<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-19829
ARGO BANCORP, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 36-3620612
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 486,403 shares outstanding as of October 31, 1997.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
-----
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1997 (unaudited) and
December 31, 1996.............................................. 3
Consolidated Statements of Income for the Three
and Nine Months ended September 30, 1997 and
1996 (unaudited)............................................... 4
Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 1997,
and 1996 (unaudited)........................................... 5
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997,
and 1996 (unaudited)........................................... 6
Notes to Consolidated Financial Statements..................... 7
Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings................................................. 21
Item 2 Changes in Securities............................................. 21
Item 3 Default Upon Senior Securities.................................... 21
Item 4 Submission of Matters to a Vote of Security Holders............... 21
Item 5 Other Information................................................. 21
Item 6 Exhibits and Reports on Form 8-K.................................. 21
Signature Page........................................................... 22
</TABLE>
2
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Dollars in Thousands) 9/30/97 12/31/96
- -------------------------------------------------------------------- ----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash................................................................ $ 6,694 $ 12,518
Interest-earning deposits........................................... 10,243 758
FHLB of Chicago stock............................................... 3,271 3,428
Securities available for sale....................................... 6,003 5,788
Loans receivable, net of allowances for losses of $714 and $665 in
1997 and 1996, respectively ....................................... 128,218 125,704
Discounted loans receivable, net of purchased discounts of 6,122 and
14,177, respectively............................................... 38,925 47,725
Accrued interest receivable......................................... 1,789 2,089
Foreclosed real estate and real estate in judgment.................. 4,333 3,913
Premises and equipment, net......................................... 11,511 9,856
Goodwill............................................................ 188 333
Purchased mortgage servicing rights................................. 6,745 5,264
Prepaid expenses and other assets................................... 11,106 11,908
----------- -----------
$ 229,026 $ 229,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits........................................................... $ 169,148 $ 150,627
Borrowed money..................................................... 30,624 50,879
Interest-bearing custodial escrow balances for loans serviced...... 19 76
Custodial escrow balances for loans serviced....................... 6,898 5,706
Advance payments by borrowers for taxes and insurance.............. 544 24
Other liabilities.................................................. 4,184 5,412
----------- -----------
Total liabilities................................................. $ 211,417 $ 212,724
----------- -----------
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
486,403 shares and 440,692 shares in 1997 and 1996,
respectively..................................................... 5 4
Class B, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Class C, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Class D, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Additional paid-in capital......................................... 8,545 7,382
Retained earnings - substantially restricted....................... 9,817 9,444
Unrealized gain (loss) on securities available for sale, net of
tax............................................................... (44) 12
Common stock acquired by:
Employee Stock Ownership Plan..................................... (72) (117)
Management Recognition Plan....................................... (642) (165)
----------- -----------
Total stockholders' equity....................................... $ 17,609 $ 16,560
----------- -----------
$ 229,026 $ 229,284
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
(Dollars in thousands, except per share data) 9/30/97 9/30/96 9/30/97 9/30/96
- ------------------------------------------------------------ -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable........................................... $ 3,075 $ 3,131 $ 9,513 $ 9,277
Discounted loans receivable................................ 658 836 3,868 1,634
Mortgage-backed securities................................. 72 86 228 272
Interest-earning deposits.................................. 160 165 446 487
-------- -------- -------- --------
Total interest income..................................... 3,965 4,218 14,055 11,670
-------- -------- -------- --------
Interest expense:
Deposits................................................... 2,222 1,639 6,345 4,673
Custodial escrow balances for loans
serviced.................................................. 2 9 7 75
Borrowed money............................................. 512 620 2,208 1,761
-------- -------- -------- --------
Total interest expense.................................... 2,736 2,268 8,560 6,509
-------- -------- -------- --------
Net interest income before provision
for loan losses.......................................... 1,229 1,950 5,495 5,161
Provision for loan losses................................... --- 45 60 100
-------- -------- -------- --------
Net interest income after provision
for loan losses............................................ 1,229 1,905 5,435 5,061
-------- -------- -------- --------
Non-interest income:
Purchased mortgage servicing income, net................... 101 76 270 273
Mortgage banking........................................... 173 20 522 52
Gain on sale of mortgage servicing rights, loans
receivable, discounted loans receivable, mortgage-backed
securities, and securities available for sale............. 422 332 765 1,096
Fees for other customer services........................... 112 102 335 290
Data processing income..................................... 2,880 2,701 8,389 8,185
Other...................................................... 578 22 644 117
-------- -------- -------- --------
Total non-interest income................................. 4,266 3,253 10,925 10,013
-------- -------- -------- --------
Non-interest expense:
Compensation and benefits.................................. 1,913 2,019 6,443 6,213
Occupancy and equipment.................................... 1,273 1,099 3,626 3,183
Data processing cost of services........................... 1,025 449 1,972 1,132
Federal deposit insurance premiums......................... 27 863 74 1,011
Other general and administrative fees...................... 1,297 754 3,452 2,184
Amortization of goodwill................................... 26 27 78 82
-------- -------- -------- --------
Total non-interest expense................................ 5,561 5,211 15,645 13,805
-------- -------- -------- --------
Earnings (loss) before provision for
income tax expense......................................... (66) (53) 715 1,269
Provision for income tax expense (benefit).................. (78) (85) 79 339
-------- -------- -------- --------
Net earnings................................................ 12 32 636 930
-------- -------- -------- --------
Primary net earnings per share.............................. .02 .09 1.24 2.56
-------- -------- -------- --------
Fully diluted earnings per share............................ .02 .09 1.23 2.53
-------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Additional Marketable Common Stock Common Stock Total
Stock paid-in Retained Equity acquired acquired Stockholders'
Nine Months ended September 30, 1996 Class A Capital earnings Securities by ESOP by MRP Equity
- ------------------------------------ ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ $ 3 2,739 8,322 42 (177) (50) 10,879
Net Income.......................... --- --- 930 --- --- --- 930
Change in unrealized loss on
securities available for sale, net. --- --- --- (10) --- --- (10)
Principal payments of ESOP loan..... --- --- --- --- 45 --- 45
Purchase of MRP Stock............... --- --- --- --- --- (115) (115)
Amortization of purchase price of
MRP stock.......................... --- --- --- --- --- 9 9
Proceeds from exercise of stock
options............................ --- 15 --- --- --- --- 15
Fair value adjustment for committed
ESOP shares........................ --- 74 --- --- --- --- 74
Cash dividends...................... --- --- (157) --- --- --- (157)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at September 30, 1996....... $ 3 2,828 9,095 32 (132) (156) 11,670
========== ========== ========== =========== =========== =========== ===========
Nine months ended September 30, 1997
- ------------------------------------
Balance at December 31, 1996........ $ 4 7,382 9,444 12 (117) (165) 16,560
Net income.......................... --- --- 636 --- --- --- 636
Proceeds from issuance of stock..... 1 411 --- --- --- --- 412
Change in unrealized loss on
securities available for sale, net. --- --- --- (56) --- --- (56)
Principal payments on ESOP loan..... --- --- --- --- 45 --- 45
Purchase of MRP stock............... --- --- --- --- --- (486) (486)
Amortization of purchase price of
MRP stock.......................... --- --- --- --- --- 9 9
Proceeds from exercise of stock
options............................ --- 525 --- --- --- --- 525
Tax benefits of stock options
exercised.......................... --- 193 --- --- --- --- 193
Fair value adjustment for committed
ESOP shares........................ --- 34 --- --- --- --- 34
Cash dividends...................... --- --- (263) --- --- --- (263)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at September 30, 1997....... $ 5 8,545 9,817 (44) (72) (642) 17,609
========== ========== ========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------------------------------------ ---------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 636 $ 930
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation...................................................................... 1,604 1,352
Accretion of discounts and deferred loan fees..................................... (852) (571)
Provision for loan losses......................................................... 60 100
Provision for losses on foreclosed real estate.................................... 38 126
(Gain) loss on sale of:
Securities available for sale.................................................... (427) (5)
Loans receivable................................................................. (207) (90)
Discounted loans receivable...................................................... (57) (1,185)
Foreclosed real estate........................................................... (74) 184
Loans originated and purchased for sale........................................... (14,428) (22,011)
Proceeds from sale of loans receivable............................................ 39,880 27,233
Proceeds from sale of discounted loans receivable................................. 14,736 4,867
Amortization of goodwill.......................................................... 78 82
Amortization of purchased mortgage servicing rights............................... 136 ---
Amortization of purchase price of MRP and ESOP stock.............................. 54 54
Recognition of fair value of ESOP shares scheduled to be released................. 34 74
FHLB stock dividends.............................................................. 157 ---
(Increase) decrease in accrued interest receivable, prepaid expenses,
and other assets................................................................. 1,329 (194)
Increase (decrease) in accrued interest payable and other liabilities............. (1,228) 387
---------- ----------
Net cash provided by (used in) operating activities.............................. 41,469 11,333
---------- ----------
Cash flows from investing activities:
Loans originated and purchased for portfolio....................................... (63,780) (24,425)
Discounted loans receivable purchased.............................................. (8,947) (42,257)
Principal repayments on:
Loans receivable and discounted loans receivable.................................. 36,806 36,065
Mortgage-backed securities........................................................ 713 555
Proceeds from maturities of investment securities................................. --- 600
Proceeds from sale of:
Foreclosed real estate............................................................ 2,704 982
Securities available for sale..................................................... 4,074 83
Proceeds from liquidating dividend ............................................... 67 --
Purchase of:
FHLB stock........................................................................ --- (320)
Loan servicing rights............................................................. (1,617) (201)
Securities available for sale..................................................... (4,678) (105)
Premises and equipment............................................................ (3,259) (2,857)
Contribution to MRP and ESOP....................................................... (486) (115)
---------- ----------
Net cash provided by (used in) investing activities............................. (38,403) (31,995)
---------- ----------
Cash flows from financing
activities:
Net increase in deposits........................................................... 18,521 11,500
Proceeds from borrowed funds....................................................... 76,392 86,718
Repayment of borrowed funds........................................................ (96,647) (71,324)
Proceeds from stock issuance....................................................... 412 ---
Proceeds from exercise of stock options............................................ 525 15
Dividends paid..................................................................... (263) (157)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance............................................................... 520 (100)
Net increase (decrease) in custodial escrow balances for
loans serviced.................................................................... 1,135 (4,616)
---------- ----------
Net cash provided by financing activities......................................... 595 22,036
---------- ----------
Net increase (decrease) in cash and cash equivalents.............................. 3,661 1,374
Cash and cash equivalents at beginning of year...................................... 13,276 11,061
---------- ----------
Cash and cash equivalents at end of period........................................... 16,937 12,435
========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest expense.................................................................. 8,487 6,459
Income taxes...................................................................... 80 400
Non-cash investing activity - transfer of loans to foreclosed
real estate....................................................................... $ 3,141 $ 1,413
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
6
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-QSB, and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for fair presentation have been
included. The results of operations for the three months and nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or "Holding Company") and its
wholly owned subsidiaries, On-Line Financial Services, Inc. ("On-Line"), Argo
Federal Savings Bank, FSB ("Argo Savings" or "Savings Bank") and Argo Savings'
wholly owned subsidiaries, Argo Mortgage Corporation, Dolton-Riverdale Savings
Service Corporation, and Argo Savings' majority owned subsidiary Margo Financial
Services LLC ("Margo"). The statements also include Argo Bancorp's majority
owned limited liability company, Argo / Empire Mortgage LLC, which is
consolidated into the Corporation. Significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE B - STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(K) Plan (Plan) effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve consecutive
month period and are age 21 or older. Participants may make contributions to
the Plan from 1.0% to 12.0% of their earnings, subject to Internal Revenue
Service limitations. Matching contributions of 50.0% of each participant's
contribution up to 12.0% are made at the Savings Bank's discretion each Plan
year. The Savings Bank made contributions of $61,000 and $46,000, to the Plan
for the nine months ended September 30, 1997, and 1996. The Plan also provides
benefits in the event of death, disability, or other termination of employment.
On-Line has a 401(k) Plan covering all employees who have completed one or more
years of service. Participants may make contributions to the Plan from 1.0% to
12.0% of their earnings, subject to Internal Revenue Service limitations.
Matching contributions of 50.0% of each participant's contribution up to 6.0% of
the participant's contribution is made at On-Line's discretion each year. On-
Line made contributions of $36,000 and $61,000 to the Plan for the nine months
ended September 30, 1997, and 1996, respectively.
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.
7
<PAGE>
In connection with the Merger Conversion, Argo Savings formed an Employee Stock
Ownership Plan ("ESOP") for eligible employees. The ESOP borrowed funds from an
unrelated third party lender in the amount of $60,180 in order to purchase 7.0%
of the Common Stock issued in the Merger Conversion (5,233 shares at $11.50 per
share). The ESOP has subsequently borrowed additional funds from the same third
party lender in the amount of $245,000 in order to purchase additional shares.
The ESOP has purchased an additional 13,020 shares at an average price of $18.79
per share. Argo Savings will make scheduled discretionary cash contributions to
the ESOP sufficient to service the amounts borrowed. The unpaid balance of the
ESOP has been included in borrowed funds on the unaudited consolidated statement
of condition and stockholders' equity has been reduced by a similar amount.
Contributions of $51,000 and $55,000 were made to the ESOP to fund principal and
interest payments for the nine months ended September 30, 1997, and 1996,
respectively.
On January 1, 1994, Argo Bancorp adopted the provisions of Statement of Position
93-6, (SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans",
issued by the American Institute of Certified Public Accountants. SOP 93-6
requires Argo Bancorp to consider outstanding only those shares of the ESOP that
are committed to be released when calculating both primary and fully diluted
earnings per share. SOP 93-6 also requires the Savings Bank to record the
difference between the fair value of the shares committed to be released and the
cost of those shares to the ESOP as a charge to additional paid-in-capital with
the corresponding increase or decrease to compensation expense. The adoption of
SOP 93-6 had the effect of increasing additional paid-in capital by $34,000 for
the nine months ended September 30, 1997.
On-Line does not offer an ESOP for On-Line employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
The Board of Directors of Argo Savings formed a Management Recognition Plan and
Trust ("MRP") effective October 31, 1991, which purchased 6.8% or 15,400 shares,
of the Corporation's common stock in December 1991. In addition, Argo Savings
contributed $34,385 to allow the MRP to purchase 2,990 shares in the merger
conversion or on the open market. All initial MRP shares have been awarded to
employees in key management positions with the Savings Bank and are fully
vested.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 24,498. As of
September 30, 1997, an additional 5,704 shares have been purchased under the MRP
and none have been awarded. Employees earn the awards over a three-year period.
Once awarded the aggregate purchase price of the shares will be amortized to
expense as a portion of annual compensation as the employees become vested in
their stock awards and the unamortized cost is reflected as a reduction of
stockholders' equity.
The Board of Directors of Argo Bancorp formed a new MRP effective September 1,
1996, which authorized the purchase of 12,500 shares of Argo Bancorp stock for
up to $486,000. Under this plan, employees in key management positions with Argo
Bancorp and all its subsidiaries are eligible for participation. During the nine
months ended September 30, 1997, 1,575 shares were awarded to certain key On-
Line employees. Amortization expense amounted to $9,000 for the nine months
ended September 30, 1997.
8
<PAGE>
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 107,450 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. All 107,450 options were awarded by Argo
Bancorp under the 1991 Stock Option Plan. The exercise price for the options
awarded was equal to the fair market value of the common stock at the date of
grant. To date there have been 53,838 options exercised, including 23,997
shares that were exercised during the nine months ended September 30, 1997. At
September 30, 1997, options to purchase 53,612 shares were outstanding.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 107,450
shares of Argo Bancorp's common stock were reserved for issuance by Argo Bancorp
upon exercise of non-incentive stock options to be granted to non-employee
directors of the Corporation and its subsidiaries from time to time. At
September 30, 1997, 58,100 options for shares have been awarded by Argo Bancorp
under the Non-Qualified Stock Option Plan. To date, options to acquire 13,200
shares have been exercised, including 8,500 shares that were exercised during
the nine months ended September 30, 1997. The exercise price for the options
awarded was equal to the fair market value of the common stock at the date of
grant. At September 30, 1997, options to purchase 44,900 shares were
outstanding under the Non-Qualified Stock Option Plan.
On-Line does not offer a stock option plan for On-Line employees. On-Line
employees are not eligible for participation under Argo Bancorp's Stock Option
Plan.
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements:
(1) a risk-based capital requirement of 8.0% of risk-weighted assets, (2) a
leverage or core ratio of 3.0% core capital to total adjusted assets, and (3) a
tangible capital requirement of 1.5% tangible core capital to total assets.
Although the minimum capital requirement is 3.0%, the OTS Regulations provide
that an institution with less than 4.0% core capital is deemed to be "under-
capitalized". The following table summarizes, as of September 30, 1997, Argo
Savings' capital requirements under FIRREA and its actual capital ratios at that
date:
<TABLE>
<CAPTION>
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
----------- ----------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Risk-based 8.0% 11.49% $9,292 $13,340 $4,048
Core 3.0 5.93% 6,384 12,626 6,242
Tangible 1.5 5.93% 3,193 12,626 9,433
</TABLE>
9
<PAGE>
NOTE D - EARNINGS PER SHARE
Primary earnings per share is based on a weighted average number of shares
outstanding of 514,968 and 363,815 for the nine months ended September 30, 1997,
and 1996, respectively. Fully diluted earnings per share for the nine months
ended September 30, 1997, and 1996, is based upon 517,259 and 367,461,
respectively.
NOTE E - COMMITMENTS AND CONTINGENCIES
At September 30, 1997, Argo Savings had loan commitments totaling $5.7 million,
and $8.1 million in unused lines of credit. Commitments to fund loans have
credit risk essentially the same as that involved in extending loans to
customers and are subject to Argo Savings' normal credit policies. Argo Savings
also had community reinvestment act ("CRA") investment commitments outstanding
of $2.0 million.
10
<PAGE>
ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 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
conditions include, 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-KSB.
GENERAL
Argo Bancorp was incorporated in August 1987, for the sole purpose of acquiring
Argo Savings. Argo Bancorp was originally capitalized through the sale of 300
shares (which split in December of 1991 at 700/1) of common stock to three
investors for total proceeds of $60,000. Argo Bancorp acquired Argo Savings on
November 17, 1987, for a capital infusion of $1.1 million. On May 26, 1992, the
Corporation completed a merger conversion whereby Dolton-Riverdale Savings
converted from a state chartered mutual association to a federally chartered
stock association and simultaneously merged with and into Argo Savings with Argo
Savings as the surviving entity. The transaction was accounted for under the
pooling of interests method. There was no goodwill or other intangible assets
recorded as a result of the transaction. As part of the merger conversion with
Dolton-Riverdale Savings, the Corporation sold an additional 74,750 shares of
common stock at an issuance price of $11.50. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Corporation retained 50.0% of the net proceeds from the merger conversion and
injected the remaining 50.0% into Argo Savings. All proceeds were used for
general business uses.
Argo Bancorp is a unitary savings and loan company and is registered as such
with the OTS. The Corporation is an active holding company with assets
consisting of Argo Savings' stock, On-Line stock, marketable securities,
interest-earning deposits, and a majority interest in Argo/Empire Mortgage LLC,
a limited liability company that engages in the purchase and disposition of
loans. Argo Bancorp is a Federal Housing Authority ("FHA") approved originator
and servicer, a licensed Illinois mortgage banker and an approved Federal
National Mortgage Association ("FNMA") servicer.
11
<PAGE>
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with custodial escrow
accounts associated with purchased mortgage servicing rights and funds generated
internally, primarily in one-to-four family mortgage loans. Argo Savings is a
member of the Federal Home Loan Bank ("FHLB") System, and its deposits are
insured to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC").
Argo Savings operates one (1) wholly-owned service corporation subsidiary.
Dolton-Riverdale Savings Service Corporation is a wholly owned subsidiary, which
offers life insurance annuities to the customer base of Argo Savings. Argo
Savings also operates two (2) operating subsidiaries, Argo Mortgage Corporation
and Margo Financial Services LLC. Argo Mortgage Corporation is a wholly owned
operating subsidiary, which engages in mortgage brokerage activities that focus
on the purchase and sale of discount mortgage loans into the secondary market.
Margo Financial Services LLC is a majority owned operating subsidiary, which was
incorporated and fully operational on August 20, 1996. The activities of Margo
relate to the origination, investment, sale and servicing of mortgage loans.
Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows and borrowings. Argo Savings' operating results are also affected by
the fees generated by its investment in purchased mortgage servicing rights and,
to a lesser extent, the profit recognized on the sale of mortgage loans,
customer service charges and other income. Argo Savings' operating expenses
consist of employee compensation, occupancy expenses, federal insurance
premiums, amortization of goodwill, and other general and administrative
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
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 than
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.
On October 31, 1995, Argo Bancorp acquired On-Line, an Oak Brook, Illinois based
computer services bureau, serving bank and thrift clients throughout the
Midwest. The purchase transaction was consummated through the use of a wholly-
owned subsidiary, OLF Acquisition Corporation, which acquired shares of three
separate state chartered savings and loan services corporations which owned, in
the aggregate, 98.9% of the outstanding shares of On-Line. Sale of the
remaining 1.1% of On-Line shares was made by a single institutional stockholder
which held shares in On-Line directly. The intervening acquisition subsidiary
and state chartered savings and loan service corporation shells were liquidated
and merged by Argo Bancorp during 1996.
12
<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 (2) year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a twenty-
six (26) month escrow note in the amount of $460,000, representing funds held
for future performance under a third party computer lease; and a structured
schedule of contingent payments based on future revenues of On-Line over the
next seven (7) years. The total transaction value, including asset notes and
contingent payments, will not exceed $10.0 million.
On-Line is a third party provider of 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 (6)
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 include 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 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 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.
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 portfolios,
custodial escrow accounts related to loans serviced for others, and the sale of
newly originated fixed rate long-term mortgage loans. The most liquid assets are
cash and short-term investments. The levels of these assets are dependent on the
operating, financing and investing activities during any given period. Cash and
interest-earning deposits totaled $16.9 million at September 30, 1997.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the nine months ended September 30, 1997, and 1996,
Argo Savings originated and purchased mortgage loans in the principal amounts of
$87.2 million and $66.7 million, respectively. During the nine months ended
September 30, 1997, and 1996, these investing activities were primarily funded
by principal repayments on loans receivable, discounted loans receivable and
mortgage-backed securities of $37.5 million and $36.6 million, respectively, and
the proceeds from the sale of loans receivable, discounted loans receivable and
securities available for sale of $58.7 million and $33.1 million, respectively.
During the three months ended September 30, 1997, additional funding was
provided by the increase in deposits of $18.5 million offset by a $20.3 million
decrease in borrowings. During the
13
<PAGE>
nine months ended September 30, 1996, additional funding was provided by the
increase in deposits of $11.5 million, and an increase in borrowings of $15.4
million, respectively.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 1997, Argo Savings liquid assets represented
5.01% of its liquidity base as compared to the required level of 5.0%. The
level of liquidity maintained is believed by management to be adequate to meet
the requirements of normal operations, potential deposit outflows, and the
current loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At September 30, 1997, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 5.93%, 5.93% and
11.49%, respectively.
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 $300.0 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 September
30, 1997, 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.
CHANGES IN FINANCIAL CONDITION
Total assets decreased $258,000 to $229.0 million at September 30, 1997, from
$229.3 million at December 31, 1996.
Cash and interest-earning deposits increased $3.7 million to $16.9 million at
September 30, l997, primarily due to a quarter end loan sale and liquidity
management. Because Argo Savings is leveraged, all excess funds not necessary
to meet regulatory liquidity are used to reduce borrowings.
14
<PAGE>
Loans receivable and discounted loans receivable decreased $6.3 million to
$167.1 million at September 30, 1997, due to principal repayments of $36.8
million, the sale of $54.6 million of loans receivable and discounted loans
receivable, and the transfer of $3.1 million of loans receivable and discounted
loans receivable to foreclosed real estate, partially offset by the origination
and purchase of $87.2 million of loans receivable and discounted loans
receivable and discount accretions of $852,000.
Premises and equipment increased $1.7 million to $11.5 million at September 30,
1997. The increase is primarily due to the significant leasehold improvements
at On-Line related to the new training facility. Also contributing to the
increase is the completion of Argo Savings' permanent branch facility on the
Westside of Chicago.
Purchased mortgage servicing rights increased $1.5 million at September 30,
1997, primarily due to the additional investment by Argo Savings into a limited
partnership that acquires mortgage servicing rights.
Deposits increased $18.5 million to $169.1 million at September 30, 1997, from
$150.6 million at December 31, 1996. The increase can primarily be attributed to
an aggressive marketing effort during the first nine months of 1997 aimed at
attracting a larger customer base and interest credited of $6.3 million for the
nine months ended September 30, 1997. Brokered deposits increased $2.4 million
during the nine months ended September 30, 1997.
Borrowings decreased $20.3 million to $30.6 million at September 30, 1997, from
$50.9 million at December 31, 1996. The decrease in borrowings was due to the
$18.5 million increase in deposits and the additional funds available as a
result of the sale of loans receivable and discounted loans receivable during
the nine months ended September 30, 1997.
Custodial escrow balances for loans serviced increased $1.1 million to $6.9
million at September 30, 1997, from $5.8 million at December 31, 1996. This
increase reflects the escrow accounts acquired as a result of the purchase of
mortgage servicing rights in December of 1996. The custodial accounts pertain
to escrowed payments of taxes and insurance and the float on principal and
interest payments of 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 both
interest-bearing and non-interest bearing accounts. The custodial accounts
associated with loans or purchased mortgage servicing rights serviced for Argo
Savings are maintained in non-interest bearing accounts. At September 30, 1997,
the $6.9 million of custodial escrow balances pertain to loans subserviced on
behalf of Argo Savings for portfolio loans, servicing retained loans, and
purchased mortgage servicing rights.
Stockholders' equity increased $1.0 million to $17.6 million at September 30,
1997, from $16.6 million at December 31, 1996. The increase was caused by the
issuance of stock totaling $412,000, the exercise of stock options for $525,000,
a $193,000 tax benefit related to the exercise of non-qualified options, and net
income of $635,000. Offsetting this increase was the purchase of common stock
for the Management Recognition Plan totaling $486,000 and cash dividends of
$263,000.
15
<PAGE>
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the investment in purchased mortgage servicing rights which provide a
source of non-interest income and also act as a hedge against the decline in the
value of fixed rate mortgages in a rising interest rate environment; (v) the
increase of non-interest bearing custodial accounts related to the purchased
mortgage servicing rights; and (vi) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo
Savings does not use any artificial hedge products to reduce its exposure to
interest rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15.0% of
total assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities, which mature or
reprice within one year over interest sensitive assets of $44.8 million or
21.02% of total assets at September 30, 1997. As a result of the excess of
interest sensitive liabilities over interest sensitive assets, Argo Savings is
"Net Liability Sensitive" which would indicate that its earnings would be
negatively affected by rising interest rates. In periods of falling interest
rates, however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest published gap
analysis report. 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, money market accounts and interest-bearing escrows assumes
17.0% of these accounts are withdrawn within three years, and 15.0% per year,
thereafter. Management believes that these decay rate assumptions are
reasonable.
ACCOUNTING DEVELOPMENTS
In February 1997, the FASB issued statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128"). The Statement is effective for
periods ending after December 15, 1997, and will require restatement of all
prior-period earnings per share ("EPS") data presented. The statement
established standards for computing and presenting EPS, and requires dual
presentation of basic and diluted EPS on the face of the income statement.
16
<PAGE>
EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Based on its review of the Statement, management believes the adoption of SFAS
No. 128 will not have a material effect on per share disclosures of the Company.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129 ("SFAS 129"), "Disclosure of Information about Capital Structure." This
statement established standards for disclosing information about an entity's
capital structure. It supersedes specific disclosure requirements of APB
Opinion No. 10, "Omnibus Opinion 1966," and No. 15, "Earnings Per Share," and
SFAS No. 47, "Disclosure of Long-Term Obligations," and consolidates them in
this statement for ease of retrieval and for greater visibility to nonpublic
entities. This statement is effective for financial statements for periods
ending after December 15, 1997. It contains no changes in disclosure
requirements for entities that were previously subject to the requirements of
Opinions No. 10 and No. 15 and SFAS No. 47, and, therefore, it is not expected
to have a significant impact on the consolidated financial condition or results
of operations of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, losses) in a full set of general purpose financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997. The Company has not yet determined the impact of adopting this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information," which becomes effective for fiscal years beginning after December
15, 1997. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest and the collectibility of the loan's
principal and interest becomes doubtful.
At September 30, 1997, Argo Savings had one hundred twenty-four (124)
properties, totaling $4.3 million classified as foreclosed real estate, as
compared to ninety-five (95) properties for $3.9 million at December 31, 1996.
The underlying properties on September 30, 1997, consisted primarily of single
family residences. The foreclosed real estate is written down to its estimated
fair value at September 30, 1997. The total amount of loans receivable ninety
(90) days or more past due at September 30, 1997, was $5.7 million or 4.49% of
total loans receivable compared to $3.9 million or 3.12% of total loans on
December 31, 1996. At September 30, 1997, loans ninety (90) days or more past
due totaling $5.7 million were secured by one-to-four family residences. Total
non-performing
17
<PAGE>
assets at September 30, 1997, totaled $6.7 million or 2.92% of total assets
compared to $7.9 million or 3.43% of total assets at December 31, 1996. Excluded
from this total at September 30, 1997 is the $5.4 million of discounted loans
ninety (90) days or more past due, and $3.4 million in foreclosed real estate
attributable to the discounted loans receivable portfolio. Discounted loans that
are often purchased with the intent to foreclose and sell the underlying
property are excluded from non-performing assets.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997, AND 1996.
GENERAL
Net income for the three and nine months ended September 30, 1997, was $12,000
or $.02 per share (fully diluted) and $636,000 or $1.23 per share (fully
diluted), respectively, as compared to net income of $32,000 or $.09 per share
(fully diluted) and $930,000 or $2.53 per share (fully diluted) for the
comparable three and nine month periods ended September 30, 1996.
INTEREST INCOME
Interest income for the three months ended September 30, 1997, was $4.0 million
as compared to $4.2 million for the three months ended September 30, 1996. This
$253,000 decrease in interest income was primarily attributable to a $280,000
adjustment to accrued interest on discounted loans receivable as a result of the
Company adopting a cash basis method of recognizing interest income on non-
current discounted loans receivable. Average interest-earning assets increased
$20.9 million to $186.4 million for the quarter ended September 30, 1997.
Offsetting this increase was a 108 basis point decrease in the average yield on
interest earning assets. This decrease in the average yield reflects a decrease
in the yield on the discounted loans receivable portfolio.
Interest income for the nine month period ended September 30, 1997, totaled
$14.1 million as compared to $11.7 million for the comparable 1996 period. The
$2.4 million increase was caused by the $36.3 million increase in average
interest earning assets. The weighted average yield on interest-earning assets
for the nine month period ended September 30, 1997, remained unchanged from the
comparable period in 1996 at 9.79%. Offsetting this increase was the $280,000
adjustment attributable to discounted loans receivable.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1997, was $2.7 million
as compared to $2.3 million for the comparable 1996 period. The $467,000
increase was caused by the $24.1 million increase in average interest-bearing
liabilities to $199.5 million for the quarter ended September 30, 1997, and a 31
basis point increase in the weighted average cost of interest-bearing
liabilities to 5.48% for the quarter ended September 30, 1997.
18
<PAGE>
Interest expense for the nine months ended September 30, 1997, totaled $8.6
million as compared to $6.5 million for the comparable 1996 period. The $2.1
million increase was driven by the $41.5 million increase in average interest-
bearing liabilities to $208.6 million for the nine months ended September 30,
1997, and the 28 basis point increase in the weighted average cost of interest-
bearing liabilities to 5.47% for the nine months ended September 30, 1997.
NET INTEREST INCOME
Net interest income totaled $1.2 million for the three months ended September
30, 1997, reflecting a decrease of $676,000 over the amount recorded in the
comparable 1996 period. The effective net spread for the quarter ended
September 30, 1997, decreased 139 basis points to 3.63% from 5.02% for the
comparable 1996 period. This decrease reflects the lower yield on discounted
loans receivable, the accrual interest adjustment and the slight increase in the
cost of funds.
Net interest income totaled $5.4 million for the nine months ended September 30,
1997, reflecting an increase of $374,000 over the amount recorded in the
comparable 1996 period. This increase was caused by the $36.3 million increase
in average interest-earning assets offset by the $41.5 million increase in
average interest-bearing liabilities and the 28 basis point decrease in the net
spread. The effective net spread for the nine months ended September 30, 1997,
was 4.32% as compared to 4.59% for the comparable 1996 period.
PROVISION FOR LOAN LOSSES
A general loan loss provision of $60,000 was recorded during the nine months
ended September 30, 1997, as compared to $100,000 for the comparable 1996
period. Management believes that the loan loss provisions are adequate and will
continue to monitor the mortgage portfolio and substandard assets for loss
exposure.
NON-INTEREST INCOME
Non-interest income increased $1.0 million and $912,000 for the three month and
nine month periods ended September 30, 1997, respectively. The $1.0 million
increase for the three months ended September 30, 1997, was primarily due to a
$153,000 increase in mortgage banking, attributable to Margo's operations, a
$90,000 increase in gain on sale of assets, a $179,000 increase in data
processing revenues and a $556,000 increase in other income, primarily
attributable to increases in hardware and software sales and other ancillary
income at On-Line.
The $912,000 increase for the nine months ended September 30, 1997, was
primarily due to a $471,000 increase in mortgage-banking, attributable to
Margo's operation, a $204,000 increase in data processing income, and a $527,000
increase in other income primarily attributable to increases in other ancillary
income at On-Line. Offsetting these increases was a decrease in gain on sale of
assets of $331,000 for the nine month period. This decrease is primarily
attributable to a decrease in gain on sale of discounted loans receivable.
19
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense increased $350,000 and $1.8 million for the three month and
nine month periods ended September 30, l997, respectively. These increases are
primarily due to increases in occupancy, data processing services, and other
general and administrative fees. Occupancy increased $174,000 and $443,000 for
the three and nine months periods ended September 30, 1997, respectively,
primarily due to significant leasehold improvements at On-Line, as well as the
opening of Argo Savings' permanent branch location on the Westside of Chicago,
Illinois. The $576,000 and $840,000 increase in the data processing cost of
services for the three and nine months periods ended September 30, 1997,
respectively, is due to significant increases in hardware and software cost of
sales by On-Line as a result of growth in the hardware and software sales
division. Also contributing to the increase in data processing cost of services
are increases in various third party data communication charges. The increase
in other general and administrative charges of $543,000 and $1.3 million for the
three and nine month periods ended September 30, 1997, respectively, was caused
by significant increases at Argo Bancorp, Argo Savings, On-Line, and Margo.
These increases were caused by increases in legal and accounting fees incurred
in conjunction with the ongoing investigation of accounting irregularities
discovered in the first quarter of 1997. Also contributing to the increase were
increases in promotion expense, loan expense, and other expense. Margo
Financial Services, which was not fully operational during the three and nine
months ended September 30, 1996, contributed to the increase in other general
and administrative charges as Margo became fully operational during 1997.
Offsetting these increases in non-interest expenses is the significant decrease
in federal deposit insurance premiums as a result of the one time SAIF
assessment during the nine months ended September 30, 1996.
INCOME TAX EXPENSE
The provision for income tax expense decreased $220,000 to $119,000 or 14.5% of
pre-tax earnings for the nine months ended September 30, 1997, as compared to
$339,000 or 26.7% of pre-tax earnings for the comparable 1996 period. The
decrease was due to the utilization of low income housing credits and the
decrease in pre-tax earnings.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc. *
3.2 By-Laws of Argo Bancorp, Inc. *
4.0 Stock Certificate of Argo Bancorp, Inc. *
27.0 Financial Data Schedule (filed herewith).
B. REPORTS ON FORM 8-K:
None
- -------------------
* Incorporated herein by reference into this document from Exhibits to Form
S-1, Registration Statement, filed on January 28, 1992, and any amendments
thereto, Registration No. 33-45222.
21
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: November 10, 1997 /s/ John G. Yedinak
----------------- -------------------------------------------------
John G. Yedinak, President of the Board and Chief
Executive Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted form the Form
10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,694
<INT-BEARING-DEPOSITS> 10,243
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,003
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 167,143
<ALLOWANCE> 714
<TOTAL-ASSETS> 229,026
<DEPOSITS> 169,148
<SHORT-TERM> 30,624
<LIABILITIES-OTHER> 11,645
<LONG-TERM> 0
0
0
<COMMON> 5
<OTHER-SE> 17,609
<TOTAL-LIABILITIES-AND-EQUITY> 229,026
<INTEREST-LOAN> 13,381
<INTEREST-INVEST> 228
<INTEREST-OTHER> 446
<INTEREST-TOTAL> 14,055
<INTEREST-DEPOSIT> 6,345
<INTEREST-EXPENSE> 8,560
<INTEREST-INCOME-NET> 5,495
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,645
<INCOME-PRETAX> 715
<INCOME-PRE-EXTRAORDINARY> 635
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 5,761
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,404
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0<F1>
<ALLOWANCE-DOMESTIC> 0<F1>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>This information is not disclosed in the form 10QSB.
</FN>
</TABLE>
