted loans receivable 46,231 35,928 31,936
Mortgage-backed securities available-for-sale 735 936 1,897
Proceeds from maturities of investment securities 625 4,100 99
Proceeds from sale of:
Securities available-for-sale 742 1,448 962
Foreclosed real estate 1,968 600 167
Purchased loan servicing rights -- -- 568
Premises and equipment 19 14 45
Purchase of:
Securities available-for-sale (152) (830) (648)
Premises and equipment (5,849) (3,691) (919)
Stock in Federal Home Loan Bank of Chicago (759) (53) --
Loan servicing rights (1,089) -- (1,724)
Net cash paid (received) in purchase of subsidiary 67 (629) --
Purchase of MRP shares (115) (50) --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (58,190) (17,764) (44,548)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
21
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 27,143 22,787 12,477
Proceeds from borrowed money 118,671 145,718 178,773
Repayment of borrowed money (105,974) (137,482) (157,017)
Proceeds from stock issuance 4,027 -- --
Proceeds from exercise of stock options 430 49 54
Dividends paid (212) (208) (206)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance (143) (17) 119
Net decrease in custodial escrow balances for loans serviced (3,914) (4,995) (5,340)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,028 25,852 28,860
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,175 1,875 2,480
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 11,061 9,186 6,706
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,236 11,061 9,186
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 8,980 7,983 4,954
Income taxes 400,000 190 695
Noncash investing activity -
transfer of loans to foreclosed real estate 4,285 1,820 256
Decrease in taxes payable from exercise of stock options 159 -- --
On-Line acquisition:
Fair value of assets acquired, including
cash and cash equivalents -- 5,344 --
Value assigned to intangibles -- 154 --
Liabilities assumed -- 5,190 --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Argo Bancorp, Inc. (Argo Bancorp or the Company)
and subsidiaries conform to generally accepted accounting principles and to
prevailing industry practices. The following is a description of the more
significant of those policies.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are comprised of the accounts of Argo
Bancorp; its wholly-owned subsidiaries, On-Line Financial Services, Inc.
and the Savings Bank; the Savings Bank's wholly-owned subsidiaries, Argo
Mortgage Corporation and Dolton-Riverdale Savings Service Corporation and
its majority owned subsidiary, Margo Financial Services LLC; and Argo
Bancorp's consolidated joint venture, Empire/Argo Mortgage LLC. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
(B) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
Disclosures," effective January 1, 1995. SFAS No. 114 requires that
impaired loans be measured at the present value of expected future cash
flows discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. SFAS No. 118 eliminates the
provisions in SFAS No. 114 that describe how a creditor should report
interest income on an impaired loan and allows a creditor to use existing
methods to recognize, measure, and display interest income on an impaired
loan. Homogeneous loans that are collectively evaluated for impairment,
including first mortgage loans, consumer loans, and the portfolio of
discounted loans receivable are excluded from the provisions of SFAS No.
114. At December 31, 1996 and 1995, the Company identified no loans that
were considered impaired as defined in SFAS No. 114.
(C) INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investments for which the Company has the positive intent and ability to
hold to maturity are classified as "held-to-maturity" and measured at
amortized cost. Investments purchased and held principally for the purpose
of selling them in the near term are classified as "trading securities" and
measured at fair value, with any changes in fair value included in
earnings. All other investments that are not classified as "held-to-
maturity" or "trading securities" are classified as "available-for-sale."
Investments available-for-sale are measured at fair value with any changes
in fair value reflected as a separate component of stockholders' equity,
net of income taxes.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities.
(Continued)
23
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Amortization of premiums and accretion of discounts are recognized in
interest income over the estimated life of the related securities using the
interest method. Gains or losses on the sale of investment and mortgage-
backed securities are determined using the specific identification method.
(D) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less unearned
discounts, deferred loan fees (costs), and allowance for loan losses.
Discounts on loans are amortized to interest income over the contractual
life of the related loans using the interest method.
All loan origination fees and certain direct costs associated with loan
originations are deferred. Net deferred fees and costs are amortized as
yield adjustments over the contractual life of the related loans using a
method which approximates the interest method, adjusted for estimated
prepayments based on the Savings Bank's historical prepayment experience.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Allowances for estimated
losses on loans receivable are established when any permanent decline in
value occurs. Additions to allowances for losses are provided based on a
periodic evaluation by management. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current and prospective economic conditions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for
losses. Such agencies may require the Savings Bank to recognize additions
to the allowance for loan losses based on their judgments of information
available to them at the time of their examination. In the opinion of
management, the allowance, when taken as a whole, is adequate to absorb
losses in the current loan portfolio. Interest income is not recognized on
loans which are 90 days or greater delinquent and on loans which management
believes are uncollectible.
(E) DISCOUNTED LOANS RECEIVABLE
The Company purchases predominately single family loans at moderate to deep
discounts. The moderate discount loans have been historically performing
loans whereas the deep discount loans have been nonperforming. These loan
receivables are stated at unpaid principal balance less unearned discount.
Discounts on the performing loans are accreted to interest income over the
contractual life of the related loans using the interest method. Discounts
on purchased loans for which the collection of principal and interest is
not probable are only recognized in income when the loan is sold or paid in
full. Management evaluates collectibility of the portfolio of discounted
loans receivable on an aggregate pool basis. Any excess of estimated fair
value over the net loan balance, in aggregate, is charged to income. There
was no expense recorded in 1996, 1995, or 1994.
(F) MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized by charges to income.
(Continued)
24
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(G) FORECLOSED REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure or
in judgment is carried at the lower of fair value less costs to dispose or
the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is
established by a charge to operations if the carrying value of a property
exceeds its fair value less costs to dispose.
Activity in the allowance for losses on foreclosed real estate is
summarized as follows:
================================================================================
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 412 399 392
Provision for losses 238 59 -
Transfer from allowance for loan losses 77 45 43
Charge-offs (538) (91) (36)
- --------------------------------------------------------------------------------
Balance at end of year $ 189 412 399
================================================================================
</TABLE>
(H) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets. Useful
lives are 25 to 50 years for building and additions, 7 to 10 years for
building and parking lot improvements, and 3 to 10 years for furniture,
fixtures, equipment, and computer software.
(I) PURCHASED LOAN SERVICING RIGHTS
The investment in purchased loan servicing rights represents equity
investments in limited partnerships carried at the lower of fair value or
the equity investment. The cost of acquiring the rights to service mortgage
loans is capitalized at the partnership level as are other loan servicing
costs. Valuations are performed by management of Argo Bancorp on a
quarterly basis, and an independent valuation is performed annually by the
partnerships.
(J) SOFTWARE LICENSING RIGHTS
The cost of certain software licensing rights acquired and other product
conversion costs at On-Line Financial Services, Inc. are capitalized and
amortized to expense on a straight-line basis over periods of 5 to 7 years.
(Continued)
25
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(K) EXCESS COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED
The cost in excess of fair value of net assets acquired (goodwill) in
business combinations is amortized to expense over 15 years (interest
method) for banking acquisitions and 20 years (straight-line method) for
the On-Line acquisition.
(L) INCOME TAXES
Argo Bancorp and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and state income taxes is based upon
earnings reported in the consolidated financial statements.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the tax consequences attributable to differences between
the financial statement existing assets and liabilities and their
respective tax bases (temporary differences). Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(M) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and
interest-earning deposits with banks with original maturities less than 90
days are considered to be cash and cash equivalents.
The Savings Bank is required by federal regulations to maintain a minimum
level of liquid assets of 5%. The Savings Bank exceeded the federal
requirement at December 31, 1996 and 1995.
(N) EARNINGS PER SHARE
Primary earnings per share is based on a weighted average number of shares
outstanding of 366,673, 348,707, and 332,637 for the years ended December
31, 1996, 1995, and 1994, respectively. Fully diluted earnings per share
for the years ended December 31, 1996, 1995, and 1994 is based upon
370,774, 351,164, and 341,281 weighted average shares outstanding,
respectively.
(O) MANAGEMENT ESTIMATES
In order to prepare the consolidated financial statements in conformity
with generally accepted accounting principles, management is required to
make certain estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. These estimates may differ from
actual results.
(Continued)
26
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(2) ACQUISITION OF ON-LINE FINANCIAL SERVICES, INC.
On October 31, 1995 Argo Bancorp acquired On-Line Financial Services, Inc.
(On-Line), an Oak Brook, Illinois based computer service bureau, servicing
bank and thrift clients throughout the Midwest. The acquisition was
accounted for using the purchase method. The consolidated financial
statements include the results of operations since the acquisition date.
The purchase transaction was consummated through the use of a wholly owned
subsidiary of the Company, OLF Acquisition Corporation, which acquired
shares of three separate state chartered savings and loan service
corporations which owned, in the aggregate, 98.9% of the outstanding shares
on 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 were liquidated and merged by Argo Bancorp in
1996.
Financial terms of the transaction included a cash sweep of On-Line funds
on hand to shareholders, less amounts necessary to establish certain
agreed-upon escrow balances; a two-year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a 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 net revenue, as defined, of
On-Line over a seven-year period. Net revenues as defined include all
revenues from information processing services generated by the acquired
customer list, reduced by certain expenses allocable to such revenues as
established as part of the transaction. The annual contingent payment is
based on an annual percentage of the net revenues as established by the
transaction. The structured payment schedule is as follows:
================================================================================
<TABLE>
<CAPTION>
Percentage of
net revenues
- --------------------------------------------------------------------------------
<S> <C>
Year 1 10.5%
Year 2 15.5
Year 3 15.5
Year 4 11.0
Year 5 11.0
Year 6 11.0
Year 7 11.0
</TABLE>
================================================================================
The total transaction value, including asset notes and contingent payments,
will not exceed $10 million. Cash dividends from On-Line as well as Argo
Savings Bank will provide the necessary liquidity to fund these future
contingent payments.
Goodwill, representing the excess of cost over fair value of net assets
acquired, totaled $82,000 as of December 31, 1996. Any contingent payments
based on future earnings made over the seven year period will increase this
amount.
(Continued)
27
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(3) SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
================================================================================
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- -------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
United States Government obligations $ 370 29 - 399
Municipal securities 187 16 - 203
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation 826 12 (4) 834
Federal National Mortgage Association 4,009 4 (103) 3,910
Government National Mortgage Association 152 8 - 160
Marketable equity securities 226 56 - 282
=================================================================================================
$5,770 125 (107) 5,788
=================================================================================================
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- -------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
United States Government obligations $ 601 2 - 603
Municipal securities 558 61 - 619
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation 1,162 23 (2) 1,183
Federal National Mortgage Association 4,419 8 (63) 4,364
Government National Mortgage Association 158 7 - 165
Marketable equity securities 607 36 (4) 639
- -------------------------------------------------------------------------------------------------
$7,505 137 (69) 7,573
=================================================================================================
</TABLE>
(Continued)
28
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The amortized cost and estimated fair value of securities available-for-
sale, by contractual maturity, at December 31, 1996 and 1995, are shown
below. Mortgage-backed securities, although not due at a single maturity
date, are allocated among the maturity groupings based on contractual
maturity. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
================================================================================
<TABLE>
<CAPTION>
1996 1995
----------------------- -------------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
- -----------------------------------------------------------------------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,884 3,779 781 784
Due after one year through five years 805 816 2,462 2,476
Due after five years through ten years 333 353 372 395
Due after ten years 522 558 3,283 3,279
- -----------------------------------------------------------------------------------------------
5,544 5,506 6,898 6,934
Marketable equity securities 226 282 607 639
- -----------------------------------------------------------------------------------------------
$ 5,770 5,788 7,505 7,573
===============================================================================================
</TABLE>
Proceeds from sales of securities available-for-sale for the years ended
December 31, 1996, 1995, and 1994 were $742,000, $1,448,000, and $962,000,
respectively. Gross gains of $235,000, $219,000, and $79,000, respectively,
were realized on those sales.
(Continued)
29
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(4) LOANS RECEIVABLE
Loans receivable and loans held for sale, net are summarized as follows:
================================================================================
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
First mortgage loans $ 81,050 88,841
Participating investment in first mortgage loans 37,487 34,625
Commercial real estate loans 4,019 2,379
Equity line of credit loans 6,035 5,124
Other loans 1,297 910
- --------------------------------------------------------------------------------
Total gross loans receivable 129,888 131,879
Add (deduct):
Allowance for loan losses (665) (587)
Deferred loan costs 93 63
Unearned discounts (3,612) (2,501)
- --------------------------------------------------------------------------------
$125,704 128,854
================================================================================
Weighted-average interest rate 9.95% 9.35%
================================================================================
</TABLE>
Included in first mortgage loans are loans held for sale totaling
approximately $6.2 million and $570,000 at December 31, 1996 and 1995,
respectively.
The following is a summary of the changes in the allowance for loan losses:
================================================================================
<TABLE>
<CAPTION>
Years ended December 31
-------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 587 613 613
Provision for loan losses 248 55 48
Transfer to allowance for losses on
foreclosed real estate (77) (45) (43)
Charge-offs (93) (36) (5)
- --------------------------------------------------------------------------------
Balance at end of year $ 665 587 613
================================================================================
</TABLE>
(Continued)
30
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Loans receivable delinquent three months or more are as follows:
================================================================================
<TABLE>
<CAPTION>
Percentage of
Number loans receivable
of loans Amount net of discount
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
December 31, 1996 78 $ 3,942 3.12%
December 31, 1995 57 1,987 1.54
December 31, 1994 78 2,324 1.98
================================================================================
</TABLE>
First mortgage loans at December 31, 1996 include approximately $107
million in out-of-area purchased participation and whole loans, which are
secured by single-family homes, with approximately 17% in California, 18%
in New York, and 65% spread throughout the remainder of the country. There
is no geographic concentration of nonperforming loans.
(5) DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net are as follows:
================================================================================
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
First mortgage loans $ 60,276 21,472
Commercial real estate loans 504 173
Other loans 1,062 291
- --------------------------------------------------------------------------------
Total discounted loans receivable 61,842 21,936
Less unearned discount (14,117) (8,410)
- --------------------------------------------------------------------------------
$ 47,725 13,526
================================================================================
</TABLE>
(Continued)
31
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Discounted loans receivable delinquent three months or more are as follows:
================================================================================
<TABLE>
<CAPTION>
Percentage
of discount loans
Amount receivable, net
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
December 31, 1996 $ 15,454 32.38%
December 31, 1995 8,381 61.96%
================================================================================
</TABLE>
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
================================================================================
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Investment securities $ 58 26
Mortgage-backed securities 27 32
Loans receivable and discounted loans receivable 2,004 1,651
- --------------------------------------------------------------------------------
$ 2,089 1,709
================================================================================
</TABLE>
(Continued)
32
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(7) PREMISES AND EQUIPMENT
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
================================================================================
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land $ 537 434
Office buildings and improvements 3,776 3,359
Leasehold improvements 1,293 701
Furniture, fixtures, and equipment 15,331 16,458
Capital leases 5,811 2,392
- --------------------------------------------------------------------------------
26,748 23,344
Less accumulated depreciation and amortization (16,892) (16,660)
- --------------------------------------------------------------------------------
$ 9,856 6,684
================================================================================
</TABLE>
Included in occupancy and equipment expense is depreciation and
amortization expense of office properties and equipment of approximately
$1,435,000, $708,000, and $425,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
The Company leases certain equipment under capital lease agreements. The
cost of these assets is amortized on the straight-line basis with the
charge included in depreciation expense.
At December 31, 1996 the Company had capital lease obligations of $5.8
million relating to lease agreements for equipment and other space in
connection with On-Line. Interest expense in 1996 and 1995 totaled $207,000
and $42,000, respectively.
The Company leases office space and computer equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1996, 1995,
and 1994 totaled $574,000, $149,000, and $24,000, respectively.
(Continued)
33
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
At December 31, 1996, minimum future rental payments due under capital and
noncancelable operating leases having an initial or remaining term of one
year or more consisted of the following:
================================================================================
<TABLE>
<CAPTION>
Year ended December 31 Operating Capital
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
1997 $ 544 1,500
1998 554 1,127
1999 550 798
2000 585 601
2001 415 589
Thereafter - 776
- --------------------------------------------------------------------------------
Total minimum lease payments 2,648 5,391
Amount representing interest - capital leases 1,053
- --------------------------------------------------------------------------------
Present value of minimum capital lease payments $ 4,338
================================================================================
</TABLE>
(8) LOAN SERVICING AND PURCHASED MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans totaled $8.9 million, $10.3 million, and $11.9
million at December 31, 1996, 1995, and 1994, respectively.
For independently acquired servicing rights, the cost of acquiring the
rights to service mortgage loans is capitalized and amortized in proportion
to and over the period of the estimated net servicing income. On December
31, 1996, Argo Savings entered into a contract to acquire purchased
mortgage servicing rights (PMSR's) with an underlying principal balance of
approximately $83.2 million, for a price of approximately $1.1 million. The
weighted average servicing fee on the pool is estimated to be approximately
.56%. In 1995 Argo Bancorp had no independently purchased servicing rights.
There were no sales of purchased loan servicing rights for the years ended
December 31, 1996 and 1995. Proceeds from the sale of purchased loan
servicing rights for the year ended December'31, 1994 totaled $568,000,
with net gains of $13,000 recorded.
(Continued)
34
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The custodial accounts which relate to loans subserviced on behalf of the
Savings Bank and Argo Bancorp for portfolio loans, servicing retained
loans, and purchased mortgage servicing rights are maintained at the
Savings Bank in noninterest-bearing accounts. The custodial accounts are
used for escrowed payments of taxes and insurance and the float on
principal and interest payments. At December 31, 1996, the entire balance
of the custodial accounts of $5,706,000 relates to loans serviced on behalf
of the Savings Bank and Argo Bancorp.
The balance of investment in limited partnerships of $4.2 million at
December 31, 1996 represents Argo Savings' investment in two limited
partnerships. The single business activity of each of these limited
partnerships is the purchase of current mortgage servicing rights. There
are several equity investors in each partnership. The purchase of the
servicing rights is then leveraged on a 1:1 ratio, allowing the partnership
to purchase additional servicing rights. At the end of five years, or at
such time as the investors agree, the servicing rights will be sold and the
proceeds divided pro rata among the investors. As with typical investments
in PMSR's, the collateral underlying the equity investment is the servicing
rights. All purchases of servicing rights must be approved by all equity
investors and undergo stringent guidelines outlined previously for a
purchase of servicing. The administration and servicing of the purchased
portfolios in each partnership is performed by the general partner of each.
Argo Savings' recorded income related to these partnerships on the equity
method of $352,000, $360,000, and $244,000 during 1996, 1995, and 1994,
respectively, is included in servicing fee income, net of amortization of
PMSR's, in the consolidated statements of operations.
(Continued)
35
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(9) DEPOSITS
Deposits at December 31 are summarized as follows:
================================================================================
<TABLE>
<CAPTION>
1996 1995
------------------------------- -----------------------------------
Amount Weighted Amount Weighted
in average in average
thousands Percent rate thousands Percent rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 18,349 12.2% 2.76% $ 18,516 15.0% 2.75%
NOW accounts 12,426 8.3 3.05 12,830 10.4 3.23
Money market accounts 4,957 3.3 4.30 4,483 3.6 4.23
- ------------------------------------------------------------------------------------------------------------------
35,732 23.8 3.07 35,829 29.0 3.11
- ------------------------------------------------------------------------------------------------------------------
Certificate accounts:
3.99% or less 52 - 2.50 18 - 3.65
4.00 - 4.99% 769 .5 4.84 5,457 4.4 4.66
5.00 - 5.99% 71,169 47.2 5.50 36,937 30.0 5.47
6.00 - 6.99% 39,194 26.0 6.17 30,560 24.7 6.28
7.00 - 7.99% 3,612 2.4 7.05 14,550 11.8 7.32
8.00 - 8.99% 99 .1 8.44 133 .1 8.27
- ------------------------------------------------------------------------------------------------------------------
114,895 76.2 5.77 87,655 71.0 6.01
- ------------------------------------------------------------------------------------------------------------------
$150,627 100.0% 5.13% $123,484 100.0% 5.17%
==================================================================================================================
</TABLE>
Contractual maturities of certificate accounts at December 31 are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Under 12 months $ 48,570 50,370
12 months to 36 months 57,111 28,660
Over 36 months 9,214 8,625
- ------------------------------------------------------------------------------------------------------------------
$ 114,895 87,655
==================================================================================================================
</TABLE>
(Continued)
36
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The Savings Bank has pledged investment securities of approximately
$4,160,000 and $4,403,000 at December'31, 1996 and 1995, respectively, as
collateral to secure certain public deposits. At December'31, 1996 the
Savings Bank also has a letter of credit of $14,523,000 as collateral to
secure several State of Illinois certificates of deposit totaling
approximately $14,114,000. The aggregate amount of deposit accounts with a
balance greater than $100,000 was $36,487,000 and $33,797,000 at
December'31, 1996 and 1995, respectively.
Interest expense on deposit accounts is summarized as follows:
================================================================================
<TABLE>
<CAPTION>
Years ended December 31
--------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Passbook and certificate accounts $ 5,934 5,162 3,006
NOW accounts 282 333 374
Money market accounts 217 115 121
- ----------------------------------------------------------------------------------
$ 6,433 5,610 3,501
==================================================================================
</TABLE>
(Continued)
37
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(10) BORROWED MONEY
Borrowed money at December 31 is summarized as follows:
================================================================================
<TABLE>
<CAPTION>
Weighted interest rate Balance
December 31 December 31
----------------------- -------------------
Maturity 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank of Chicago:
Open line 5.59% 5.94 $ 25,650 19,800
1/29/96 -- - 5.80 -- 5,000
7/11/96 -- 8.21 -- 417
10/31/96 -- 6.98 -- 64
1/02/97 6.14 6.14 297 297
2/11/97 4.80 4.80 2,000 2,000
2/10/97 4.80 4.80 1,409 1,409
12/17/97 6.30 6.30 55 55
6/03/01 8.43 8.43 72 72
4/20/03 6.13 6.13 2,760 2,760
11/25/06 6.58 -- 10,000 --
- -----------------------------------------------------------------------------------------------------------
5.80 5.85 42,243 31,874
- -----------------------------------------------------------------------------------------------------------
Other borrowings:
ESOP note payable 4/27/99 8.02 8.25 117 177
Note payable Open line 8.25 8.75 2,227 2,816
Note payable 10/31/97 5.90 5.90 1,026 1,026
Note payable Open line 8.25 -- 975 --
Capital lease obligations
(see note 7) various 9.28 10.50 4,291 2,288
- -----------------------------------------------------------------------------------------------------------
8.48 8.91 8,636 6,307
- -----------------------------------------------------------------------------------------------------------
6.25 6.36% $ 50,879 38,181
===========================================================================================================
</TABLE>
(Continued)
38
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The Savings Bank adopted a collateral pledge agreement whereby the Savings
Bank has agreed to at all times keep on hand, free of all other pledges,
liens, and encumbrances, first mortgages with unpaid principal balances
aggregating no less than 167% of the outstanding secured advances from the
Federal Home Loan Bank of Chicago. All stock in the Federal Home Loan Bank
of Chicago is pledged as additional collateral for these advances.
The 18,253 shares of common stock of Argo Bancorp held by the ESOP are
pledged as collateral for the ESOP note. The other borrowings at December
31, 1996 consist of three notes payable. The note payable of $2,227,000 is
drawn on an open line of credit totaling $6,000,000 with a third-party
financial institution, and is collateralized by the Company's stock in Argo
Federal Savings Bank. The rate of interest adjusts monthly at prime (8.25%
at December 31, 1996). The note payable of $975,000 is drawn on On-Line's
$1,000,000 line of credit with a third-party financial institution, and is
collateralized by accounts receivable of On-Line. The rate of interest
adjusts monthly at prime (8.25% at December 31, 1996). The note payable of
$1,026,000, which matures on October 31, 1997, is an unsecured note due to
the former shareholders of On-Line. This note payable has a fixed interest
rate of 5.9%.
(11) INCOME TAXES
The provision for Federal and state income tax expense (benefit) consists
of the following:
================================================================================
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ 82 122 609
Deferred 261 545 (328)
- -------------------------------------------------------------------------------------
343 667 281
State - - -
- -------------------------------------------------------------------------------------
Total income tax expense $ 343 667 281
=====================================================================================
</TABLE>
(Continued)
39
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December
31, 1996 and 1995 are summarized as follows:
================================================================================
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 111 211
Allowance for loan losses 259 259
Depreciation 159 69
Other 40 16
- --------------------------------------------------------------------------------------------
Gross deferred tax assets 569 555
Valuation allowance - (62)
- --------------------------------------------------------------------------------------------
Net deferred tax assets 569 493
- --------------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess tax bad debt deduction (31) (67)
Limited partnership interest (988) (584)
Unrealized gain on securities available-for-sale (7) (26)
Other (108) (101)
- --------------------------------------------------------------------------------------------
Gross deferred tax liabilities (1,134) (778)
- --------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (565) (285)
============================================================================================
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
of 34%. The major reasons for this difference for the years ended
December'31 follow:
================================================================================
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate $ 570 819 570
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net 37 35 34
Net operating loss carryforwards utilized (18) (19) (55)
Net decrease in valuation allowance (62) - (167)
Municipal interest, net (14) (13) (10)
Tax credits (179) (306) (69)
Other (9) 151 (22)
- -------------------------------------------------------------------------------------------
Income tax expense $ 343 667 281
===========================================================================================
</TABLE>
(Continued)
40
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
At December 31, 1996 Argo Bancorp has net operating loss carryforwards
available of approximately $323,000 expiring in 2004. Utilization of these
net operating losses is limited to approximately $55,000 per year.
Reductions of the valuation allowance are attributable to utilizations of
state net operating loss carryforwards.
Retained earnings at December 31, 1996 include $1,349,000 for which no
provision for Federal income tax has been made. These amounts represent
allocations of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt
losses will create income, which will be subject to the then-current
corporate income tax rate.
(12) EMPLOYEE BENEFIT PLANS
401(K) PLAN AND TRUST
The Argo Federal Savings 401(k) Plan (Plan) is an ERISA-qualified plan
covering all employees of the Savings Bank who have completed at least
1,000 hours of service within a 12 consecutive month period and are age 21
or older. Participants may make contributions to the Plan from 1% to 12% of
their earnings, subject to Internal Revenue Service limitations. Matching
contributions of 50% of each participant's contribution up to 12% are made
at the Savings Bank's discretion each Plan year. The Savings Bank made
contributions of $73,000, $64,000, and $43,000 to the Plan for the years
ended December 31, 1996, 1995, and 1994, respectively. The Plan also
provides benefits in the event of death, disability, or other termination
of employment.
On-Line has a qualified 401(k) Plan covering all employees who have
completed one or more years of service. Participants may make contributions
to the Plan from 1% to 12% of their earnings, subject to Internal Revenue
Service limitations. Matching contributions of 50% of each participant's
contribution up to 6% of participant contributions are made at On-Line's
discretion each year. On-Line made contributions of $81,000 to the Plan in
1996 and $10,800 in 1995.
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.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Dolton Riverdale merger conversion, the Savings Bank
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% 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 an additional 13,020 shares at
an average price of $18.79 per share. The Savings Bank will make scheduled
discretionary cash contributions to the ESOP sufficient to
(Continued)
41
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
service the amounts borrowed. The unpaid balance of the ESOP loan has been
included in borrowed funds on the consolidated statements of financial
condition, and stockholders' equity has been reduced by a similar amount.
Contributions of $72,000, $78,000, and $72,000 were made to the ESOP to
fund principal and interest payments for the years ended December 31, 1996,
1995, and 1994, respectively. At December 31, 1996, 18,253 shares were
allocated, 12,690 shares were committed to be released, and 5,563 shares
were in suspense. The fair value of unearned shares at December 31, 1996
was $173,844.
In accordance with Statement of Position 93-6, (SOP 93-6), "Employers'
Accounting for Employee Stock Ownership Plans," Argo Bancorp considers
outstanding only those shares of the ESOP that are committed to be released
when calculating both primary and fully diluted earnings per share. The
Savings Bank records 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. Additional paid-in capital was increased
by $38,000, $26,000, and $3,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
On-Line does not offer an ESOP for its employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
MANAGEMENT RECOGNITION PLAN
The Board of Directors of the Savings Bank formed a Management Recognition
Plan and Trust (MRP) effective October 31, 1991, which purchased 6.8%, or
15,400 shares, of Argo Bancorp's authorized but unissued common stock in
December 1991. In addition, Argo Bancorp contributed $34,385 to allow the
MRP to purchase 2,990 shares in the merger conversion or on the open
market. All MRP shares have been awarded to employees in key management
positions with the Savings Bank. The awards vested over a three-year
period. The aggregate purchase price of the shares awarded is being
amortized to expense as a portion of annual compensation, and the
unamortized cost is reflected as a reduction of stockholders' equity. For
the years ended December 31, 1995 and 1994, the Savings Bank expensed
$21,000 and $103,000, respectively, of the funds relating to the MRP
awards. No MRP shares were awarded or expensed during the year ended
December 31, 1996.
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. An
additional 3,797 and 1,907 shares were purchased in 1996 and 1995,
respectively, under the MRP. None have been awarded.
The Board of Directors of Argo Bancorp formed a new MRP effective
September 1, 1996, which purchased 12,500 shares of Argo Bancorp stock on
September 24, 1996 for $115,000. Under this plan, employees in key
management positions with Argo Bancorp and all its subsidiaries are
eligible for participation. No MRP shares were awarded or expensed during
the year ended December 31, 1996.
(Continued)
42
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
STOCK OPTION PLANS
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and
Incentive Plan (the 1991 Stock Option Plan), 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 during 1993. The exercise price for the
options awarded was equal to the fair market value of the common stock on
the date of grant. During 1996 and 1995, 22,972 and 3,107 of the options
were exercised, respectively. The weighted average exercise price for the
options exercised in 1996 and 1995 was $16.76 and $14.21. During 1994,
3,762 options were exercised. At December 31, 1996, options to purchase
77,609 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) in 1991,
under which up to 107,450 shares of Argo Bancorp's common stock were
reserved for issuance by Argo Bancorp upon exercise of nonincentive stock
options to be granted to nonemployee directors of the Savings Bank
subsidiary from time to time. At December 31, 1996, 55,100 options for
shares have been awarded by Argo Bancorp under the Non-Qualified Stock
Option Plan. The exercise price for the options awarded was equal to the
fair market value of the common stock on the date of grant. During 1996 and
1995, 3,200 and 500 of the options were exercised, respectively. There were
no options exercised in 1994. The weighted average exercise price for
options exercised in 1996 and 1995 was $14.31 and $11.50, respectively. At
December 31, 1996, options to purchase 50,400 shares were outstanding.
On-Line does not offer a stock option plan for its employees. On-Line
employees and directors are not eligible for participation under Argo
Bancorp's Stock Option Plans.
The Company applies ABP Opinion No. 25 in accounting for the Restated Stock
Plan and, accordingly, compensation cost based on the fair value at grant
date has not been recognized for its stock options in the consolidated
financial statements during the years ended December 31, 1996 and 1995. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, "Accounting for Stock-
Based Compensation," the Company's net income would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
================================================================================
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Net income:
As reported $1,334 1,741
Pro forma 1,115 1,375
Earnings per share:
Primary:
As reported 3.64 4.99
Pro forma 3.04 3.94
Fully diluted:
As reported 3.60 4.96
Pro forma 3.01 3.91
================================================================================
</TABLE>
(Continued)
43
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above, because compensation cost is reflected over the
options' graded vesting period of three years for the 1991 Stock Option
Plan and immediate vesting for the Non Qualified Stock Option Plan and
compensation cost for options granted prior to January 1, 1995, is not
considered. However, the annual expense allocation methodology prescribed
by SFAS No. 123 attributes a higher percentage of the reported expense to
earlier years than to later years, resulting in an accelerated expense
recognition.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option pricing model. The following assumptions were used
in estimated the fair value for options granted in 1995 and 1996:
<TABLE>
<CAPTION>
================================================================================
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 2.37% 2.37%
Risk-free interest rate 6.10% 6.64%
Weighted average expected life 8 yrs. 8 yrs.
Expected volatility 6.95% 6.95%
================================================================================
</TABLE>
The weighted average per share fair values of options granted during 1996
and 1995 were $9.99 and $8.49, respectively.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Savings Bank is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments represent
commitments to originate and sell first mortgage loans and letters of
credit, and involve credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
Commitments to originate fixed and adjustable rate mortgage loans amounted
to approximately $2.6 million at December 31, 1996, at rates ranging from
6.875% to 9.5%. These commitments represent amounts which the Savings Bank
plans to fund in its normal commitment period. The Savings Bank evaluates
each customer's creditworthiness on a case-by-case basis.
Unused lines of credit amounted to approximately $5.4 million as of
December 31, 1996. The Savings Bank also had Community Reinvestment Act
(CRA) investment commitments outstanding of $1.7 million. These commitments
include $981,000 to be funded over ten years for investment in the Chicago
Equity Fund and $320,000 to be funded over six years for investment in the
Community Investment Corporation.
(Continued)
44
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(14) CAPITAL CONTRIBUTIONS
Argo Bancorp contributed $1.5 million to On-Line during the year ended
December 31, 1996. These capital contributions were used to fund software
license purchases and to improve the cash flow position. Argo Bancorp
contributed $2.3 million and $1.0 million to the Savings Bank in December
of 1996 and 1994, respectively. Both contributions were made with the
intent of increasing regulatory capital levels and thereby allowing future
growth. Argo Bancorp also contributed $2.5 million to Empire Mortgage LLC
during the year ended December 31, 1995 to fund loan purchases.
(15) PRIOR PERIOD ADJUSTMENT
Management of the Company has identified an out-of-balance condition at the
Savings Bank relating to historical cash disbursement activity, primarily
occurring during 1991 and 1992. The balance has been quantified at
$726,000, however, the ultimate disposition has yet to be determined.
Although investigation of this matter is continuing, management has
concluded that it is probable that the entire balance will be
unrecoverable. As a result, a prior period adjustment has been recorded to
reduce retained earnings, net of the related tax effect of $275,000, by
$451,000.
(16) REGULATION AND SUPERVISION
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Savings Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Savings Bank capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined) to risk-
weighted assets (as defined), Tier I capital (as defined) to assets (as
defined), and tangible capital (as defined). Management believes, as of
December 31, 1996, that the Savings Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
the Thrift Supervision categorized the Savings Bank as well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well-capitalized, the Savings Bank must maintain minimum
total risk-based, Tier I risk-based, Tier I leverage, and tangible capital
ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
(Continued)
45
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The Savings Bank's actual capital amounts (in thousands) and ratios are as
follows as of December 31, 1996:
<TABLE>
<CAPTION>
=====================================================================================================
To be well-
For capital capitalized under
adequacy prompt corrective
Actual purposes action
---------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $13,212 10.84% $9,749 8.00% $12,186 10.00%
Tier I capital
(to risk-weighted assets) 12,547 10.30 N/A N/A 7,311 6.00
Tier I capital (core leverage)
(to assets) 12,547 5.82 6,464 3.00 10,774 5.00
Tangible capital
(to assets) 12,547 5.82 3,232 1.50 N/A N/A
=====================================================================================================
</TABLE>
(17) DIVIDEND RESTRICTIONS
The OTS imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution (Tier I Savings 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 the approval of the OTS, make capital distributions during a
calendar year up to the higher of (i) 100% of its net income 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 income over the most recent four-quarter period. Any additional
capital distributions would require prior regulatory approval. As of
December 31, 1996 and 1995, the Savings Bank was a Tier I Savings Bank.
(Continued)
46
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(18) SEGMENT FINANCIAL INFORMATION
Argo Bancorp operates in two primary business segments, banking and data
processing, through its two operating subsidiaries. The Savings Bank
provides a wide array of diversified financial services including mortgage,
commercial, and consumer banking services to individuals as well as small
and midsize businesses. The data processing company was purchased by Argo
Bancorp on October 31, 1995 and operates as On-Line Financial Services,
Inc. in six midwestern states. On-Line Financial provides data processing
services to financial institutions.
The following table highlights Argo Bancorp's organizational revenues,
earnings, and assets by business segment. Organizational revenues,
earnings, and assets by business segment are impacted by Argo Bancorp
allocations. The allocations are based upon various management estimates.
The data processing figures in 1995 represent a stub period of two months
from the acquisition date of On-Line.
<TABLE>
<CAPTION>
================================================================================
Data Consolidated
Banking processing total
================================================================================
(in thousands)
<S> <C> <C> <C>
1996:
Revenues $18,722 11,546 30,268
Earnings 598 736 1,334
Assets 218,972 10,312 229,284
================================================================================
1995:
Revenues $16,630 1,836 18,466
Earnings 1,519 222 1,741
Assets 179,983 6,485 186,468
================================================================================
</TABLE>
(Continued)
47
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(19) PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows of
Argo Bancorp, Inc. are presented on the following pages, and should be read
in connection with the consolidated financial statements and notes thereto.
================================================================================
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
================================================================================
December 31
----------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets:
Cash $ 538 123
Interest-bearing deposits 316 102
Securities available-for-sale 282 639
Loans receivable 5 8
Investment in subsidiaries. 18,583 14,734
Other assets 813 206
- --------------------------------------------------------------------------------
Total assets $20,537 15,812
================================================================================
Liabilities and stockholders' equity:
Borrowed money 3,540 4,717
Other liabilities 437 216
Total stockholders' equity. 16,560 10,879
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,537 15,812
================================================================================
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
================================================================================
Years ended December 31
-----------------------
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Interest income $ 9 23 31
Interest expense (341) (286) (99)
- --------------------------------------------------------------------------------
Net interest expense (332) (263) (68)
Dividends from subsidiaries 1,818 973 1,582
Equity in undistributed earnings
of subsidiaries 148 1,097 92
Other noninterest income 235 206 41
Noninterest expense (683) (399) (291)
- --------------------------------------------------------------------------------
Net income before income taxes 1,186 1,614 1,356
Income tax benefit (148) (127) (40)
- --------------------------------------------------------------------------------
Net income $1,334 1,741 1,396
================================================================================
</TABLE>
(Continued)
48
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years ended December 31
---------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,334 1,741 1,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of loans --- 137 ---
(Gain) loss on the sale of:
Loans --- (2) ---
Investment securities (235) (204) (51)
Purchased loan servicing rights --- --- (13)
Equity in undistributed earnings of subsidiaries (148) (1,097) (92)
Amortization of purchased loan servicing rights --- --- 36
Amortization of purchase price of ESOP and MRP 60 81 156
Recognition of fair value of ESOP shares scheduled
to be released 38 26 3
Increase in other assets (586) (139) (10)
Increase (decrease) in other liabilities 370 (499) (234)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 833 44 1,191
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated --- (135) ---
Principal repayments on loans receivable 3 3 2
Proceeds from the sale of:
Purchased loan servicing rights --- --- 568
Investment securities 742 1,314 746
Purchase of investment securities (127) (760) (341)
Net cash paid in purchase of subsidiary --- (629) ---
Contribution to MRP and ESOP (115) (50) ---
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 503 (257) 975
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities: 4,027 --- ---
Proceeds from stock issuance 1,943 5,173 3,244
Proceeds from borrowed money
Repayment of borrowed money (3,120) (2,573) (2,234)
Capital contributions to subsidiaries (3,775) (2,517) (2,321)
Proceeds from exercise of stock options 430 49 54
Dividends paid (212) (208) (206)
Net decrease in custodial escrow balances for loans serviced --- --- (1,497)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (707) (76) (2,960)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 629 (289) (794)
Cash and cash equivalents at beginning of year 225 514 1,308
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 854 225 514
- ---------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
49
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of estimated fair values for all asset, liability,
and off-balance-sheet financial instruments. The estimated fair value
amounts under SFAS No. 107 have been determined as of a specific point in
time utilizing various available market information, assumptions, and
appropriate valuation methodologies. Accordingly, the estimated fair values
presented herein are not necessarily representative of the underlying value
of Argo Bancorp. Rather, the disclosures are limited to reasonable
estimates of the fair value of only Argo Bancorp's financial instruments.
The use of assumptions and various valuation techniques, as well as the
absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. Argo Bancorp does not plan to sell most of its assets or
settle most of its liabilities at these fair values. The estimated fair
values of Argo Bancorp's financial instruments as of December 31, 1996 and
1995 are set forth in the following table, followed by the methods and
assumptions used.
<TABLE>
<CAPTION>
===================================================================================
1996 1995
---------------- ---------------
Carrying Fair Carrying Fair
amount value amount value
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 12,518 12,518 7,224 7,224
Interest-bearing deposits 758 758 3,837 3,837
FHLB of Chicago stock 3,428 3,428 2,669 2,669
Securities available-for-sale 5,788 5,788 7,573 7,573
Loans receivable 173,429 190,655 143,141 145,637
Accrued interest receivable 2,089 2,089 1,709 1,709
===================================================================================
Financial liabilities:
Deposits without stated maturities $ 35,732 35,732 35,829 35,829
Deposits with stated maturities 114,895 115,184 87,655 92,410
Borrowed money 50,879 50,018 38,181 38,205
Interest-bearing custodial escrow
balances 76 76 2,623 2,623
Custodial escrow balances 5,706 5,706 7,073 7,073
Accrued interest payable 267 267 224 224
===================================================================================
</TABLE>
(Continued)
50
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
================================================================================
The following methods and assumptions are used by Argo Bancorp in
estimating the fair value amounts for its financial instruments.
(A) CASH AND INTEREST-BEARING DEPOSITS
The carrying value of cash and interest-bearing deposits approximates fair
value due to the short period of time between origination of the
instruments and their expected realization.
(B) SECURITIES AVAILABLE-FOR-SALE
AND FHLB OF CHICAGO STOCK
The fair value of these securities available-for-sale were estimated using
quoted market prices. The fair value of FHLB stock is based on its
redemption value .
(C) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the
secondary market. The loan portfolio is segmented into fixed and adjustable
interest rate categories. For fixed rate loans, fair value is estimated
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. For adjustable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The carrying amount of accrued interest receivable approximates its
fair value due to the relatively short period of time between accrual and
expected realization.
(D) DEPOSITS, CUSTODIAL ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook
savings, NOW, and money market accounts and custodial escrows are disclosed
as the amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being
offered for deposits with similar remaining terms to maturity.
The carrying amount of interest payable approximates its fair value due to
the relatively short period of time between accrual and expected
realization.
(E) BORROWED FUNDS
The fair value of borrowed funds is the present value of the contractual
cash flows, discounted by the current rate offered for similar remaining
maturities.
51
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
================================================================================
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
<S> <C>
ARGO BANCORP, INC.
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
Frances M. Pitts Charles E. Shomo, IV
Executive Vice President, Secretary and Director First Vice President, R. W. Baird, Incorporated
Director
Carol J. Delgado Donald G. Wittmer
Senior Vice President, Chief Financial Officer President and Owner, Wittmer Financial Services, Ltd.
Director
ARGO FEDERAL SAVINGS BANK, FSB
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer and Director President and Owner, Coldwell Banker
Stanmeyer Realtors
Frances M. Pitts Chairman of the Board
Senior Vice President, General Counsel and Secretary
Richard B. Duffner
Carol J. Delgado President and Owner, RBD & Associates, Ltd.
Senior Vice President, Finance and Operations Director
Ruth M. Louie Emil T. Sergo
Senior Vice President and Director of Community Mayor, McCook, Illinois
Lending and Development Director
Frank J. Lis Dennis G. Carroll
Vice President and Detective, City of Chicago Police Department
Chief Financial Officer Director
Patricia E. Reid Raymond E. Froula
Assistant Vice President, Controller Retired
Director
Maria L. Garcia
Assistant Secretary Mary Ann Gearhart
Member, Will County Board of Commissioners
Director
</TABLE>
52
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
================================================================================
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
On-Line Financial Services, Inc.
John G. Yedinak Gordon L. Grevengoed
Chief Executive Officer and Chairman of the Board Vice Chairman and CEO
Ameribank, fsb
John J. Murphy Director
Executive Vice President
Dennis Kosobucki
Colleen Kitch President and Chairman of the Board
Senior Vice President West Town Savings Bank
Chief Operating Officer Director
Frances M. Pitts Sergio Martinucci
Senior Vice President and Secretary President and Owner, Coldwell Banker
Stanmeyer Realtors
Carol J. Delgado Director
Senior Vice President and Chief Financial Officer
Thomas F. Prisby
David Birk Chairman
Vice President, Citizens Financial Services FSB
Information Systems Development Director
Angelo Tomasello Joseph J. Renn
Vice President, President, Chairman of the Board and
Information Processing Chief Executive Officer
Lisle Savings & Loan
Greg Wright Director
Vice President, Sales
Charles E. Shomo, IV
Phyllis Duffner First Vice President, R. W. Baird, Incorporated
Vice President, Director
Client Services
David H. Stack
Steve Szopa President
Vice President, Superior Savings Bank
Information Systems Director
Kristin Seper Edward E. Whalen
Controller Chairman of the Board
Lincoln Federal Savings Bank
Director
Donald G. Wittmer
President and Owner,
Wittmer Financial Services, LTD
Director
</TABLE>
53
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
================================================================================
STOCKHOLDER REFERENCE
<TABLE>
<S> <C>
Corporate Headquarters Independent Auditors
Argo Bancorp, Inc. KPMG Peat Marwick LLP
7600 W. 63rd Street 303 E. Wacker Drive
Summit, Illinois 60501 Chicago, Illinois 60601
(708) 496-6010
Washington Counsel Transfer Agent and Registrar
Muldoon, Murphy & Faucette Harris Trust and Savings Bank
5101 Wisconsin Avenue, N.W. Shareholder Services Division
Washington, D.C. 20016 311 W. Monroe 11th floor
Chicago, Illinois 60690
312-461-2545
Chicago Counsel Annual Report on Form 10-K
Kemp, Grzelakowski & Lorenzini, Ltd. Copies of Argo Bancorp, Inc.'s 1996 Annual
1900 Spring Road Report on Form 10-K filed without exhibits
Suite 500 with the Securities and Exchange Commission
Oak Brook, Illinois 60521 are available without charge to stockholders,
upon written request to:
Market Makers
R. W. Baird, Incorporated Frances M. Pitts, Corporate Secretary
Chicago, Illinois Argo Bancorp, Inc.
(312) 578-2060 7600 W. 63rd Street
Summit, Illinois 60501
Investor Information Annual Meeting
Stockholders, investors, and analysts interested The annual meeting of stockholders will be held at
in additional information may contact: 3:00 p.m. on May 28, 1997, at Argo Federal Savings
John G. Yedinak, President Bank, FSB, 7600 W. 63rd Street, Summit, Illinois
and CEO at the Corporate 60501.
Headquarters
Stockholders are encouraged to attend.
</TABLE>
OFFICE LOCATIONS
<TABLE>
<S> <C> <C>
Home Office Branch Offices
7600 W. 63rd Street 8267 S. Roberts Road 2240 W. Madison Street
Summit, Illinois 60501 Bridgeview, Illinois 60455 Chicago, Illinois 60612
(708) 496-6010 (708) 496-6020 (312) 563-5500
14076 Lincoln Avenue 6121 Washington Street
Dolton, Illinois 60419 Gurnee, Illinois 60031
(708) 849-3770 (847) 855-2100
</TABLE>
54
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
================================================================================
STOCK PRICE INFORMATION
Argo Bancorp's Inc.'s common stock is traded on the NASDAQ Over the Counter
Market under the symbol ARGO. The table shows the reported high and low sale
prices of common stock and the dividends per share during the periods indicated.
<TABLE>
<CAPTION>
================================================================================
High Low Dividends
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1996:
First Quarter $ 30 26 3/4 .17
Second Quarter 30 1/4 30 1/8 .17
Third Quarter 30 1/2 30 1/4 .18
Fourth Quarter 31 1/4 30 1/2 .18
- --------------------------------------------------------------------------------
Year ended December 31, 1995:
First Quarter $ 25 25 .17
Second Quarter 25 1/4 25 .17
Third Quarter 26 1/4 25 1/4 .17
Fourth Quarter 26 1/4 26 1/4 .17
- --------------------------------------------------------------------------------
Year ended December 31, 1994:
First Quarter $ 25 19 .17
Second Quarter 25 25 .17
Third Quarter 25 25 .17
Fourth Quarter 25 25 .17
================================================================================
</TABLE>
55
<PAGE>
[LETTERHEAD OF PEAT MARWICK LLP]
EXHIBIT 23
The Board of Directors
Argo Bancorp, Inc.
We consent to incorporation by reference in the Registration Statements on Forms
S-8 (File Numbers 33-59856, 33-59858, 33-59860, 33-87202, and 33-13047) of Argo
Bancorp, Inc. of our report dated April 9, 1997, relating to the consolidated
statements of financial condition of Argo Bancorp, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears on
Form 10-K of Argo Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,518
<INT-BEARING-DEPOSITS> 758
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,788
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 174,094
<ALLOWANCE> 665
<TOTAL-ASSETS> 229,284
<DEPOSITS> 150,627
<SHORT-TERM> 50,879
<LIABILITIES-OTHER> 11,218
<LONG-TERM> 0
<COMMON> 4
0
0
<OTHER-SE> 16,556
<TOTAL-LIABILITIES-AND-EQUITY> 229,284
<INTEREST-LOAN> 15,057
<INTEREST-INVEST> 354
<INTEREST-OTHER> 663
<INTEREST-TOTAL> 16,074
<INTEREST-DEPOSIT> 6,433
<INTEREST-EXPENSE> 9,083
<INTEREST-INCOME-NET> 6,991
<LOAN-LOSSES> 248
<SECURITIES-GAINS> 235
<EXPENSE-OTHER> 19,260
<INCOME-PRETAX> 1,677
<INCOME-PRE-EXTRAORDINARY> 1,334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,334
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.60
<YIELD-ACTUAL> 0
<LOANS-NON> 3,942
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,454
<ALLOWANCE-OPEN> 587
<CHARGE-OFFS> 93
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 665
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 665
</TABLE>
