<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1998
REGISTRATION NO. 333-
REGISTRATION NO. 333- -01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
ARGO BANCORP, INC. ARGO CAPITAL TRUST CO.
(exact name of registrant as specified (exact name of registrant as specified
in its certificate of incorporation) in its certificate of incorporation)
DELAWARE DELAWARE
(state or other jurisdiction (state or other jurisdiction
of incorporation or organization) of incorporation or organization)
36-3620612 BEING APPLIED FOR
(IRS Employer Identification No.) (IRS Employer Identification No.)
6035 N/A
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
7600 WEST 63RD STREET 7600 WEST 63RD STREET
SUMMIT, ILLINOIS 60501 SUMMIT, ILLINOIS 60501
(708) 496-6010 (708) 496-6010
(Address, including zip code, and (Address, including zip code, and
telephone number, including area code, of telephone number, including area code, of
registrants' principal executive offices) registrants' principal executive offices)
</TABLE>
------------------------
JOHN G. YEDINAK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ARGO BANCORP, INC.
7600 WEST 63RD STREET
SUMMIT, ILLINOIS 60501
(708) 496-6010
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
MARY M. SJOQUIST, ESQUIRE
PHILIP FEIGEN, ESQUIRE
PATTON BOGGS LLP
2550 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 457-6000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock $.01 par Value 900,000 Shares $8.80 (1) $7,992,000 $2,360
Capital Securities of ARGO Capital Trust Co. $15,000,000 100% $15,000,000(2) $4,425
Junior Subordinated Deferrable Interest
Debentures of ARGO Capital Trust Co. (3) N/A N/A N/A N/A
ARGO Bancorp, Inc. Guarantee with respect to
Capital Securities (4) N/A N/A N/A N/A
Total -- 100% $22,992,000 $6,785
</TABLE>
(1) Based upon the fair market value of the Common Stock on , 1998,
as adjusted for a proposed four-to-one stock split to be completed prior to
the Offering.
(2) Such amount represents the liquidation amount of the ARGO Capital Trust Co.
and ARGO Bancorp Capital Securities to be exchanged hereunder and the
principal amount of Junior Subordinated Debentures that may be distributed
to holders of such Capital Securities upon any liquidation of ARGO Capital
Trust Co.
(3) No separate consideration will be received for the % Junior Subordinated
Deferrable Interest Debentures of ARGO Bancorp, Inc. (the "Junior
Subordinated Debentures") distributed upon any liquidation of ARGO Capital
Trust Co.
(4) No separate consideration will be received for the ARGO Bancorp, Inc.
Guarantee.
(5) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE>
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE CAPITAL SECURITIES AND COMMON STOCK MAY
NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THE CAPITAL SECURITIES AND COMMON STOCK IN THOSE STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF SUCH STATES.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1998
ARGO BANCORP, INC.
900,000 SHARES OF COMMON STOCK
ARGO CAPITAL TRUST CO.
$15,000,000 OF % CAPITAL SECURITIES
(LIQUIDATION AMOUNT OF $10.00 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY ARGO BANCORP
Argo Bancorp, Inc., a Delaware corporation (the "Company"), is hereby
offering 900,000 shares of its common stock, par value $.01 per share (the
"Common Stock"), at a price of $ per share. In addition, ARGO Capital Trust
Co. (, a statutory business trust formed under the laws of the State of Delaware
(the "Trust") is hereby offering $15,000,000 aggregate liquidation amount of the
% Capital Securities, liquidation amount $10.00 per Capital Security (the
"Capital Securities"), fully and unconditionally guaranteed, as described
herein, by Argo Bancorp. (The offering of the Common Stock and the Capital
Securities may hereinafter be referred to as the "Offering.") On , the
closing bid and asked prices for the Common Stock, as reported on the Nasdaq
Over-the-Counter Market, were $ and $ , respectively. The Company
and Trust have applied to have the Capital Securities listed on the Nasdaq
National Market and it is anticipated that following the Offering the Common
Stock will continue to trade on the Nasdaq Over-the-Counter Market. (The Common
Stock and the Capital Securities may sometimes be referred to herein as the
"Securities"). The Offering of the Capital Securities is contingent on the
successful completion and closing of the Common Stock Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGECOMMISSION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE UNDERWRITING THE COMPANY PROCEEDS TO
TO PUBLIC DISCOUNTS (1) (2) THE TRUST (2)
<S> <C> <C> <C> <C>
Per Share of Common Stock......................... $ $ $ $
Total Common Stock................................ $ $ $ $
Per Capital Security.............................. $ $ $ $
Total Capital Securities.......................... $ $ $ $
Total Offering (3)................................ $ $ $ $
</TABLE>
(1) The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) The Company has agreed to pay expenses of the Offering estimated to be
$ . Additionally, in view of the fact that the proceeds of the sale
of the Capital Securities will be invested in the Junior Subordinated
Debentures, the Company, as issuer of the Junior Subordinated Debentures,
has agreed to pay the Underwriters, as compensation, $ per Capital
Security or $ in the aggregate ($ in the aggregate if the
over-allotment option is exercised in full). See "Underwriting."
(3) The Company and Trust have granted the Underwriters a 30-day option to
purchase up to additional shares of Common Stock and additional
Capital Securities, respectively, solely to cover overallotments, if any. To
the extent that the options are exercised, the Underwriters will offer the
additional shares of Common Stock and Capital Securities at the Price to
Public shown above. If the options are exercised in full, the total Price to
Public, Underwriting Discounts and Proceeds to the Company and Proceeds to
the Trust will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
-------------------------------------------
[LOGO]
The date of this Prospectus is , 1998
<PAGE>
The Common Stock and Capital Securities offered by the Underwriters in the
Offering are subject to prior sale, when, as and if delivered to and accepted by
the Underwriters, and subject to their right to withdraw, modify, correct and
reject orders in whole or in part. It is expected that delivery of the
certificates representing such shares of Common Stock and Capital Securities
will be made against payment therefore at the offices of Tucker Anthony
Incorporated, in book entry form, or through the facilities of the Depository
Trust Company ("DTC") on or about , 1998.
Except as provided below, the Common Stock and the Capital Securities will
each be represented by certificates in fully registered form deposited with a
custodian for and registered in the name of a nominee of DTC. Beneficial
interests in the Capital Securities and Common Stock will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants. Beneficial interests in such Capital Securities and Common Stock
will trade in DTC's Same-Day Funds Settlement System and secondary market
trading activity in such interests will therefore settle in immediately
available funds.
The Capital Securities offered hereby will represent beneficial interests in
the Trust. The Company will be the owner of all of the beneficial interests
represented by common securities of the Trust (the "Common Securities" and,
together with the Capital Securities, the "Trust Securities"). The Trust exists
for the exclusive purpose of issuing the Trust Securities and investing the
proceeds thereof in the % Junior Subordinated Deferrable Interest Debentures
(the "Junior Subordinated Debentures") to be issued by the Company, and certain
other limited activities described herein. The Junior Subordinated Debentures
are scheduled to mature on , 2028 (the "Stated Maturity Date"). See
"Description of Junior Subordinated Debentures--General." The Capital Securities
will have a preference over the Common Securities under certain circumstances
with respect to cash distributions and amounts payable on liquidation,
redemption or otherwise. See "Description of the Capital
Securities--Subordination of Common Securities."
Holders of the Trust Securities will be entitled to receive cumulative cash
distributions arising from the payment of interest on the Junior Subordinated
Debentures, accruing from the date of original issuance and payable quarterly in
arrears on April 15th, July 15th, October 15th and January 15th of each year
(subject to possible deferral as described below), commencing , at the
annual rate of % of the Liquidation Amount (as defined herein) per Trust
Security ("Distributions"). So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, the Company will have the right to defer
payments of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding twenty (20) consecutive quarterly
periods with respect to each deferral period (each, an "Extension Period"),
provided that no Extension Period may extend beyond the Stated Maturity Date (as
defined herein). Upon the termination of any such Extension Period and the
payment of all amounts then due, the Company may elect to begin a new Extension
Period subject to the requirements set forth herein. If and for so long as
interest payments on the Junior Subordinated Debentures are so deferred,
Distributions on the Trust Securities also will be deferred and the Company will
not be permitted, subject to certain exceptions described herein, to declare or
pay any cash distributions with respect to its capital stock, including the
Common Stock, or to make any payment with respect to debt securities of the
Company that rank PARI PASSU with or junior to the Junior Subordinated
Debentures. DURING THE EXTENSION PERIOD, INTEREST ON THE JUNIOR SUBORDINATED
DEBENTURES WILL CONTINUE TO ACCRUE (AND THE AMOUNT OF DISTRIBUTIONS TO WHICH
HOLDERS OF THE TRUST SECURITIES ARE ENTITLED WILL CONTINUE TO ACCUMULATE) AT THE
RATE OF % PER ANNUM, COMPOUNDED QUARTERLY AND HOLDERS OF THE TRUST SECURITIES
WILL BE REQUIRED TO INCLUDE DEFERRED INTEREST INCOME FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES PRIOR TO THE RECEIPT OF THE CASH ATTRIBUTABLE TO SUCH INCOME
ON THAT INCOME. See "Description of Junior Subordinated Debentures--Option to
Extend Interest Payment Date" and "Certain Federal Income Tax Consequences with
Respect to the Issuance of the Capital Securities--Interest Income and Original
Issue Discount."
The Company will, through the Guarantee, the Common Guarantee, the Trust
Agreement, the Junior Subordinated Debentures, and the Indenture (each as
defined herein) taken together, fully, irrevocably and unconditionally,
guarantee all of the Trust's obligations under the Trust Securities. See
"Relationship
2
<PAGE>
Among the Capital Securities, the Junior Subordinated Debentures and the
Guarantee--Full and Unconditional Guarantee." The Guarantee and the Common
Guarantee will guarantee payments of Distributions and payments upon liquidation
of the Trust or redemption of the Trust Securities, but in each case only to the
extent that the Trust has funds legally available therefore and has failed to
make such payments, as described herein. See "Description of Guarantee." If the
Company fails to make a required payment on the Junior Subordinated Debentures,
the Trust will not have sufficient funds to make the related payments, including
Distributions, on the Trust Securities. The Guarantee and the Common Guarantee
will not cover any such payment when the Trust does not have sufficient funds
legally available therefore. In such event, a holder of Capital Securities may
institute a legal proceeding directly against the Company to enforce its rights
in respect of such payment. See "Distribution of Junior Subordinated
Debentures--Enforcement of Certain Rights by the Company of Capital Securities."
The obligations of the Company under the Guarantee, the Common Guarantee and the
Junior Subordinated Debentures will be unsecured and will rank subordinate and
junior in right of payment to all Senior Indebtedness (as defined in
"Description of Junior Subordinated Debentures--Subordination"). The ability of
the Company to make required payments on the Junior Subordinated Debentures will
depend, in large part, on its receipt of dividends from the subsidiaries of the
Company. See "Use of Proceeds" and "Risk Factors--Ranking of Subordinated
Obligations Under the Guarantee and the Junior Subordinated Debentures;
Limitations on Sources of Funds."
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein): (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Junior Subordinated Debentures at a redemption price
equal to the principal amount of, plus accrued and unpaid interest on, the
Junior Subordinated Debentures (the "Maturity Redemption Price"); (ii) in whole
but not in part, at any time prior to (the "Initial Optional Prepayment
Date"), contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Company, upon the occurrence and continuation of
a Special Event (as defined herein) at a redemption price equal to, for each
Capital Security, the Special Event Prepayment Price (as defined herein) for a
corresponding $ principal amount of Junior Subordinated Debenture (the
"Special Event Redemption Price"); and (iii) in whole or in part, on or after
the Initial Optional Prepayment Date, contemporaneously with the optional
prepayment by the Company of all or part of the Junior Subordinated Debentures,
at a redemption price equal to, for each Capital Security to be redeemed, the
Optional Prepayment Price (as defined herein) for a corresponding $ principal
amount of Junior Subordinated Debentures (the "Optional Redemption Price"). Any
of the Maturity Redemption Price, the Special Event Redemption Price and the
Optional Redemption Price may be referred to herein as the "Redemption Price."
See "Description of Capital Securities--Redemption."
Subject to the Company having received any required regulatory approval, the
Junior Subordinated Debentures will be prepayble prior to the Stated Maturity
Date at the option of the Company; (i) on or after the Initial Optional
Prepayment Date, in whole or in part, at 100% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of prepayment (the
"Optional Prepayment Price"); or (ii) at any time prior to the Initial Optional
Prepayment Date, in whole but not in part, upon the occurrence and continuation
of a Special Event, at a prepayment price (the "Special Event Prepayment Price")
equal to the Make-Whole Amount (as defined below). The "Make-Whole Amount" shall
be equal to the greater of (a) 100% of the principal amount of the Junior
Subordinated Debentures or (b) the sum, as determined by a Quotation Agent (as
defined herein), of the present values of the scheduled payments of principal
and interest on the Junior Subordinated Debentures from the date of prepayment
to the Initial Optional Prepayment Date, discounted to the prepayment date on a
quarterly basis (assuming a 360-day year consisting of twelve 30-day months) at
the Adjusted Treasury Rate (as defined herein) plus, in the case of each of
clauses (a) and (b), accrued and unpaid interest thereon to the date of
prepayment. Either of the Optional Prepayment Price or the Special Event
Prepayment Price may be referred to herein as the "Prepayment Price." See
"Description of Junior Subordinated Debentures--Optional Prepayment" and
"--Special Event Prepayment."
3
<PAGE>
The Company will have the right at any time, including without limitation
upon the occurrence of a Tax Event (as defined herein) to terminate the Trust
and, after satisfaction of liabilities of creditors of the Trust as required by
applicable law, to cause a Like Amount of the Junior Subordinated Debentures to
be distributed to the holders of the Trust Securities in liquidation of the
Trust, subject to (i) the Company having received an opinion of counsel to the
effect that such distribution will not be a taxable event to holders of Capital
Securities and (ii) the receipt of any required regulatory approvals. Unless the
Junior Subordinated Debentures are distributed to the holders of the Trust
Securities, in the event of a liquidation of the Trust as described herein,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, the holders of the Trust Securities generally will be entitled
to receive $ per Trust Security plus accumulated and unpaid Distributions
thereon to the date of payment. See "Description of Capital
Securities--Liquidation of the Trust and Distribution of Junior Subordinated
Debentures."
[MAP TO BE INSERTED]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
AND/OR CAPITAL SECURITIES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY
BIDS, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY ON NASDAQ IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S
OVER-ALLOTMENT OPTIONS WILL NOT BE EXERCISED, AND GIVES EFFECT TO THE ISSUANCE
BY THE COMPANY OF A FOUR-TO-ONE STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND OF
THREE SHARES OF COMMON STOCK FOR EACH SHARE OF COMMON STOCK ISSUED AND
OUTSTANDING (THE "STOCK SPLIT"). UNLESS OTHERWISE INDICATED ALL REFERENCES TO
THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES.
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE
PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD SPECIFICALLY CONSIDER THE
VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH
UNDER "RISK FACTORS," WHICH WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY
The Company was incorporated in Delaware in 1987 primarily for the purpose
of acquiring all of the issued and outstanding stock of Argo Federal Savings
Bank, F.S.B. (the "Bank"), then in receivership, in exchange for an initial
capital infusion of $1.1 million by the three initial investors. In 1992, the
Company expanded its operations by acquiring, through the Bank, a neighboring
savings and loan association ("Dolton Riverdale") in a public supervisory merger
conversion, pursuant to which the Bank was the resulting entity (the "Merger
Conversion"). Unlike many savings and loan holding companies, the Company is an
active holding company with only a portion of its future anticipated operating
income dependent upon the Bank. At March 31, 1998, on an unconsolidated basis,
the Company's assets consisted of a $14.2 million investment in the Bank, a $5.2
million investment in On-Line Financial Services, Inc. ("On-Line"), a $1.4
million investment in Empire/Argo LLC ("Empire"), securities available-for-sale
of $1.7 million, cash and other interest-earning deposits of $1.2 million and
other assets of $1.3 million. On a consolidated basis at March 31, 1998, the
Company's total assets were $238.5 million, total liabilities were $219.9
million and stockholders' equity was $18.6 million.
As the Company's primary subsidiary, the Bank's principal business is
attracting deposits from the general public and originating or purchasing loans
primarily secured by one- to four- family residential real estate. To a much
lesser extent, the Bank also originates multi-family and commercial real estate
mortgage loans, home equity loans, deposit account loans and other consumer
loans. Historically, the Bank's lending portfolio in 1992 consisted of those
loans in existence when the Company acquired Dalton Riverdale, primarily one- to
four-family residential mortgage loans. Since 1992, the Bank has acquired
portfolios of loans consisting primarily of performing seasoned one- to
four-family residential mortgage loans. The Bank has also originated loans
through its branch network. From time to time and in limited amounts, the Bank
has purchased, through Argo Mortgage Corp., a wholly-owned subsidiary of the
Bank ("Argo Mortgage"), and through Empire, which is 98.4% owned by the Company,
discounted mortgage loans, generally for less than 90% of their principal
balance, most of which are non-performing when acquired ("Discounted Loans").
Discounted Loans are purchased with a view toward either bringing such loans
current for the Bank's portfolio, for resale in the secondary market or
foreclosure and liquidation. Primarily as a result of its Discounted Loan
activities, the Bank's level of non-performing loans to total loans has been
historically higher than that of its peers. At March 31, 1998, the Company had
$21.8 million in loans classified as Discounted Loans. Since mid 1997, the
Company has significantly reduced its emphasis on the purchase of Discounted
Loans. At March 31, 1998, non-performing loans to total loans, exclusive of
Discounted Loans, were 3.13% and non-performing assets to total assets,
exclusive of Discounted Loans, totaled 3.84%. The Bank has also originated loans
through its branch network.
5
<PAGE>
In order to expand its level of loan originations and purchases, in 1996 the
Bank established a 50.1% ownership interest in Margo Financial Services, LLC
("MARGO"), a mortgage banking subsidiary. Since August 1996, the Bank has
engaged in both wholesale and retail lending activities primarily through MARGO.
MARGO focuses on the origination, purchase and sale of mortgage loans generally
on a "servicing released" basis into the secondary market. Through MARGO, the
Bank has originated loans through a network of brokers and correspondents (the
"Correspondents") located in various states throughout the country. These loans
generally fall into three categories: (1) Conventional Loans--loans which
conform to all of the underwriting guidelines of FannieMae and FreddieMac
("Agency Qualified"); (2) Expanded Criteria Loans--loans which are (a) not
Agency Qualified, generally due to the borrowers credit profile, (b) are not as
readily saleable in the secondary market as Conventional Loans or Portfolio
Loans and (c) are generally fixed-rate loans which are originated at interest
rates higher than those of fixed-rate Conventional Loans; and (3) Portfolio
Loans--adjustable-rate mortgage ("ARM") loans which (a) are not Agency Qualified
but are readily saleable in the secondary market, (b) are originated under
specific criteria set forth by the Bank, and (c) are not Conventional or
Expanded Criteria Lending. See "Risk Factors -- Risks Associated With Portfolio
and Expanded Criteria Lending" and "Business of the Bank --Lending Activities --
One- to Four-Family Residential Loans." ARM loans originated by MARGO are
generally retained by the Bank for its portfolio, while fixed-rate loans
originated by MARGO are generally not retained in the Bank's portfolio but are
immediately sold in the secondary market. Another core business investment
consists of purchased mortgage servicing rights ("PMSRs"). Additionally, the
Bank invests in United States Government and federal agency obligations,
mortgage-backed securities, time deposits, federal funds and other types of
liquid investments as permitted by federal law.
The primary sources of revenue to the Bank are interest and fee income
derived from lending and mortgage activities, and, to a lesser extent, net fees
generated from investments in PMSRs. In addition, and more recently, the Bank
also generates revenue from automatic teller machine ("ATM") and service fees.
The overall strategy of the Bank is to increase stockholder value.
Specifically the Bank intends to focus on traditional banking activities while
non-traditional functions, such as activities related to Discounted Loan
purchases, will be maintained at the Company level. Management expects to meet
its goals by:
- GROWING THE BANK IN THE LOCAL MARKET. Management intends to prudently
expand the operations of the Bank by opening additional branches
throughout its primary market area and is currently considering two sites
which have become available due to consolidation in the Bank's market
area.
- EXPANDING ONE- TO FOUR-FAMILY LENDING. The Bank will continue to expand
the origination of one-to four-family loans through MARGO both on a
retail basis and on a wholesale basis through its network of
Correspondents.
- MAINTAINING COMMUNITY ORIENTATION. Management intends to maintain the
Bank's community orientation by continuing to emphasize traditional
deposit products, loan products consisting of primarily one- to
four-family residential mortgages, and active community lending and
development activities such as affordable housing.
- REDUCING NON-PERFORMING ASSETS. The Bank intends to reduce non-performing
assets by decreasing its emphasis on the purchasing of Discounted Loans,
and increasing its concentration on lending activities through MARGO and
reducing its real estate acquired through foreclosure or deed in lieu of
foreclosure or in judgement ("REO").
- INCREASING FEE INCOME. Management plans to increase fee income through
the expansion of its ATM network in the Greater Chicago Metro area
(hereinafter referred to as its Primary Market Area) and outside the
Primary Market Area.
6
<PAGE>
- INCREASING THE BANK'S CORE DEPOSIT BASE. The Bank intends to develop its
core deposit base through the use of specific marketing relationships.
The Company also operates through it wholly-owned subsidiary, On-Line, which
was purchased by the Company in October 1995. On-Line is a third-party provider
of electronic data processing services to primarily financial institution
clients throughout the Midwest. Since On-Line's acquisition, the Company has
promoted a corporate commitment to implementation of advanced technologies
sufficient to remain competitive in the rapidly changing financial services
marketplace. The Company's business plan has been to enhance On-Line's
foundation as a data processing and communications network provider by
implementing tools to continue supporting existing services, as well as evolve
into a provider of electronic commerce, Intranet and Internet services,
technical training services, and document management and imaging services. Since
its acquisition, On-Line has streamlined and restructured its organization to
deploy and implement its business strategies. Currently, On-Line maintains two
fully-integrated application software systems for its clients. On-Line has
targeted new potential sales markets both within and outside the financial
services industry, in order to expand and diversify its revenues. On-Line's
services also include computer output laser disc storage technology utilizing a
high-speed document storage and retrieval system, integrated check and document
imaging systems, as well as the planning and deployment of local and wide area
network architectural design and implementation services, the sale of all
related hardware and software, consultation, and training.
BUSINESS STRATEGY OF ON-LINE. On-Line's primary objective through its
strategic planning has been to increase the Company's shareholder value by
implementing data processing platforms capable of continuously evolving to meet
the needs of the rapidly changing financial services industry and attracting and
developing skilled management and technical personnel. Principal steps taken
include:
- - MANAGEMENT AND PERSONNEL. Since its acquisition in 1995, On-Line has
streamlined and re-structured its entire organization to deploy and
implement its revised business strategies.
- - IMPLEMENTATION OF ADVANCED TECHNOLOGIES. Since On-Line's acquisition, the
Company has promoted a corporate commitment to implementation of advanced
technologies sufficient to remain competitive in the future marketplace.
- - NEW PRODUCT LINES. In order to become a full service out-sourcing business
partner to its clients, On-Line has upgraded and increased its product and
service offerings. On-Line is now actively offering the
BankFORCE-Registered Trademark- system, an integrated application system
developed by Information Technology Incorporated ("ITI"), and On-Line
introduced and implemented a Computer Output Information Server ("COINS")
product, which is a high-speed optical storage and retrieval system.
- - RELATIONSHIP DEVELOPMENT. On-Line seeks to initiate, develop and strengthen
its business relationships with its clients by offering new products and
services designed to provide technologically advanced solutions for
improving client profitability, performance, growth, and competitive
position in the marketplace.
- - INTERNAL GROWTH AND SALES. On-Line seeks to grow internally by selling
services and products to new clients and cross-selling additional services
to existing clients. On-Line also seeks to develop and sell new services to
clients to help them retain existing customers and attract additional
customers from new markets.
7
<PAGE>
STRUCTURE OF THE COMPANY
[CHART]
The Company's principal executive office and home office are located at 7600
West 63rd Street, Summit, Illinois and its telephone number is (708) 496-6010.
THE TRUST
The Trust is a statutory business trust formed under Delaware law upon the
filing of a Certificate of Trust with the Delaware Secretary of State. The
Trust's business and affairs are conducted by the Issuer Trustees: the Property
Trustee, the Delaware Trustee and individual Administrative Trustees who are
officers of either the Bank or the Company. The Trust exists for the exclusive
purpose of (i) issuing and selling the Trust Securities, (ii) using the proceeds
from the sale of the Trust Securities to acquire the Junior Subordinated
Debentures issued by the Company, and (iii) engaging in only those other
activities necessary, advisable or incidental thereto. Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Trust, and payments by
the Company under the Junior Subordinated Debentures will be the sole revenues
of the Trust. All of the Common Securities will be owned by the Company.
The Trust's principal offices are located at 7600 West 63rd Street, Summit,
Illinois and its telephone number is (708) 496-6010.
8
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
GENERAL
<S> <C>
Securities Offered.............. shares of Common Stock and $ million aggregate
liquidation amount of Capital Securities.
Use of Proceeds................. Proceeds from the Offering will be used (a) at the Bank
level for general lending purposes and enhancements of
operational capabilities and (b) at the Company for the
repayment of existing corporate debt of $7.0 million as of
March 31, 1998, general corporate purposes, the
enhancement of operational capabilities and the potential
purchase of loans.
Participation by Management and
Affiliates.................... Management intends to purchase up to shares of
Common Stock and $ aggregate liquidation amount of
Capital Securities in the Offering. In addition, Deltec
Banking Corporation Limited, a banking corporation
organized under the laws of the Commonwealth of the
Bahamas, intends to purchase shares of the shares of
Common Stock to be issued in the Offering so as to
maintain its 25% ownership interest in the Company. See
"--Stockholder Agreement."
Risk Factors.................... Prospective investors are urged to carefully review the
matters discussed under "Risk Factors."
Condition to Closing............ The Offering of the Capital Securities is contingent on
the successful completion and closing of the Common Stock
Offering.
COMMON STOCK
Common Stock to be outstanding
after the Offering............ shares
Purchase Price to Public........ $ per share
Dividend Policy................. Since 1992, the Company has paid quarterly dividends on
its Common Stock. Future declarations of dividends by the
Board of Directors will depend upon a number of factors.
The dividend for the first quarter of 1998 was $0.045. See
"Dividend Policy."
Dilution........................ Upon completion of the Offering, there will be an
immediate dilution of the net tangible book value per
share of $ per share based upon an Offering Price
of $ per share of Common Stock. See "Risk
Factors--Dilution" and "Dilution."
Nasdaq Stock Market Symbol for
the Common Stock.............. Currently, the Common Stock is quoted on the Nasdaq
Over-the-Counter market under the symbol "ARGO".
CAPITAL SECURITIES
Price to Public................. $10.00 per Capital Security.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Distribution Dates.............. April 15th, July 15th, October 15th and January 15th of
each year, commencing on 15, 1998.
Extension Periods............... So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, Distributions on
Capital Securities will be deferred for the duration of
any Extension Period elected by the Company with respect
to the payment of interest on the Junior Subordinated
Debentures. No Extension Period will exceed twenty (20)
consecutive quarterly periods, end on a date other than an
Interest Payment Date or extend beyond the Stated Maturity
Date. During an Extension Period, the holders of Capital
Securities will be required to include deferred interest
income in their gross income for United States federal
income tax purposes in advance of any corresponding cash
distributions. See "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment Date" and
"Certain Federal Income Tax Consequences with Respect to
the Issuance of the Capital Securities--Interest Income
and Original Issue Discount."
Redemption...................... The Trust Securities will be subject to mandatory
redemption in a Like Amount: (i) in whole but not in part,
on the Stated Maturity Date upon repayment of the Junior
Subordinated Debentures; (ii) in whole but not in part, at
any time prior to , contemporaneously with the
optional prepayment of the Junior Subordinated Debentures
by the Company upon the occurrence and continuation of a
Special Event (as defined herein); and (iii) in whole or
in part, on or after , contemporaneously with the optional
prepayment by the Company of all or part of the Junior
Subordinated Debentures, at the Optional Redemption Price.
See "Description of Capital Securities--Redemption" and
"Description of Junior Subordinated Debentures--Special
Event Prepayment."
Ranking......................... The Capital Securities will rank PARI PASSU, and payments
thereon will be made pro rata, with the Common Securities,
except as described under "Description of Capital
Securities--Subordination of Common Securities." The
Junior Subordinated Debentures will rank pari passu with
all other junior subordinated debentures, if any issued by
the Company (the "Other Debentures"), which are issued and
sold, if at all, to other trusts established by the
Company if any, in each case similar to the Trust ("Other
Trusts"), and will constitute unsecured obligations of the
Company and will rank subordinate and junior in right of
payment to all Senior Indebtedness (as defined herein) to
the extent and in the manner set forth in the Indenture.
The Guarantee will rank PARI PASSU with all other
guarantees, if any, issued by the Company with respect to
Capital Securities, if any, issued by Other Trusts ("Other
Guarantees") and will constitute an unsecured obligation
of the Company and will rank subordinate and junior in
right of payment to all Senior Indebtedness to the extent
and in the manner set forth in the Guarantee, including
the Bank's deposit liabilities. See "Description of
Guarantee." In addition, because the Company is a
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
holding company, the Junior Subordinated Debentures and
the Guarantee will be effectively subordinated to all
existing and future liabilities of the Company's
subsidiaries, including the Bank's deposit liabilities.
See "Description of Junior Subordinated
Debentures--Subordination."
Guarantee....................... Taken together, the Company's obligations under various
documents described herein, including the Guarantee
Agreement, provide a full guarantee of payments by the
Trust of Distributions and other amounts due on the
Capital Securities. Under the Guarantee Agreement, the
Company guarantees the payment of Distributions by the
Trust and payments on liquidation of or redemption of the
Capital Securities (subordinate to the right to payment of
Senior Indebtedness of the Company), in each case to the
extent of funds legally available and held by the Trust.
If the Trust has insufficient funds to pay Distributions
on the Capital Securities (i.e., if the Company has failed
to make required payments under the Junior Subordinated
Debentures), a holder of the Capital Securities would have
the right to institute a legal proceeding directly against
the Company to enforce payment of such Distributions to
such holder. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of
the Capital Securities," "--Debenture Events of Default"
and "Description of Guarantee."
Voting Rights................... The holders of the Capital Securities will generally have
limited voting rights relating only to the modification of
the Capital Securities, the dissolution, wind-up or
liquidation of the Trust and certain other matters
described herein. See "Description of Capital
Securities--Voting Rights; Amendment of the Trust
Agreement."
ERISA Considerations............ For a discussion of certain restrictions on purchases, see
"ERISA Considerations."
Absence of Market for the
Capital Securities............ The Capital Securities will be a new issue of securities
for which there is no market. Although the Underwriters
have informed the Company that they may in the future make
a market in the Capital Securities, the Underwriters are
not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the Capital Securities.
Nasdaq National Market Symbol
for the Capital Securities.... The Company and Trust have applied for listing of the
Capital Securities on the Nasdaq National Market under the
symbol "ARGOP".
</TABLE>
11
<PAGE>
AVAILABLE INFORMATION
No separate financial statements of the Trust have been included herein. The
Company and the Trust do not consider that such financial statements would be
material to holders of the Trust Securities because the Trust is a newly-formed
special purpose entity, has no operating history or independent operations and
is not engaged in and does not propose to engage in any activity other than
holding as trust assets the Junior Subordinated Debentures and issuing the Trust
Securities.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth summary consolidated historical financial
data for the Company during the periods ended and at the dates indicated. The
selected consolidated historical financial data gives effect to a four-to-one
stock split in the form of a stock dividend which will take place prior to the
date of the Offering. This information should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
----------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Loans receivable, net......................... $ 174,985 $ 184,358 $ 173,429 $ 142,380 $ 118,063 $ 90,139
FHLB of Chicago Stock, at cost................ 3,271 3,271 3,428 2,669 2,576 2,576
Securities available-for-sale, at fair
value....................................... 5,348 4,974 5,788 7,573 12,491 15,009
Cash and cash equivalents..................... 20,479 8,677 13,276 11,061 9,286 6,905
Mortgage loan servicing rights................ 6,779 6,706 5,264 4,033 3,641 2,508
Foreclosed real estate, net................... 4,323 4,251 3,913 2,234 359 554
Other assets.................................. 23,321 24,061 24,186 16,518 9,601 8,038
----------- --------- --------- --------- --------- ---------
Total assets................................ $ 238,506 $ 236,298 $ 229,284 $ 186,468 $ 156,017 $ 125,729
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Deposits...................................... $ 179,832 $ 172,469 $ 150,627 $ 123,484 $ 100,697 $ 88,220
Borrowed money................................ 28,510 34,156 50,879 38,181 30,820 9,064
Custodial escrow balances for loans
serviced.................................... 5,582 6,400 5,782 9,696 14,691 20,031
Other liabilities............................. 5,954 5,169 5,436 4,228 835 619
----------- --------- --------- --------- --------- ---------
Total liabilities........................... 219,878 218,194 212,724 175,589 147,043 117,934
Stockholders' equity.......................... 18,628 18,104 16,560 10,879 8,974 7,795
----------- --------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity.................................... $ 238,506 $ 236,298 $ 229,284 $ 186,468 $ 156,017 $ 125,729
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................ $ 4,187 $ 4,656 $ 18,266 $ 16,074 $ 13,987 $ 10,282 $ 9,477
Interest expense............................... 2,804 2,745 11,286 9,083 8,341 5,012 3,822
--------- --------- --------- --------- --------- --------- ---------
Net interest income.......................... 1,383 1,911 6,980 6,991 5,646 5,270 5,655
Provision for loan losses...................... 185 60 210 248 55 48 270
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses..................................... 1,198 1,851 6,770 6,743 5,591 5,222 5,385
Non-interest income............................ 4,590 3,361 15,585 14,194 4,479 1,838 1,738
Non-interest expense........................... 5,245 4,862 21,409 19,260 7,662 5,383 4,587
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle... 543 350 946 1,677 2,408 1,677 2,536
Income tax expense............................. 157 93 123 343 667 281 952
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle (1)................... 386 257 823 1,334 1,741 1,396 1,584
Cumulative effect of change in accounting for
income taxes (1)............................. -- -- -- -- -- -- 460
--------- --------- --------- --------- --------- --------- ---------
Net income................................... $ 386 $ 257 $ 823 $ 1,334 $ 1,741 $ 1,396 $ 2,044
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic earnings per share (2)..................... $ .20 $ .14 $ .43 $ 1.07 $ 1.47 $ 1.16 $ 1.70
Diluted earnings per share (2)................... $ .19 $ .13 $ .39 $ .90 $ 1.24 $ 1.02 $ 1.55
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED MARCH
31 YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:(5)
Return on average assets.............................. .65% .43% .35% .68% 1.00% 1.00%
Return on average equity.............................. 8.39 5.92 4.62 10.89 17.09 16.17
Average equity to average assets...................... 7.80 7.27 7.53 6.26 5.85 6.10
Stockholders' equity to total assets.................. 7.81 7.03 7.66 7.22 6.08 5.75
Interest rate spread during period.................... 3.03 4.06 3.80 4.62 3.69 4.25
Net interest margin................................... 2.80 3.83 3.54 4.29 3.65 4.24
Non-interest expense to average assets................ 8.89 8.15 9.05 9.83 4.40 3.86
Non-interest expense (exclusive of On-Line) to average
assets.............................................. 3.86 4.00 4.28 4.99 3.61 --
Non-performing loans to gross loans receivable and
loans held for sale(3).............................. 3.13 3.98 3.57 3.12 1.54 1.98
Non-performing assets to total assets (4)............. 3.84 4.03 4.14 3.43 1.86 1.72
Allowance for loan losses to non-performing loans
(3)................................................. 20.39 12.57 14.73 16.87 29.54 26.38
Allowances for loan losses to net loans receivable
(3)................................................. .64 .50 .53 .53 .45 .52
Ratio of net charge-offs during the period to average
loans outstanding, excluding Discounted Loans....... .01 -- .01 -- .04 .04
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans.............. .64 .50 .53 .53 .45 .52
Average interest-earning assets to average
interest-bearing liabilities........................ .96x .96x .95x .94x .99x 1.00x
Book value per share(2)............................... $ 9.36 $ 9.13 $ 9.25 $ 9.28 $ 9.18 $ 7.73
Full-service customer service branches................ 5 5 5 5 5 4
<CAPTION>
1993
---------
<S> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:(5)
Return on average assets.............................. 1.59%
Return on average equity.............................. 27.88
Average equity to average assets...................... 5.71
Stockholders' equity to total assets.................. 6.20
Interest rate spread during period.................... 4.82
Net interest margin................................... 4.93
Non-interest expense to average assets................ 3.58
Non-interest expense (exclusive of On-Line) to average
assets.............................................. --
Non-performing loans to gross loans receivable and
loans held for sale(3).............................. 1.19
Non-performing assets to total assets (4)............. 1.31
Allowance for loan losses to non-performing loans
(3)................................................. 55.88
Allowances for loan losses to net loans receivable
(3)................................................. .68
Ratio of net charge-offs during the period to average
loans outstanding, excluding Discounted Loans....... .01
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans.............. .68
Average interest-earning assets to average
interest-bearing liabilities........................ 1.03x
Book value per share(2)............................... $ 6.85
Full-service customer service branches................ 3
</TABLE>
- ------------------------
(1) On January 1, 1993 the Company adopted Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes," (Statement 109) on a
prospective basis which changed the Company's method of accounting for
income taxes from the deferred method required under APB No. 11 to the asset
and liability method. The cumulative effect of this change in accounting of
$460,000 was reported in the 1993 consolidated statement of operations.
(2) Adjusted to reflect the four-to-one stock split.
(3) The formula used to calculate the ratios excludes balances related to the
portfolio of Discounted Loans receivable from both the numerator and the
denominator.
(4) The formula used to calculate the ratios excludes from the numerator the
balances related to the portfolio of Discounted Loans receivable.
(5) Average balances are derived from month end balances. Performance ratios at
and for the three months ended March 31, 1998 and 1997 are annualized, where
appropriate.
14
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS, SHOULD BE CONSIDERED BY INVESTORS IN DECIDING WHETHER TO PURCHASE
THE SECURITIES OFFERED HEREBY.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE FOLLOWING
MATTERS. INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "PROJECTED,"
"CONTEMPLATES" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS
THEREON OR COMPARABLE TERMINOLOGY. NO ASSURANCE CAN BE GIVEN THAT THE FUTURE
RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE
FOLLOWING MATTERS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING STATEMENTS. OTHER FACTORS, SUCH
AS THE GENERAL STATE OF THE ECONOMY, COULD ALSO CAUSE ACTUAL RESULTS TO VARY
MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING STATEMENTS.
RISKS RELATED TO THE CAPITAL SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES; LIMITATIONS ON SOURCES OF FUNDS. The obligations of
the Company under the Guarantee issued by it for the benefit of the holders of
Capital Securities, as well as under the Junior Subordinated Debentures will be
unsecured and will rank subordinate and junior in right of payment to all Senior
Indebtedness to the extent and in the manner set forth in the Guarantee and the
Indenture, respectively. No payment may be made of the principal or premium, if
any, or interest on the Junior Subordinated Debentures, or in respect of any
redemption, retirement, purchase or other acquisition of any of the Junior
Subordinated Debentures, at any time when (i) there shall have occurred and be
continuing a default in any payment in respect of any Senior Indebtedness, or
there has been an acceleration of the maturity thereof because of a default, or
(ii) in the event of the acceleration of the maturity of the Junior Subordinated
Debentures, until payment has been made on all Senior Indebtedness. Because the
Company is a holding company, the right of the Company to participate in any
distribution of assets of any subsidiary upon such subsidiary's liquidation or
reorganization or otherwise (and thus the ability of holders of the Capital
Securities to benefit indirectly from such distribution) is subject to the prior
claims of creditors of that subsidiary (including depositors, in the case of the
Bank), except to the extent that the Company may itself be recognized as a
creditor of that subsidiary. At March 31, 1998, the subsidiaries of the Company
had total liabilities (excluding liabilities owed to the Company) of $213.9
million. Accordingly, the Junior Subordinated Debentures effectively will be
subordinated to all existing and future liabilities of the Company's
subsidiaries (including the Bank's deposit liabilities, which aggregated $180.9
million at March 31, 1998) and holders of Junior Subordinated Debentures should
look only to the assets of the Company for payments on the Junior Subordinated
Debentures. The Guarantee will constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of payment to all Senior
Indebtedness in the same manner as the Junior Subordinated Debentures. None of
the Indenture, the Guarantee or the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Company or any of its subsidiaries. See "Description of
Guarantee-- Status of the Guarantee" and "Description of Junior Subordinated
Debentures--General" and "-- Subordination."
The ability of the Trust to pay amounts due on the Capital Securities is
solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required.
The Company is a holding company and almost all of the operating assets of
the Company are owned by the Company's subsidiaries. There are regulatory
limitations on the payment of dividends directly or indirectly to the Company
from the Bank. As of March 31, 1998, under regulations of the OTS, the total
capital available for payment of dividends by the Bank to the Company was
approximately $2.4 million.
15
<PAGE>
However, the OTS has the power to prohibit any act, including the payment of
dividends, if such act would reduce the Bank's capital to a point that, in its
opinion, would render the Bank undercapitalized and thus constitute an unsafe or
unsound banking practice. In addition to restrictions on the payment of
dividends, the Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, and certain other transactions with, the Company
and certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent the Company and such other affiliates from
borrowing from the Bank unless the loans are secured by various types of
collateral. Further, such secured loans, other transactions and investments by
the Bank are generally limited in amount as to the Company and as to each of
such other affiliates to 10% of the Bank's capital and surplus and as to the
Company and all of such other affiliates to an aggregate of 20% of the Bank's
capital and surplus.
OPTION TO EXTEND INTEREST PAYMENT PERIOD. So long as no Debenture Event of
Default (as defined herein) shall have occurred and be continuing, the Company
will have the right under the Indenture to defer payments of interest on the
Junior Subordinated Debentures at any time or from time to time for a period not
exceeding twenty (20) consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period shall end on a date other
than an Interest Payment Date or extend beyond the Stated Maturity Date. As a
consequence of any such deferral, quarterly Distributions on the Trust
Securities by the Trust will be deferred (and the amount of Distributions to
which holders of the Trust Securities are entitled will accumulate additional
Distributions thereon at the rate of % per annum, compounded quarterly, but
not exceeding the interest rate then accruing on the Junior Subordinated
Debentures) from the relevant payment date for such Distributions during any
such Extension Period. During the pendency of any Extension Period, the Company
generally will be prohibited from declaring or paying dividends on the Company's
capital stock, including the Common Stock. See "Description of Capital
Securities--Distributions."
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed twenty (20) consecutive quarterly periods,
end on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any Extension Period and the payment of
all interest then accrued and unpaid on the Junior Subordinated Debentures
(together with interest thereon at the annual rate of %, compounded
quarterly, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period, subject to the above requirements. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of Capital Securities--Distributions" and
"Description of Junior Subordinated Debentures--Option to Extend Interest
Payment Date."
TAX CONSEQUENCES. The Company has no current plan to exercise its right to
defer payments of interest on the Junior Subordinated Debentures. However,
should the Company exercise its right to defer payments of interest on the
Junior Subordinated Debentures, each holder of Trust Securities will be required
to accrue income (as original issue discount ("OID")) in respect of the deferred
stated interest allocable to its Trust Securities for United States federal
income tax purposes, which will be allocated but not distributed to holders of
Trust Securities. As a result, each holder of Capital Securities will recognize
income for United States federal income tax purposes in advance of the receipt
of cash and will not receive the cash related to such income from the Trust if
the holder disposes of the Capital Securities prior to the record date for the
payment of Distributions thereafter. See "Certain Federal Income Tax
Consequences with Respect to the Issuance of the Capital Securities--Interest
Income and Original Issue Discount" and "--Sales of Capital Securities."
MARKET PRICE CONSEQUENCES. Should the Company elect to exercise its right
to defer payments of interest on the Junior Subordinated Debentures in the
future, the market price of the Capital Securities is likely to be affected. A
holder that disposes of its Capital Securities during an Extension Period,
therefore, might not receive the same return on its investment as a holder that
continues to hold its Capital
16
<PAGE>
Securities. In addition, the Company's right to defer payments of interest on
the Junior Subordinated Debentures may cause the market price of the Capital
Securities to be more volatile than the market prices of other securities on
which OID accrues and that are not subject to such deferrals.
SPECIAL EVENT REDEMPTION. Upon the occurrence and continuation of a Special
Event, including a Tax Event or a Regulatory Capital Event (in each case as
defined under "Description of Junior Subordinated Debentures--Special Event
Prepayment" and when referred to together (the "Special Event")), prior to the
Initial Optional Prepayment Date, the Company will have the right to prepay the
Junior Subordinated Debentures in whole (but not in part) at the Special Event
Prepayment Price within 90 days following the occurrence of such Special Event
and therefore cause a mandatory redemption of the Trust Securities at the
Special Event Redemption Price. The exercise of such right is subject to the
Company having received any required regulatory approval. See "Description of
Capital Securities--Redemption."
LIQUIDATION DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES. The Company
will have the right at any time to terminate the Trust and, after satisfaction
of liabilities to creditors of the Trust as required by applicable law, to cause
the Junior Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. The exercise of such right is subject
to: (i) the Company having received an opinion of counsel to the effect that
such distribution will not be a taxable event to the holders of Capital
Securities; and (ii) receipt of any required regulatory approval. Under current
United States federal income tax law, a distribution of Junior Subordinated
Debentures upon the dissolution of the Trust would not be a taxable event to
holders of the Capital Securities. Upon the occurrence of a Special Event, a
dissolution of the Trust in which holders of the Capital Securities receive cash
would be a taxable event to such holders. See "Certain Federal Income Tax
Consequences with Respect to the Issuance of the Capital Securities--Receipt of
Junior Subordinated Debentures or Cash Upon Liquidation of the Trust."
Under current United States federal income tax law and interpretations, and
assuming that the Trust is classified as a grantor trust for such purposes, a
distribution of the Junior Subordinated Debentures upon a liquidation of the
Trust should not be a taxable event to holders of the Capital Securities.
However, if a Special Event were to occur which would cause the Trust to be
subject to United States federal income tax with respect to income received or
accrued on the Junior Subordinated Debentures, a distribution of the Junior
Subordinated Debentures by the Trust could be a taxable event to the Trust and
the holders of the Capital Securities. See "Certain Federal Income Tax
Consequences with Respect to the Issuance of the Capital Securities--Receipt of
Junior Subordinated Debentures or Cash Upon Liquidation of the Trust."
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES. The
Company will have the right at any time to shorten the maturity of the Junior
Subordinated Debentures to a date not earlier than , and thereby cause the
Capital Securities to be redeemed on such earlier date. The exercise of such
right is subject to the Company having received prior regulatory approval if
then required under applicable capital guidelines or policies. See "Description
of Junior Subordinated Debentures--Redemption."
UNDER THE GUARANTEE. The Guarantee will guarantee to the holders of the
Capital Securities the following payments, to the extent not paid by or on
behalf of the Trust: (i) any accumulated and unpaid Distributions required to be
paid on the Capital Securities, to the extent that the Trust has funds legally
available therefore at such time, (ii) the applicable Redemption Price with
respect to the Capital Securities called for redemption, to the extent that the
Trust has funds legally available therefore at any such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(unless the Junior Subordinated Debentures are distributed to holders of the
Capital Securities), the lesser of (a) the aggregate of the Liquidation Amount
and all accumulated and unpaid Distributions to the date of payment, to the
extent that the Trust has funds on hand available therefore at such time and (b)
the amount of assets of the Trust remaining available for distribution to
holders of the Capital Securities after satisfaction of liabilities to creditors
of the Trust as required by applicable law.
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The holders of not less than a majority in aggregate Liquidation Amount of
the Capital Securities will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee Trustee
in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Capital Securities may institute a legal proceeding directly against the Company
to enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee or any other person or
entity. If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust would not have sufficient
funds for the payment of Distributions or amounts payable on redemption of the
Capital Securities or otherwise, and, in such event, holders of the Capital
Securities would not be able to rely upon the Guarantee for payment of such
amounts. Instead, in the event a Debenture Event of Default shall have occurred
and be continuing and such event is attributable to the failure of the Company
to pay principal (or premium, if any) or interest (including Additional Sums (as
defined below) and Compounded Interest (as defined below), if any) on the Junior
Subordinated Debentures on the payment date on which such payment is due and
payable, then a holder of Capital Securities may institute a legal proceeding
directly against the Company for enforcement of payment to such holder of the
principal (or premium, if any) or interest (including Additional Sums and
Compounded Interest, if any) on such Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Capital
Securities of such holder (a "Direct Action"). Notwithstanding any payments made
to a holder of Capital Securities by the Company in connection with a Direct
Action, the Company shall remain obligated to pay the principal (and premium, if
any) and interest (including Additional Sums and Compounded Interest, if any) on
the Junior Subordinated Debentures, and the Company shall be subrogated to the
rights of the holder of such Capital Securities with respect to payments on the
Capital Securities to the extent of any payments made by the Company to such
holder in any Direct Action. Except as described herein, holders of Capital
Securities will not be able to exercise directly any other remedy available to
the holders of the Junior Subordinated Debentures or to assert directly any
other rights in respect of the Junior Subordinated Debentures. See "Description
of Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of
Capital Securities," "--Debenture Events of Default" and "Description of
Guarantee." The Trust Agreement will provide that each holder of Capital
Securities by acceptance thereof agrees to the provisions of the Indenture.
will act as Guarantee Trustee and will hold the Guarantee for the
benefit of the holders of the Capital Securities. will also act as
Property Trustee and as Debenture Trustee under the Indenture. will
act as Delaware Trustee under the Trust Agreement.
LIMITED VOTING RIGHTS. Holders of Capital Securities will generally have
limited voting rights relating only to the modification of the Capital
Securities, the dissolution, winding-up or liquidation of the Trust, and the
exercise of the Trust's rights as holder of Junior Subordinated Debentures.
Holders of Capital Securities will not be entitled to vote to appoint, remove or
replace the Property Trustee or the Delaware Trustee, and such voting rights are
vested exclusively in the holder of the Common Securities except upon the
occurrence of certain events described herein. In no event will the holders of
the Capital Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights are vested exclusively in the holder
of the Common Securities. The Property Trustee, the Administrative Trustees and
the Company may amend the Trust Agreement without the consent of holders of
Capital Securities to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust, even if such action adversely
affects the interests of such holders. See "Description of Capital
Securities-Voting Rights; Amendment of the Trust Agreement" and "--Removal of
Issuer Trustees."
TRADING CHARACTERISTICS OF THE CAPITAL SECURITIES. The Capital Securities
may trade at a price that does not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A holder
who uses the accrual method of accounting for tax purposes (and a cash method
holder, if the Junior Subordinated Debentures are deemed to have been issued
with OID) and who disposes of its Capital Securities between record dates for
payments of distributions thereon will be required to include accrued but unpaid
interest on the Junior Subordinated Debentures through the date
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of disposition in income as ordinary income (i.e., interest or, possible, OID),
and to add such amount to its adjusted tax basis in its share of the underlying
Junior Subordinated Debentures deemed disposed of. To the extent the selling
price is less than the holder's adjusted tax basis (which will include all
accrued but unpaid interest), a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences with Respect to the Issuance of the Capital
Securities--Interest Income and Original Issue Discount" and "--Sales of Capital
Securities."
MARKET PRICE OF CAPITAL SECURITIES. There can be no assurance as to the
market prices for the Capital Securities or Junior Subordinated Debentures that
may be distributed in exchange for Capital Securities if a liquidation of the
Trust occurs. Accordingly, the Capital Securities that a purchaser may purchase,
whether pursuant to this Offering or in the secondary market, or the Junior
Subordinated Debentures that a holder of the Capital Securities may receive on
liquidation of the Trust, may trade at a discount to the price that the
purchaser paid to purchase the Capital Securities offered hereby.
Future trading prices of the Capital Securities will depend on many factors
including, among other things, prevailing interest rates, the operating results
and financial condition of the Company, and the market for similar securities.
As a result of the existence of the Company's right to defer interest payments
on or, subject to any prior regulatory approval then required under applicable
capital guidelines or policies, shorten the Stated Maturity Date of the Junior
Subordinated Debentures, the market price of the Capital Securities may be more
volatile than the market prices of debt securities that are not subject to such
optional deferrals or reduction in maturity. There can be no assurance as to the
market prices for the Capital Securities, or the Junior Subordinated Debentures
that may be distributed in exchange for the Capital Securities, if the Company
exercises its right to terminate the Trust. Accordingly, the Capital Securities
that an investor may purchase, or the Junior Subordinated Debentures that a
holder of the Capital Securities may receive in liquidation of the Trust, may
trade at a discount from the price that the investor paid to purchase the
Capital Securities offered hereby.
ABSENCE OF PUBLIC MARKET AND RATINGS. The Capital Securities have not been
rated by any rating agency. In addition, there is no existing market for the
Capital Securities. Consequently, there can be no assurance as to the liquidity
of any markets that may develop for the Capital Securities, the ability of the
holders to sell their Capital Securities or at what price holders of the Capital
Securities will be able to sell their Capital Securities, as the case may be.
Future trading prices of the Capital Securities will depend on many factors
including, among other things, prevailing interest rates, the Company's
operating results, and the market for similar securities. Although the Company
and Trust have applied to have the Capital Securities approved for quotation on
the Nasdaq National Market, there can be no assurance that such application will
be approved, that an active trading market for the Capital Securities will
develop or, if one does develop, that it will be maintained.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
Like most banks, the Bank realizes income primarily from the spread between
interest earned on loans and investments and the interest paid on deposits and
borrowings. It is expected that the Bank, from time to time, will experience
"gaps" in the interest rate sensitivities of its assets and liabilities, meaning
that either its interest-bearing liabilities will be more sensitive to changes
in market interest rates than its interest-earing assets, or vice versa. In
either event, if market interest rates should move contrary to the Bank's
position, the "gap" will adversely affect the Bank's earnings and the Net
Present Value ("NPV") of the Bank's interest sensitive assets and liabilities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
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NO ASSURANCE AS TO THE ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
At March 31, 1998, the Company's allowance for the loan losses amounted to
$984,000 or 20.4% of total non-performing loans (excluding Discounted Loans) and
.64% of net loans receivable (excluding Discounted Loans). The Company's
allowance for loan losses is maintained at a level considered adequate by
management to absorb inherent losses in its loan portfolio. The amount of
inherent loan losses which could be ultimately realized is susceptible to
changes in economic, operating, and other conditions, including changes in
interest rates, that could be beyond the Company's control. Such losses could
exceed current estimates. Although management believes that the Company's
allowance for loan losses is adequate, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses should such losses
be realized or that the Company will not have to increase its allowance for loan
losses in the future.
NON-PERFORMING ASSETS
As of March 31, 1998, total non-performing assets were $9,149,000, 3.84% of
total assets as of that date. As of March 31, 1998, the Company had $4.8 million
of loans and $4.3 million of foreclosed real estate classified as Substandard or
Doubtful.
The level of non-performing assets may remain high in the future and the
levels of nonaccural loans and REO may fluctuate from period to period as
problem loans are worked out and in some instances additional properties are
taken into REO. Further, depending on real estate values, the overall economy
and other circumstances, the resolution of problem loans and liquidation of REO
may be more costly than presently anticipated, and may require the Company to
increase its allowances and incur additional REO-related expenses.
The Company believes that its policies and procedures related to its
monitoring and resolution of problem assets are adequate. In this regard, the
Company monitors its problem assets, and based on information known to
management at such time, establishes allowances against foreseeable losses
related to such loans. While the Company believes it has established adequate
reserves against such loans or written down the value of the properties securing
such loans to reflect the current estimated fair values of such properties, no
assurances can be provided that the properties securing such loans will not
further decrease in value or can be sold for their estimated fair values in the
event the Bank forecloses or takes possession of such properties or that the
Company will not experience additional losses related to such loans.
RISKS ASSOCIATED WITH MORTGAGE ORIGINATION, PURCHASE AND SALE ACTIVITIES
The Bank is actively involved in the origination, purchase and sale of real
estate secured loans. Generally, the profitability of such mortgage banking
operations depends on maintaining a sufficient volume of loans for sale and the
availability of loan purchasers. Changes in the level of interest rates and
economic factors may affect the amount of loans originated or available for
purchase by the Bank, and thus the availability of net gains from mortgage
banking operations. Changes in the purchasing policies of loan purchasers or
increases in defaults after funding could substantially reduce the amount of
loans sold to such loan purchasers. Any such changes could have a material
adverse effect on the Bank's results of operations and financial condition.
Therefore, between the time the Bank originates loans and purchase commitments
are issued, the Bank is exposed to downward movements in the market price of
such loans due to upward movements in interest rates or default by the borrower.
Management believes that this risk is mitigated to a certain extent as ARM loans
are generally originated for the portfolio while fixed-rate loans, excluding
Expanded Criteria Loans, are generally originated after receipt of a firm
commitment from a buyer to acquire such loans from the Bank. Fixed-rate Expanded
Criteria Loans are generally retained for portfolio due to their higher yielding
interest rates. See "Business of the Bank--Lending Activities--Loan Originations
and Purchases."
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In addition to its lending activity in Illinois, the Bank has originated or
purchased a significant number of one- to four-family residential mortgage loans
on a nationwide basis through its network of Correspondents. At March 31, 1998,
$4.2 million, or 2.5%, of the Bank's one- to four-family loan portfolio was
secured by property located outside of Illinois. Management believes that
originating and purchasing loans secured by properties located across the
country results in a geographically diversified lending operation which reduces
certain risks associated with loan concentrations in a single area. However,
there are certain other risks involved in nationwide lending. The Bank may not
have the same depth of experience or knowledge about particular markets in which
it lends as other lenders with staff physically located in such market areas.
Additionally, the Bank has historically experienced a greater level of
non-performing loans with respect to loans purchased rather than originated
through its Correspondents. Some of the properties may be located in states
which are experiencing adverse economic conditions, including a general
softening in real estate markets and the local economies, which may result in
increased loan delinquencies and loan losses. Further, regulations and practices
regarding the liquidation of properties (E.G., foreclosure) and the rights of
mortgagors in default vary greatly from state to state, and these restrictions
may impact the Bank's ability to foreclose on a property or seek other recovery.
See "Business of the Bank--Lending Activities--Use and Qualifications of
Correspondents."
RISKS ASSOCIATED WITH PORTFOLIO AND EXPANDED CRITERIA LENDING
The Bank actively originates Portfolio and Expanded Criteria Loans on one-
to four-family residential properties. These loans are originated, in many
instances, when the borrower's credit profile, or some aspect of the loan, does
not meet Agency criteria. Because the Bank retains in its portfolio a portion of
these Portfolio and Expanded Criteria Loans that it originates, such loans
expose the Bank to additional risk of default by the borrower because the Bank
cannot as readily transfer the credit risk to a third party by sale of the loan.
To offset the possible additional risks of Portfolio and Expanded Criteria
Loans, the Bank may require a lower loan-to-value ratio, a co-signer, mortgage
insurance and/or other compensating factors. The Bank also uses six major
mortgage insurance companies which act as a contract underwriter on such loans.
Additionally, these loans provide the Bank with higher yields and prepayment
penalty fees. See "Business of the Bank -- Lending Strategies -- Loan Approval
and Underwriting."
COMPETITION
As a purchaser and originator of mortgage loans, the Bank faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, thrift institutions, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Bank. Certain large national
finance companies and conforming mortgage originators have announced their
intention to adapt their conforming origination programs and allocate resources
to the origination of loans similar to the Bank's Expanded Criteria Loans.
Certain of these larger mortgage companies and commercial banks have begun to
offer products similar to those offered by the Bank, targeting customers similar
to those of the Bank. In addition, it is anticipated that the participation of
government-sponsored entities with substantial capital resources in the
origination of loans similar to the Bank's Portfolio and Expanded Criteria Loans
will further intensify competition. FreddieMac recently announced its intention
to support such originations by purchasing, guaranteeing and securitizing loans
similar to the Bank's Portfolio and Expanded Criteria Loans originated by
qualified institutions. Other government-sponsored entities, such as the
FannieMae or Ginnie Mae may also enter into the market for loans similar to the
Bank's Portfolio and Expanded Criteria Loans. The offering by these competitors,
some of which are anticipated to receive support from government-sponsored
entities, of products similar to those of the Bank's, could have a material
adverse effect on the Bank's results of operations and financial condition. The
Bank depends largely on Correspondents with whom the Bank's competitors also
seek to establish relationships. The Bank's future results may become
increasingly sensitive to fluctuations in the volume and cost of its wholesale
loan purchases resulting from competition
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from other purchasers for such loans. In addition, as the Bank expands into new
geographic markets, it will face competition from lenders with established
positions in these locations. There can be no assurance that the Bank will be
able to continue to compete successfully in the markets it serves.
AVAILABILITY OF FUNDING SOURCES
The Bank funds substantially all of the loans which it originates and
purchases through deposits, internally generated funds or Federal Home Loan Bank
("FHLB") advances. The Bank competes for deposits primarily on the basis of
rates, and as a consequence the Bank could experience difficulties in attracting
deposits to fund its operations if it does not continue to offer deposit rates
at levels that are competitive with other financial institutions. Certificate of
deposit accounts constituted $139.8 million, or 77.7% of total deposits at March
31, 1998, of which $121.6 million mature in one-year or less. Increases in
short-term certificate accounts, which tend to be more sensitive to movements in
market interest rates than core deposits, may result in the Bank's deposit base
being less stable than if it had a large amount of core deposits which, in turn,
may result in increases in the Bank's cost of funds. The Bank also uses the cash
proceeds generated by the Bank in selling loans in the secondary market to fund
subsequent originations and purchases. On an ongoing basis, the Company explores
opportunities to access credit lines as an additional source of funds. To the
extent the Company is not able to maintain its currently available funding
sources or to access new funding sources, it may have to curtail its loan
investment activities. Any such event would have a material adverse effect on
the Bank's results of operations and financial condition. See "Business of the
Bank--Sources of Funds and Borrowings."
CONTINGENT RISKS
Substantially all of the mortgage loans sold by the Bank are sold without
recourse. In connection with its loan sales, the Bank enters agreements which
generally require the Bank to repurchase or substitute loans in the event of a
breach of a representation or warranty made by the Bank to the loan purchaser,
any misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or early default on such mortgage loans. The remedies
available to a loan purchaser from the Bank are generally broader than those
available to the Bank against the sellers of such loans, and if a loan purchaser
enforces its remedies against the Bank, the Bank may not be able to enforce
whatever remedies the Bank may have against such sellers. If the loans were
originated directly by the Bank, the Bank would be solely responsible for any
breaches of representations or warranties. For loans originated through its
network of Correspondents, the Bank utilizes contract underwriters who provide
the Company with certain representations and warranties that such loans meet the
Bank's underwriting guidelines. For loans retained by the Bank in its portfolio,
credit risk may be incurred with respect to Expanded Criteria Loans in which the
borrower may have an impaired credit profile. The rates of delinquencies,
foreclosures and losses on and Expanded Criteria Loans could be higher under
adverse economic conditions than on Agency Qualified loans. In addition, during
the period of time that the loans are held for sale, the Bank is subject to
various business risks associated with the lending business, including borrower
default, foreclosure and the risk that a rapid increase in interest rates would
result in a decline of the value of loans held for sale to potential purchasers.
See "Business of the Bank--Lending Activities--Loan Approval and Underwriting."
RISKS ASSOCIATED WITH PURCHASED MORTGAGE SERVICING RIGHTS
At March 31, 1998, the Bank owned, directly and indirectly, $6.8 million in
purchased mortgage servicing rights ("PMSRs"). The Bank's ownership of PMSRs
carries interest rate risk because the total amount of servicing fees earned, as
well as the amortization of the investment in the servicing rights, fluctuates
based on loan prepayments (affecting the expected average life of a portfolio of
PMSRs). The rate of prepayment of mortgage loans may be influenced by changing
national and regional economic trends, prevailing mortgage rates and the housing
market in general. During periods of declining interest rates, as currently
exists, many borrowers refinance their mortgage loans. Accordingly, prepayments
of
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mortgage loans increase and the loan administration fee income related to the
mortgage loan servicing rights corresponding to a mortgage loan ceases as
underlying loans are prepaid. Consequently, the market value of portfolios of
mortgage loan servicing rights tends to decrease during periods of declining
interest rates, since greater prepayments can be expected. The income derived
from and the market value of the Bank's servicing portfolio, therefore, may be
adversely affected during periods of declining interest rates. See "Business of
the Bank-Purchased Mortgage Servicing Rights."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a considerable degree on the contributions of a
limited number of key management personnel who have had, and will continue to
have, a significant role in the development and management of the Company. The
continued development of the Company's business strategy depends to a large
extent upon the continued employment of Mr. John Yedinak, President and Chief
Executive Officer of both the Company and the Bank. Additionally, the Company
maintains lines of credit with various lending institutions, some of which are
personally guaranteed by Mr. Yedinak. Should Mr. Yedinak be no longer employed
by the Company, there is no assurance such lines of credit would continue to be
available. However, it is anticipated that following the Offering such lines of
credit will no longer require a personal guarantee. The Company and Bank have
entered into renewable employment agreements, providing for five and three year
terms, respectively, with Mr. Yedinak, effective November 1, 1996. The Company
and the Bank also maintain a total of $2.5 million in key-man life insurance
policies with respect to Mr. Yedinak. See "The Board of Directors and Management
of the Bank--Executive Compensation-- Employment Agreements."
ABSENCE OF MARKET FOR COMMON STOCK
The Company's Common Stock trades on the Nasdaq Over-The-Counter Market. As
of March 31, 1998, the Company's Common Stock was held by approximately 222
holders of record. There can be no assurance that an active and liquid trading
market for the Common Stock will develop, or, once developed, will continue, nor
can there be any assurances that holders of the Common Stock will be able to
sell their shares at or above the price per share in the Offering. The absence
or discontinuation of a market for the Common Stock may have an adverse impact
on both the price and liquidity of the Common Stock. In addition, the stock
market has on occasion experienced extreme price and volume fluctuation. These
broad market fluctuations may adversely affect the market price for the
Company's Common Stock. See "Market for Common Stock."
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS. Certain provisions of
the Company's Certificate of Incorporation and Bylaws as well as certain federal
regulations, assist the Company in maintaining its status as an independent
publicly owned corporation. These provisions provide for, among other things,
supermajority voting on certain matters, staggered elections of the boards of
directors, non-cumulative voting for directors, and limits on the calling of
special meetings. These provisions in the Company's governing instruments may
discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate current management. See
"Restrictions on Acquisition of the Company."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Company and Bank currently own approximately 84.5% of the shares of
common stock. In addition, directors and executive officers of the Company and
Bank expect to purchase approximately % of the shares of Common Stock to be
issued in the Offering. An additional 349,584 shares may be attributable to
directors and officers of the Company and Bank through the exercise of options
to purchase shares of Common Stock held by such directors and officers pursuant
to the Company's stock option plans. Accordingly, management's potential voting
control will continue to have a significant influence over the affairs of the
Company and the Bank.
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Such concentration of ownership may have the effect of delaying, deferring or
preventing takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. Additionally, pursuant
to a stockholder agreement (the "Stockholder Agreement") with Deltec Banking
Corporation Limited ("Deltec"), a banking corporation organized under the laws
of the Commonwealth of the Bahamas, for so long as Deltec, holds at least 15% of
the Company's Common Stock, Deltec has the right to nominate one director to the
Company's Board of Directors. Additionally, Mr. Yedinak has agreed that during
this time period he will vote all shares of the Company's Common Stock owned by
him for the nominee designated by Deltec. See "Restrictions on Acquisition of
the Company and the Bank -- Restrictions in the Company's Certificate of
Incorporation and Bylaws," "The Board of Directors and Management of the Bank --
Stock Option Plans" and "Stockholder Agreement."
DILUTION
Upon completion of the Offering, there will be an immediate dilution to
investors purchasing Common Stock in the Offering of the net tangible book value
per share of Common Stock of $ per share based on the Price to Public of the
Common Stock (the "Price to Public"). On an as adjusted basis, the Price to the
Public is substantially greater than the effective price at which the existing
stockholders purchased their shares and the effective exercise price of the
outstanding stock options. See "Dilution."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Company, as a savings association holding company, and the Bank, as a
federal savings bank, are subject to extensive federal law, regulations and
supervision. Such law and regulations, which affect the Bank on a daily basis,
may be changed at any time, and the interpretation of the relevant law and
regulations is also subject to change by the federal regulatory authorities. Any
change in the regulatory structure or the applicable statutes or regulations,
whether by the OTS, the Federal Deposit Insurance Corporation ("FDIC") or the
Congress, could have a material impact on the Company, the Bank and their
respective operations. See "Regulation."
RECHARTERING LEGISLATION. The Deposit Insurance Funds Act of 1996 ("the
Funds Act"), enacted in September 1996, provides that the Bank Insurance Fund
("BIF"), the fund which insures most commercial bank deposits, and the Savings
Association Insurance Fund ("SAIF") will merge on January 1, 1999, if there are
no savings associations, as defined, in existence on that date. Pursuant to that
legislation, the Department of Treasury in May 1997 recommended in a report to
Congress that the separate charters for thrifts and banks be abolished. Various
proposals to eliminate the federal thrift charter, create a uniform financial
institutions charter, conform holding company regulation and abolish the OTS
have been introduced in Congress. The House Committee on Banking and Financial
Services has reported a bill that will require federal savings associations to
convert to national banks or some type of state charter within two years of
enactment or they would automatically become national banks. The bill would also
merge the BIF and the SAIF, repeal the Home Owners' Loan Act ("HOLA"), abolish
the OTS and transfer the regulation of savings associations to the federal bank
regulators and the Federal Reserve Board. Federal thrifts converted to national
banks generally will be permitted to continue to engage in any activity,
including the holding of any asset, lawfully conducted on the date prior to the
enactment. A federal savings association converted to a national bank may retain
all branches established or proposed in a pending application as of enactment
and establish new branches in any state in which it has a branch. Otherwise it
may establish new branches only under national bank rules. In addition,
beginning two years after enactment, national banks will be authorized to
exercise all powers formerly authorized for federal savings associations.
Under the proposal, holding companies for savings associations converted to
national banks generally will become subject to the same regulation as holding
companies that control commercial banks, with a grandfather provision for former
unitary savings and loan holding companies. Such grandfathered companies will be
permitted to maintain and establish affiliations with any type of company and to
acquire
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additional depository institutions, as long as any acquired depository
institution is merged into its converted savings association and such
institution continues to comply with both the qualified thrift lender test and
certain asset and investment limitations to which it was subject as a federal
savings association.
The Financial Services Act of 1998, introduced in March 1998, would allow
securities firms, insurance companies and commercial banks to merge under a
holding company structure. Among other things, the bill would expand the Federal
Reserve's regulatory authority over these financial institutions. The Company is
unable to predict whether this bill or any other such legislation will be
enacted, what the provisions of such final legislation may be, or the extent to
which the legislation would restrict, disrupt or otherwise have a material
effect on its operations.
YEAR 2000 READINESS
As the Year 2000 approaches, a critical business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. In brief, many existing application software products in the
marketplace were designed to only accommodate a two digit date position which
represents the year (E.G., the year 1995 is stored on the system as "95"). The
Company has implemented a program designed to ensure that all software used in
connection with the Company's business will manage and manipulate data involving
the transition with data from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such data. However, there
can be no assurances that such program will be effective as to the results of
any potential failure of computer programs and/or systems. To the extent the
Company's systems or the systems of its vendors are not fully Year 2000 Ready,
there can be no assurance that potential systems interruptions or the cost
necessary to update software would not have a material adverse effect on the
Company's business, financial condition, results of operations or business
prospects. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Discussions."
ENVIRONMENTAL RISKS
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. There is a risk that
hazardous substances or waste, contaminants, pollutants or sources thereof could
be discovered on such properties after acquisition by the Company. In such
event, the Company may be required by law to remove such substances from the
affected properties at its sole cost and expense. There can be no assurance that
(i) the cost of such removal would not substantially exceed the value of the
affected properties or the loans secured by the properties, (ii) the Company
would have adequate remedies against the prior owner or other responsible
parties or (iii) the Company would not find it difficult or impossible to sell
the affected properties either prior to or following such removal.
RISK FACTORS RELATED TO ON-LINE
COMPETITION. On-Line competes with a number of other companies that provide
electronic data processing and other related services primarily to financial
institutions. The market for electronic data processing services within the
financial services industry is intensely competitive and rapidly changing and
there can be no assurance that On-Line will be able to compete successfully in
the future. In addition to direct competition, On-Line may also face indirect
competition from its existing and potential customers, many of which internally
design, integrate and deploy their own technologies for their particular needs,
and therefore may be reluctant to use services offered by independent providers
such as On-Line. This indirect risk is generally dependent on the size and
technological sophistication of the existing or potential customer, both of
which impact the cost versus benefit analysis for deciding whether to use an
independent provider or manage processing needs internally.
25
<PAGE>
On-Line believes that its ability to compete successfully depends upon a
number of factors both within and beyond its control, including system
performance, price, market perception, level of customer support, quality and
breadth of services, and industry and general economic trends. As a result,
On-Line must educate existing and prospective customers as to the advantages and
differentiating factors of On-Line's services, which include offering advanced
technologies that compliment core application system products. In addition,
since mid-1997 On-Line began marketing its optical report retrieval and document
management and imaging systems, as well as local and wide area network
architectural design and implementation services, to companies outside the
financial services industry in order to expand and diversify its revenues. There
can be no assurance that On-Line will be able to compete effectively with its
direct competitors or to adequately educate potential customers as to the
benefits provided by On-Line's services, or effectively continue to increase
sales to companies outside of the financial services industry. See "Business of
On-Line Financial Services, Inc."
CONSOLIDATION IN BANKING AND FINANCIAL SERVICES INDUSTRY. There has been
and continues to be merger, acquisition and consolidation activity in the
banking and financial services industry. Mergers or consolidations of banks and
financial institutions in the future could reduce the number of On-Line's
clients or potential clients. A smaller market for On-Line's services could have
a material adverse impact on On-Line's business and results of operations. Also,
it is possible that larger banks or financial institutions resulting from
mergers or consolidations would consider the possibility of performing some or
all of the services which On-Line currently provides or could provide. Should
such events occur, it could have a material adverse impact on On-Line's business
and results of operations.
HIGH OPERATING EXPENSES. As a result of its acquisition in 1995, On-Line's
expenditures have increased the overall operating expenses of the Company.
During 1996 and 1997, On-Line implemented a restructuring program whereby it has
invested in highly skilled technical personnel and focused its resources on
advanced technologies in order to stay competitive in its industry, which is an
innovative and frequently changing market. On-Line incurred significant costs to
upgrade and increase the products and services it offers its customers, which
resulted in a period of rising operating expenses as such upgrades and increased
products and services were being implemented. Management believes that such
expenses have stabilized at the current level of recurring costs. Although
management believes that its capital expenditures are unlikely to continue to
escalate at the same rate, there can be no assurances that On-Line will not
continue to experience high operating costs or that it will obtain an adequate
revenue base or sustain future profitability.
DEPENDENCE ON SKILLED PERSONNEL. On-Line's success will depend on its
ability to attract and retain highly skilled personnel in all areas of its
business, as the demand for these individuals is high in all industry markets.
In addition, On-Line is dependent upon many skilled and highly specialized
technical personnel, none of whom are parties to employment agreements. The loss
or unavailability of one or more of certain of these individuals could have a
material adverse effect on On-Line's business prospects and existing clients. As
the Year 2000 approaches, key individuals knowledgeable in certain areas of
mainframe programming languages will also become more and more valuable to
companies faced with Year 2000 issues. On-Line will be competing for these
individuals with larger companies that may be offering better compensation
packages. As a result, On-Line may need to rely on the use of outside consulting
services and there can be no assurance that such consulting services will be
available. Although Management believes it has good relations with its personnel
and currently has several Year 2000 incentive plans in place, no assurance can
be given that On-Line will be able to attract and retain personnel in the
future.
YEAR 2000 READINESS. On-Line has implemented several Year 2000 programs
designed to facilitate meeting Year 2000 criteria. However, there can be no
assurance that such programs will be effective as to the results of any
potential failure of the various computer systems and application programs in
place at On-Line. To the extent that On-Line's systems are not fully Year 2000
Ready, there can be no assurance that potential systems interruptions or the
cost necessary to update systems would not have a material
26
<PAGE>
adverse effect on On-Line's financial condition, results of operations or
business prospects. Although Year 2000 planning initiatives are currently in
place, there can be no assurances that third parties will not commence
litigation against On-Line concerning Year 2000 Readiness. Any of the foregoing
could result in a material adverse effect on On-Line's business, financial
condition or results of operations.
27
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock and the Capital Securities offered in the Offering are estimated to be
approximately $ million, or $ million if the Underwriters'
overallotment option with respect to the Common Stock and Capital Securities are
each exercised in full, in each case after deducting the Underwriting discount
and estimated expenses). All of the proceeds from the sale of the Capital
Securities will be invested in the Trust in the Junior Subordinated Debentures.
Approximately half of the proceeds from the sale of the Common Stock and the
Junior Subordinated Debentures will be contributed to the Bank and the remaining
half will be used by the Company. The proceeds at the Bank level will be used
for general lending purposes, including the funding of new loans, as well as the
enhancement of operational capabilities. At the Company level the proceeds will
be used to reduce the existing corporate debt by approximately $7.0 million and
for general corporate purposes, the enhancement of operational capabilities and
for the potential purchase of loans.
27
<PAGE>
DIVIDEND POLICY
The Company currently pays a regular quarterly cash dividend of $0.045 per
share, giving effect to the four-to-one stock split. Following the completion of
the Offering, the Company intends to continue the payment of this regular
quarterly cash dividend. However, the declaration and payment of dividends, as
well as the amount thereof, are subject to the discretion of the Board of
Directors of the Company and will depend upon the Company's results of
operations, financial condition, cash requirements, applicable regulatory
requirements, future prospects and other factors deemed relevant by the Board of
Directors. "See--Risk Factors--Option to Extend Interest Payment Period." There
can be no assurance that the Company will declare and pay any dividends in the
future.
As a holding company, the payment of any dividends by the Company will be
significantly dependent on dividends received by the Company from the Bank and
the Company's other subsidiaries. For a description of limitations on the
ability of the Bank to pay dividends on its capital stock to the Company, "See
Regulation--Federal Savings Institution Regulation--Limitation on Capital
Distributions."
The following table sets forth, for the periods indicated, the cash
dividends declared by the Company and range of high and low bid prices for the
Common Stock as quoted on the Nasdaq Over-the-Counter Market.
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------
<S> <C> <C> <C>
PRICE (1)
-------------------- CASH DIVIDENDS
HIGH LOW PAID PER SHARE(1)
--------- --------- -----------------
FISCAL YEAR ENDED
DECEMBER 31, 1998:
- ----------------------------------------------------------------------------
1st Quarter................................................................ $ 8.719 $ 8.530 $ 0.045
2nd Quarter............................................................... $ 8.750 $ 8.719 $ 0.045
3rd Quarter (through July , 1998)...................................
FISCAL YEAR ENDED
DECEMBER 31, 1997:
- ----------------------------------------------------------------------------
1st Quarter................................................................ $ 8.188 $ 7.813 $ 0.045
2nd Quarter............................................................... 8.469 8.188 0.045
3rd Quarter............................................................... 8.531 8.469 0.045
4th Quarter............................................................... 8.656 8.531 0.045
FISCAL YEAR ENDED
DECEMBER 31, 1996:
- ----------------------------------------------------------------------------
1st Quarter................................................................ $ 7.500 $ 6.688 $ 0.043
2nd Quarter............................................................... 7.563 7.531 0.043
3rd Quarter............................................................... 7.625 7.563 0.045
4th Quarter............................................................... 7.813 7.625 0.045
</TABLE>
- ------------------------
(1) Adjusted to reflect the four-to-one stock split which will be effected prior
to this Offering.
28
<PAGE>
MARKET FOR COMMON STOCK AND CAPITAL SECURITIES
The Common Stock has been traded on Nasdaq Over-the-Counter since June 1992
under the symbol "ARGO". On , the last day on which shares of the
Company's Common Stock traded before commencement of the Offering, the closing
bid and asked prices of the Common Stock, as quoted on Nasdaq Over-the-Counter
Market, were $ and $ , respectively, and the reported last sale
price of the Common Stock was $ . As of March 31, 1998, there were
approximately 222 holders of record of Common Stock and 1,990,576 shares issued
and outstanding. The trading market for the Common Stock is limited.
The Capital Securities will be a new issue of securities for which there is
no current market. The Company and Trust have applied to have the Capital
Securities listed on the Nasdaq National Market under the trading symbol
"ARGOP".
DILUTION
The net tangible book value of the Common Stock at March 31, 1998, was $9.36
per share, after giving effect to the four-to-one stock split. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the Offering, assuming a Price to the Public for the Common
Stock of $ per share, the sale of $ million aggregate liquidation amount
of Capital Securities and the application of the net proceeds therefrom, the pro
forma net tangible book value of the Company at March 31,1998 would have been
$ million, or $ per share of Common Stock. This would represent an
immediate increase in net tangible book value per share of $ to the
existing stockholders of the Company and an immediate dilution in net tangible
book value per share of $ to new investors in the Common Stock at the
Price to the Public. The following illustrates this dilution per share:
<TABLE>
<S> <C>
Public offering price per share.................................................... $
Net tangible book value per share as of March 31, 1998,............................ 18,628
Increase in pro forma net tangible book value per share attributable to new
investors in the Common Stock....................................................
Pro forma net tangible book value per share after the Offering.....................
Dilution per share to new investors in the Common Stock............................ $
</TABLE>
29
<PAGE>
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the ratios of earnings to combined fixed
charges of the Company on a consolidated basis for the respective periods
indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
FOR THE YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1996(1) 1995
--------- --------- --------- --------- ----------- ---------
Ratios of Earnings to Combined Fixed Charges: Excluding
interest on deposits.................................... 1.98x 1.45x 1.35x 1.63x 1.93x 1.88x
Including interest on deposits.......................... 1.19x 1.13x 1.08x 1.18x 1.27x 1.29x
<CAPTION>
<S> <C> <C>
1994 1993
--------- ---------
Ratios of Earnings to Combined Fixed Charges: Excluding
interest on deposits.................................... 2.11x 3.76x
Including interest on deposits.......................... 1.33x 1.66x
</TABLE>
- ------------------------
(1) Represents the respective fixed charge ratios excluding the SAIF
recapitalization assessment.
For purposes of computing the ratios of earnings to combined fixed charges,
earnings represent net income plus applicable income taxes and fixed charges.
Fixed charges, excluding interest on deposits, include gross interest expense
other than on deposits. Fixed charges, including gross interest on deposits,
include all interest expense.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the Consolidated Financial Statements of the Company. The Capital Securities
will be presented as a separate line item in the consolidated balance sheet of
the Company under the caption "Guaranteed preferred beneficial interests in the
Company's Junior Subordinated Debentures," and appropriate disclosures about the
Capital Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the notes to Consolidated Financial Statements. For financial
reporting purposes, the Company will record Distributions payable on the Capital
Securities as interest expense in the consolidated statements of operations.
Future audited Consolidated Financial Statements of the Company will include
a footnote to the financial statements stating that (i) the Trust is
wholly-owned, (ii) the sole assets of the Trust are the Junior Subordinated
Debentures (specifying the principal amount, interest rate and maturity date of
such Junior Subordinated Debentures), and (iii) the full and unconditional
guarantee by the Company of the obligations of the Trust under the Capital
Securities in the event of the occurrence of an Event of Default. The Trust will
not obtain separate audited financial statements.
30
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1998 and as adjusted as of that date to give effect to the sale by the
Company of shares of Common Stock at the Price to the Public of $ per
share and the sale by the Trust of $ aggregate liquidation amount of the
Capital Securities (in each case net of Underwriting discounts and estimated
expenses and excluding any exercise by the underwriters of an over-allotment
option). The information below should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto which are
included elsewhere herein. See "Use of Proceeds."
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Guaranteed preferred beneficial interests in the Company's Junior Subordinated
Debentures(1)........................................................................... $
Stockholders' Equity:
Preferred stock of the Company, $0.01 par value (500,000 shares authorized, none issued or
outstanding)............................................................................ $
---------
Common stock of the Company, $0.01 par value (9,000,000 shares authorized, shares
issued and outstanding, shares issued and outstanding, as adjusted)............... 5
Additional paid-in capital................................................................ 8737
Retained earnings......................................................................... 10222
Accumulated other comprehensive income.................................................... -1
Common stock acquired by:
Employee Stock Ownership Plan........................................................... -42
Management Recognition Plan............................................................. -293
---------
Total stockholders' equity................................................................ $ 18,628
---------
---------
Book value per share...................................................................... $ 9.36
---------
---------
Bank regulatory capital ratios(2):
Tangible Capital........................................................................ 6.10%
Core (leverage) capital................................................................. 6.10%
Total risk-based capital................................................................ 11.90%
Stockholders' equity to total assets...................................................... 7.81%
</TABLE>
- ------------------------
(1) The Capital Securities will be issued by the Trust in an amount which is
assumed to be $ million. The sole assets of the Trust will consist
of the Junior Subordinated Debentures issued by the Company to the Trust.
(2) Pursuant to the OTS regulations, savings institutions must meet three
separate minimum capital-to-assets requirements: (1) a risk-based capital
requirement of 8.0% for 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
"undercapitalized."
31
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The operating data presented below is derived in part from and should be
read in conjunction with the audited Consolidated Financial Statements of the
Company and Notes thereto of the Company, presented elsewhere in the Prospectus.
The operating data for the three month periods ended March 31, 1998 and 1997 is
derived from unaudited financial data, but in the opinion of management,
reflects all adjustments (consisting of only normal recurring adjustments) which
are necessary to present fairly the results for such interim periods. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (DOLLARS IN THOUSANDS)
Interest income:
Loans receivable................................................... $ 3,341 $ 2,974 $ 12,072 $ 11,370 $ 11,836
Discounted loans receivable........................................ 624 1,456 5,249 3,687 1,174
Securities available-for-sale...................................... 115 150 581 596 910
Interest-earning deposits.......................................... 107 76 364 421 67
--------- --------- --------- --------- ---------
Total interest income............................................ 4,187 4,656 18,266 16,074 13,987
--------- --------- --------- --------- ---------
Interest expense:
Deposits........................................................... 2,249 1,973 8,580 6,433 5,610
Custodial escrows.................................................. -- -- 1 78 224
Borrowed money..................................................... 555 772 2,705 2,572 2,507
--------- --------- --------- --------- ---------
Total interest expense........................................... 2,804 2,745 11,286 9,083 8,341
--------- --------- --------- --------- ---------
Net interest income before provision for loan losses................. 1,383 1,911 6,980 6,991 5,646
Provision for loan losses............................................ 185 60 210 248 55
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses................ 1,198 1,851 6,770 6,743 5,591
--------- --------- --------- --------- ---------
Noninterest income:
Loan servicing income, net......................................... 112 102 426 352 361
Net gain (loss) on sale:
Loans held for sale................................................ (9) 3 217 246 226
Discounted loans receivable........................................ 541 250 279 1,843 1,062
Foreclosed real estate............................................. (21) 46 19 (366) (2)
Securities available-for-sale...................................... 165 83 710 235 219
Fees and service charges........................................... 479 240 1,451 520 450
Data processing income............................................. 3,080 2,605 11,528 11,111 1,836
Other.............................................................. 243 32 955 253 327
--------- --------- --------- --------- ---------
Total noninterest income......................................... 4,590 3,361 15,585 14,194 4,479
--------- --------- --------- --------- ---------
Noninterest expense:
Compensation and benefits.......................................... 2,105 2,273 8,799 8,731 3,648
Occupancy and equipment............................................ 1,367 1,090 4,930 4,260 1,471
Federal deposit insurance premiums................................. 28 22 102 1,072 268
Loan servicing expense............................................. 165 146 550 268 251
Professional fees.................................................. 138 209 1,261 788 431
Advertising and promotion.......................................... 84 108 382 305 104
Goodwill amortization.............................................. 25 27 104 108 102
Data processing cost of services................................... 838 439 2,806 1,542 231
Computer services.................................................. -- -- -- -- 181
Software expense................................................... 261 151 865 705 119
Other.............................................................. 234 397 1,610 1,481 856
--------- --------- --------- --------- ---------
Total noninterest expense........................................ 5,245 4,862 21,409 19,260 7,662
--------- --------- --------- --------- ---------
Income before income tax expense................................. 543 350 946 1,677 2,408
Income tax expense................................................. 157 93 123 343 667
--------- --------- --------- --------- ---------
Net income....................................................... $ 386 $ 257 $ 823 $ 1,334 $ 1,741
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per share amounts(1):
Basic.............................................................. $ .20 $ .14 $ .43 $ 1.07 $ 1.47
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted............................................................ $ .19 $ .13 $ .39 $ .90 $ 1.24
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Adjusted to reflect the four-to-one stock split which will be effected prior
to this offering.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT OF INTEREST RATE RISK
Generally, the Bank's financial objective is to manage the sensitivity of
its earnings to interest rate fluctuations by altering the match between the
interest rate sensitivity of its assets and liabilities. The major strategies
the Bank has implemented are (i) the origination and purchase of ARMs; (ii) the
origination of balloon mortgages; (iii) the origination of adjustable rate home
equity lines of credit; (iv) the sale of newly originated long-term fixed-rate
mortgages; (v) the purchase of seasoned fixed-rate and adjustable rate mortgage
loans at a discount; (vi) from time to time, in appropriate interest rate
environments, 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; (vii) the maintenance of
noninterest-bearing custodial accounts related to loans and PMSRs; and (viii)
the control of deposit growth and maintenance of long-term deposits. In addition
to the foregoing, the Bank has recently implemented a pre-payment penalty on
ARMs and management looks for and continues to seek low cost liabilities in the
public and private sectors. The strategies listed have been implemented by the
Bank and are monitored on a quarterly basis by management. The Bank does not use
any derivatives to reduce its exposure to interest rate risk. See "Business of
Bank--Lending Activities."
NET PORTFOLIO VALUE. As part of its normal operations, the Bank is subject
to interest-rate risk on the interest-sensitive assets it invests in and the
interest-sensitive liabilities it borrows. The Bank's Investment Committee which
includes members of senior management and directors, monitors and determines the
strategy of managing the rate and sensitivity repricing characteristics of the
individual asset and liability portfolios the Bank maintains. The overall goal
is to manage this interest rate risk to most efficiently utilize the Bank's
capital, as well as to maintain an acceptable level of change to its NPV and net
interest income. The Bank strategy is to minimize the impact of sudden and
sustained changes in interest rates on NPV and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine the Bank change in NPV in the event of hypothetical
changes in interest rates, as well as interest rate sensitivity gap analysis,
which monitors the repricing characteristics of the Bank's interest-earning
assets and interest-bearing liabilities. The Board of Directors has established
limits to changes in NPV and net interest income across a range of hypothetical
interest rate changes. If estimated changes to NPV and net interest income are
not within these limits, the Board may direct management to adjust its
asset/liability mix to bring its interest rate risk within Board limits.
Interest rate sensitivity analysis is used to measure the Bank's interest
rate risk by calculating the estimated change in the NPV of its interest
sensitive assets and liabilities, as well as certain off- balance sheet items,
in the event of a series of sudden and sustained changes in interest rates
ranging from 100 to 400 basis points. Management assumes that a 200 basis point
movement up or down is considered reasonable and plausible for purposes of
managing its interest-rate risk on a day-to-day basis. NPV is computed as the
difference between the estimated market value of assets and the estimated market
value of liabilities, adjusted for the value of off-balance sheet items. The
following table presents the Bank's projected change in NPV for the various rate
movements as of March 31, 1998.
33
<PAGE>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
<TABLE>
<CAPTION>
ESTIMATED INCREASE NPV AS % OF PORTFOLIO
(DECREASE) IN NPV VALUE OF ASSETS
----------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN ESTIMATED PERCENT PERCENT
INTEREST RATE NPV CHANGE CHANGE NPV RATIO CHANGE
- ---------------------------------------------------------- ----------- ---------- ----------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 basis point increase.................................. $ 17,399 $ (10,271) (37.0)% 7.84% (3.82%
300 basis point increase.................................. 21,158 (6,512) (24.0) 9.33% (2.34)
200 basis point increase.................................. 24,479 (3,191) (12.0) 10.58% (1.08)
100 basis point increase.................................. 26,835 (835) (3.0) 11.42% (.25)
Base scenario............................................. 27,670 -- -- 11.67% --
100 basis point decline................................... 27,102 (568) (2.0) 11.38% (.28)
200 basis point decline................................... 26,039 (1,631) (6.0) 10.91% (.76)
300 basis point decline................................... 25,237 (2,433) (9.0) 10.53% (1.14)
400 basis point decline................................... 24,736 (2,934) (11.0) 10.26% (1.41)
</TABLE>
The NPV is calculated by the OTS using guidelines related to interest rates,
loan prepayment rates, deposit decay rates and market values of certain assets
under the various interest rate scenarios. These assumptions should not be
relied upon as indicative of actual results due to the inherent shortcomings of
the NPV analysis. These shortcomings include (i) the possibility that actual
market conditions could vary from the assumptions used in the computation of
NPV, (ii) certain assets, including adjustable-rate loans, have features which
affect the potential repricing of such instruments, which may vary from the
assumptions used, (iii) that the discount rates used by the OTS in its
computation may not accurately reflect the credit risks inherent in the Bank's
loan portfolio and (iv) the likelihood that as interest rates are changing, the
Investment Committee would likely be changing strategies to limit the indicated
changes in NPV as part of its management process. See "Regulation--Federal
Savings Institution Regulation--Capital Requirements."
The Bank does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Other types of market risk, such as
foreign currency exchange risk and commodity price risk, do not arise in the
normal course of the Company's business activities and operations.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company's
consolidated average balance sheets and reflects the average yield on assets and
average cost of liabilities for the period indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end
34
<PAGE>
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>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997
----------------------------------- ------------------------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- ---------- ----------- ---------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable(1).............................. $ 179,977 $ 3,965 8.81% $ 184,607 $ 4,430 9.60%
Securities available-for-sale.................... 8276 115 5.56 9974 150 6.02
Interest-earning deposits........................ 9259 107 4.62 5204 76 5.84
---------- ---------- ----------- ---------- --------- ---
Total interest-earning assets.................. 197512 4187 8.48 199785 4656 9.32
Noninterest-earning assets......................... 38412 38885
---------- ----------
Total assets................................... $ 235,924 $ 238,670
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits......................................... $ 175,486 $ 2,249 5.13 $ 157,315 $ 1,973 5.02
Custodial escrows................................ 1 -- -- 45 -- --
Borrowed money................................... 30253 555 7.34 51462 772 6
---------- ---------- ---------- ---------
Total interest-bearing liabilities............. 205740 2804 5.45 208822 2745 5.26
Noninterest bearing liabilities.................... 11778 12486
---------- ----------
Total liabilities.............................. 217518 221308
Stockholders' equity............................... 18406 17362
---------- ----------
Total liabilities and stockholders' equity..... $ 235,924 $ 238,670
---------- ----------
---------- ----------
Net interest income/interest rate spread(2)........ $ 1,383 3.03% $ 1,911 4.06%
---------- ----------- --------- ---
---------- ----------- --------- ---
Net interest-earning assets(liabilities)/net
interest margin(3)............................... $ (8,228) 2.80% $ (9,037) 3.83%
---------- ----------- ---------- ---
---------- ----------- ---------- ---
Ratio of average interest-earning assets to average
interest-bearing liabilities..................... .96x .96x
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Loans receivable include loans held for sale, Portfolio Loans receivable and
Discounted Loans receivable.
(2) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
35
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996
------------------------------------- ---------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE
--------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable(1)....................................................... $ 180,964 $ 17,321 9.57% $ 151,384
Securities available-for-sale............................................. 9,670 581 6.01 9,470
Interest-earning deposits................................................. 6,573 364 5.54 2,103
--------- ----------- ---------
Total interest-earning assets........................................... 197,207 18,266 9.26 162,957
Noninterest-earning assets.................................................. 39,260 32,927
--------- ---------
Total asset:............................................................ $ 26,467 $ 195,884
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits.................................................................. $ 165,669 8,580 5.18 $ 130,163
Custodial escrows......................................................... 21 1 4.76 1,209
Borrowed money............................................................ 41,140 2,705 6.58 41,909
--------- ----------- ---------
Total interest-bearing liabilities...................................... 206,830 11,286 5.46 173,281
Noninterest bearing liabilities............................................. 11,827 10,340
--------- ---------
Total liabilities....................................................... 218,657 183,621
Stockholders' equity........................................................ 17,810 12,263
--------- ---------
Total liabilities and stockholders' equity.............................. 236,467 $ 195,884
--------- ---------
--------- ---------
Net interest income/interest rate spread(2)................................. $ 6,980 3.80%
----------- ---
----------- ---
Net interest-earning assets(liabilities)/net interest margin(3)............. $ (9,623) 3.54% $ (10,324)
--------- --- ---------
--------- --- ---------
Ratio of average interest-earning assets to average interest-bearing
liabilities............................................................... .95x .94x
--------- ---------
<CAPTION>
1995
----------------------
AVERAGE AVERAGE
INTEREST YIELD/COST BALANCE INTEREST
----------- ------------- --------- -----------
<S> <C>
ASSETS:
Interest-earning assets:
Loans receivable(1)....................................................... $ 15,057 9.95% $ 139,194 $ 13,010
Securities available-for-sale............................................. 596 6.29 13,945 910
Interest-earning deposits................................................. 421 4.84 1,459 67
----------- --------- -----------
Total interest-earning assets........................................... 16,074 9.86 154,598 13,987
Noninterest-earning assets.................................................. 19,444
---------
Total asset:............................................................ $ 174,042
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits.................................................................. 6,433 4.94 $ 113,857 5,610
Custodial escrows......................................................... 78 6.45 3,126 224
Borrowed money............................................................ 2,572 6.14 38,768 2,507
----------- --------- -----------
Total interest-bearing liabilities...................................... 9,083 5.24 155,751 8,341
Noninterest bearing liabilities............................................. 8,103
---------
Total liabilities....................................................... 163,854
Stockholders' equity........................................................ 10,188
---------
Total liabilities and stockholders' equity.............................. $ 174,042
---------
---------
Net interest income/interest rate spread(2)................................. $ 6,991 4.62% $ 5,646
----------- --- -----------
----------- --- -----------
Net interest-earning assets(liabilities)/net interest margin(3)............. 4.29% $ (1,153)
--- ---------
--- ---------
Ratio of average interest-earning assets to average interest-bearing
liabilities............................................................... .99x
---------
<CAPTION>
AVERAGE
YIELD/COST
-------------
ASSETS:
Interest-earning assets:
Loans receivable(1)....................................................... 9.35%
Securities available-for-sale............................................. 6.53
Interest-earning deposits................................................. 4.59
---
Total interest-earning assets........................................... 9.05
Noninterest-earning assets..................................................
Total asset:............................................................
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits.................................................................. 4.93
Custodial escrows......................................................... 7.17
Borrowed money............................................................ 6.47
Total interest-bearing liabilities...................................... 5.36
Noninterest bearing liabilities.............................................
Total liabilities.......................................................
Stockholders' equity........................................................
Total liabilities and stockholders' equity..............................
Net interest income/interest rate spread(2)................................. 3.69%
---
---
Net interest-earning assets(liabilities)/net interest margin(3)............. 3.65%
---
---
Ratio of average interest-earning assets to average interest-bearing
liabilities...............................................................
</TABLE>
- ------------------------
(1) Loans receivable include loans held for sale, Portfolio Loans receivable
and Discounted Loans receivable.
(2) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
36
<PAGE>
RATE VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company 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
(changes in volume multiplied by prior rate); (2) changes in rates (changes in
rate multiplied by prior volume); and (3) net changes in rate-volume. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
COMPARED TO
THREE MONTHS ENDED
MARCH 31, 1997
INCREASE (DECREASE) DUE TO
---------------------------------
<S> <C> <C> <C>
VOLUME RATE NET
----------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net.................................................................. $ (111) $ (354) $ (465)
Securities available-for-sale.......................................................... (30) (5) (35)
Interest-earning deposits.............................................................. 59 (28) 31
----- --------- ---------
Total interest-earning assets........................................................ $ (82) $ (387) $ (469)
----- --------- ---------
----- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits............................................................................... $ 226 $ 50 $ 276
Custodial escrows...................................................................... -- -- --
Borrowed money......................................................................... (318) 101 (217)
----- --------- ---------
Total interest-bearing liabilities................................................... $ (92) $ 151 $ 59
----- --------- ---------
----- --------- ---------
Net change in interest income............................................................ $ 10 $ (538) $ (528)
----- --------- ---------
----- --------- ---------
<CAPTION>
1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO
---------------------------------
<S> <C> <C> <C>
VOLUME RATE NET
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net.................................................................. $ 2,943 $ (679) $ 2,264
Securities available-for-sale.......................................................... (58) (3) (61)
Interest-earning deposits.............................................................. 304 (315) (11)
----------- --------- ---------
Total interest-earning assets........................................................ $ 3,189 $ (997) $ 2,192
----------- --------- ---------
----------- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits............................................................................... $ 1,755 $ 392 $ 2,147
Custodial escrows...................................................................... (77) -- (77)
Borrowed money......................................................................... (47) 180 133
----------- --------- ---------
Total interest-bearing liabilities................................................... $ 1,631 $ 572 $ 2,203
----------- --------- ---------
----------- --------- ---------
Net change in interest income............................................................ $ 1,558 $ (1,569) $ (11)
----------- --------- ---------
----------- --------- ---------
<CAPTION>
1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO
---------------------------------
VOLUME RATE NET
----------- --------- ---------
INTEREST-EARNING ASSETS:
Loans receivable, net.................................................................. $ 1,220 $ 828 $ 2,048
Securities available-for-sale.......................................................... (54) 3 (51)
Interest-earning deposits.............................................................. (84) 174 90
----------- --------- ---------
Total interest-earning assets........................................................ $ 1,082 $ 1,005 $ 2,087
----------- --------- ---------
----------- --------- ---------
INTEREST-BEARING LIABILITIES:
Deposits............................................................................... $ 805 $ 18 $ 823
Custodial escrows...................................................................... (124) (22) (146)
Borrowed money......................................................................... 193 (128) 65
----------- --------- ---------
Total interest-bearing liabilities................................................... $ 874 $ (132) $ 742
----------- --------- ---------
----------- --------- ---------
Net change in interest income............................................................ $ 208 $ 1,137 $ 1,345
----------- --------- ---------
----------- --------- ---------
</TABLE>
37
<PAGE>
RESULTS OF OPERATIONS
GENERAL. The Company's 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 fees generated by ATMs,
and the Bank's investment in PMSRs. The Company's operating results are also
affected by the profit recognized on the sale of mortgage loans and equity
securities, customer service charges, and other income. The Company's 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 public sales and auctions, mortgage loans at a discount for which the
borrowers may not be current as to principal and interest payments. Acquired
loans are valued based upon an analysis of the underlying collateral of the
loans being purchased. 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 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.
The Bank also incurs higher operating expenses associated with administering
these loans.
Beginning in the fourth quarter of 1996, the Company began to focus its
resources on Conventional Loans receivable originated through MARGO and began to
reduce its portfolio of Discounted Loans receivable. Sales of Discounted Loans
receivable totaled $4.9 million for the three month period ended March 31, 1998,
$20.7 million for the year ended December 31, 1997, and $7.5 million for the
year ended December 31, 1996. As a result of the Company's business strategy,
the balance of the Discounted Loans receivable portfolio decreased from $47.7
million or 20.8% of total assets at December 31, 1996, to $30.6 million or 12.9%
of total assets at December 31, 1997, to $21.8 million or 9.1% of total assets
at March 31,1998. Gains on these sales were $541,000 and $250,000 for the three
month periods ended March 31, 1998 and 1997, and were $279,000 and $1.8 million
for the years ended December 31, 1997 and 1996, respectively.
ON-LINE FINANCIAL SERVICES, INC. On October 31, 1995, the Company acquired
On-Line, an Oak Brook, Illinois based computer services bureau. 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 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 the Company in
June 1996.
Financial terms of the transaction included a cash sweep of On-Line funds on
hand to shareholders 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, which was paid in 1997, representing
funds held for future performance under a third-party computer lease; and a
structured schedule of contingent payments based on future defined net 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. During 1997,
the Company asserted claims that the selling shareholders of On-Line had
breached certain representations and warranties in the purchase contract.
Following a series of negotiations, the selling shareholders agreed to reduce
the
38
<PAGE>
purchase price by $1,098,000, resulting in the cancellation of the two-year
asset note and a reduction by $72,000 of the first contingent payment rights. As
a result, at December 31, 1997, the amount paid or payable, exclusive of the
future contingent payments for On-Line, was $836,000 less than the fair value of
the net assets acquired. Any future contingent payments will reduce this
difference. In December 1997, the Company purchased from certain of the former
shareholders their rights to 25.45% of the future contingent payments. The
Company paid $172,000 for these future contingent payments. Additionally, a
payment of $478,000 was made in April 1998, further reducing the remaining
contingent payments to former stockholders to an amount not to exceed $3.51
million. Management anticipates funding any required future payments with
borrowed funds and 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. On-Line currently provides data processing
services to thrifts, community banks, savings banks, and mortgage bankers
throughout the Midwest. In addition, On-Line provides data report retrieval
services to an insurance company with offices located throughout the United
States. Management believes that On-Line's orientation toward superior customer
service and specialized products allows it to effectively compete in these
markets. The acquisition by the Company 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 ITI, integrated check and
document imaging systems, computer output laser disc storage technology and high
speed communication 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.
PRIVATE PLACEMENT OF STOCK. On December 31, 1996, the Company entered into
the Stock Purchase Agreement with Deltec. Under the terms of the Stock Purchase
Agreement, the Company agreed to issue and sell 446,256 shares of the Company's
authorized but unissued Common Stock to Deltec at a purchase price of $9.50 per
share. Total proceeds from this transaction wereapproximately $4.2 million, with
net proceeds of $4.0 million following payment of a 5% investment advisory fee.
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 the Bank. 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, the Company shall offer to sell to
Deltec such number of shares required to allow Deltec to continue to own 25.0%
of the outstanding common stock in the Company. Deltec has indicated that it
will purchase shares of the Common Stock in the Offering to maintain its
level of ownership of Common stock at 25.0%. See "Stockholder Agreement."
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 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 was tax deductible.
The Bank paid $789,000 in connection with the FDIC special assessment.
Under the legislation, the FDIC estimated that BIF members will be paying a
portion of the FICO annual 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 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.
39
<PAGE>
RECHARTERING LEGISLATION. The Funds Act, enacted in September 1996,
provides that the BIF, the fund which insures most commercial bank deposits, and
the SAIF will merge on January 1, 1999, if there are no savings associations, as
defined, in existence on that date. Pursuant to that legislation, the Department
of Treasury in May 1997 recommended in a report to Congress that the separate
charters for thrifts and banks be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter, conform
holding company regulation and abolish the OTS have been introduced in Congress.
The House Committee on Banking and Financial Services has reported a bill that
will require federal savings associations to convert to national banks or some
type of state charter within two years of enactment or they would automatically
become national banks. The bill would also merge the BIF and the SAIF, repeal
the HOLA, abolish the OTS and transfer the regulation of savings associations to
the federal bank regulators and the Federal Reserve Board. Federal thrifts
converted to national banks generally will be permitted to continue to engage in
any activity, including the holding of any asset, lawfully conducted on the date
prior to the enactment. A federal savings association converted to a national
bank may retain all branches established or proposed in a pending application as
of enactment and establish new branches in any state in which it has a branch.
Otherwise it may establish new branches only under national bank rules. In
addition, beginning two years after enactment, national banks will be authorized
to exercise all powers formerly authorized for federal savings associations.
Under the proposal, holding companies for savings associations converted to
national banks generally will become subject to the same regulation as holding
companies that control commercial banks, with a grandfather provision for former
unitary savings and loan holding companies. Such grandfathered companies will be
permitted to maintain and establish affiliations with any type of company and to
acquire additional depository institutions, as long as any acquired depository
institution is merged into its converted savings association and such
institution continues to comply with both the qualified thrift lender test and
certain asset and investment limitations to which it was subject as a federal
savings association.
The Financial Services Act of 1998, introduced in March 1998, would allow
securities firms, insurance companies and commercial banks to merge under a
holding company structure. Among other things, the bill would expand the Federal
Reserve's regulatory authority over these financial institutions. The Company is
unable to predict whether this bill or any other such legislation will be
enacted, what the provisions of such final legislation may be, or the extent to
which the legislation would restrict, disrupt or otherwise have a material
effect on its operations.
Legislation regarding bad debt reserve recapture was enacted into law on
August 20, 1996. The legislation requires the Bank to recapture its tax bad debt
reserves accumulated after 1987 over a six year period starting in 1996.
However, the Bank was able to defer the recapture of income in 1996 and 1997
since it met the residential loan requirements of the legislation. Management
does not believe that this legislation will have a material impact on the
operations of the Bank.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997.
Total assets increased $2.2 million to $238.5 million at March 31, 1998,
from $236.3 million at December 31, 1997.
Cash and interest-earning deposits increased $11.8 million to $20.5 million
at March 31, 1998, primarily due to loan sales during the three month period
ended March 31, 1998.
Loans receivable and Discounted Loans receivable decreased $9.4 million to
$175.0 million at March 31, 1998, primarily due to principal repayments of $14.6
million and the sale of $17.9 million of loans receivable and Discounted Loans
receivable, partially offset by originations and purchases of $23.6 million in
loans receivable and the purchase of $178,000 in Discounted Loans receivable.
Securities available for sale, which totaled $5.3 million at March 31, 1998
are carried at fair value and include $2.5 million of mortgage-backed
securities, $2.4 million of marketable equity securities and
40
<PAGE>
$370,000 of municipal securities. Deposits increased $7.4 million to $179.8
million at March 31, 1998, from $172.5 million at December 31, 1997.
Borrowings decreased $5.6 million to $28.5 million at March 31, 1998, from
$34.2 million at December 31, 1997. The decrease is primarily due to the
increase in deposits and decreased funding needs for the purchase of seasoned
loan packages. At March 31, 1998, borrowings consisted of FHLB advances totaling
$17.9 million, two lines of credit totaling $6.9 million, capital lease
obligations in the amount of $3.5 million and other borrowings of $300,000. The
increase in deposits can be attributed to a certificate of deposit promotion
that occurred during the three months ended March 31, 1998.
Custodial escrow balances for loans serviced decreased $818,000 to $5.6
million at March 31, 1998, from $6.4 million at December 31, 1997. This decrease
reflects normal fluctuations within these accounts. The custodial accounts
pertain to escrowed payments of taxes and insurance and the float on principal
and interest payments on loans serviced either for the Bank or on behalf of
others by an independent mortgage servicing operation. The custodial accounts
related to loans and PMSRs serviced by others are maintained at the Bank in both
interest-bearing and non-interest bearing accounts. The custodial accounts
associated with loans or PMSRs serviced for the Bank are maintained in
non-interest bearing accounts.
Stockholders' equity increased $524,000 to $18.6 million at March 31, 1998,
from $18.1 million at December 31, 1997. The increase was caused by the exercise
of stock options for $116,000, a tax benefit of $39,000 related to the exercise
of the options and net income of $386,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997.
GENERAL. Net income for the three months ended March 31, 1998, was $386,000
or $.19 per diluted share compared to net income of $257,000 or $.13 per diluted
share for the three months ended March 31, 1997. The $129,000 increase in
comparable three-month earnings resulted from increases in data processing
income and gain on sale of assets partially offset by a decrease in net interest
income and increases in data processing cost of services and occupancy expenses.
INTEREST INCOME. Interest income for the three months ended March 31, 1998,
totaled $4.2 million, as compared to $4.7 million for the comparable 1997
period. The $469,000 decrease was caused by the $2.3 million decrease in average
interest-earning assets to $197.5 million for the quarter ended March 31, 1998,
and the 84 basis point decrease in the weighted average yield on
interest-earning assets to 8.48% for the three months ended March 31, 1998. The
decrease in yield is primarily attributable to the decreased investment in
Discounted Loans receivable, which typically have higher yields. The decrease in
average interest-earning assets is primarily attributable to the sale of
approximately $11.9 million in loan receivables and Discounted Loan receivables.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1998, totaled $2.8 million as compared to $2.7 million for the comparable 1997
period. The $59,000 increase was caused by a 19 basis point increase in the
weighted average cost of interest-bearing liabilities to 5.45% for the
three-months ended March 31, 1998, which was partially offset by a $3.1 million
decrease in the average interest-bearing liabilities.
NET INTEREST INCOME. Net interest income totaled $1.4 million for the three
months ended March 31, 1998, reflecting a decrease of $528,000 from the amount
recorded in the comparable 1997 period. The decrease in net interest income for
the three months ended March 31, 1998, resulted from a 103 basis point decrease
in the effective net spread to 3.03% from 4.06% for the comparable 1997 period
and a $2.3 million decrease in average interest-earning assets, partially offset
by a $3.1 million decrease in average interest-bearing liabilities. At March 31,
1998, the Company's net interest margin had declined to 2.80% as compared to
3.83% for the three months ended March 31, 1997.
41
<PAGE>
PROVISION FOR LOAN LOSSES. A provision for loan losses of $185,000 was
recorded during the three months ended March 31, 1998, as compared to $60,000
for the three months ended March 31, 1997. The allowance for loan losses
amounted to $984,000 or 20.4% of total non-performing loans (excluding
Discounted Loans) and .64% of net loans (excluding Discounted Loans). 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. Management currently believes
that its allowance for loan losses is adequate, however, additions to such
allowance may be necessary in future periods.
NONINTEREST INCOME. Noninterest income increased $1. million to $4.6
million for the three months ended March 31, 1998, as compared to $3.4 million
for the three months ended March 31, 1997. The increase was the result of a
$475,000 increase in data processing income, which was caused by increases in
ancillary income at On-Line that occurred during the three months ended March
31, 1998. Also contributing to the increase was a $294,000 increase in gains on
sale of loans receivable and securities available-for-sale, a $160,000 increase
in mortgage banking income, as a result of the operations of MARGO, and a
$211,000 increase in other income.
NONINTEREST EXPENSE. Noninterest expense increased $383,000 primarily due
to increases in occupancy expense and data processing costs of services, which
were partially offset by decreases in other general and administrative expenses
and compensation and benefits expense. The $277,000 increase in occupancy and
equipment expense was primarily due to significant additions at On-Line,
including leasehold improvements, equipment purchases, and software upgrades, as
well as the opening of the Bank's permanent branch location on the West Side of
Chicago, Illinois during the second half of 1997. The $399,000 increase in data
processing cost of services was due to significant hardware and software
upgrades at On-Line. Partially offsetting these increases was a $163,000
decrease in other general and administrative expenses and a $168,000 decrease in
compensation and benefits. These decreases were due to Company-wide cost
reduction measures.
INCOME TAX EXPENSE. The provision for income tax expense increased $64,000
to $157,000 or 28.9% of pre-tax earnings for the three months ended March 31,
1998, as compared to $93,000 or 26.6% of pre-tax earnings for the comparable
period. The increase is due to the increase in pre-tax earnings and a decrease
in the utilization of affordable housing tax credits.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased $7.0 million to $236.3 million at December 31, 1997
from $229.3 million at December 31, 1996. The increase in total assets was
funded primarily by an increase of $21.8 million in deposits, partially offset
by a $16.7 million decrease in borrowed money.
Loans receivable, which include loans held for sale and Discounted Loans
receivable, increased $10.9 million or 6.28% in 1997 to $184.4 million at
December 31, 1997. The increase in loans receivable for 1997 is due to the
origination of ARMs and the purchase of seasoned fixed-rate loans secured by
single-family residences. New originations and purchases contributed $115.2
million in loans receivable and purchases contributed $8.9 million in Discounted
Loans receivable. These purchases and originations were primarily funded by
principal repayments of $49.1 million on loans receivable, Discounted Loans
receivable and mortgage-backed securities, proceeds from the sale of loans
receivable, Discounted Loans receivable and foreclosed real estate of $65.8
million and an increase in deposits of $21.8 million, partially offset by a
$16.7 million decrease in borrowings. The 1996 originations and purchases,
excluding Discounted Loan purchases of $41.1 million, were $83.2 million
primarily funded by a $27.1 million increase in deposits, a $12.7 million
increase in borrowings, principal repayments of $47.0 million and proceeds from
the sale of loans receivable and Discounted Loans receivable of $45.4 million.
42
<PAGE>
Securities available-for-sale, which totaled $5.0 million at December 31,
1997, are carried at fair value and include $2.9 million of mortgage-backed
securities, $1.7 million of marketable equity securities, and $380,000 of
municipal securities. The balance of mortgage-backed securities decreased during
1997 by $2.0 million due to the sale of $1.1 million and principal repayments of
$855,000. Partially offsetting these decreases was a $1.4 million increase in
marketable equity securities.
Deposits increased $21.8 million to $172.5 at December 31, 1997, from $150.6
million at December 31, 1996. The increase is attributable to increased focus on
attracting retail core deposits.
Borrowings decreased $16.7 million to $34.2 million at December 31, 1997. At
December 31, 1997, borrowings consisted of FHLB advances totaling $23.8 million,
two lines of credit totaling $6.1 million, and capital lease obligations in the
amount of $3.8 million and other borrowings of $390,000. The decrease is
primarily due to the increase in deposits and decreased funding needs for the
purchase of seasoned loan packages.
Custodial escrow balances for loans serviced increased $618,000 to $6.4
million at December 31, 1997. The custodial accounts relate to escrowed payments
of taxes and insurance and the float on principal and interest payments on loans
serviced either for the Bank or on behalf of others by an independent mortgage
servicing operation. The custodial accounts related to loans serviced by others
are maintained at the Bank in interest-bearing accounts. The custodial accounts
associated with loans or PMSRs serviced for the Bank are maintained in
noninterest-bearing accounts. Due to the nature of custodial escrow deposits,
balances may fluctuate widely on a day-to-day basis.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR
ENDED DECEMBER 31, 1996
GENERAL. Net income for the year ended December 31, 1997 was $823,000 or
$.39 per diluted share, compared to net income of $1.3 million, or $.90 per
diluted share, in 1996. The $511,000 decrease in net income was attributable
primarily to an increase in noninterest expense.
INTEREST INCOME. Interest income increased $2.2 million or 13.6% to $18.3
million in 1997 from $16.1 million in 1996. The increase is primarily due to the
increase of $34.3 million in the average balance of interest-earning assets to
$197.2 million in 1997 from $163.0 million in 1996. Loans receivable accounted
for $29.6 million of the increase. Partially offsetting this increase was a 60
basis point decrease in the weighted average yield on interest-earning assets to
9.26% in 1997 from 9.86% in 1996.
INTEREST EXPENSE. Interest expense increased $2.2 million or 24.3% to $11.3
million in 1997 from $9.1 million in 1996, primarily as a result of a higher
average balance of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased $33.5 million to $206.8 million from
$173.3 million in 1996. Deposits accounted for $35.5 million of the increase,
while other borrowings decreased $2.0 million. Also contributing to the increase
in interest expense was a 22 basis point increase in the weighted average cost
of funds from 5.24% in 1996 to 5.46% in 1997.
NET INTEREST INCOME. Net interest income for the year remained relatively
unchanged from 1996 at $7.0 million. The net interest margin decreased from
4.29% in 1996 to 3.54% in 1997. The interest rate spread decreased to 3.80% in
1997 from 4.62% in 1996.
PROVISION FOR LOAN LOSSES. A provision for loan losses of $210,000 was
recorded during 1997, resulting in an allowance for loan losses of $814,000 or
.53% of total loans receivable, excluding Discounted Loans receivable, and
14.73% of total nonperforming loans, excluding Discounted Loans receivable, at
December 31, 1997. The loan loss provision in 1996 was $248,000 and the
allowance for loan losses at December 31, 1996 amounted to $665,000 or .53% of
total loans receivable, excluding Discounted Loans receivable. In the
determination of the provision for loan losses and adequacy of the corresponding
43
<PAGE>
allowance for loan losses, management considers changes in the asset quality,
charge off experience and economic conditions.
NONINTEREST INCOME. Noninterest income increased $1.4 million to $15.6
million in 1997 from $14.2 million in 1996. The increase is primarily due to a
$931,000 increase in fees attributable to MARGO's operations; a $475,000
increase in gains on sale of securities; a $417,000 increase in data processing
income;, a $702,000 increase in other income primarily attributable to other
ancillary income at On-Line; and a $385,000 increase in gains on sale of
foreclosed real estate. Offsetting these increases was a $1.6 million decrease
in gains on sale of Discounted Loans receivable.
NONINTEREST EXPENSE. Noninterest expense increased $2.1 million to $21.4
million in 1997 from $19.3 million in 1996. This increase was primarily due to
increases in occupancy, professional fees, data processing cost of services, and
other expenses. Occupancy and computer equipment and software expense increased
$670,000 primarily due to significant leasehold improvements, hardware
purchases, and software upgrades at On-Line, as well as the opening of the
Bank's permanent branch location on the West Side of Chicago, Illinois. The
$473,000 increase in professional fees was caused by significant increases in
legal and accounting fees. Data processing cost of services increased $1.3
million primarily 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
were increases in various third party data communication charges. The $129,000
increase in other expenses was partially due to MARGO being fully operational in
1997 as well as increases at other subsidiaries. Offsetting these increases in
noninterest expenses is the significant decrease in federal deposit insurance
premiums as a result of the one time SAIF assessment of $789,000 which was
recognized during the year ended December 31, 1996.
INCOME TAX EXPENSE. The provision for income tax expense decreased $220,000
to $123,000 for the year ended December 31, 1997. The decrease was primarily due
to a decrease of pretax income of $731,000 and the utilization of approximately
$202,000 in available tax credits primarily attributable to the Company's
investment in low-income housing partnerships. The Company has low-income
housing tax credit carryforwards in the amount of $212,000 expiring in 2011 and
2012. In addition, the Company has net operating loss carryforwards of
approximately $267,000 expiring in 2004.
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 $.90 per diluted share, compared to net income of $1.7 million, or $1.24 per
diluted share, 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
weighted 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 weighted 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
44
<PAGE>
increased from 3.65% in 1995 to 4.29% 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.
PROVISION FOR LOAN LOSSES. A provision for loan losses 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 at December 31, 1995 amounted to $587,000 or .45% of total 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, 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 $11.6 million to $19.3
million in 1996 from $7.7 million in 1995. This increase was primarily due to
the acquisition of On-Line in the fourth quarter of 1995. The full year of
operations of On-Line resulted in increases of $3.8 million in compensation and
benefits, $658,000 in occupancy and equipment expense, $1.4 million in data
processing servicing costs, $715,000 in other general and administrative costs,
$1.7 million in software and equipment expenses, and $154,000 in legal and
professional fees. Also contributing to the increase in noninterest expense in
1996 was the $804,000 increase in FDIC insurance premiums. This was primarily
the result of the special SAIF recapitalization assessment of $789,000 which was
paid on September 30, 1996.
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. The Company had low-income
housing tax credit carryforwards in the amount of $358,000 expiring in 2011 and
2012. In addition, the Company had net operating loss carryforwards available of
approximately $323,000 expiring in 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 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 $20.5 million at March 31, 1998. Additional sources of funds
have included FHLB advances and loan sales. The Company has adequate alternative
funding sources if short-term liquidity needs arise.
The primary investment activity of the Company is the origination and
purchase of mortgage loans. During the three months ended March 31, 1998 and
years ended December 31, 1997 and 1996, the Company originated and purchased
$23.6 million, $115.2 million and $83.2 million of loans receivable,
respectively, and $178,000, $8.9 million and $41.1 million of Discounted Loans
receivable, respectively. Purchases of securities available-for-sale totaled
$3.3 million, $8.1 million and $152,000 for the three months ended March 31,
1998 and years ended December 31, 1997 and 1996, respectively. These investing
activities were primarily funded by principal repayments on loans and
mortgage-backed securities of $14.6
45
<PAGE>
million, $49.1 million, and $47.0 million, respectively, and an increase in
deposits of $7.4 million, $21.8 million and $27.1 million for the three months
ended March 31, 1998 and the years ended December 31, 1997 and 1996,
respectively. Also providing funding was the $22.0 million, $74.5 million and
$48.1 million in total proceeds that resulted from the sale of loans receivable,
Discounted Loans receivable, securities available-for-sale, and foreclosed real
estate for the three months ended March 31, 1998 and the years ended December
31, 1997 and 1996.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At March 31, 1998 liquid assets represented 6.2% of its
liquidity base as compared to the required level of 4.0%. 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 the Company is both a daily and long-term function
of the Company's management. The Company's 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 March 31, 1998 the Bank's capital exceeded all capital requirements of
the OTS. The Bank's tangible, core, and risk-based capital ratios were 6.10%,
6.10%, and 11.86%, respectively. The Bank is considered "well capitalized" under
OTS prompt corrective action regulations.
At March 31, 1998 , the Bank had outstanding loan commitments and unused
lines of credit of $5.8 million and $14.5 million, respectively. The Bank also
had Community Reinvestment Act investment commitments outstanding of $3.2
million. The Bank anticipates that it will have sufficient funds available to
meet its current commitments.
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 NPV of the estimated market
value of interest sensitive 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% of the estimated market value of interest sensitive assets must
deduct an amount equal to one-half of the difference between the institution's
measured 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 March 31, 1998, the Bank
met each of its capital requirements, and it is anticipated that the Bank will
not be subject to the interest rate risk component.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management of
Interest Rate Risk."
46
<PAGE>
YEAR 2000 DISCUSSIONS
Many existing computer programs use only two digits to identify a year in a
date field. These programs were designed and developed without considering the
impact of a change in century. If not corrected, many computer programs could
fail, or create erroneous results that could affect a company's ability to do
business prior to, at, or after December 31, 1999.
Financial service organizations such as the Bank are heavily reliant upon
computer systems in processing and accounting for services provided to
customers. Substantially all of the Company's major computer processing is
contracted with third party providers. Although the contracted vendors bear the
responsibility of making their systems "Year 2000 Ready," assuming the costs
associated with necessary changes, keeping the Company apprised of their
progress in meeting established benchmarks, and certifying to the Company that
the systems are in fact "Year 2000 Ready," the Company bears ultimate
responsibility for testing, due diligence and assurance that its major vendors
will continue to provide service without interruption due to the change in
century at year-end 1999.
In 1996, the Company and the Bank established an internal Technology
Committee to identify and/or resolve issues related to the Year 2000 date
change. The Technology Committee has inventoried all of the systems used by the
Company and the Bank, and has identified those that are deemed "critical" to its
business. As a part of its responsibilities, the Committee maintains regular
communications with vendors providing critical systems to the Company and the
Bank to verify that 1) testing is performed regularly, and 2) necessary changes
are being identified and addressed. The Bank management estimates that its Year
2000 Readiness expenses will total approximately $100,000.
On-Line has initiated a company-wide business planning initiative to prepare
On-Line's multiple platform environment for the Year 2000, which includes due
diligence efforts, certain program remediation, and testing of all
date-sensitive hardware and operating systems, financial application system
product offerings, and other ancillary interface applications and systems.
On-Line has established four primary Year 2000 Committees: 1) a Thrift System
Committee to oversee, convert, implement and test Year 2000 renovation efforts
for the Thrift (COMMAND) proprietary application system product; 2) a Third
Party Software Committee to oversee due diligence efforts and test primarily the
BANKFORCE-Registered Trademark- application system product for Year 2000
Readiness, which is a third party system that On-Line licenses from ITI on
behalf of its clients; 3) a Network Communications Committee to test existing
hardware and software residing or running on On-Line's local and/or wide area
network; and 4) a Business Operations Committee to perform due diligence and
testing procedures on primary operational vendors such as telecommunication
carriers, disaster recovery providers, certain maintenance vendors, and other
software used for administrative functions.
On-Line expects to incur primarily internal staffing and consulting services
expenses related to internal Year 2000 efforts, as well as costs for software
tools and a dedicated testing platform. Such costs for testing and conversion of
On-Line's infrastructure and applications within its processing environment are
estimated at $600,000 to $800,000 over the next three years. On-Line estimates
approximately $450,000 to $600,000 will be related to salaries and benefits for
additional personnel and Year 2000 incentive plans. The remaining $150,000 to
$200,000 is estimated for indirect costs related to depreciation and
amortization expense on equipment and software. In addition to the direct and
indirect costs necessary for On-Line to meet its contractual and regulatory
requirements for its existing and future clients to ensure "Year 2000
Readiness", On-Line will also incur certain costs related to optional
subscription services for its clients to perform their own Year 2000 testing
both at On-Line's facility and from their institution locations. Costs
associated with these optional services are expected to be offset by revenues
earned from providing these testing services.
47
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from net worth and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes are required. The Company
adopted SFAS No. 130 on January 1, 1998. The adoption of SFAS No. 130 did not
have an effect on the Consolidated Financial Statements of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosure for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. Management of the Company does not expect that the
adoption of SFAS No. 131 will have a material effect on the Consolidated
Financial Statements of the Company.
The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits," which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other post-retirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful. The
Company adopted SFAS No. 132 on January 1, 1998. The adoption did not have an
effect on the Consolidated Financial Statements of the Company.
48
<PAGE>
BUSINESS OF THE COMPANY
DEVELOPMENT OF THE COMPANY
The Company was incorporated in August 1987, for the purpose of acquiring
the Bank. On May 26, 1992, the Company acquired Dalton Riverdale pursuant to the
Merger-Conversion. The transaction was accounted for under the pooling of
interests method of accounting. No goodwill or other intangible assets were
recorded as a result of the transaction. As part of the Merger Conversion, the
Company sold an additional 299,000 shares of Common Stock and received net
proceeds of $861,000. From December 31, 1987 to March 31, 1998, the Bank's
assets have increased from $25.6 million to $223.4 million.
On October 31, 1995, the Company acquired On-Line, an Oak Brook, Illinois
based computer services bureau which, at the time of the acquisition, served
only bank, thrift and mortgage banking clients throughout the Midwest. Financial
terms of the transaction included a cash sweep of On-Line funds on hand to
shareholders 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, which was paid in 1997, representing funds held for
future performance under a third-party computer lease; and a structured schedule
of contingent payments based on future defined net 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. During 1997, the Company
asserted claims that the selling shareholders of On-Line had breached certain
representations and warranties in the purchase contract. Following a series of
negotiations, the selling shareholders agreed to reduce the purchase price by
$1,098,000, resulting in the cancellation of the two-year asset note and a
reduction by $72,000 of the first contingent payments rights. As a result, at
December 31, 1997, the amount paid or payable, exclusive of the future
contingent payments for On-Line were $836,000 less than the fair value of the
net assets acquired. Any future contingent payments will reduce this difference.
In December 1997, the Company purchased from certain of the former shareholders
their rights to 25.45% of the future contingent payments. The Company paid
$172,000 for these future contingent payment rights. Additionally, a payment of
$478,000 was made in April 1998, further reducing the remaining contingent
payment to former stockholders to an amount not to exceed $3.51 million.
Management anticipates funding any required future payments with borrowed funds
and excess funds generated from operations and, to the extent necessary,
earnings and assets of the Company.
On December 31, 1996, the Company entered into the Stock Purchase Agreement
with Deltec. Under the terms of the Stock Purchase Agreement, the Company agreed
to issue and sell 446,256 shares of the Company's Common Stock to Deltec at a
purchase price of $9.50 per share. Total proceeds from this transaction were
approximately $4.2 million, and the net proceeds of the transaction were $4.0
million following payment of a 5% investment advisory fee. The Stock Purchase
Agreement also provides that Deltec may acquire additional shares of Common
Stock from the Company when the Company issues or sells additional shares to
third parties in order that Deltec can maintain a 25% ownership in the Company's
Common Stock. Deltec has indicated it intends to purchase shares of the
Common Stock offered hereby, thereby maintaining its ownership level of Common
Stock at 25.0% following the Offering.
Unlike many savings and loan holding companies, the Company is an active
holding company with only a portion of its future anticipated operating income
dependent upon the earnings of the Bank. As an operating company, the Company
has assets, liabilities and income that are unrelated to the operations of the
Bank. Among the assets of the Company is a 98.4% investment in Empire, which
engages in the purchase and disposition of Discounted Loans. See "Business of
Empire/Argo Mortgage, LLC." The Company's assets at March 31, 1998, on an
unconsolidated basis consisted of its investment in the Bank of $14.2 million,
its investment in On-Line of $5.2 million, its investment in the majority owned
Empire of $1.4 million, securities available-for-sale of $1.7 million, cash and
other interest-earning deposits of $1.2
49
<PAGE>
million, and other assets of $1.3 million. The Company also had outstanding
borrowings on an unconsolidated basis in the amount of $6.3 million at March 31,
1998, incurred in connection with capital infusions to its subsidiaries.
At March 31, 1998, on a consolidated basis, the Company had assets totalling
$238.5 million, liabilities totalling $219.9 million and total stockholders'
equity of $18.6 million. The Company is a unitary savings and loan holding
company and is registered as such with the OTS. The Company is a FHA approved
originator and servicer, a licensed Illinois mortgage broker and an approved
FannieMae servicer. The principal executive offices of the Company are located
at 7600 West 63(rd) Street, Summit, Illinois and its telephone number is (708)
496-6010.
[LOGO]
COMPANY PERSONNEL
As of March 31, 1998, the Bank including its subsidiaries, had fifty-nine
(59) full-time employees (including 12 MARGO full-time employees consolidated
into the Bank's payroll) and fourteen (14) part-time employees. On-Line had
eighty-one (81) full-time employees and one (1) part-time employee. The
Company's employees are not represented by a collective bargaining agreement.
The Company believes its relationship with its employees is good.
COMPANY PROPERTIES
The executive offices of the Company and the home office of the Bank are
located at 7600 West 63rd Street, Summit, Illinois 60501. On-Line's offices are
located at 900 Commerce Drive, Oak Brook, Illinois 60523.
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<PAGE>
The following table sets forth the location of and certain additional
information regarding the offices of the Company and its subsidiaries at March
31, 1998.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1998
- -------------------------------------------------------- --------- ----------- ------------ ---------------------
<S> <C> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
14076 Lincoln Avenue
Dolton, IL 60419........................................ Owned 1992 -- $ 458
7600 W. 63 Street
Summit, IL 60501........................................ Owned 1987 -- 906
8267 S. Roberts Road
Bridgeview, IL 60455.................................... Owned 1987 -- 367
2154 W. Madison Street
Chicago, IL 60612....................................... Owned 1994 -- 926
5818 S. Archer
Summit, IL 60501........................................ Owned 1988 -- 452
6121 Washington Street
Gurnee, IL 60031........................................ Leased 1995 Sept. 1999 132
7604-06 W. 63rd Street
Summit, IL 60501........................................ Leased 1992 Mar. 2002 216
900 Commerce Drive
Oakbrook, IL 60523...................................... Leased 1988 Oct. 2006 1,047
------
$ 4,504
------
------
</TABLE>
COMPANY LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
legal proceedings occurring in the ordinary course of business. Management
believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial
condition of the Company.
51
<PAGE>
BUSINESS OF THE BANK
BACKGROUND OF THE BANK
The Bank was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois. The Bank 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 the Bank into receivership, whereupon the Company acquired one hundred
percent of the Bank's issued and outstanding common stock (10,000 shares) in
exchange for an injection of capital in the amount of $1.1 million, bringing the
Bank into capital compliance. In June 1989, the Company infused an additional
$1.5 million of capital into the Bank in order to facilitate the acquisition of
FannieMae mortgage servicing rights in July 1989, as well as in anticipation of
increased regulatory capitalization requirements upon the effective date of
Financial Institution Reform, Recovery, and Enforcement Act ("FIRREA"). In May
1992, the Bank received an additional infusion of capital in the amount of
$163,000 pursuant to the Merger Conversion. The Bank is a member of the FHLB
System and its deposits are insured by the FDIC under the SAIF. As of March 31,
1998, the Bank had five branch offices, located in Cook and Lake County,
Illinois. The home office of the Bank is located at 7600 West 63rd Street,
Summit, Illinois, and its telephone number is (708) 496-6010.
On May 29, 1996, the Bank incorporated a majority-owned subsidiary, MARGO.
MARGO is an Illinois chartered limited liability corporation whose members are
the Bank and Nip'n Tuck, Inc., an Illinois corporation. MARGO's primary
objectives are to increase loan origination volume and to serve as a wholesale
mortgage banking operation using a network of brokers, Correspondents and
conduits. The Bank has a 50.1% interest in MARGO.
The Bank's primary business is the solicitation of savings deposits from the
general public and the purchase or origination of both Conventional and
Portfolio Loans secured by one- to four-family residential real estate. Through
its majority-owned subsidiary, MARGO, and its wholly-owned subsidiary, Argo
Mortgage, the Bank has engaged in mortgage banking activities that focus on the
origination and sale of mortgage loans in the secondary market. The Bank,
through MARGO, also offers Expanded Criteria Loans. These one-to four-family
loans are generally not Agency Qualified, due to the borrower's credit profile,
and are not as readily saleable in the secondary market as Conventional Loans.
The Expanded Criteria Loans also include home equity lines of credit. See "Risk
Factors--Risks Associated with Portfolio and Expanded Criteria Lending." The
Bank generates fee income by the sale of mortgage loans generally on a
"servicing released" basis, into the secondary market and through investment in
partnerships in PMSRs. More recently, the Bank also generates fee income from an
expanding network of ATMs in the Chicago area and service fees.
Through Argo Mortgage, the Bank also has acquired Discounted Loans for which
the borrowers may not be current as to principal and interest payments. In
determining the amount it will bid to acquire such loans at public sales and
auctions, the Bank 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
often resulted in higher yields and gains. However, the Bank has also incurred
losses on certain properties which have become real estate owned. See "Business
of Empire/Argo Mortgage LLC" for discussion of Discounted Loans purchased by
Empire.
The Bank continues to expand its operations to include additional ATMs,
limited commercial real estate lending, commercial checking, and limited
consumer lending. The Bank also invests funds in securities approved for
investment by federal regulations, including obligations of the United States
Government and its agencies.
Beginning in the fourth quarter of 1996, the Bank began to focus its
resources on Conventional Loans receivable originated through its majority owned
subsidiary MARGO and began to reduce its position in Discounted Loans
receivable. As a result of the Bank's business strategy, the balance of the
Discounted
52
<PAGE>
Loans receivable portfolio decreased from $47.7 million or 20.8% of total assets
at December 31, 1996, to $30.6 million or 12.9% of total assets at December 31,
1997, to $21.8 million or 9.1% of total assets at March 31, 1998.
GENERAL
The discussion that follows relates primarily to the business of the Bank, a
federally-chartered depository institution. The primary lending activities of
the Company are undertaken by the Bank, accordingly, the discussion under the
caption "Lending Activities" materially relates only to the Bank. The Company
does, however, have certain investments in loans on an unconsolidated basis at
the holding company level, as well as certain borrowings unrelated to the
activities of the Bank. Accordingly, there are certain references to the
Company's separate activities in this section. See also "Business of Empire/Argo
LLC" for a discussion of Discounted Loans purchased by Empire.
BUSINESS STRATEGY OF THE BANK
The overall strategy of the Bank is to increase stockholder value by
acquiring low cost liabilities, generating traditional and electronic fee
income, investing in assets providing consistent returns and reducing
non-performing assets. Specifically, the Bank intends to focus on traditional
banking activities and move the non-traditional functions, such as Discounted
Loan activities, to the Company level. Management expects to meet its goals by:
GROWING THE BANK IN THE LOCAL MARKET. From December 31, 1987 to March 31,
1998, the Bank has grown in asset size from $25.6 million to $223.4 million.
This growth has been achieved through (1) an increase in loan purchases and
originations funded through an increase in deposits, (2) the acquisition of
Dolton Riverdale, (3) the opening of 2 de novo branches and (4) a marketing
strategy aimed at niche markets, including senior citizens and affordable
housing opportunities. Management intends to prudently expand the operations of
the Bank by opening additional branches throughout its Primary Market Area and
is currently considering two sites which have become available due to
consolidation in the Bank's market area. A portion of the Offering proceeds may
be utilized to open new branches. See "Use of Proceeds."
EXPANDING OF ONE- TO FOUR-FAMILY LENDING. The Bank will continue to expand
the origination of one-to four-family loans through MARGO both on a retail basis
and on a wholesale basis through its network of Correspondents. In particular,
the Bank intends to increase ARM product lending which is retained for portfolio
through geographic expansion of its network of Correspondents and increased
penetration in existing markets. Implementation of new electronic access and
delivery systems and technology upgrades to MARGO's underwriting system will
support this expansion effort. Additionally, the Bank intends to initiate a
warehouse lending program whereby the Bank would extend funding to qualified
mortgage brokers and bankers for the origination of single-family mortgage loans
to be held by the Bank for resale in the secondary market. Such loans would not
be originated, however, until such time as the Bank and the mortgage broker had
received a firm commitment for the purchase of such loan in the secondary
market. There can be no assurances as to when or if the Bank will begin such
warehouse lending activities.
MAINTAINING COMMUNITY ORIENTATION. Management is seeking to maintain the
value of the Bank's existing franchises in its Primary Market Area, which is
based in large part upon its long-standing reputation for a high level of
customer service in the delivery of traditional thrift products and services and
active community involvement. Management intends to maintain the Bank's
community orientation by continuing to emphasize traditional deposit products
and loan products consisting of primarily one- to four-family residential
mortgages. The Bank has been and intends to continue to be actively engaged in
community lending and development activities such as affordable housing. See
"Business of the Bank--Lending Activities--General."
53
<PAGE>
NON-PERFORMING ASSETS. The Bank intends to reduce non-performing assets by
decreasing its emphasis on the purchase of Discounted Loans, and increasing its
concentration on lending activities, primarily through MARGO, and reducing its
REO. Additionally, the Bank has been and intends to take additional steps to
work out its existing non-performing loans by bringing such loans current or
foreclosing on such loans and selling the underlying properties.
INCREASING FEE INCOME. Management plans to increase fee income through the
expansion of its ATM network both in its Primary Market Area and outside its
Primary Market Area. At March 31, 1998, the Bank had 21 ATMs strategically
located in such high traffic urban areas as retail food stores, gas stations,
hotels and other high volume areas. A number of these ATMs are located in low
income neighborhoods where there is little competition. Management is in the
process of installing several additional ATMs and plans to expand its ATM cash
withdrawal network throughout the Chicago area and, in the near future, to
additional states. Fee income from ATMs for the three months ended March 31,
1998, totaled $86,074 compared to $39,799 for the three months ended March 31,
1997.
INCREASE IN CORE DEPOSIT BASE. The Bank has developed certain marketing
relationships in an effort to increase its core deposit base. For instance, the
Bank holds exclusive rights to use the Chicago Bull's logo on ATM cards and
offers such a card to its customers in connection with the opening of a new
savings or checking account. The Bank has also created a GOLDTIMER'S CLUB with
specific marketing efforts aimed at senior citizens. The Bank maintains and
services this customer base through seminars, travel events and special events
such as polka parties. The Bank plans to further develop and implement such
sector driven programs.
MARKET AREA
The Bank considers its Primary Market Area to be the greater Chicago
metropolitan area. The Bank maintains its headquarters and a branch in Summit,
Illinois. It also has branch offices in Bridgeview, the West Side of Chicago,
Dolton, and Gurnee, Illinois. The areas surrounding Summit, Bridgeview, and
Dalton are urban and are comprised of high density residential neighborhoods
interspersed with mixed-use and heavily industrialized areas. This area is fully
developed with a relatively large number of generally older homes. Median
household income levels are average, and a large portion of household earnings
are derived from traditional "blue collar" local manufacturing facilities. 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.
In recent periods, the Bank, through MARGO, has originated loans through its
network of Correspondents outside of its Primary Market Area. As of March 31,
1998, the Bank was originating loans in several states. See "--Lending
Activities--Loan Originations and Purchases."
LENDING ACTIVITIES
GENERAL. The Bank's total loans receivable, which includes loans held for
sale, Portfolio Loans receivable and Discounted Loans receivable, totaled $181.6
million, excluding accrued interest, at March 31, 1998, representing 76.1% of
the Company's total assets. On that date, $168.6 million of total loans
outstanding or 92.9% of the Bank's total loan portfolio, consisted of loans
secured by first mortgages on one-to four-family residential properties, $1.6
million, or 0.9%, consisted of loans secured by multi-family properties, and
$1.8 million, or 1.0%, consisted of loans that are secured by commercial
buildings primarily in suburban Cook and Lake County. In addition, at March 31,
1998, $9.5 million, or 5.2% of the Bank's loan portfolio consisted of other
loans, primarily comprised of home equity and construction loans.
The Bank has focused its lending activities on the generation of gains from
the sale of loans, as well as increasing the interest-rate sensitivity of its
loan portfolio. The Bank originates long-term, fixed-rate mortgage loans with 15
and 30 year maturities generally for immediate sale in the secondary mortgage
market. Such loans are originated, in most instances, through its mortgage
brokerage subsidiary, MARGO,
54
<PAGE>
through the Bank's branch network and through MARGO's national network of
Correspondents. Historically, the Bank's lending activity has also included the
origination and purchase of ARMs. The majority of the growth in the Bank's loan
balances in the current year is due to the purchase and origination of
adjustable-rate loans and seasoned fixed-rate loans secured by single-family
residences located throughout the country. The Bank originated and purchased
approximately $23.6 million of loans for portfolio and purchased $178,000 of
Discounted Loans receivable during the first quarter of 1998. The Bank's policy
of purchasing ARM 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.
55
<PAGE>
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Company's loan portfolio, including loans held for sale, in dollar
amounts and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
-------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
<CAPTION>
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family..................... $ 168,633 92.85% $ 177,521 92.20% $ 177,345 92.50% $ 143,758 93.46%
Multi-family............................ 1,646 .91 1,252 .65 1,468 .77 1,180 .77
Commercial.............................. 1,826 1.01 1,951 1.01 4,523 2.36 2,552 1.66
--------- --------- --------- --------- --------- --------- --------- ---------
Total mortgage loans.................. 172,105 94.77 180,724 93.86 183,336 95.63 147,490 95.89
--------- --------- --------- --------- --------- --------- --------- ---------
Other loans: Automobile................... -- -- 4 -- 4 -- 5 --
Mobile home............................. 203 .11 208 .11 248 .13 379 0.25
Other (1)............................... 9,312 5.12 11,597 6.03 8,142 4.24 5,941 3.86
Total other loans..................... 9,515 5.23 11,809 6.14 8,394 4.37 6,325 4.11
--------- --------- --------- --------- --------- --------- --------- ---------
Total loans receivable(2)............. 181,620 100.00% 192,533 100.00% 191,730 100.0% 153,815 100.00%
--------- --------- --------- --------- --------- --------- --------- ---------
Less:
Unearned discounts, premiums and
deferred loans, net................... 5,651 7,361 17,636 10,848
Allowance for loan losses............... 984 814 665 587
--------- --------- --------- ---------
Loans receivable, net................... $ 174,985 $ 184,358 $ 173,429 $ 142,380
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C>
1994 1993
-------------------- ----------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family..................... $ 112,393 93.57% $ 80,059 86.92%
Multi-family............................ 1,177 .98 1,799 1.95
Commercial.............................. 1,684 1.40 1,454 1.59
--------- --------- ----------- ---------
Total mortgage loans.................. 115,254 95.95 $ 83,312 90.46
--------- --------- ----------- ---------
Other loans: Automobile................... 28 .02 102 .11
Mobile home............................. 472 .39 636 .69
Other (1)............................... 4,364 3.64 8,052 8.74
Total other loans..................... 4,864 4.05 8,790 9.54
--------- --------- ----------- ---------
Total loans receivable(2)............. 120,118 100.00% 92,102 100.00%
--------- --------- ----------- ---------
Less:
Unearned discounts, premiums and
deferred loans, net................... 1,442 1,350
Allowance for loan losses............... 613 613
--------- -----------
Loans receivable, net................... $ 118,063 $ 90,139
--------- -----------
--------- -----------
</TABLE>
- ------------------------------
(1) Consists primarily of $4.8 million of home equity loans secured by one-to
four-family properties, and $3.6 million of construction loans at March 31,
1998.
(2) Includes loans receivable and Discounted Loans receivable.
56
<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. Set forth below is a table showing
the Company's loan originations, purchases, sales and principal repayments for
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of period(1).......................... $ 180,724 $ 183,336 $ 183,336 $ 147,490 $ 115,254
---------- ---------- ---------- ---------- ----------
Mortgage loans originated:
One- to four-family(3)............................. 13,674 18,168 56,318 12,904 10,292
Multi-family....................................... -- -- 333 455 --
Commercial......................................... -- -- -- 1,440 890
---------- ----------
Total mortgage loans originated.................. 13,674 18,168 56,651 14,799 11,182
One- to four-family mortgage loans receivable
purchased........................................ 5,931 13,816 39,521 58,859 75,371
Discounted loans purchased......................... 178 8,529 8,858 41,061 19,904
---------- ---------- ---------- ---------- ----------
Total mortgage loans originated and purchased.... 19,783 40,513 105,030 114,719 106,457
---------- ---------- ---------- ---------- ----------
Less:
Transfer to foreclosed real estate................. (1,117) (1,035) (4,955) (4,422) (2,871)
Principal repayments................................. (9,850) (7,019) (33,510) (27,386) (21,885)
Loans receivable sold(3)............................. (12,576) (3,981) (48,466) (39,550) (44,033)
Discounted loans sold(2)............................. (4,859) (1,491) (20,711) (7,515) (5,432)
---------- ---------- ---------- ---------- ----------
At end of period................................. $ 172,105 $ 210,323 $ 180,724 $ 183,336 $ 147,490
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Other loans:(4)
At beginning of period............................. $ 11,809 $ 8,394 $ 8,394 $ 6,325 $ 4,864
Loans Purchased.................................. 628 -- -- -- --
Other loans originated............................. 2,877 4,710 18,137 20,914 15,504
Principal repayments............................... (4,732) (4,606) (14,722) (18,845) (14,043)
---------- ---------- ---------- ---------- ----------
Other loans sold................................... (1,067) -- -- -- --
---------- ---------- ---------- ---------- ----------
At end of period................................. $ 9,515 $ 8,498 $ 11,809 $ 8,394 $ 6,325
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes balances related to portfolio of Discounted Loans receivables.
(2) Gains related to these sales were $541,000 and $250,000 for the three month
periods ended March 31, 1998 and 1997 and were $279,000, $1,843,000 and
$1,062,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(3) Originations and sales exclude $25.7 million for the three months ended
March 31, 1998 and $38.0 million and $3.5 million for the years ended
December 31, 1997 and 1996, respectively for loans originated and
immediately sold directly to third party investors.
(4) Consists primarily of $4.8 million of home equity loans secured by one- to
four-family properties, and $3.6 million of construction loans.
LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Company's loan portfolio at March 31, 1998. 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
57
<PAGE>
mortgage loans totaled $14.6 million, $48.2 million, $46.2 million, and $35.9
million for the quarter ended March 31, 1998 and the years ended December 31,
1997, 1996, and 1995, respectively.
<TABLE>
<CAPTION>
LOANS
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ONE- TO COMMERCIAL
FOUR-FAMILY MULTI-FAMILY REAL ESTATE OTHER(1) TOTAL
------------ ------------- ----------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within one year................................ $ 52,390 $ -- $ 184 $ 8,123 $ 60,697
After one year:
One to three years........................... 3,380 1,646 451 175 5,652
Three to five years.......................... 19,108 -- 102 62 19,272
Five to 10 years............................. 10,708 -- 35 257 11,000
10 to 20 years............................... 10,639 -- 1,054 820 12,513
Over 20 years................................ 72,408 -- -- 78 72,486
------------ ------ ----------- -----------
Total due after one year......................... 116,243 1,646 1,642 1,392 120,923
------------ ------ ----------- -----------
Total amounts due................................ 168,633 1,646 1,826 9,515 181,620
Less:
Unearned discounts, premiums and deferred loans
fees, net.................................... 5,728 -- -- (77) 5,651
Allowance for loan losses...................... 750 14 216 4 984
------------ ------ ----------- ----------- ----------
Loans receivable, net.......................... $ 162,927 $ 1,633 $ 1,610 $ 9,588 $ 174,985
------------ ------ ----------- ----------- ----------
------------ ------ ----------- ----------- ----------
</TABLE>
- ------------------------
(1) Consists primarily of home equity loans secured by one-to four-family
properties in the amount of $4.8 million and $3.6 million of construction
loans.
The following table sets forth at March 31, 1998, the dollar amount of all
loans due after March 31, 1999, and whether such loans have fixed or adjustable
interest rates.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------------------
<S> <C> <C> <C>
FIXED ADJUSTABLE
RATES RATES TOTAL
---------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Due after March 31, 1999:
Mortgage Loans:
One- to four-family...................................................... $ 98,389 $ 17,854 $ 116,243
Multi-family............................................................. 1,646 -- 1,646
Commercial............................................................... 1,642 -- 1,642
Other loans.............................................................. 1,392 -- 1,392
Total loans receivable....................................................... $ 103,069 $ 17,854 $ 120,923
</TABLE>
LOAN ORIGINATIONS AND PURCHASES. The Bank's principal business is
attracting deposits from the general public and originating or purchasing loans
primarily secured by one- to four-family residential real estate. To a much
lesser extent, the Bank also originates multi-family and commercial real estate
mortgage loans, home equity loans, construction loans, deposit account loans and
other consumer loans. Historically, the Bank's lending portfolio consisted of
those loans in existence in 1992 when the Company acquired Dolton Riverdale,
which primarily consisted of one- to four-family residential mortgage loans.
Since 1992, the Bank has acquired portfolios of loans consisting primarily of
performing seasoned one- to four-family residential mortgage loans. From time to
time and in limited amounts, the Bank has purchased, through Argo Mortgage and
through Empire, Discounted Loans. Discounted Loans are purchased by the Bank
with a view toward bringing such loans current for the Bank's portfolio, for
resale in the secondary market
58
<PAGE>
or foreclosure and liquidation. Primarily as a result of its Discounted Loan
activities, the Bank's level of non-performing loans to total loans has been
historically higher than that of its peers.
In order to expand its level of loan originations and purchases, in 1996 the
Bank established MARGO as a majority-owned subsidiary. Since August 1996, The
Bank has engaged in both wholesale and retail lending activities primarily
through MARGO. MARGO focuses on the origination, purchase, and sale of mortgage
loans generally on a "servicing released" basis into the secondary market.
Through MARGO, the Bank has originated loans through Correspondents located in
various states throughout the country. ARM loans originated by MARGO are
generally retained by the Bank for its portfolio, while fixed-rate loans
originated by MARGO are generally not retained in the Bank's portfolio but are
immediately sold in the secondary market. From time to time, the Bank will
selectively sell ARM loans.
Through its network of Correspondents, the Bank is able to originate one- to
four-family residential mortgage loans throughout the United States.
The Bank continues to purchase performing seasoned one- to four-family
mortgage loans. In addition, Argo Mortgage purchases Discounted Loans for which
the borrowers may not be current as to principal and interest payments. For the
three months ended March 31, 1998, and the years ended December 31, 1997 and
December 31, 1996, Argo Mortgage purchased $178,000, $8.9 million and $41.1
million of Discounted Loans, respectively. From time to time, Discounted Loans
are also purchased by the Company through Empire, although the Company, in
general is reducing its emphasis on the purchase of Discounted Loans. See
"Business of Empire/Argo Mortgage, LLC."
USE AND QUALIFICATIONS OF CORRESPONDENTS. The core of MARGO's
Correspondents consist of a nationwide network of third party loan originators.
Additional Correspondents are regularly added to MARGO's list of third party
originators through referrals (primarily from one of the six mortgage insurance
companies utilized by MARGO) and from contacts made at trade shows, conferences,
and over the Internet. At March 31, 1998, MARGO accepted application
presentations from approximately 100 Correspondents.
In order to be approved as a Correspondent for MARGO, an applicant must meet
certain defined criteria. In evaluating potential Correspondents, MARGO looks at
a number of criteria including, but not limited to, the financial statements of
the potential Correspondent, participation in trade associations, and continuing
education. Quality control measures and historical performance with respect to
originations and volume selling are also significant in selecting and continuing
relationships with Correspondents. MARGO seeks to enter into relationships with
Correspondents who are experienced, educated and financially secure and who do
not require day to day contact with MARGO staff. In addition, management will
maintain a relationship with a Correspondent only if that Correspondent brings
an established level of loans to MARGO on a monthly basis. Management believes
that it will be able to sustain relationships with Correspondents meeting the
foregoing criteria as it offers Correspondents what it believes to be very
competitive rates. In addition, as an additional incentive to Correspondents to
bring loans to MARGO, Correspondents originating an average of $250,000 per
month for MARGO are paid a servicing premium of 0.0625 basis points on
outstanding principal balance on such loans per year, up to a maximum of seven
years. In the event loans are sold, Correspondents are paid a fee equal to the
present value of the remaining service fee premiums less the amounts paid to
date.
ONE-TO FOUR-FAMILY RESIDENTIAL LOANS. The Bank, through MARGO, originates,
purchases, sells and services primarily fixed-rate and adjustable-rate mortgage
loans secured by one- to four-family residences. At March 31, 1998, the Bank's
one- to four-family loan portfolio totaled $168.6 million, or 92.9% of the
Bank's total loan portfolio. The loans generally fall into three categories: (1)
Conventional Loans--loans which conform to all of the underwriting guidelines of
FannieMae and FreddieMac ("Agency Qualified"); (2) Expanded Criteria
Loans--loans which are (a) not Agency Qualified, generally due to the borrowers
credit profile, (b) are not as readily saleable in the secondary market as
Conventional Loans and (c) are
59
<PAGE>
generally fixed-rate loans which are originated at interest rates higher than
those of fixed-rate Conventional Loans; and (3) Portfolio Loans -adjustable-rate
mortgage ("ARM") loans which (a) are not Agency Qualified, (b) are originated
under specific criteria set forth by the Bank and (c) are not Conventional or
Expanded Criteria Loans.
The Bank, through MARGO, originates loans which it classifies as either
Conventional, Portfolio Loans or Expanded Criteria Loans. The bulk of the loan
originations by MARGO have been sold by the Bank. See "--Loan Originations and
Purchases." The Conventional Loans are either fixed-rate or adjustable-rate
mortgage loans ranging from $10,000 up to a maximum of $227,150. These loans are
then sold into the secondary market through one of eight third-party wholesale
conduits with servicing released. In the future, as the Company's cash flow and
volume of Agency Qualified loans increases, MARGO may sell such loans directly
to the Agencies.
The Portfolio Loans are adjustable-rate and, to a lesser extent, fixed-rate
mortgage loans originated by the Bank, through MARGO, with principal balances
that range from $10,000 to $2.0 million and which are not necessarily Agency
Qualified. The yield on these loans is generally 100 basis points higher than
the yield on Agency Qualified loans. Portfolio Loans are generally held in the
Bank's loan portfolio. From time to time, the Bank has made strategic sales of
such loans. The Bank, through MARGO, also originates Portfolio Loans which are
jumbo residential mortgage loans. The jumbo loans are loans with principal
balances that generally range between $300,000 and $2.0 million. Adjustable-rate
jumbo mortgage loans under $600,000 are generally held in the Bank's loan
portfolio, while other jumbo mortgage loans are originated for sale. The yield
on jumbo loans is generally between 125 and 375 basis points higher than the
yield on Agency Qualified loans.
Since September 1996, the Bank, through MARGO, has enlarged its product
offerings to include the origination of Expanded Criteria Loans, loans secured
by one- to four-family residences that are not Agency Qualified and may not be
as readily saleable in the secondary market as Conventional Loans. These loans
are originated, in many instances, when the borrower's credit profile, or some
aspect of the loan, does not adhere to the Agency underwriting guidelines.
Expanded Criteria Loans are perceived by management as being advantageous to the
Bank because they generally have higher interest rates and origination and
servicing fees and generally lower loan-to-value ratios than loans that conform
to Agency guidelines. In addition, management believes that the resources are
available through its third party servicers to adequately service Expanded
Criteria Loans as well as the experience to resolve loans that may become
non-performing.
As of March 31, 1998, the amount of Portfolio Loans originated by MARGO
which are nonperforming is $706,000. The Bank intends to continue to expand the
volume of Portfolio and Expanded Criteria Loans throughout the country through
its nationwide network of Correspondents. See "Risk Factors-- Risks Associated
With Portfolio and Expanded Criteria Lending" and "--Discounted Loans."
The Bank requires title insurance to insure the priority of its lien on all
of its mortgage loans. It also requires fire, flood, and casualty insurance on
all its properties securing loans provided by the Bank and mortgage insurance on
all loans with a loan-to-value of 80% or greater.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank also originates
loans for the acquisition of existing multi-family residences or for the
refinancing of such properties, such as five to twelve unit apartment buildings
located in the greater Chicago metropolitan area. At March 31, 1998, the Bank
had gross loans secured by multi-family properties in the amount of $1.6
million, or 0.9% 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 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. The Bank
evaluates all aspects of multi-family real estate
60
<PAGE>
loan transactions in order to mitigate risk to the greatest extent possible. To
minimize these risks, the Bank generally limits its multi-family lending to
properties used solely for residential purposes. The Bank 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%.
COMMERCIAL REAL ESTATE LENDING. The commercial real estate loan portfolio
originated or purchased is primarily secured by office buildings and other
income producing commercial properties and amounted to $1.8 million or 1.0% of
the total gross loan portfolio at March 31, 1998.
The Bank will continue on a limited basis to originate loans secured by
commercial real estate. 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 regulations 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 the Bank
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.
The Bank also typically obtains full personal loan guarantees from the
borrowers. The Bank validates such personal loan guarantees through an
investigation of the borrower's personal finances.
Commercial real estate lending entails significant additional risks compared
to 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 LENDING. The Bank 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 years, while mobile home loans have terms of up to
15 years. At March 31, 1998, the Bank's consumer loan portfolio totaled $9.5
million, or 5.2%, of the Bank's total loan portfolio, which included $3.6
million in construction loans.
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 the Bank and generally provide the Bank with
shorter maturities than single-family residential mortgage loans.
LOAN APPROVAL AND UNDERWRITING. Loan applications are accepted by both
MARGO personnel and employees of the Bank. Upon receipt of a loan application,
credit reports are ordered to verify specific information relating to a loan
applicant's employment, income, assets and credit standing, and for independent
verification of all credit, income and liability information provided by the
applicant. In the case of a real estate loan originated by the Bank, or by MARGO
for the Bank, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser approved by the Bank's Board of
Directors. For loans originated for MARGO by third parties, an independent
appraiser approved by MARGO is used.
MARGO uses six major mortgage insurance companies, any of which may act as a
contract underwriter on all loans originated through its network of
Correspondents. These insurance companies are provided with the Bank's
underwriting manuals and guidelines and all loans are underwritten to conform
with the Bank's guidelines. Written assurances that the manuals and guidelines
have been adhered to, in the form of representations and warranties, are
provided to MARGO by the insurance company.
61
<PAGE>
Upon completion of the loan application processing activities, all other
loan files are presented to the Bank's loan underwriters if the loan is
originated on behalf of the Bank, or to third party investors if the loan is
originated for immediate sale. In the case of the Bank, certain senior officers
have lending authority and may approve loans of up to $350,000 in the case of
commercial loans and $450,000 in the case of one-to four-family loans, after
completion of the underwriting process. Loans in excess of $350,000 but less
than $500,000, in the case of commercial loans, and in excess of $450,000 and
less than $600,000, in the case of one- to four-family loans, must be submitted
to the Bank's Lending Committee for approval. Loans in excess of $500,000, in
the case of commercial loans, and $600,000, in the case of one- to four-family
loans, are subject to approval by the Board of Directors of the Bank.
Loan applicants are promptly notified in writing of the final determination
of the loan request by both the Bank 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
incurred by MARGO, as well as their own costs in connection with the loan
closing. If denied, disclosure of the factors resulting in the denial is made
pursuant to the requirements of applicable federal and state law.
The loan documentation and processing activities utilized by the Bank/MARGO
in connection with the origination of real estate loans conforms to standards
imposed by the Agencies , as well as third party investor guidelines. Loan
documentation and processing activities utilized by the Bank/MARGO also conforms
to both requirements of the Agencies, as well as to the 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 the Bank.
Statistics regarding all loan applications, including those both denied and
approved, are retained by the Bank 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 the Bank and MARGO.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans
and commitments for making loans, the Bank and MARGO earn fees in connection
with the origination of 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
Bank's historical prepayment experience. At March 31, 1998, the Bank had
$731,000 in net deferred fees or 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.
The Bank 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. In accordance with Federal
regulations, loans and other assets are reviewed by the Bank on a regular basis
for a determination of need to classify such assets as "Substandard," "Doubtful"
or "Loss" assets. An asset is considered "Substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor, or of the
current realizable value of the collateral pledged. "Substandard" assets include
those characterized by the "distinct possibility" that the Bank will sustain
"some loss" if the deficiencies noted are not corrected. Assets classified as
62
<PAGE>
"Doubtful" have all the weaknesses inherent in those classified as
"Substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncorrectable" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. An allowance for losses is established in amounts deemed
prudent by management. General allowances represent loss allowances which have
been established by the Bank to recognize the inherent risk associated with
lending activities but, which, unlike specific allowances, have not been
allocated to a particular problem asset. When an asset is classified as "Loss,"
the Bank is required to establish a specific allowance for such losses equal to
100% of the amount of the asset so classified, or to charge-off such amount.
Recently, the OTS 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.
At March 31, 1998, the Bank had $4.8 million of loans and $4.3 million of
foreclosed real estate classified as substandard or doubtful, respectively.
Excluded from this total is the $4.2 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 analyses and from all
general valuation allowance analyses. If an asset or portion thereof is
classified as loss, the Bank must either establish a specific allowance for loan
losses in the amount of 100 percent of the portion of the asset classified as
Loss, or charge off such amount. At March 31, 198, the Bank had no assets
classified as loss. Management evaluates collectibility of the Discounted Loans
receivable on an aggregate pool basis.
As a general rule, the Bank has entered into contractual arrangements with
third parties ("Sub-servicers") who collect principal and interest payments from
obligors on loans owned by the Bank, pay real estate property taxes and ensure
collateral securing loans remains insured for the benefit of the Bank, in
accordance with generally recognized servicing standards and practices.
Sub-servicers remit payments received from loan obligors and submit monthly
reports detailing delinquencies and other matters to the Bank. The Company may
handle managing the process of collection and liquidation of loan assets,
however, in some instances, Sub-servicers are charged with such responsibility.
Generally, when a loan becomes 15 days or more past due, the Sub-servicer
submits a reminder notice to the loan obligor. For loans 30-89 days delinquent,
additional notices are submitted to the borrower, and the Sub-servicer attempts
telephonic contact. After principal and interest are 90 days or more past due,
and the loan obligor has failed to respond to the Sub-servicer and no
forbearance or other repayment plan has been agreed to, the Sub-servicer
generally initiates foreclosure action. The Bank's policy is to stop accruing
interest for any loan in excess of 90 days delinquent separate from management's
analysis as to the future collectibility of interest.
Real estate acquired through foreclosure or deed in lieu of foreclosure or
in judgment REO is carried at the lower of the fair market value less cost to
dispose or the related loan balance at the date of foreclosure. An allowance for
loss is established by a charge to operations if the carrying value of REO
exceeds its fair value less cost to dispose. Sub-servicers generally manage the
disposition process for the Bank, contracting for security and maintenance of
REO, listing REO with real estate brokers for sale, submitting offers to
purchase to the Bank for review and approval, and arranging for final sale of
REO utilizing attorneys and title companies licensed in the jurisdiction where
REO is located.
63
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets as of the dates indicated. For the three months ended
March 31, 1998, the amount of interest income that would have been recognized on
nonaccrual loans if such loans had continued to perform in accordance with their
contractual terms were immaterial, none of which was recognized. As of the dates
shown, the Bank had no restructured loans.
<TABLE>
<CAPTION>
AT
MARCH 31, AT DECEMBER 31,
--------- -----------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
(Unaudited)
Non-performing loans(1)(2)................... $ 4,826 $ 5,525 $ 3,942 $ 1,987 $ 2,324 $ 1,097
Foreclosed real estate, net (3).............. 4,323 4,251 3,913 1,473 359 554
--------- --------- --------- --------- --------- ---------
Total non-performing assets.................. $ 9,149 $ 9,776 $ 7,855 $ 3,460 $ 2,683 $ 1,651
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Allowance for estimated loan losses as a
percentage of gross loans receivable (1)... .64% .53% .53% .45% .52% .68%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Allowance for loan losses to non-performing
loans...................................... 20.39% 14.73% 16.87% 29.54% 26.38% 55.88%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-performing loans as a percentage of loans
receivable (1)............................. 3.13% 3.57% 3.12% 1.54% 1.98% 1.19%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-performing assets as a percentage of
total assets (1)........................... 3.84% 4.14% 3.43% 1.86% 1.72% 1.31%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) All non-performing loan totals exclude Discounted Loans receivable which at
March 31, 1998 amounted to $4.2 million.
(2) At March 31, 1998, $871,000 or 18.0% of the $4.8 million in non-performing
loans represent loans originated by the Company. The remaining loans
represent loans purchased by the Company.
(3) Includes $3.3 million of foreclosed real estate related to the Discounted
Loans receivable portfolio at March 31, 1998.
At March 31, 1998, the Bank had $4.8 million of Portfolio Loans receivable
and loans held for sale and $4.2 million of Discounted Loans receivable 90 days
or more delinquent. At both March 31, 1998 and December 31, 1997, the Company
had approximately $4.3 million of foreclosed real estate. This stabilization is
the result of the Company's reduction in its position in Discounted Loans
receivable as the Company focuses its resources on conventional lending.
64
<PAGE>
The following table sets forth delinquencies in the Company's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1998 AT DECEMBER 31, 1997
-------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
90 DAYS OR
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS MORE
------------------------ ------------------------ ------------------------ -----------
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family.................... 88 $ 4,795 83 $ 4,497 108 $ 4,862 95
Multi-family.......................... 1 6 2 127 -- -- --
Commercial............................ -- -- -- -- -- -- --
--- ----------- --- ----------- --- ----------- ---
Total mortgage loans.............. 89 4,801 85 4,624 108 4,862 95
--- ----------- --- ----------- --- ----------- ---
Other loans............................. -- -- 8 202 -- -- 9
Total............................. 89 $ 4,801 93 $ 4,826 108 $ 4,862 104
--- ----------- --- ----------- --- ----------- ---
--- ----------- --- ----------- --- ----------- ---
Delinquent loans to total loans
receivable(1)......................... 3.11% 3.13% 3.14%
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
<S> <C>
PRINCIPAL
BALANCE
OF LOANS
-----------
<S> <C>
Mortgage loans:
One-to four-family.................... $ 5,474
Multi-family.......................... --
Commercial............................ --
-----------
Total mortgage loans.............. 5,474
-----------
Other loans............................. 51
Total............................. $ 5,525
-----------
-----------
Delinquent loans to total loans
receivable(1)......................... 3.57%
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT DECEMBER 31, 1995
---------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS
------------------------ -------------------------- --------------------------
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family.................... 119 $ 4,727 80 $ 3,923 44 $ 1,417
Multi-family.......................... -- -- -- -- -- --
-- --
--- ----------- ----------- -----------
Commercial............................ -- -- -- -- -- --
Total mortgage loans.............. 119 4,727 80 3,923 44 1,417
Other loans............................. 1 1 9 19 2 1
-- --
--- ----------- ----------- -----------
Total............................. 120 $ 4,728 89 $ 3,942 46 $ 1,418
-- --
-- --
--- ----------- ----------- -----------
--- ----------- ----------- -----------
Delinquent loans to total loans
receivable(1)......................... 3.74% 3.12% 1.10%
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
<S> <C> <C>
90 DAYS OR MORE
--------------------------
PRINCIPAL
NUMBER BALANCE
OF LOANS OF LOANS
------------- -----------
<S> <C> <C>
Mortgage loans:
One-to four-family.................... 49 $ 1,918
Multi-family.......................... -- --
--
-----------
Commercial............................ -- --
Total mortgage loans.............. 49 1,918
Other loans............................. 13 69
--
-----------
Total............................. 62 $ 1,987
--
--
-----------
-----------
Delinquent loans to total loans
receivable(1)......................... 1.54%
-----------
-----------
</TABLE>
- ------------------------
(1) Excludes balances related to portfolio of Discounted Loans receivable.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb future
charge-offs of loans deemed uncollectible. During the three months ended March
31, 1998, the Company experienced a decrease in the percentage of net loans 90
days or more delinquent from 3.57% of total loans receivable and loans held for
sale (excluding Discounted Loans) at December 31, 1997 to 3.13% of total loans
receivable and loans held for sale (excluding Discounted Loans) at March 31,
1998. In addition to the allowance for loan losses, the Bank maintains an
allowance for losses on foreclosed real estate. At March 31, 1998, the Bank's
allowance for losses on foreclosed real estate amounted to $42,000, which
represents specific reserves currently in place on foreclosed real estate. As of
March 31, 1998, all of the allowance for loan losses pertains to a general
allowance. The Bank had no specific reserves established at March 31, 1998,
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.
65
<PAGE>
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. Management believes that the allowance for loan
losses is currently adequate. However, there can be no assurances as to whether
such allowance may be increased in future periods. 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 the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgment of information available to them at the time of their
examination.
66
<PAGE>
The following table sets forth information with respect to the Company's
allowance for loan losses by loan category for the periods and at the dates
indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
AT OR FOR THE YEAR ENDED
MARCH 31 DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:
Mortgage loans (gross):
One- to four-family.............................................. $ 561 $ 412 $ 412 $ 330 $ 315
Multi-family..................................................... 14 14 14 14 14
Commercial loans................................................. 216 216 216 216 216
Other loans...................................................... 23 23 23 27 68
--------- --------- --------- --------- ---------
Total............................................................ 814 665 665 587 613
Provision for loan losses:
Mortgage loans (gross):
One- to four-family.............................................. 185 60 210 248 96
Multi-family..................................................... -- -- -- -- --
Commercial loans................................................. -- -- -- -- --
Other loans...................................................... -- -- -- -- (41)
--------- --------- --------- --------- ---------
Total............................................................ 185 60 210 248 55
Purchased allowance one- to four-family loans........................ 14 -- -- -- --
Transfer to allowance for losses on foreclosed real estate........... (10) -- (50) (77) (45)
Charge-offs:
Mortgage loans (gross):
One- to four-family.............................................. -- -- (11) (89) (36)
Multi-family..................................................... -- -- -- -- --
Commercial loans................................................. -- -- -- -- --
Other loans...................................................... (19) -- -- (4) --
--------- --------- --------- --------- ---------
Total............................................................ (19) -- (11) (93) (36)
Balance at end of period:
Mortgage loans (gross):
One- to four-family.............................................. 750 472 561 412 330
Multi-family..................................................... 14 14 14 14 14
Commercial loans................................................. 216 216 216 216 216
Other loans...................................................... 4 23 23 23 27
--------- --------- --------- --------- ---------
Total............................................................ $ 984 $ 725 $ 814 $ 665 $ 587
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs during the period to average loans
outstanding, excluding Discounted Loans........................ .01% --% .01% --% .04%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of allowance for loan losses to net loans receivable,
excluding Discounted Loans..................................... .64% .50% .53% .53% .45%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
1994 1993
--------- ---------
<S> <C> <C>
Balance at beginning of period:
Mortgage loans (gross):
One- to four-family.............................................. $ 313 $ 138
Multi-family..................................................... 14 14
Commercial loans................................................. 216 216
Other loans...................................................... 70 13
--------- ---------
Total............................................................ 613 381
Provision for loan losses:
Mortgage loans (gross):
One- to four-family.............................................. 50 200
Multi-family..................................................... -- --
Commercial loans................................................. -- --
Other loans...................................................... (2) 70
--------- ---------
Total............................................................ 48 270
Purchased allowance one- to four-family loans........................ -- --
Transfer to allowance for losses on foreclosed real estate........... (43) (25)
Charge-offs:
Mortgage loans (gross):
One- to four-family.............................................. (5) --
Multi-family..................................................... -- --
Commercial loans................................................. -- --
Other loans...................................................... -- (13)
--------- ---------
Total............................................................ (5) (13)
Balance at end of period:
Mortgage loans (gross):
One- to four-family.............................................. 315 313
Multi-family..................................................... 14 14
Commercial loans................................................. 216 216
Other loans...................................................... 68 70
--------- ---------
Total............................................................ $ 613 $ 613
--------- ---------
--------- ---------
Ratio of net charge-offs during the period to average loans
outstanding, excluding Discounted Loans........................ .04% .01%
--------- ---------
--------- ---------
Ratio of allowance for loan losses to net loans receivable,
excluding Discounted Loans..................................... .52% .68%
--------- ---------
--------- ---------
</TABLE>
67
<PAGE>
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 cost of acquiring the right to service the mortgage loans is carried as a
capitalized asset and amortized proportionately over the estimated remaining
lives of the loans serviced. 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. The Company uses Sub-servicers to
perform the administrative activities discussed above under sub-servicing
agreements. The Company's primary administrative task associated with PMSRs is
to review monthly analysis of all servicing and accounting reports prepared by
each Sub-servicer and to perform periodic on-site inspections and reviews of the
Sub-servicers' operations.
Prior to completing any acquisition of servicing rights, the Company
analyzes a wide range of parameters with respect to each portfolio under
consideration. This review includes the projected revenues and expenses,
maturity dates, geographic distribution, interest rate distribution,
loan-to-value ratios, outstanding balances, delinquency history, and other
statistics. Due diligence is either performed by the Bank's 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 approximately 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 the Company 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.
The value of PMSRs generally decrease in a declining interest rate
environment and increase in a rising 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 the Bank. The value of mortgage loans, comprising the majority of the
Bank's 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 the Bank's portfolio in a changing interest rate
environment.
The Bank's principal investment in PMSRs is through a $6.0 million equity
investment in three divisions of a single limited partnership whose business
activity is to purchase current mortgage servicing rights. There are several
equity investors in each division. The purchase of the servicing rights is then
leveraged, allowing the partnership to purchase rights equaling one to three
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-
68
<PAGE>
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 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 Sub-services the PMSRs in each partnership. Each limited
partnership is audited annually by an independent auditor and an independent
third party valuation of the partnership's PMSRs is performed quarterly. The
results of both reviews are sent directly to each equity investor. The risks
associated with PMSRs are somewhat mitigated in the case of PMSRs managed by
DMI. As a result of the current decline in the interest rate market, DMI has
actively moved to retain servicing rights on refinancings. The loans are
refinanced at lower rates, for longer terms, and, from time to time, with higher
balances with the servicing on such loans retained by the partnership.
With respect to the Bank's $6.0 million equity investment in the limited
partnership at March 31, 1998, the Bank's proportionate share of the
partnership's PMSR portfolio was $10.5 million at the partnership's amortized
cost. At March 31, 1998, the valuation prepared by the independent third party
appraiser indicated that the market value of the Bank's proportionate share of
the partnership's PMSR's portfolio was between $9.3 million and $11.0 million.
In addition to its investment in the limited partnership, at March 31, 1998,
the Bank had a $747,000 investment, at amortized cost, in a PMSR portfolio that
it owns directly. At March 31, 1998, this directly owned PMSR portfolio
consisted of 1,435 mortgage loans having an outstanding principal balance of
$60.4 million.
At March 31, 1998, the Bank's investment in PMSRs, including the limited
partnership, was $6.7 million. Of this amount, $531,000 exceeded the amount of
PMSRs allowable in regulatory capital. The remaining $6.2 million investment in
PMSRs constituted 45.6% of the Bank's core capital at March 31, 1998.
A secondary benefit derived from the PMSRs is the interest free custodial
accounts comprised of the borrowers' taxes and insurance escrows and, for a
short time period, the float on their principal and interest payments. The
custodial balances are maintained in noninterest-bearing accounts and are not
affected by changes in interest rates. The custodial balances relating to the
servicing owned at March 31, 1998, amounted to $5.6 million.
INVESTMENT ACTIVITIES
The 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 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 March
31, 1998, the Bank's liquidity ratio (liquid assets as a percentage of deposits
and borrowings payable in one year or less) was 6.2%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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.
69
<PAGE>
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives. It is the Bank's general policy to
invest in certificates of deposit, overnight funds, and securities which are
securities of government sponsored entities and federal agency obligations, and
other fixed-issues that are rated investment grade. The policy also permits the
Bank to invest in the equity securities of government sponsored entities. All
mortgage-backed securities in the Bank's portfolio at March 31, 1998 were
acquired in the Merger Conversion. The Bank has not purchased mortgage-backed
securities since that time. All of the mortgaged-backed securities are insured
or guaranteed by the Agencies.
The Company also maintains a portfolio of readily marketable equity
securities, generally comprised of the equity securities of government sponsored
entities and the holding companies for local, regional and national banks,
savings banks and savings and loan associations. Generally, the Company has
acquired non-control positions in financial institution equities which
management believes, after analysis of market pricing, business practices, and
earnings potential, are under-valued and represent an opportunity for profit
from sales of such securities. At March 31, 1998, the Company and the Bank had
$5.3 million in securities, all of which were classified as available-for-sale.
The following table sets forth the composition of the Company's debt and
equity and mortgage-backed securities portfolios in dollar amounts and
percentages at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- ---------
FAIR % OF FAIR % OF FAIR % OF FAIR
VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government
obligations................................ $ -- --% $ -- --% $ -- --% $ 603
Municipal bonds.............................. 377 7.05 380 7.64% 602 10.40% 619
--------- --------- --------- --------- --------- --------- ---------
Total debt securities.................... $ 377 7.05% $ 380 7.64% $ 602 10.40% $ 1,222
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Equity securities.............................. $ 2,455 45.90% $ 1,667 33.51% $ 282 4.87% $ 639
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Mortgage-backed securities:
FreddieMac................................. $ 123 2.30% $ 125 2.51% $ 826 14.27% $ 1,164
FannieMae.................................... 2,374 44.42 2,798 56.26 3,949 68.23 4,339
GinnieMae.................................... -- -- -- -- 152 2.62 158
--------- --------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities............................. 2,497 46.72 2,923 58.77 4,927 85.12 5,661
Net premium (discount)....................... 37 .69 39 .78 60 1.04 78
Unrealized (loss) on
securities available-
for-sale................................... (18) (.36) (35) (.70) (83) (1.43) (27)
--------- --------- --------- --------- --------- --------- ---------
Net mortgage-backed
securities................................. $ 2,516 47.05% $ 2,927 58.85% $ 4,904 84.73% $ 5,712
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Total securities
available-for-sale..................... $ 5,348 100% $ 4,974 100% $ 5,788 100% $ 7,573
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
FHLB of Chicago stock.......................... $ 3,271 100% $ 3,271 100% $ 3,428 100% $ 2,669
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
% OF
TOTAL
---------
<S> <C>
Debt securities:
U.S. Government
obligations................................ 7.96%
Municipal bonds.............................. 8.17
---------
Total debt securities.................... 16.13%
---------
---------
Equity securities.............................. 8.44%
---------
---------
Mortgage-backed securities:
FreddieMac................................. 15.37%
FannieMae.................................... 57.30
GinnieMae.................................... 2.09
---------
Total mortgage-backed
securities............................. 74.76
Net premium (discount)....................... 1.03
Unrealized (loss) on
securities available-
for-sale................................... (.36)
---------
Net mortgage-backed
securities................................. 75.43%
---------
---------
Total securities
available-for-sale..................... 100%
---------
---------
FHLB of Chicago stock.......................... 100%
---------
---------
</TABLE>
70
<PAGE>
The following table sets forth the amortized cost and fair values of the
Company's securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
---------------------- -----------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- -----------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED
COST VALUE COST VALUE COST VALUE COST
----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government obligations.................. $ -- $ -- $ -- $ -- $ -- $ -- $ 601
Municipal bonds.............................. 370 377 370 380 557 602 558
Equity securities............................ 2,446 2,455 1,695 1,667 226 282 607
Mortgage-backed securities:
FreddieMac................................. 123 124 125 124 826 834 1,162
FannieMae.................................. 2,374 2,392 2,837 2,803 4,009 3,910 4,419
GinnieMae.................................. -- -- -- -- 152 160 158
----------- --------- ----------- --------- ----------- --------- -----------
Total mortgage-backed
securities............................. 2,497 2,516 2,962 2,927 4,987 4,904 5,739
----------- --------- ----------- --------- ----------- --------- -----------
Total investment securities
available-for-sale......................... $ 5,313 $ 5,348 $ 5,027 $ 4,974 $ 5,770 $ 5,788 $ 7,505
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
FHLB-Chicago stock........................... $ 3,271 $ 3,271 $ 3,271 $ 3,271 $ 3,428 $ 3,428 $ 2,669
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
<CAPTION>
FAIR
VALUE
---------
<S> <C>
Securities available-for-sale:
U.S. Government obligations.................. $ 603
Municipal bonds.............................. 619
Equity securities............................ 639
Mortgage-backed securities:
FreddieMac................................. 1,183
FannieMae.................................. 4,364
GinnieMae.................................. 165
---------
Total mortgage-backed
securities............................. 5,712
---------
Total investment securities
available-for-sale......................... $ 7,573
---------
---------
FHLB-Chicago stock........................... $ 2,669
---------
---------
</TABLE>
71
<PAGE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of investment securities as
of March 31, 1998.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORE THAN
FIVE
MORE THAN ONE YEARS TO
ONE YEAR OR LESS YEAR TO FIVE YEARS TEN YEARS
------------------------ ------------------------ -----------
<CAPTION>
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED
COST YIELD COST YIELD COST
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities available-for- sale:
Municipal Bonds............................................. $ -- --% $ -- --% $ 50
Equity Securities(1)........................................ $ 2,446 -- -- -- --
Mortgage-backed securities: FreddieMac...................... -- -- -- -- --
FannieMae................................................... 705 6.79 -- -- --
Total mortgage-backed securities............................ 705 6.79 -- -- --
Total investment securities available-for-sale.............. $ 3,151 6.79% $ -- --% $ 50
----------- --- ----- --- -----
----------- --- ----- --- -----
FHLB-Chicago stock(1)....................................... $ 3,271 --% $ -- --% $ --
----------- --- ----- --- -----
----------- --- ----- --- -----
<CAPTION>
<S> <C> <C> <C> <C> <C>
MORE THAN TEN YEARS
TOTAL
------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
YIELD COST YIELD COST YIELD
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment securities available-for- sale:
Municipal Bonds............................................. 9.5% $ 320 9.5% $ 370 9.5%
Equity Securities(1)........................................ -- -- -- 2,446 --
Mortgage-backed securities: FreddieMac...................... -- 123 6.15 123 6.15
FannieMae................................................... -- 1,669 6.48 2,374 6.57
Total mortgage-backed securities............................ -- 1,792 6.46 2,497 6.55
Total investment securities available-for-sale.............. 9.5% $ 2,112 6.92% $ 5,313 6.93%
--
--
----------- --- ----------- ---
----------- --- ----------- ---
FHLB-Chicago stock(1)....................................... --% $ -- --% $ 3,271 --%
--
--
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
- ------------------------
(1) Weighted average yield does not include equity securities.
72
<PAGE>
SOURCES OF FUNDS AND BORROWINGS
GENERAL. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank 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. In addition, the Company's sources of funds include two notes
payable. See "--Borrowings."
DEPOSITS. The Bank 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. The Bank in the
past has utilized brokered deposits, and will continue to use this source of
funds as needed in the future. The Bank had $5.6 million in brokered deposits at
March 31, 1998. The Bank has traditionally priced its deposit products at or
near market rates in its primary market.
DEPOSIT FLOW. The following table sets forth the change in dollar amount of
savings accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------------------------- ----------------------------------------------
1998 1997 1996
----------------------------------- ----------------------------------- ---------
PERCENT PERCENT
OF TOTAL INCREASE OF TOTAL INCREASE
AMOUNT DEPOSITS (DECREASE) AMOUNT DEPOSITS (DECREASE) AMOUNT
--------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Passbook accounts...................... $ 18,600 10.3% $ 993 $ 17,607 10.2% $ (742) $ 18,349
NOW accounts........................... 15,112 8.4 1,887 13,225 7.7 799 12,426
Money market accounts.................. 6,322 3.5 99 6,223 3.6 1,266 4,957
--------- ----- ----------- --------- ----------- ----------- ---------
Total................................ 40,034 22.2 2,979 37,055 21.5 1,323 35,732
--------- ----- ----------- --------- ----------- ----------- ---------
Certificate accounts:
3.99% or less...................... 5 -- (5) 10 -- (42) 52
4.00% to 4.99% 718 0.4 (156) 874 0.5 105 769
5.00% to 5.99% 70,001 38.9 7,066 62,935 36.5 (8,234) 71,169
6.00% to 6.99% 67,631 37.7 (2,331) 69,962 40.5 30,768 39,194
7.00% to 7.99% 1,404 0.8 (109) 1,513 0.9 (2,099) 3,612
8.00% to 8.99% 39 -- (81) 120 0.1 21 99
--------- ----- ----------- --------- ----------- ----------- ---------
Total................................ 139,798 77.8 4,384 135,414 78.5 20,519 114,895
--------- ----- ----------- --------- ----------- ----------- ---------
Total deposits......................... $ 179,832 100% $ 7,363 $ 172,469 100.0% $ 21,842 $ 150,627
--------- ----- ----------- --------- ----------- ----------- ---------
--------- ----- ----------- --------- ----------- ----------- ---------
Weighted Average Rate.................. 5.13% 5.18%
----- -----------
----- -----------
<CAPTION>
1995
-----------------------------------
PERCENT PERCENT
OF TOTAL INCREASE OF TOTAL INCREASE
DEPOSITS (DECREASE) AMOUNT DEPOSITS (DECREASE)
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Passbook accounts...................... 12.2% $ (167) $ 18,516 15.0% $ (2,680)
NOW accounts........................... 8.3 (404) 12,830 10.4 (951)
Money market accounts.................. 3.3 474 4,483 3.6 400
----------- ----------- --------- ----------- -----------
Total................................ 23.8 (97) 35,829 29.0 (3,231)
----------- ----------- --------- ----------- -----------
Certificate accounts:
3.99% or less...................... 0.0 34 18 0.0 (5,993)
4.00% to 4.99% 0.5 (4,688) 5,457 4.4 (11,733)
5.00% to 5.99% 47.2 34,232 36,937 30.0 13,828
6.00% to 6.99% 26.0 8,634 30,560 24.7 17,785
7.00% to 7.99% 2.4 (10,938) 14,550 11.8 12,298
8.00% to 8.99% 0.1 (34) 133 0.1 (167)
----------- ----------- --------- ----------- -----------
Total................................ 76.2 27,240 87,655 71.0 26,018
----------- ----------- --------- ----------- -----------
Total deposits......................... 100.00% $ 27,143 $ 123,484 100.0% $ 22,787
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Weighted Average Rate.................. 5.13% 5.13%
----------- -----------
----------- -----------
</TABLE>
73
<PAGE>
CERTIFICATE ACCOUNTS. At March 31, 1998, the Bank had outstanding $44.1
million of certificate of deposit accounts in amounts of $100,000 or more
maturing or repricing as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Three months or less........................................................................ $ 12,517
Over three through six months............................................................... 20078
Over six through 12 months.................................................................. 6632
Over 12 months.............................................................................. 4863
-------
Total..................................................................................... $ 44,090
-------
-------
</TABLE>
The Bank had pledged investment securities of approximately $2.8 million at
March 31, 1998, as collateral to secure certain public deposits. At March 31,
1998, the Bank also had letters of credit totaling $15.4 million, as collateral
to secure several government certificates of deposit totaling approximately
$15.1 million which mature or reprice in the three through six month time
period.
The following table presents the amount of certificate accounts outstanding
at March 31, 1998, and the periods to maturity or repricing.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
---------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Within one year............................................................................ $ 121,590 5.80%
One to three years......................................................................... 16758 6.09%
Thereafter................................................................................. 1,450 6.29%
---------- ---
Total...................................................................................... $ 139,798 5.84%
---------- ---
---------- ---
</TABLE>
CERTIFICATE ACCOUNTS CLASSIFIED BY RATES. The following table sets forth
the certificate accounts of the Bank classified by rates as of the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ ---------------------------------
RATE 1998 1997 1996 1995
- ---------------------------------------------------------------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
3.99% or less................................................... $ 5 $ 10 $ 52 $ 18
4.00% to 4.99%.................................................. 718 874 769 5,457
5.00% to 5.99%.................................................. 70,001 62,935 71,169 36,937
6.00% to 6.99%.................................................. 67,631 69,962 39,194 30,560
7.00% to 7.99%.................................................. 1,404 1,513 3,612 14,550
8.00% to 8.99%.................................................. 39 120 99 133
------------ ---------- ---------- ---------
Total......................................................... $ 139,798 $ 135,414 $ 114,895 $ 87,655
------------ ---------- ---------- ---------
------------ ---------- ---------- ---------
</TABLE>
74
<PAGE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits in excess of withdrawals........................... $ 5,114 $ 10,146 $ 13,262 $ 20,710 $ 17,177
Interest credited........................................... 2,249 1,970 8,580 6,433 5,610
--------- --------- --------- --------- ---------
Net increase in savings deposit accounts.................. $ 7,363 $ 12,116 $ 21,842 $ 27,143 $ 22,787
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Substantially all of the Bank's depositors are residents of the States of
Illinois and Indiana.
BORROWINGS. Borrowings at March 31, 1998 include three notes payable, a
margin account, capital lease obligations, and FHLB advances.
Although savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes, the
Bank 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 the Bank's primary borrowing source. Advances from the FHLB are secured by
the Bank's stock in the FHLB and a portion of the Bank's portfolio of first
mortgage loans. The rates on these advances vary from time to time in response
to general economic conditions. At March 31, 1998, the Bank had $17.8 million of
fixed-rate advances from the FHLB with interest rates ranging from 5.48% to
8.43%. The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, the Bank 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 programs. Each credit program has its own interest rate and
the amount of advances is based either on a fixed percentage of an institution's
net worth or on the FHLB's assessment of an association's creditworthiness.
One of the notes is payable for amount of $6.0 million and is drawn on a
$6.0 million revolving line of credit with a third party financial institution
and is collateralized by the Bank's Common Stock. Additionally, this line of
credit is personally guaranteed by Mr. Yedinak, President and Chief Executive
Officer of the Company and the Bank. However, the Company believes such
guarantee will not be required should the line of credit be accessed following
the Offering. The interest rate on this note adjusts monthly in accordance with
a designated prime rate. The second note is payable by On-Line for $885,000
drawn on a $1.0 million open line of credit with a third party financial
institution. This note is also collateralized by accounts receivable of On-Line
and the line of credit is guaranteed by the Company. Both lines of credit are
due to mature on August 17, 1998. However, the Company anticipates that the
lending institution will provide a short-term extension. The third note is
payable by the Company's ESOP, with a remaining balance of $42,000. Finally, the
balance outstanding under a third party securities brokerage firm margin account
agreement is in the amount of $260,000.
Included in other borrowings at March 31, 1998, is $3.5 million in capital
lease obligations for premises and equipment related to On-Line.
75
<PAGE>
The following table sets forth certain information regarding borrowings by
the Company on a consolidated basis at the end of and during the periods
indicated. The borrowings at and during the periods consisted of FHLB advances,
and promissory notes. The weighted average was computed on a monthly average
basis.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
--------------- -------------------------------
1998 1997 1996 1995
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average interest rate at end of period paid on:
FHLB advances........................................................... 6.21% 6.22% 5.80% 5.85%
Other borrowings........................................................ 8.64 8.63 8.48 8.91
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Maximum amount of borrowings outstanding at any month end:
FHLB advances.............................................. $ 20,331 $ 49,587 $ 49,587 $ 45,257 $ 38,416
Other borrowings........................................... 10,678 8,233 11,541 8,760 8,120
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
-------------------- ------------------------------------------
1998 1997 1997 1996 1995
--------- --------- -------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Average borrowings outstanding with
respect to:
FHLB advances........................................ $ 20,057 $ 43,028 $ 30,191 $ 34,608 $ 32,852
Other borrowings..................................... 10,196 8,434 10,621 7,669 5,916
-
--------- --------- ------- --------- ---------
Total.............................................. $ 30,253 $ 51,462 $ 40,812 $ 42,277 $ 38,768
-
-
--------- --------- ------- --------- ---------
--------- --------- ------- --------- ---------
Weighted average interest rate during the period paid
on:
FHLB advances........................................ 6.21% 5.81% 5.98% 5.69% 6.06%
Other borrowings..................................... 9.56 8.32 8.43 8.60 7.86
-
--------- --------- ------- --------- ---------
Total weighted average............................. 7.34% 6.00% 6.50% 6.20% 6.34%
-
-
--------- --------- ------- --------- ---------
--------- --------- ------- --------- ---------
</TABLE>
76
<PAGE>
BANK SUBSIDIARIES
The Bank has two wholly-owned subsidiaries, Argo Mortgage and Dolton
Riverdale. Argo Mortgage engages in mortgage brokerage activities that focus on
the purchase and sale of Discounted Loans into the secondary market. Dolton
Riverdale is an inactive subsidiary. In May 1996, the Bank incorporated a 50.1%
owned operating subsidiary, MARGO. MARGO is an Illinois chartered limited
liability corporation whose members are the Bank and Nip'n Tuck, Inc., an
unaffiliated Illinois corporation. MARGO's primary objectives are to increase
loan origination volume within the Bank's branch network and to serve as a
mortgage banking operation using a network of Correspondents. At March 31, 1998,
the Bank had an equity investment in Argo Mortgage, Dolton Riverdale, and MARGO
of $23.2 million, $160,559 and $(18,983), respectively.
COMPETITION
The Bank 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. The Bank also faces
additional significant competition for investor funds from short-term money
market securities and other corporate and government securities. The Bank's
competition for real estate loans comes principally from mortgage banking and
brokerage companies and, to a lesser extent, other thrift institutions,
commercial banks and credit unions. Competition may also increase as a result of
the lifting of restrictions on the interstate operations of financial
institutions.
The Bank 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.
The Bank 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 the Bank. Management considers
the Bank's reputation for financial strength and customer service as its major
competitive advantage in attracting and retaining customers in its market area.
The Bank also believes it benefits from its community bank orientation as well
as its core deposit base.
BUSINESS OF ON-LINE FINANCIAL SERVICES, INC.
HISTORY
On October 31, 1995 the Company acquired On-Line, an Oak Brook, Illinois
based computer services bureau. 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 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 the Company in June 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--On-Line Financial Services, Inc." for the financial terms of the
transaction.
GENERAL
On-Line is a third party provider of electronic data processing services
primarily to financial institutions located throughout the Midwest. On-Line
provides data processing services to thrifts, community banks, savings banks,
and mortgage brokers. Prior to the Company's acquisition, On-Line's business
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focus was primarily on data processing only, utilizing the existing applications
in place at the time, and On-Line generally did not have the personnel or
technological infrastructure to meet the future technological needs of its
clients, nor was there an active pursuit to solicit new clients outside or
within the financial institution arena. Company management believed that it had
acquired a mature, but limited, technology company that required a new strategic
vision and enhanced technological capabilities to meet the needs of its evolving
marketplace. The Company's primary strategy during its 1996 to 1997 period of
transition was to evaluate the existing technological and operational
environment, including the internal business processes, existing products and
services, and technical viability of the equipment and resources.
BUSINESS STRATEGY OF ON-LINE
The Company's strategy since the acquisition has been to enhance On-Line's
strong foundation as a data processing and data communications network provider
by implementing tools to continue supporting existing services, as well as
evolve into a provider of electronic commerce, Intranet and Internet services,
technical training services, and document management and imaging services.
On-Line's primary objective through its strategic planning has been to increase
the Company's shareholder value by implementing data processing platforms
capable of continuously evolving to meet the needs of the rapidly changing
financial services industry and attracting and developing skilled management and
technical personnel. Principal steps taken include:
- MANAGEMENT AND PERSONNEL. Since its acquisition in 1995, On-Line has
streamlined and re-structured its entire organization to deploy and
implement its revised business strategies. This process included taking
steps to create a team with complementary skills through extensive
internal training, re-engineering, recruiting, and the elimination of
certain technical positions which were no longer viable. While key
management personnel were retained following the acquisition, many new
management, supervisory and staff personnel were hired with complementary
advanced financial services, electronic commerce, local and wide area
networking, programming and systems software experience. Management
believes that it has assembled a technical staff capable of implementing
its future strategic objectives.
- IMPLEMENTATION OF ADVANCED TECHNOLOGIES. Since On-Line's acquisition, the
Company has promoted a corporate commitment to implementation of advanced
technologies sufficient to remain competitive in the future marketplace.
From January 1996 through March 1998, On-Line successfully upgraded its
Unisys mainframe systems which include Microsoft-C- NT client/server based
services, faster response time, faster disaster recovery capability, and
increased memory and capacity for new and/or upgraded product volumes, and
also purchased and implemented Unisys UNIX-based file servers to run its
optical report retrieval system. In addition, On-Line has implemented a
local and wide area networking infrastructure that includes an upgraded
data communications front-end processor with improved monitoring and
diagnostic tools, frame relay services, a redundant fiber optical ring,
and enough capacity to sustain On-Line's foreseeable business objectives
for continued network growth in router technology, ATM processing, running
voice over the network, video conferencing capabilities, and the potential
for performing smaller scale processing services within a Microsoft-C- NT
file server environment. On-Line's enhanced network has also resulted in
improved internal workflow processes such as the enterprise-wide automated
help desk solution and phone system implemented by On-Line during 1997 to
improve client service tracking and monitoring within all functional
departments.
- NEW PRODUCT LINES. In order to become a full service out-sourcing business
partner to its clients, On-Line has upgraded and increased its product and
service offerings. On-Line is now actively offering the
BANKFORCE-Registered Trademark- system, an integrated application system
developed by ITI, capable of meeting customer requirements relating to
daily operations, account management reporting, and product distribution
functions which can be utilized by both banking and non-banking clients of
On-Line. In addition, On-Line introduced a Computer Output Information
Server ("COINS") product,
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which is a high-speed optical storage and retrieval system developed by
INSCI Corporation. On-Line has also established its CyberDoc division,
which distributes a non-proprietary, sophisticated document imaging and
management process.
- RELATIONSHIP DEVELOPMENT. On-Line seeks to initiate, develop and
strengthen its business relationships with its clients by offering new
products and services designed to provide technologically advanced
solutions for improving client profitability, performance, growth, and
competitive position in the marketplace. On-Line's client services team
approach focuses on a partnership with each individual client and to
tailoring products and services to meet their needs.
- INTERNAL GROWTH AND SALES. On-Line seeks to grow internally by selling
services and products to new clients and cross-selling additional services
to existing clients. On-Line also seeks to develop and sell new services
to clients to help them retain existing customers and attract additional
customers from new markets. The acquisition by the Company has resulted in
new potential targeted sales markets for On-Line that focus on educating
existing clients on necessary technological advances in order to remain
competitive in today's financial services industry, as well opening new
opportunities to offer servicing solutions to financial services
companies. Such sales include the resale of software developed by ITI,
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 design and implementation, the sale of all related hardware and
services, expanded technical and communications support, consultation, and
training.
- UPGRADED PLANT AND LIFE SAFETY. Since On-Line's acquisition, the Company
has significantly upgraded the physical plant where On-Line is located,
including the creation of a viewing area for visitors to monitor computer
processing activities, reconstruction of departmental office space,
improvement of workflow processes, and installation of numerous life
safety features within the facility such as improved lighting and fire
sprinkler systems. In addition, during July 1997, On-Line completed
construction of the APEX Training & Conference Solution Center, an
on-site, computer-based training and conference facility for use by its
staff, clients, and outside service providers.
CLIENT BASE
On-Line's data processing clients are currently located primarily in the
Midwest. Historically, On-Line's clients have consisted primarily of financial
institutions. Since mid-1997, On-Line has expanded its client base to include
optical report processing services for an insurance company with offices
throughout the United States; document management and imaging services to
financial institution clients, a payroll processor, and manufacturing companies;
and network services to existing and new financial institutions, restaurants,
manufacturing firms, and out-sourcing services for other hardware providers and
technology servicing companies.
COMPETITION
The market for On-Line's services is highly competitive. On-Line seeks to
compete based upon several factors, including product quality, technical
management and staff, leveraging of current advanced technologies capabilities
to existing and prospective clients, introduction of new products and services,
competitive pricing and its relationship strategy. On-Line competes with
independent vendors who offer a full range of products and services to financial
institutions which have assets significantly larger than those of the Company,
as well as certain existing and prospective clients' in-house technical
departments.
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SALES, MARKETING AND CLIENT SUPPORT
Sales and Marketing representatives are responsible for sales of On-Line
services to existing clients and the development of new business, including
COINS, document imaging, and data processing. Collectively with On-Line's Client
Services department, such representatives are also responsible for communication
between On-Line and its clients and coordination of On-Line resources to provide
conversion and consultative services. Account Managers manage client
relationships, communicate On-Line's activities and strategic plans, and serve
as a liaison with various On-Line servicing groups. On-Line's collective client
servicing team consists of professional staff members who generally have data
processing experience and/ or experience in the financial services industries.
During 1997, On-Line also began to leverage its enhanced network to improve
internal workflow processes and implement productivity tools. On-Line's
enterprise network provides for a company-wide electronic communications system,
access to all host based applications from multiple platforms, an electronic
application product documentation library, and complete and timely access to all
client reports via the COINS optical viewing system. In addition, On-Line has
implemented an enterprise-wide automated help desk solution and a new phone
system to improve client service tracking and monitoring within all functional
departments. The automated help desk solution provides for call tracking by
client, time, and type of problem, includes a problem solutions database for
reference and ease of problem solving, maintains a client call history, and
provides statistical analysis capabilities for management reporting and
performance measurement. The help desk system allows for call problem escalation
within and between departments and allows for information sharing among
departments to improve customer problem resolution response time.
On-Line's strategy to implement and offer local and wide area networking
services, computer output laser disc storage, optical report retrieval, i.e.
COINS technology, and a full line of document management services has been
realized. Additionally, certain products and services are now being marketed to
a wide array of users in various paper intensive industries. Together with
aggressive marketing to small and mid-size commercial and community banks,
On-Line's business plan to expand its traditional financial institution client
base and enter into other industries is also being implemented. See
"--Description of Business--Interface and/or Stand Alone Systems" and
"--Ancillary Services"
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FINANCIAL RESULTS
A summary of the financial results of On-Line is presented below.
ON-LINE FINANCIAL SERVICES, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT
MARCH 31,
----------- AT DECEMBER 31,
1998 1997 1996 1995
----------- --------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets:
Cash and cash equivalents...................................... $ 138 $ 98 $ 36 $ 1,171
Trade accounts receivable, net................................. 2,034 2,244 2,023 1,374
Property and equipment, net.................................... 8,532 6,445 5,719 2,897
Other.......................................................... 158 2,302 2,445 1,043
----------- --------- --------- -----------
Total assets..................................................... $ 10,862 $ 11,089 $ 10,223 $ 6,485
----------- --------- --------- -----------
----------- --------- --------- -----------
Liabilities and stockholders' equity:
Capital lease obligations...................................... $ 3,491 $ 3,829 $ 4,338 $ 2,288
Note payable................................................... 885 830 975 --
Other liabilities.............................................. 1,260 1,316 1,364 2,795
Total stockholders' equity..................................... 5,226 5,114 3,546 1,402
----------- --------- --------- -----------
Total liabilities and stockholders' equity....................... $ 10,862 $ 11,089 $ 10,223 $ 6,485
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
ON-LINE FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWO
MONTHS ENDED YEARS ENDED DECEMBER MONTHS ENDED
MARCH 31, 31, DECEMBER 31,
---------------------- -------------------- ---------------
1998 1997 1997 1996 1995
----------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Processing revenue................................. $ 3,147 $ 2,467 $ 11,690 $ 10,956 $ 1,758
Other income....................................... 226 205 1,063 590 256
----------- --------- --------- --------- ------
Total Revenue.................................... 3,373 2,672 12,753 11,546 2,014
Expense:
Processing costs................................... 838 439 2,806 1,665 232
Personnel costs.................................... 1,141 1,153 4,499 4,618 784
Computer equipment and software expenses........... 730 596 2,642 2,033 380
Other expense...................................... 530 560 2,610 2,103 260
----------- --------- --------- --------- ------
Total Expense.................................... 3,239 2,748 12,557 10,419 1,656
----------- --------- --------- --------- ------
Income before income taxes......................... 134 -76 196 1127 358
Income tax expense (benefit)....................... 51 -29 71 391 136
----------- --------- --------- --------- ------
Net Income (loss).................................. $ 83 $ (47) $ 125 $ 736 $ 222
----------- --------- --------- --------- ------
----------- --------- --------- --------- ------
</TABLE>
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DESCRIPTION OF BUSINESS--CORE APPLICATION SYSTEMS
On-Line maintains two fully-integrated application software systems for its
clients. The COMMAND. System is a proprietary application system primarily used
by thrift institutions. BANKFORCE-Registered Trademark- is a third-party banking
electronic commerce solution developed by ITI that can be used by a variety of
financial services clients. In addition to security controls in place within
On-Line's facility, logical security for both application systems resides at the
mainframe, network, terminal, and application levels.
The COMMAND.System, On-Line's proprietary product offering, provides user
institutions with an on-line real-time system for maintaining savings,
IRA/KEOGH, DDA accounts (including line of credit), mortgage loans,
loans-in-process, mortgage banking, installment loans, and general ledger-type
accounts, and supports a batch commercial loan system. The COMMAND.Teller system
serves as an interface with the COMMAND.System applications and allows the
teller to enter transactions using menu screens. The COMMAND.System core
application system includes a mix of integrated value added systems, which
include full ATM processing, support for electronic funds transfer ("EFT") /
automated clearing house ("ACH") transactions, over-the-counter transaction
system capabilities, personal computer ("PC")-based teller and platform systems,
and a telephone banking system.
BANKFORCE-Registered Trademark- is On-Line's electronic commerce solution
developed by ITI. BANKFORCE-Registered Trademark- performs account processing
services for all types of financial institutions and may also be used in any
business utilizing electronic commerce technology. The
BANKFORCE-Registered Trademark- product is capable of meeting customer
requirements relating to daily operations, account management, regulatory
reporting and product distribution functions. All facets of electronic banking
are available with BANKFORCE-Registered Trademark-, as well as detailed customer
information files and expansive capabilities on loan and deposit requirements
allowing customization by users. All modules available with the
BANKFORCE-Registered Trademark- product interface with the general ledger module
to provide a totally integrated product meeting customer needs.
The BANKFORCE-Registered Trademark- application system also includes several
"value added" systems including real-time ATM processing and support for EFT/ACH
transactions. During 1997, On-Line also introduced and implemented the telephone
banking option for its BANKFORCE-Registered Trademark- clients. The
BANKFORCE-Registered Trademark-version of telephone banking allows customers of
On-Line's clients to access account information and transfer funds between
accounts. During the first quarter of 1998, On-Line also introduced home banking
into its BANKFORCE-Registered Trademark- client base, which allows the customers
of On-Line's clients to access account information via PC. Allowable
transactions are determined by the On-Line client, and can include viewing
statements, histories, and transferring funds.
During the first quarter of 1998, On-Line entered into a joint marketing
agreement with a leading provider of remote financial servicing options such as
full-service banking through home computers, an Internet web browser solution,
and another type of voice response ("IVR" or telephone banking) system. These
remote financial services are available to both COMMAND.System and
BANKFORCE-Registered Trademark- clients. On-Line also has a joint marketing
agreement with a Chicago, Illinois ATM supplier and servicer. Both joint
marketing agreements include certain referral fees for On-Line, and may assist
with the renewal of existing client contracts by offering a wider breath of
servicing options to the client.
On-Line's conversion services include product file specification training,
application functionality training, and pre- and post-conversion support at the
client location with the goal for client institutions to become self-sufficient
in managing their new system. On-Line is responsible for providing the training
and guidance necessary to complete the required COMMAND.System or
BANKFORCE-Registered Trademark- system specifications. Each client is ultimately
responsible, however, for reviewing and making decisions regarding the
specifications, based on the institution's products and services. On-Line client
services personnel work with user institutions to set-up institutional
parameters such as interest rates, loan payment schedules, loan classification
codes, etc. Client services professionals then develop the specifications
necessary for converting each existing application field to a corresponding
COMMAND.System or BANKFORCE-Registered Trademark- field. Conversion programming
for the COMMAND. System is performed by On-Line's in-house programming and
client
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services departments. Conversion programming for the
BANKFORCE-Registered Trademark- system is out-sourced to ITI's programming staff
and performed in conjunction with On-Line's Client Services department.
After conversion and on an on-going basis, BANKFORCE-Registered Trademark-
allows for customization of products and services through modification of
appropriate specifications within the system. As such, it is each institution's
responsibility to modify application file specifications, implement segregation
of duties and application-level security through the mechanisms within the
BANKFORCE-Registered Trademark- security control module, and ensure that local
area network ("LAN") security is adequately controlled and administered. After
conversion and on an on-going basis, COMMAND.System users are also responsible
for implementing application level security and determining specifications, but
certain specifications must be made with the assistance of On-Line staff after
receiving written authorization from the client.
Once a client has entered into a COMMAND.System or
BANKFORCE-Registered Trademark-processing contract, On-Line's monthly recurring
fees are generated from processing charges primarily based on the number of
accounts and number of transactions, plus communications charges, disaster
recovery fees and any recurring or one-time special services. In addition,
conversion services generally include a one-time conversion fee, re-sale of
certain software licensing fees, the sale of teller terminals and computer
hardware and/or software.
DESCRIPTION OF BUSINESS--INTERFACE AND/OR STAND ALONE SYSTEMS
COINS. In 1996, On-Line completed the acquisition, development and testing
of its Computer Output INformation Server product ("COINS"), which is a
high-speed, optical computer storage and retrieval system that replaces computer
paper and/or microfiche output. Any mainframe-based output can be transferred to
On-Line's COINS server for on-line viewing via a PC and can be distributed and
viewed by multiple concurrent users on a local or wide area network.
Since late 1996, On-Line has been actively marketing COINS to existing
clients, as well as potential clients both within, and outside, the financial
services industry. As of March 31, 1998, most existing On-Line data processing
clients utilize, or have contracted for, the COINS system as their microfiche
replacement, as well as a non-data processing insurance company with offices
throughout the United States. With over 500 installations worldwide, the COINS
solution is based on client server technology and is one of the market leaders.
While the COINS application can operate on various client/server platforms, the
On-Line COINS application currently resides on a Unisys UNIX-based server within
the On-Line climate controlled computer room. After the nightly update, all
existing client files (I.E., reports, notices, statements ) are transferred from
the On-Line mainframe to the UNIX-based server. Through the existing
communications network, multiple concurrent users at client locations can then
access and retrieve stored data via terminals/PCs, and can distribute the data
electronically. Reports, statements, checks and notices may also be printed if
hard copy is required. Non-data processing client files are transferred from the
client's location to On-Line, and can then be viewed at the clients' sites via
dedicated communication links to On-Line.
Access to COINS is controlled by user ID and password to ensure that only
authorized users receive these images. On-Line has also purchased a second
UNIX-based server for disaster recovery purposes.
On-Line obtains recurring revenue from COINS by charging monthly licensing
and account fees. Annual software maintenance fees are also assessed to each
client. On-Line has competitive advantages related to offering an out-sourcing
solution for COINS, as opposed to running the COINS system in-house because,
generally, it is more cost beneficial for clients. There are substantial
hardware investment costs and software licensing fees for running the system
in-house. Currently, On-Line has a site-license for the COINS application and,
thus, can add an unlimited number of file servers and individual users to the
system without incurring additional licensing upgrades.
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CYBERDOC. On-Line has entered into several re-selling agreements with third
parties, both formally and informally, for the resale of two primary imaging
solutions and various different hardware components. During third quarter 1997,
On-Line officially introduced document management and imaging to its line of
products and services under the marketing label "CyberDoc", thereby enhancing
the scope of services available to its clients. CyberDoc is also being
aggressively marketed to attract new clients. The sales and implementation cycle
for CyberDoc clients includes On-Line's use of high-speed scanners to scan
backlogged client records, such as personnel records or mortgage files, save
scanned documents to CD-ROM, and then code and index the documents for retrieval
according to client specifications. Clients are then able to manipulate the data
and access information meeting specific parameters, i.e., mortgages meeting
specific requirements for sale in the secondary market or a specified customer
base for cross-selling products. Clients have the option of having On-Line
continue to scan new documents on an on-going basis or On-Line will train the
client to scan and code new documents in-house.
Typically, CyberDoc sales consist of one-time, high-margin revenues
associated with backlog conversion of client documents, the sale of complete
imaging capture and retrieval systems, and associated scanners. Image capturing
and scanners may not be sold if the client decides to have On-Line scan and code
new documents; in this case, On-Line benefits from the recurring conversion
work. A licensing fee is also charged to the customer, as well as maintenance
fees for software systems.
DESCRIPTION OF BUSINESS--ANCILLARY SERVICES
Since the Company's acquisition, On-Line has expanded its existing client
services by creating a Network Services department in order to re-sell hardware
and software to existing clients and provide local and wide area network
architectural design and implementation services. Since mid-1997, On-Line's
Network Services have also been targeted to companies both within and outside
the financial services industry. See also "Business of On-Line Financial
Services, Inc.--Client Base"
In addition, during July 1997, On-Line completed construction of its APEX
Training and Conference Solution Center ("APEX"). APEX has a dedicated local
area network and is designed to provide computer based training services.
On-Line utilizes APEX to conduct application and conversion training services to
existing clients, and also generates one-time revenues from rental of the center
to third parities, primarily training companies that provide instruction on
PC-based application software.
CONTRACTS
On-Line has contracts with its financial institution data processing clients
that generally have an initial term of three to seven years and automatically
renew for successive terms unless terminated by either party. In addition, based
on the average contract length, approximately 20% of On-Line's recurring data
processing revenues are at risk each year. On-Line's fee structure is primarily
based on the number of accounts and transactions processed, plus additional
charges for special services. All data processing contracts are in compliance
with OTS Thrift Bulletin 46 (TB-46): "Contracting for Data Processing Services
or Systems" and also address certain other Federal Financial Institutions
Examination Council (FFIEC) requirements for information systems servicing
providers. It is On-Line's policy that legal counsel review data processing
contracts for compliance with applicable regulations and soundness to help
eliminate potential risk exposures to On-Line. In addition, On-Line's data
processing contracts generally include penalties and/or recovery of servicing
discounts received over the life of the contract, in the event a client
terminates its agreement prior to the expiration date, as well as de-conversion
fees.
During October 1997, On-Line began entering into processing contracts with
non-financial institution clients. Such contracts are similar to those for
financial institutions and have specified terms, but may differ slightly based
on the nature of the client's business.
In addition, On-Line may enter into agreements to provide "one-time"
services to existing and new clients, in all industries, in the areas of local
and wide area networking, hardware and software sales and
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services, document management and retrieval systems, or specialized consulting
services. As a result of these "one-time" agreements, On-Line may from time to
time also enter into a relationship to provide ongoing maintenance services
which include network support, network administration or certain other software
maintenance services that result in a recurring revenue stream for On-Line.
DISASTER RECOVERY / BUSINESS RESUMPTION SYSTEMS
On-Line has comprehensive disaster recovery and business resumption systems.
The key restoration services include daily off-site storage and rotation of
critical files, and the availability of a third-party "hot site". On-Line's
hot-site is a fully operational off-site processing facility equipped with
hardware and system software consistent with On-Line's facility, and is ready to
operate within several hours in the event of a disaster. The hot-site is also
equipped with certain communications equipment as well as On-Line owned
equipment to provide full network recovery capabilities. In order to manage its
recovery systems, On-Line utilizes a disaster recovery planning product that is
specifically designed to meet the compliance needs of its financial institution
clients. All components of On-Line's multiple platform environment and product
offerings are considered in its recovery systems.
REGULATION
On-Line is not directly subject to federal or state banking regulations.
However, as a provider of services to banking institutions, On-Line is subject
to review from time to time by the FDIC, the OTS, the Federal Reserve Board, the
Office of the Comptroller of the Currency, and various state regulatory
authorities. These regulators make certain recommendations to On-Line regarding
various aspects of its operations. In addition, On-Line processing operations
are reviewed annually by an independent auditing firm during a third-party
service center review. Internal auditing procedures are also performed
periodically throughout the year by an independent auditing firm. Such
regulatory reviews and independent audits are intended to review compliance with
FFIEC guidelines, primarily as related to information systems internal controls,
in order to better protect client data from potential security, data integrity,
or confidentiality risks.
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BUSINESS OF EMPIRE/ARGO, LLC
In recent years, the Company has acquired Discounted Loans through Empire.
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. Investments in these assets has generally resulted in
higher yields and gains. Losses have also been incurred from certain properties
through other real estate owned activity. Discounted Loans receivable have also
been acquired through Argo Mortgage. See "Business of the Bank--Bank
Subsidiaries."
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. For its 1998 taxable year, the Bank is subject to a maximum
federal income tax rate of 35%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (I.E.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. However, thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in method of accounting, initiated
by the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act was suspended for the 1996 and 1997 taxable years because the Bank
met the residential loan requirement test for both years.
Under the 1996 Act, for its current and future taxable years, as a small
bank, the Bank is permitted to make additions to its tax bad debt reserves. In
addition, the Bank is required to recapture (i.e., take into income) over a six
year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, if
any over the balance of such reserves as of December 31, 1987 or a recomputed
December 31, 1987 reserves if the Bank's loan portfolio decreased
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since December 31, 1987. As a result of such recapture, the Bank will incur
additional taxable income of approximately $80,000 which will be taken into
income beginning in 1998 over a six year period.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, as a small bank such distributions will be
considered to have been made from the greater of the Bank's tax bad debt
reserves computed under the experience method on the Bank's tax bad debt
reserves as of December 31, 1987 to the extent thereof, and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend
distribution is the lesser of the Bank's tax bad debt reserves and supplemental
reserves as determined above as of December 31, 1987 or an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Bank makes a non-dividend distribution to the
Company, in some instances approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a $.657-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company files Illinois income tax returns. For
Illinois income tax purposes, savings institutions are presently taxed at a rate
equal to 7.18% of taxable income. For these purposes, "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
significantly the Illinois taxable income of savings institutions. The Company
is not currently under audit with respect to its Illinois income tax returns.
STATE OF DELAWARE TAXATION. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The 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 financial
institutions. There are periodic examinations by the OTS and the FDIC to
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test the 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 policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank or their operations. The Company, as a savings and loan
holding company, will also be required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS and the Commission
under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations, or the Reorganization.
Congress is expected to consider in 1998 the elimination of the federal thrift
charter and the abolishment of the OTS. The results of such consideration,
including possible enactment of legislation, is uncertain. Therefore, the
Company is unable to determine the extent to which the results of such
consideration or possible legislation, if enacted, would affect its business.
See "Risk Factors-- Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued by the agencies to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal associations may engage. In particular, many types
of lending authority for federal associations, e.g., commercial, non-residential
real property loans and consumer loans, are limited to a specified percentage of
the institutions' capital or assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At March 31, 1998, the Bank's general limit on loans-to-one
borrower was $2.0 million. At March 31, 1998, the Bank's largest aggregate
amount of loans-to-one borrower consisted of $2.9 million. The OTS has allowed
the Bank to lend an amount not to exceed $4.0 million to this customer based on
regulatory exceptions to the loan to-one-borrower limitation.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of March 31, 1998,
the Bank maintained 93% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered as "qualified thrift investments."
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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 stockholders
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 regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. At March 31, 1998, the Bank was classified as a Tier 1 Bank. In the
event the Bank's capital fell below its capital requirements or the OTS notified
it that it was in need of more than normal supervision, the 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.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the quarter
ended March 31, 1998 was 6.22% and for the year ended December 31, 1997 was
5.91%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the
quarter ended March 31, 1998 totaled $31,000 and for the year ended December 31,
1997 totaled $102,000.
BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors--Financial
Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, 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.
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ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against 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 or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action 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 and state law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit systems; 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
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholders' equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The OTS
regulations require that, in meeting the leverage ratio, tangible and risk-based
capital standards, institutions generally must deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank. In
addition, the OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See
"Regulation--Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks the OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed earlier
under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-weighting
for certain mortgage derivative securities. Under the
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rule, savings associations with "above normal" interest rate risk exposure would
be subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the NPV 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 association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose measured interest
rate risk exposure exceeds 2% must deduct an interest rate component in
calculating its total capital under the risk-based capital rule. The interest
rate risk component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies.
At both March 31, 1998 and December 31, 1997, the Bank met each of its
capital requirements.
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 capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 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" and 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 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF (the deposit insurance fund that covers most commercial bank deposits)
are statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying average
deposit insurance premiums of between 24 and 25 basis points. The BIF met the
required reserve in 1995, whereas the SAIF was not expected to meet or exceed
the required level until 2002 at the earliest. This situation was primarily due
to the statutory requirement that SAIF members make payments on bonds issued in
the late 1980s by the FICO to recapitalize the predecessor to the SAIF.
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In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, 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 Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was tax deductible. The SAIF Special Assessment recorded
by the Bank amounted to $789,000 on a pre-tax basis and $489,000 on an after-tax
basis.
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. However, SAIF members will continue to make
the FICO payments described above. 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.
The Bank's assessment rate for the quarter ended March 31, 1998 and the year
ended December 31, 1997 was 6 basis points and the premiums paid for these
periods were $31,000 and $102,000, respectively. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION
The Funds Act, enacted in September 1996, provides that the BIF, the fund
which insures most commercial bank deposits, and the SAIF will merge on January
1, 1999, if there are no savings associations, as defined, in existence on that
date. Pursuant to that legislation, the Department of Treasury in May, 1997
recommended in a report to Congress that the separate charters for thrifts and
banks be abolished. Various proposals to eliminate the federal thrift charter,
create a uniform financial institutions charter, conform holding company
regulation and abolish the OTS have been introduced in Congress. The House
Committee on Banking and Financial Services has reported a bill that will
require federal savings associations to convert to national banks or some type
of state charter within two years of enactment or they would automatically
become national banks. The bill would also merge the BIF and the SAIF, repeal
the HOLA, abolish the OTS and transfer the regulation of savings associations to
the federal bank regulators and the
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Federal Reserve Board. Federal thrifts converted to national banks generally
will be permitted to continue to engage in any activity, including the holding
of any asset, lawfully conducted on the date prior to the enactment. A federal
savings association converted to a national bank may retain all branches
established or proposed in a pending application as of enactment and establish
new branches in any state in which it has a branch. Otherwise, it may establish
new branches only under national bank rules. In addition, beginning two years
after enactment, national banks will be authorized to exercise all powers
formerly authorized for federal savings associations.
Under the proposal, holding companies for savings associations converted to
national banks generally will become subject to the same regulation as holding
companies that control commercial banks, with a grandfather provision for former
unitary savings and loan holding companies. Such grandfathered companies will be
permitted to maintain and establish affiliations with any type of company and to
acquire additional depository institutions, as long as any acquired depository
institution is merged into its converted savings association and such
institution continues to comply with both the qualified thrift lender test and
certain asset and investment limitations to which it was subject as a federal
savings association.
TRUTH IN LENDING
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
requires lenders, such as the Bank, to provide a disclosure statement to
borrowers which explains the terms and cost of credit, including, but not
limited to, the amount financed, finance charges, other charges, and prepayment
terms. Regulation Z applies to a wide variety of lending transactions, including
mortgage loans and credit cards. The TILA provides borrowers with a three day
right to cancel certain credit transactions, including residential mortgage
loans and other loans where a customer pledges his or her principal dwelling as
security for the loan. Failure to comply with the provisions of the TILA could
subject a lender to criminal and civil sanctions.
The TILA was amended effective October 1, 1995 to impose new disclosure
requirements and substantive limitations on closed-end home equity mortgage
loans bearing rates or fees above a certain percentage or amount ("TILA
Amendments"). Specifically, the TILA Amendments applies to loans secured by a
customer's principal dwelling (other than a residential mortgage loan to acquire
or construct a borrower's principal dwelling, a reverse mortgage transaction or
home equity lines of credit) with (i) an annual percentage rate which exceeds by
more than ten percentage points the yield on U.S. Treasury securities having
comparable periods of maturity; or (ii) total loan origination fees and other
fees payable by the customer will exceed the greater of 8% of the loan amount or
$400 ("Covered Loans"). Additional disclosures are required to be provided to
the customer under the TILA Amendments for all Covered Loans not less than three
business days prior to the consummation of the transaction.
OTHER LENDING LAWS
The Bank is also required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), which prohibits creditors from discriminating against
applicants on certain prohibited bases, including race, color, religion,
national origin, sex, age or marital status. Regulation B promulgated under ECOA
restricts creditors from obtaining certain types of information from loan
applicants. Among other things, it also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loans increases as a result of information
obtained from a consumer credit agency, another statute, the Fair Credit
Reporting Act of 1970, as amended, requires lenders to supply the applicant with
the name and address of the reporting agency. In addition, the Bank is subject
to the Fair Housing Act and regulations thereunder, which broadly prohibit
certain discriminatory practices in connection with the Bank's business. The
Bank is also subject to the Real Estate Settlement Procedures Act of 1974, as
amended, and the Home Mortgage Disclosure Act.
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In addition, the Bank is subject to various other Federal and state laws,
rules and regulations governing, among things, the licensing of, and procedures
which must be followed by, mortgage lenders and services, and disclosures which
must be made to consumer borrowers. Failure to comply with such laws, as well as
with the laws described above, may result in civil and criminal liability.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at March 31, 1998, of $3.3 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance. At March 31, 1998, the Bank had outstanding FHLB advances of
$17.9 million.
The FHLBs are required to provide funds for 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 FHLBs imposing a higher rate of interest on
advances to their members. For the three months ended March 31, 1998 and 1997
and the years ended December 31, 1997, 1996 and 1995, dividends from the FHLB to
the Bank amounted to $53,000, $57,000, $226,000, $188,000, and $175,000
respectively. If dividends were reduced, the Bank's net interest income would
likely also be reduced. Further, there can be no assurance that the impact of
recent or future legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock the Bank is required to hold.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.4 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
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As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. See
"Regulation--Federal Savings Institution Regulation--QTL Test" for a discussion
of the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, 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 BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation. Previously proposed
legislation would have treated all savings and loan holding companies as bank
holding companies and limit the activities of such companies to those
permissible for bank holding companies. See "Risk Factors--Financial Institution
Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies 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, except: (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.
FEDERAL SECURITIES LAWS
The Company has filed with the Commission a registration statement on Form
S-1 under the Securities Act for the registration of the Common Stock and the
Capital Securities to be issued in the Offering. Upon the effectiveness of the
Offering, the Company's Common Stock and Capital Securities will be registered
with the Commission under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company will then be subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock and the Capital Securities to be issued in the
Offering does not cover the resale of such shares. Shares of the Common Stock
and/or Capital Securities purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks revision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
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<PAGE>
THE BOARD OF DIRECTORS AND
MANAGEMENT OF THE COMPANY
The following table sets forth certain information regarding executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH COMPANY
- ------------------------------------------ ----------- ------------------------------------------
<S> <C> <C>
John G. Yedinak........................... 48 Director, Chairman of the Board, President
and Chief Executive Officer
Sergio Martinucci......................... 63 Director, Vice President
Frances M. Pitts.......................... 38 Director, Executive Vice President and
Secretary
Donald G. Wittmer......................... 62 Director
Arthur E. Byrnes.......................... 53 Director
George L. Koehm........................... 35 Interim Chief Financial Officer
</TABLE>
- ------------------------
(1) As of March 31, 1998
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Mr. Wittmer, has a term of office expiring at the 1999 annual
meeting of stockholders; a second class, consisting of Ms. Pitts and Mr. Byrnes,
has a term of office expiring at the 2000 annual meeting of stockholders; and a
third class consisting of Messrs. Martinucci and Yedinak, has a term of office
expiring at the 2001 annual meeting of stockholders.
During the term of the Stockholder Agreement with Deltec, and for so long as
Deltec holds at least 15% of the Company's Common Stock, Deltec has the right to
nominate one director to the Company's Board of Directors. The Stockholder
Agreement also grants Deltec registration rights in respect of any shares of
Common Stock that Deltec decides to sell. Furthermore, John G. Yedinak, the
President and Chief Executive Officer of the Company has agreed that, during
this time period, he will vote all shares of the Company's Common Stock owned by
him for the nominee designated by Deltec. Finally, during the term of the
Stockholder Agreement, Deltec has agreed to remain in compliance with the
Rebuttal Agreement between Deltec and the OTS. See "Stockholder Agreement."
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors of the Company met on a monthly basis during the year
ended December 31, 1997. No directors attended fewer than 75% of the total
number of Board and Committee meetings held during this period. The Board of
Directors of the Company maintains committees, the nature and composition of
which are described below:
EXECUTIVE COMMITTEE. The Executive Committee of the Company consists of
Messrs. Yedinak, Wittmer and Martinucci. This committee exercises the authority
of the Board of Directors with respect to matters requiring action between
meetings of the Board of Directors. Any actions by this committee require
subsequent ratification by the Board of Directors at the next regular meeting.
This committee meets as needed between regular meetings of the Board. The
Executive Committee met 12 times in 1997.
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<PAGE>
AUDIT COMMITTEE. The Audit Committee of the Company consists of Messrs.
Wittmer, Byrnes and Yedinak. The Audit Committee met 12 times in 1997.
NOMINATING COMMITTEE. The Company's Nominating Committee for the 1998
Annual Meeting of Stockholders consisted of the entire Board of Directors. The
Nominating Committee considers and recommends the nominees for director to stand
for election at the Company's annual meeting of stockholders. The Company's
Bylaws provide for stockholder nominations of directors. These provisions
require such nominations to be made pursuant to timely notice in writing to the
Secretary of the Company. The stockholder's notice of nomination must contain
all information relating to the nominee which is required to be disclosed by the
Company's bylaws and by the Exchange Act. The Nominating Committee last met on
February 11, 1998.
DIRECTORS' COMPENSATION
DIRECTORS' FEES. Directors of the Company are paid $700 monthly for
attendance at meetings and for services rendered to the Company. Directors of
the Bank are paid $700 for attendance at monthly meetings of the Board, and are
also compensated for service to and attendance at meetings of the committees of
the Board on which they serve at the rate of $400 ($450 for the Chairman) for
each committee meeting. The Chairman of each Board and each committee is
compensated at a higher rate for attendance at monthly meetings and for duties
performed during the month and the Secretary of the Board and of each committee
also receives compensation for services, at the rate of $400 each meeting.
Directors of On-Line are paid $700 for attendance at meetings of the Board.
1998 INCENTIVE STOCK OPTION PLAN. Each member of the Board of Directors who
is not an officer or employee of the Bank or the Company, is eligible to receive
non-statutory stock options to purchase shares of Common Stock under the
Company's 1998 Incentive Stock Option Plan ("Incentive Stock Option Plan"). As
of the Record Date no options had been granted under the Incentive Stock Option
Plan.
97
<PAGE>
THE BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
POSITIONS HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK SINCE EXPIRES
- ------------------------------------------ ----------- ------------------------------------------ ----------- -----------
<S> <C> <C> <C> <C>
Sergio Martinucci......................... 63 Chairman of the Board 1987 1999
John G. Yedinak........................... 48 Director, President and Chief Executive
Officer 1987 1999
Richard B. Duffner........................ 63 Director 1987 2001
Emil T. Sergo............................. 72 Director 1988 2001
Dennis G. Carroll......................... 48 Director 1990 1999
Raymond E. Froula......................... 72 Director 1991 2000
Mary Ann Gearhart......................... 47 Director 1991 2000
</TABLE>
- ------------------------
(1) As of March 31, 1998.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION HELD WITH THE BANK
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
Frances M. Pitts.................................... 38 Senior Vice President, General Counsel and Secretary
George L. Koehm..................................... 35 Senior Vice President and Chief Operating Officer
</TABLE>
- ------------------------
(1) As of March 31, 1998.
BIOGRAPHICAL INFORMATION
Presented below is biographical information regarding directors and
executive officers of the Company and directors and executive officers of the
Bank who are not also directors and executive officers of the Company.
JOHN G. YEDINAK has served as the Chairman of the Board, President and
Chief Executive Officer of the Company. Mr. Yedinak also serves as the President
and Chief Executive Officer and Director of the Bank and the Chairman of the
Board and Chief Executive Officer of On-Line. He received a B.S. from Northern
Illinois University and his Master of Business from Governor's State University.
Mr. Yedinak was previously President of Summit Financial Services, Inc.,
City-Wide Collection Company, Inc., and Assistant Secretary and Systems Manager
of Talman Federal Savings and Loan Association.
SERGIO MARTINUCCI has served as a Director and Vice President of the
Company since 1987. Mr. Martinucci also serves as the Chairman of the Board of
the Bank and is a Director of On-Line. Mr. Martinucci is President of Coldwell
Banker-Stanmeyer Realtors. He received his B.A. and Masters in Education from
Roosevelt University, Chicago, Illinois. Previously, Mr. Martinucci was a
college professor.
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<PAGE>
FRANCES M. PITTS has served as a Director of the Company since 1992 and as
Executive Vice President and Secretary of the Company since 1994. Ms. Pitts also
serves as Senior Vice President, General Counsel and Secretary of the Bank and
Senior Vice President and Secretary of On-Line. She received her B.A. from
Marquette University and her J.D. from Valparaiso University School of Law. Ms.
Pitts was previously in private practice representing financial institutions.
RICHARD B. DUFFNER has served as a Director of the Bank since 1987. He
received his B.S.C. in accounting and M.B.A. from Loyola University. Mr. Duffner
has served as Assistant Treasurer and Director of Cash Management at Commerce
Clearing House, Inc. and also served as Vice President, Branch Operations of
Talman Federal Savings. Mr. Duffner is also President of R.B.D. & Associates,
Ltd, a real estate appraisal firm.
DONALD G. WITTMER has served as Director of the Company since 1992 and also
serves as a Director of On-Line. He received his B.S. in Accounting from
Fairleigh Dickinson University and his MBA in Finance from Loyola University in
Chicago. Previously he served as Vice President, Controller for Quaker Oats
Company. Currently, Mr. Wittmer is an owner and President of Wittmer Management
Corporation and Wittmer Financial Services, Ltd. Mr. Wittmer is a Certified
Public Accountant.
ARTHUR E. BYRNES has served as a Director of the Company since 1997. Mr.
Byrnes is Chairman of the Deltec Asset Management Corporation, a wholly owned
subsidiary of Deltec, and a Director of Deltec International S.A., the parent
holding company of Deltec. He received his B.A. from Harvard University and his
M.B.A. from Stanford University. Mr. Byrnes is also a Director at Dravo
Corporation and Home Federal Financial Corporation.
EMIL T. SERGO has served as a Director of the Bank since 1988. He is the
Mayor of McCook, Illinois. Currently, Mr. Sergo is a member and past President
of the Lyons Township Democratic Organization.
DENNIS G. CARROLL has served as a Director of the Bank since 1990. He is a
detective with the City of Chicago Police Department. He received his B.S. from
St. Joseph College and his Masters in Public Administration from Illinois
Institute of Technology. Mr. Carroll was previously associated with the Chicago
City Bank. He is a Certified Residential Appraiser. Currently, he also is a
consultant for Midwest Appraisals, Ltd.
RAYMOND E. FROULA has served as a Director of the Bank since 1991. He is
currently retired, but was previously a Senior Vice President in charge of
appraisal services for Bell Federal Savings in Chicago, Illinois. Mr. Froula was
a past President of Illinois Chapter #6 of the American Institute of Real Estate
Appraisers and of the Society of Real Estate Appraisers Market Data Center.
MARY ANN GEARHART has served as a Director of the Bank since 1991. Ms.
Gearhart received her B.S. and M.A. in Education from Illinois State University.
Previously, she was an owner of Deer Creek Cooperative Preschool and was a
special education teacher. Currently, she also serves as Executive Chairperson
of the Will County Board of Commissioners and a Supervisor in Crete Township.
GEORGE L. KOEHM joined the Bank in October 1997 as Senior Vice President
and Chief Operating Officer and was appointed Interim Chief Financial Officer of
the Company in July 1998. From August 1989 until August 1997, Mr. Koehm was Vice
President and Treasurer of Community Bank, a Federal Savings Bank located in
Michigan City, Indiana and served as Vice President and Chief Financial Officer
of its parent company, CB Bancorp, Inc.
Presented below is biographical information regarding certain executive
officers of the Company's subsidiaries other than the Bank.
COLLEEN A. KITCH joined On-Line in May 1996 as Director of Information
Systems Integration and was promoted to Senior Vice President and Chief
Operating Officer in October 1996. Prior to joining On-
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<PAGE>
Line, Ms. Kitch worked for KPMG Peat Marwick LLP's financial audit division and
Information Risk Management/Information Systems consulting division. Ms. Kitch
graduated from the University of Notre Dame with a Bachelor of Business
Administration in Accountancy and a Bachelor of Arts degree in Computer
Applications. Ms. Kitch is also a Certified Public Accountant and Certified
Systems Auditor.
JOSEPH C. ("TUCK") MARSHALL, has served as the President for MARGO since
its inception in May 1996. Mr. Marshall has an extensive background in mortgage
brokerage and mortgage financing. He is responsible for the marketing direction
and efforts of MARGO. In addition, Mr. Marshall is the current President of the
National Association of Mortgage Brokers which represents approximately 8,000
mortgage brokers across the country.
RALPH E. ROSYNEK, JR., has served as the Executive Vice President and Chief
Operating Officer of MARGO since its inception in May, 1996. From 1993-1996, Mr.
Rosynek was President of Shoreline Bancorp, Inc., a privately held mortgage
banking firm. . Mr. Rosynek is responsible for all operations of MARGO, assisted
by a staff of 14 and has a 22 year background in banking, mortgage banking and
mortgage brokerage. In addition, Mr. Rosynek is currently the Treasurer of the
National Association of Mortgage Brokers Educational Foundation and holds the
national designation of Senior Mortgage Consultant.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. During the year
ended December 31, 1997, the Board of Directors met 12 times. No director
attended fewer than 75% of the total number of Board and committee meetings held
during this period.
The Board of Directors of the Bank has established the following Board and
management committees:
The Audit Committee consists of Messrs. Carroll and Duffner and Mmes.
Gearhart and Pitts. The Bank's outsourced internal audit function reports to
this Committee. The purpose of this Committee is to review the audit report and
to suggest management actions regarding the implementation of audit findings.
The Committee also maintains a liaison with the outside auditors and reviews the
adequacy of internal controls. The Committee meets monthly.
The Loan Committee consists of Messrs. Yedinak, Carroll, Duffner, Froula,
Koehm, Rosynek and Ms. Pitts. This Committee exercises the authority of the
Board pertaining to loan matters and approves or rejects all loans presented by
management. This Committee also reviews the workout solutions of problem loans,
and approves the classification of assets and the establishment of adequate
valuation allowances. The Committee meets monthly.
The Executive Committee consists of Messrs. Yedinak, Martinucci, Carroll and
Duffner. This committee exercises the authority of the Board of Directors with
respect to matters requiring action between meetings of the Board of Directors.
Any actions by this committee require subsequent ratification by the Board of
Directors at the next regular meeting. The Executive Committee meets as needed;
in the year ended December 31, 1997 it met 12 times.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table shows for the fiscal years
ending December 31, 1997, 1996 and 1995, the cash compensation paid by the
Company and its subsidiaries, the Bank and On-Line, as well as certain other
compensation paid or accrued for those years, to the Chief Executive Officer and
to the other executive officers of the Company who received total salary and
bonus in excess of $100,000 in 1997 (the "Named Executive Officers").
100
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION
----------------------------------- AWARDS
OTHER ---------------------------- PAYOUTS
ANNUAL RESTRICTED SECURITIES -----------
NAME AND COMPEN- STOCK UNDERLYING LTIP
PRINCIPAL SALARY BONUS SATION AWARD(S) OPTIONS/ PAYOUTS
OFFICER YEAR ($)(1)(2) ($)(3) ($)(4) ($) SARS(#) ($)(5)
- ---------------------------------- --------- ---------- ---------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John G. Yedinak................... 1997 $ 359,804 $ 176,000 $ -- $ -- -- -- -- None
President and Chief Executive 1996 320,336 200,998 -- -- None
Officer of the Company and 1995 299,149 125,434 -- 13,755 None
President and Chief Executive
Officer of the Savings Bank
Frances M. Pitts.................. 1997 144,615 $ 70,500 $ -- $ -- -- -- -- None
Executive Vice President and 1996 126,368 82,989 -- -- None
Secretary of the Company and 1995 117,034 46,201 -- 5,000 None
Senior Vice President, General
Counsel and Secretary of the
Saving Bank
<CAPTION>
ALL OTHER
NAME AND COMPEN-
PRINCIPAL SATION
OFFICER ($)
- ---------------------------------- -----------
<S> <C>
John G. Yedinak................... $ 24,816(6)
President and Chief Executive 58,451
Officer of the Company and 23,369
President and Chief Executive
Officer of the Savings Bank
Frances M. Pitts.................. $ 23,482(6)
Executive Vice President and 21,453
Secretary of the Company and 9,945
Senior Vice President, General
Counsel and Secretary of the
Saving Bank
</TABLE>
- ------------------------
(1) Includes amounts of salary deferred pursuant to the Bank's 401(k) Plan.
Under the plan, participants may elect to have up to the lesser of 12% or
$9,500 of annual compensation deferred for the plan year.
(2) Includes directors' fees received from the Company, the Bank and On-Line
with respect to Mr. Yedinak and directors' fees and Secretary's fees
received from the Company and the Bank with respect to Ms. Pitts.
(3) Includes deferred bonus amounts as described under "--Employment Agreements"
with respect to Mr. Yedinak and Ms. Pitts. Such bonuses were based upon the
financial results of the Company for 1996 and 1995. No bonuses were paid in
1997.
(4) For 1997, 1996 and 1995, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the years; (b)
payments of above market preferential earnings on deferred compensation; (c)
payments of earnings with respect to long term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(5) The Company does not maintain a long-term incentive plan and therefore,
there were no payouts or awards under such plan.
(6) Includes $4,750 contributed by the Bank pursuant to the 401(k) Plan for the
account of each of Mr. Yedinak and Ms. Pitts, for the year ended December
31, 1997. Excludes $82,219, and $10,797 which represents the market value of
premiums paid on supplemental policies covering life (with proceeds to be
paid to the Company and the Bank) and long-term disability for Mr. Yedinak
and Ms. Pitts for the year ended December 31, 1997. Includes $20,066 and
$18,632, the market value of the allocations of shares made under the
Employee Stock Ownership Plan for 1997.
EMPLOYMENT AGREEMENTS. The Company and the Bank (collectively the
"Employer") entered into employment agreements ("Agreements") with each of Mr.
Yedinak and Ms. Pitts (the "Executives"), effective November 1, 1996. The Bank
Agreements provide for a three year term and, commencing on the first
anniversary date and continuing each anniversary date thereafter, the Board of
Directors may extend the Agreements for an additional year so that the remaining
term shall be three years, unless written notice of non-renewal is given by the
Board of Directors after conducting a performance evaluation of the Executives.
The Company Agreements provide for a five year term and shall be extended on a
daily basis unless written notice of non-renewal is given by the Board of the
Company. Under the Agreements with
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<PAGE>
each of the Executives, base compensation of $150,000 and $173,800 with respect
to Mr. Yedinak and $98,000 and $33,415 with respect to Ms. Pitts, will be paid
by each of the Bank and the Company, respectively. The salary amounts under the
Agreements may be increased at the discretion of the Board of Directors, or
authorized committee of the Board, of each of the Company and the Bank. The
salary may not be decreased during the term of the Agreements without the prior
written consent of the executive officer.
Pursuant to the Agreements, in addition to the Executive's base
compensation, an amount equal to 2% for Mr. Yedinak and 1% for Ms. Pitts of
gross profits of each of the Company and Bank shall be credited as additional
compensation to the executive to be paid on the earlier of termination for other
than cause, death or disability, the expiration of the Agreements, or annually
on the anniversary date of the Agreements. The deferred amounts will be
forfeited if the Executive is terminated prior to the anniversary date of the
Agreements for any reason other than death or disability. The Agreements also
provide for, among other things, participation in stock benefits plans and other
fringe benefits applicable to executive personnel. The Agreements provide for
termination by the Bank or the Company for cause as defined in the Agreements at
any time.
In the event the Bank or the Company chooses to terminate the Executive's
employment for reasons other than for cause, or in the event of the Executive's
resignation from the Bank and the Company upon: (i) termination of employment
other than for disability, retirement or cause or (ii) the Executive's
resignation upon: (a) a failure to re-elect the Executive or his current offices
or failure to nominate or renominate the Executive to the board; (b) a material
demotive change in the Executive's functions, duties or responsibilities; (c) a
relocation of the Executive's principal place of employment by more than 30
miles; (d) a material reduction in benefits or perquisites being provided to the
Executive under the Agreements; (e) liquidation or dissolution of the Bank or
the Company; or (f) a breach of the Agreements by the Bank or the Company, the
Executive or, in the event of death, his beneficiary would be entitled to
receive an amount equal to the base salary increased annually by four percent
(4.0%) due to the Executive for the remaining term of the Agreements and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank or the Company during the remaining term of
the Agreements. The Bank and the Company would also continue and pay for the
Executive's life, health and disability coverage for the remaining term of the
Agreements.
Under the Agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company (as defined in the Agreements), the
Executive or, in the event of the Executive's death, his beneficiary, would be
entitled under the Company Agreements to a severance payment equal to five times
the average of the three preceding taxable years' annual compensation. Under the
Bank Agreements, the Executive would be entitled to a severance payment equal to
three times the Executive's average annual compensation for the five most recent
taxable years. The Bank and the Company would also continue the Executive's
life, health, and disability coverage for sixty months. Notwithstanding that
both the Bank and the Company Agreements provide for a severance payment in the
event of a change in control, the Executive would only be entitled to receive a
severance payment under one agreement. Any excise taxes due as a result of an
"excess parachute payment" under the Company Agreements will be reimbursed under
the Agreements. Based solely on the compensation reported in the Summary
Compensation Table for 1997 and excluding any benefits under any employee plan
which may be payable, following a change in control and termination of
employment, Mr. Yedinak and Ms. Pitts would be entitled to severance payments of
approximately $2,469,535 and $980,035, respectively.
Payments to the Executives under the Bank Agreements will be guaranteed by
the Company in the event that payments or benefits are not paid by the Bank.
Payment under the Company Agreements would be made by the Company. The
Agreements also provide that the Bank and Company shall indemnify the Executive
to the fullest extent allowable under federal and Delaware law, respectively.
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<PAGE>
MANAGEMENT RECOGNITION PLAN AND TRUST. The Management Recognition and
Retention Plan (the "MRP") provides stock awards to officers and key employees.
Awards made after June 1, 1995 are subject to performance goals and vest at a
rate of 16.66% on the last day of each six month period following the date of
grant. Awards made prior to June 1, 1995 are not subject to performance goals
and vest at a rate of 33 1/3% per year commencing on the date of grant. As of
March 31, 1998, 3250 shares have been granted pursuant to the MRP and remain
unvested and 23,652 shares remain available for grant.
STOCK OPTION PLANS. On May 20, 1998 the Stockholders of the Company
approved the Incentive Stock Option Plan. The Incentive Stock Option Plan
provides for discretionary awards of options to purchase Common Stock to
officers and key employees as determined by a committee of disinterested
directors. As of March 31, 1998 no options had been granted under the Incentive
Stock Option Plan. All outstanding options to purchase common stock held by
employees were granted under the Argo Bancorp, Inc. 1991 Employee Stock Option
and Incentive Plan (the "1991 Stock Option Plan"). The following table provides
certain information with respect to option exercises in the previous fiscal year
by Named Executive Officers and the number of shares of Common Stock represented
by outstanding stock options held by the Named Executive Officers as of December
31, 1997. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the year-end price of the Common Stock. As of March 31, 1998,
400,000 options to purchase shares of Common Stock are available for grant (all
under the Incentive Stock Option Plan) and 381,808 options to purchase Common
Stock have been granted and are outstanding.
103
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS/SARS
AT FISCAL YEAR END AT FISCAL YEAR END
SHARES (#)(1)(2)(3)(4) ($)(5)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ------------- ------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John G. Yedinak....................... 95988 $ 271,365 95,984(6) -- $ 449,325 --
Frances M. Pitts...................... -- -- 54,000(7) -- 265,687 --
</TABLE>
- ------------------------
(1) All options become 100% exercisable upon death, disability, retirement or a
change in control, as defined generally under the 1991 Stock Option Plan. In
addition, vesting of non-statutory options may be accelerated by a committee
consisting of outside directors.
(2) The purchase price may be made in whole or in part through the surrender of
previously held shares of Common Stock.
(3) Under limited circumstances, such as death, disability or normal retirement
of an employee, the employee (or his beneficiary) may request that the
Company, in exchange for the employee's surrender of an option, pay to the
employee (or beneficiary) the amount by which the fair market value of the
Common Stock exceeds the exercise price of the option on the date of the
employee's termination of employment. It is within the Company's discretion
to accept or reject such as request.
(4) Options are subject to limited (SAR) rights pursuant to which the options,
to the extent outstanding for at least six months, may be exercised in the
event of a change in control of the Company. Upon the exercise of a limited
right, the option holder would receive a cash payment equal to the
difference between the exercise price of the related option on the date of
grant and the fair market value of the underlying shares of Common stock on
the date the limited right is exercised.
(5) The price of the Common Stock on December 31, 1997 was $8.53.
(6) The exercise price for 95,984 options is $3.85. The exercise price includes
a 10% premium applicable to controlling shareholders.
(7) The exercise price for 50,000 options is $3.50 and the exercise price for
4,000 options is $5.00.
INDEBTEDNESS OF MANAGEMENT AND TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Bank has adopted a policy which requires that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features.
BENEFICIAL OWNERSHIP
At March 31, 1998, the Company had 1,990,576 shares of Common Stock
outstanding. The following table sets forth, as of , on an historical
and on a pro forma basis, giving effect to the sale of shares in the
Offering, certain information as to those persons who were known by management
to be beneficial owners of more than 5% of the Company's outstanding shares of
Common Stock, each
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director, each Named Executive Officer and the shares of Common Stock
beneficially owned by all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERINGS AFTER OFFERINGS
NAME AND ADDRESS ----------------------- -----------------------
OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- --------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
The Deltec Banking Corporation, Limited........................
Deltec House
Lyford Cay
Nassau, Bahamas 497,644 25.00%
John G. Yedinak................................................ 979,048(2) 46.92%
Sergio Martinucci.............................................. 275,676(3) 13.50%
Frances M. Pitts............................................... 107,352(2) 5.25%
Donald G. Wittmer.............................................. 28,004(3) 1.39%
Arthur E. Byrnes............................................... 497,644(4) 25.00%
All executive officers and directors as a group
(9 persons).................................................... 1,894,028(5) 85.99%
</TABLE>
- ------------------------
(1) Each person or relative of such person whose shares are included herein,
exercises sole (or shared with spouse, relative or affiliate) voting or
dispositive power as to the shares reported.
(2) Includes 95,987 and 54,000 shares subject to options which are currently
exercisable and which may be acquired by Mr. Yedinak and Ms. Pitts,
respectively.
(3) Includes 38,000 and 24,000 shares subject to options which are currently
exercisable and may be acquired by Mr. Martinucci and Mr. Wittmer,
respectively.
(4) Shares owned by Deltec attributable to Mr. Byrnes.
(5) Includes 211,984 shares subject to options which are currently exercisable
and 960 shares allocated to executive officers but not yet vested under the
Company's MRP.
ARGO CAPITAL TRUST CO.
The Trust is a statutory business trust formed under Delaware law upon the
filing of a certificate of trust with the Delaware Secretary of State. The Trust
exists for the exclusive purposes of: (i) issuing and selling the Trust
Securities; (ii) using the proceeds from the sale of Trust Securities to acquire
the Junior Subordinated Debentures; and (iii) engaging in only those other
activities necessary, advisable or incidental thereto. The Junior Subordinated
Debentures will be the sole assets of the Trust, and accordingly, payments under
the Junior Subordinated Debentures will be the sole revenues of the Trust. All
of the Common Securities will be owned by the Company. The Common Securities
will rank PARI PASSU, and payments will be made thereon PRO RATA, with the
Capital Securities, except that upon the occurrence and continuance of an event
of default under the Trust Agreement resulting from a Debenture Event of
Default, the rights of the Company as holder of the Common Securities to
payments in respect of Distributions and payments upon liquidation, redemption
or otherwise will be subordinated to the rights of the holders of the Capital
Securities. See "Description of Capital Securities--Subordination of Common
Securities." The Company will acquire Common Securities in a Liquidation Amount
equal to at least 3% of the total capital of the Trust. The Trust has a term of
31 years, but may be dissolved earlier as provided in the Trust Agreement. The
Trust's business and affairs are conducted by the Issuer Trustees, each
appointed by the Company as holder of the Common Securities. The Issuer Trustee
for the Trust will be
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as the Property Trustee, , as Delaware Trustee, and 3
Administrative Trustees who are officers of the Company. , as
Property Trustee, will act as sole indenture trustee under the Trust Agreement.
See "Description of Guarantee" and "Description of Junior Subordinated
Debentures." The holder of the Common Securities of the Trust or, if an Event of
Default under the Trust Agreement has occurred and is continuing, the holders of
a majority in Liquidation Amount of the Capital Securities will be entitled to
appoint, remove or replace the Property Trustee and/or the Delaware Trustee. In
no event will the holders of the Capital Securities have the right to vote to
appoint, remove or replace the Administrative Trustees; such voting rights will
be vested exclusively in the holder of the Common Securities. The duties and
obligations of each Issuer Trustee are governed by the Trust Agreement. The
Company, as issuer of the Junior Subordinated Debentures, will pay all fees,
expenses, debts and obligations (other than the payment of principal, interest
and premium, if any, on the Trust Securities) related to the Trust and the
offering of the Capital Securities and will pay, directly or indirectly, all
ongoing costs, expenses and liabilities of the Trust. The principal executive
office of the Trust is 7600 West 63rd Street, Summit, Illinois 60501.
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DESCRIPTION OF CAPITAL SECURITIES
DESCRIPTION OF CAPITAL SECURITIES
The Capital Securities will represent beneficial interests in the Trust and
the holders thereof will be entitled to a preference over the Common Securities
in certain circumstances with respect to Distributions and amounts payable on
redemption of the Trust Securities or liquidation of the Trust. See
"--Subordination of Common Securities." The Trust Agreement will be qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
This summary of certain provisions of the Capital Securities, the Common
Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Trust Agreement, including the definitions therein of certain terms.
GENERAL
The aggregate Liquidation Amount of Capital Securities at any one time
outstanding shall be limited to the aggregate Liquidation Amount of Capital
Securities issued in the Offering. The Capital Securities will rank PARI PASSU,
and payments will be made thereon PRO RATA, with the Common Securities except as
described under "--Subordination of Common Securities." Legal title to the
Junior Subordinated Debentures will be held by the Property Trustee in trust for
the benefit of the holders of the Trust Securities. The Guarantee will not
guarantee payment of Distributions or amounts payable on redemption of the
Capital Securities or liquidation of the Trust when the Trust does not have
funds on hand legally available for such payments. See "Description of
Guarantee."
DISTRIBUTIONS
Distributions on the Capital Securities will be cumulative, will accumulate
from the Issue Date, and will be payable quarterly in arrears on April 15th,
July 15th, October 15th and January 15th of each year, commencing on , at
the annual rate of % of the Liquidation Amount to the holders of the Capital
Securities on the relevant record dates. The record dates will be the 15th day
of the month in which the relevant Distribution Date (as defined herein) falls.
The amount of Distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months and, for any period of less than a
full calendar month, the number of days elapsed in such month. In the event that
any date on which Distributions are payable on the Capital Securities is not a
Business Day (as defined below), payment of the Distribution payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect to any such delay), except that if such
next succeeding Business Day falls in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). A "Business Day" shall mean any day other than a Saturday or a Sunday,
or a day on which banking institutions in the State of Delaware or Illinois are
authorized or required by law or executive order to remain closed.
So long as no Debenture Event of Default shall have occurred and be
continuing, the Company will have the right under the Indenture to elect to
defer the payment of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided that no Extension Period shall
end on a date other than an Interest Payment Date or extend beyond the Stated
Maturity Date. Upon any such election, quarterly Distributions on the Capital
Securities will be deferred by the Trust during such Extension Period.
Distributions to which holders of the Capital Securities are entitled during any
such Extension Period will accumulate additional Distributions thereon at the
rate per annum of % thereof, compounded quarterly from the relevant
Distribution Date, but not exceeding the interest rate then accruing on the
Junior Subordinated Debentures. The term "Distributions," as used herein, shall
include any such additional Distributions.
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Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, to end
on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of any such Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Capital Securities would have been payable except
for the election to begin such Extension Period and (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or automated quotation system or to holders of such Capital Securities of the
record date or the date such Distributions are payable, but in any event not
less than five Business Days prior to such record date. There is no limitation
on the number of times that the Company may elect to begin an Extension Period.
See "Description of Junior Subordinated Debentures--Option to Extend Interest
Payment Date" and "Certain Federal Income Tax Consequences with Respect to the
Capital Securities--Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not: (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock; (ii)
make any payment of principal of or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company (including any Other Debentures) that
rank PARI PASSU with or junior in right of payment to the Junior Subordinated
Debentures; or (iii) make any guarantee payments with respect to any guarantee
by the Company of the debt securities of any subsidiary of the Company
(including Other Guarantees) if such guarantee ranks PARI PASSU with or junior
in right of payment to the Junior Subordinated Debentures (other than (a)
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, the Common Stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged and (f) purchases of Common
Stock related to the issuance of Common Stock or rights under any of the
Company's benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans). The Company has no current intention to
exercise its option to defer payments of interest on the Junior Subordinated
Debentures.
The revenue of the Trust available for distribution to holders of the
Capital Securities will be limited to payments under the Junior Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. See "Description of Junior Subordinated
Debentures-- General." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Capital Securities. The payment of
Distributions (if and to the extent the Trust has funds on hand legally
available for the payment of such Distributions) will be guaranteed by the
Company on a limited basis as set forth herein under "Description of Guarantee."
REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment in whole or in
part prior to the Stated Maturity Date of the Junior Subordinated Debentures
(other than following the distribution of the Junior Subordinated Debentures to
the holders of the Trust Securities), the proceeds from such repayment or
prepayment shall be applied by the Property Trustee to redeem a Like Amount (as
defined below) of
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the Trust Securities, upon not less than 30 nor more than 60 days' notice of a
date of redemption (the "Redemption Date"), at the applicable Redemption Price,
which shall be equal to (i) in the case of the repayment of the Junior
Subordinated Debentures on the Stated Maturity Date, the Maturity Redemption
Price (equal to the principal of, and accrued and unpaid interest on, the Junior
Subordinated Debentures), (ii) in the case of the optional prepayment of the
Junior Subordinated Debentures before the Initial Optional Prepayment Dates upon
the occurrence and continuation of a Special Event, the Special Event Redemption
Price (equal to the Special Event Prepayment Price in respect of the Junior
Subordinated Debentures) and (iii) in the case of the optional prepayment of the
Junior Subordinated Debentures on or after the Initial Optional Prepayment Date,
the Optional Redemption Price (equal to the principal of, and accrued and unpaid
interest on, the Junior Subordinated Debentures). See "Description of Junior
Subordinated Debentures--Optional Prepayment" and "--Special Event Prepayment."
If less than all of the Junior Subordinated Debentures are to be prepaid on a
Redemption Date, then the proceeds of such prepayment shall be allocated PRO
RATA to the Trust Securities.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Junior Subordinated Debentures to be paid in accordance with their
terms and (ii) with respect to a distribution of Junior Subordinated Debentures
upon the liquidation of the Trust, Junior Subordinated Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Junior Subordinated Debentures are distributed.
The Company will have the option to prepay the Junior Subordinated
Debentures, (i) in whole or in part, on or after the Initial Optional Prepayment
Date, at the Optional Prepayment Price and (ii) in whole but not in part, at any
time prior to the Initial Optional Prepayment Date, upon the occurrence of a
Special Event, at the Special Event Prepayment Price, in each case subject to
the receipt of any required regulatory approval. See "Description of Junior
Subordinated Debentures--Optional Prepayment" and "--Special Event Prepayment."
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Company will have the right at any time to terminate the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to: (i) the Company having received an opinion of counsel to the effect
that such distribution will not be a taxable event to holders of Capital
Securities; and (ii) the receipt of any required regulatory approval.
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Company; (ii)
the distribution of a Like Amount of the Junior Subordinated Debentures to the
holders of the Trust Securities, if the Company, as Sponsor, has given written
direction to the Property Trustee to terminate the Trust (which direction is
optional and, except as described above, wholly within the discretion of the
Company, as Sponsor); (iii) redemption of all of the Trust Securities as
described under "--Redemption;" (iv) expiration of the term of the Trust; and
(v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If a termination occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practicable, in which event such holders will be entitled to receive out
of the assets of the Trust legally available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the aggregate of the Liquidation Amount plus accumulated
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust has
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insufficient assets on hand legally available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Trust Securities shall be paid on a PRO RATA basis, except that if a Debenture
Event of Default has occurred and is continuing, the Capital Securities shall
have a priority over the Common Securities. See "--Subordination of Common
Securities."
If the Company elects not to prepay the Junior Subordinated Debentures prior
to maturity in accordance with their terms and either elects not to or is unable
to liquidate the Trust and distribute the Junior Subordinated Debentures to
holders of the Trust Securities, the Trust Securities will remain outstanding
until the repayment of the Junior Subordinated Debentures on the Stated Maturity
Date.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities, (i) the Trust
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee
will receive, in respect of each registered global certificate, if any,
representing Trust Securities and held by it, a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution and (iii) any certificates representing Trust Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of such
Trust Securities, and bearing accrued and unpaid interest in an amount equal to
the accumulated and unpaid Distributions on such Trust Securities until such
certificates are presented to the Administrative Trustees or their agent for
cancellation, whereupon the Company will issue to such holder, and the Debenture
Trustee will authenticate, a certificate representing such Junior Subordinated
Debentures.
There can be no assurance as to the market prices for the Capital Securities
or the Junior Subordinated Debentures that may be distributed in exchange for
the Trust Securities if a dissolution and liquidation of the Trust were to
occur. Accordingly, the Capital Securities that an investor may purchase, or the
Junior Subordinated Debentures that the investor may receive on dissolution and
liquidation of the Trust, may trade at a discount to the price that the investor
paid to purchase the Capital Securities offered hereby.
REDEMPTION PROCEDURES
If applicable, Trust Securities shall be redeemed at the applicable
Redemption Price with the proceeds from the contemporaneous repayment or
prepayment of the Junior Subordinated Debentures. Any redemption of Trust
Securities shall be made and the applicable Redemption Price shall be payable on
the Redemption Date only to the extent that the Trust has funds legally
available for the payment of such applicable Redemption Price. See also
"--Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are legally available, with respect to the Capital Securities
held by DTC or its nominees, the Property Trustee will deposit or cause the
Paying Agent (as defined herein) to deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price. See "--Form, Denomination,
Book-Entry Procedures and Transfer." With respect to the Capital Securities held
in certificated form, the Property Trustee, to the extent funds are legally
available, will irrevocably deposit with the paying agent for the Capital
Securities funds sufficient to pay the applicable Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the applicable
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the Capital Securities. See "--Payment and Paying Agency."
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date shall be payable to the holders of such Capital Securities on
the relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Capital Securities called
for redemption will cease, except the right of the holders of such Capital
Securities to receive the applicable Redemption Price, but without interest on
such Redemption Price, and such Capital Securities will cease to be outstanding.
In the event that any Redemption Date of Capital Securities is not a
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Business Day, then the applicable Redemption Price payable on such date will be
paid on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay), except that, if such next
succeeding Business Day falls in the next calendar year, such payment shall be
made on the immediately preceding Business Day. In the event that payment of the
applicable Redemption Price is improperly withheld or refused and not paid
either by the Trust or by the Company pursuant to the Guarantee as described
under "Description of Guarantee," (i) Distributions on Capital Securities will
continue to accumulate at the then applicable rate, from the Redemption Date
originally established by the Trust to the date such applicable Redemption Price
is actually paid and (ii) the actual payment date will be the Redemption Date
for purposes of calculating the applicable Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement.
Notice of any redemption will be mailed at least 30 days but not more than
60 days prior to the Redemption Date to each holder of Trust Securities at its
registered address. Unless the Company defaults in payment of the applicable
Redemption Price on, or in the repayment of, the Junior Subordinated Debentures,
on and after the Redemption Date, Distributions will cease to accrue on the
Trust Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made PRO RATA based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Capital Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the applicable
Redemption Price the full amount of such Redemption Price, shall have been made
or provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Capital Securities then due and payable.
In the case of any Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to such
Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Capital Securities and not on behalf of the
Company as holder of the Common Securities, and only the holders of the Capital
Securities will have the right to direct the Property Trustee to act on their
behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default (see "Description of Junior
Subordinated Debentures-- Debenture Events of Default") constitutes an "Event of
Default" under the Trust Agreement.
Within ten Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Company, as Sponsor, unless such Event of
Default shall have been cured or waived. The Company, as Sponsor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
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If a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a preference over the Common Securities as described under
"--Liquidation of the Trust and Distribution of Junior Subordinated Debentures"
and "--Subordination of Common Securities."
REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time by the
holders of a majority in Liquidation Amount of the outstanding Capital
Securities. In no event will the holders of the Capital Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which
voting rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of an Issuer Trustee and no appointment of
a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any Person succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Issuer Trustee under the
Trust Agreement, provided such Person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described below or as otherwise described under "--Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." The Trust may, at the
request of the Company, as Sponsor, with the consent of the Administrative
Trustees but without the consent of the holders of the Capital Securities, merge
with or into, consolidate, amalgamate, or be replaced by or convey, transfer or
lease its properties and assets as an entirety or substantially as an entirety
to a trust organized as such under the laws of any State; provided, that: (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Trust Securities or (b) substitutes for the Trust
Securities other securities having substantially the same terms as the Trust
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Trust Securities rank in priority with respect to distributions
and payments upon liquidation, redemption and otherwise; (ii) the Company
expressly appoints a trustee of such successor entity possessing the same powers
and duties as the Property Trustee with respect to the Junior Subordinated
Debentures; (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Securities are then
listed or quoted, if any; (iv) if the Capital Securities (including any
Successor Securities) are rated by any nationally recognized statistical rating
organization prior to such transaction, such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Capital Securities (including any Successor Securities) or, if the Junior
Subordinated Debentures are so rated, the Junior Subordinated Debentures, to be
downgraded by any such nationally recognized statistical rating organization;
(v) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect; (vi) such successor entity has a purpose identical to that of
the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Company has received an opinion from
independent counsel to the Trust
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experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Securities (including any Successor Securities) in any material respect (other
than any dilution of such holders' interests in the new entity), and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust nor such successor entity will be required
to register as an investment company under the Investment Company Act of 1940,
as amended (the "Investment Company Act"); and (viii) the Company or any
permitted successor or assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee and
the Common Guarantee. Notwithstanding the foregoing, the Trust shall not, except
with the consent of holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity not to be classified as a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "--Mergers, Consolidations, Amalgamations
or Replacements of the Trust" and "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Capital Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities (i) to cure any ambiguity, correct or supplement
any provisions in the Trust Agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to matters or questions
arising under the Trust Agreement, which shall not be inconsistent with the
other provisions of the Trust Agreement, or (ii) to modify, eliminate or add to
any provisions of the Trust Agreement to such extent as shall be necessary to
ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that the Trust will not be required to register as an
"investment company" under the Investment Company Act; provided, however, that
in each such case such action shall not adversely affect in any material respect
the interests of the holders of the Trust Securities. Any amendments of the
Trust Agreement pursuant to the foregoing shall become effective when notice
thereof is given to the holders of the Trust Securities. The Trust Agreement may
be amended by the Issuer Trustees and the Company (i) with the consent of
holders representing a majority (based upon Liquidation Amount) of the
outstanding Trust Securities and (ii) upon receipt by the Issuer Trustees of an
opinion of counsel experienced in such matters to the effect that such amendment
or the exercise of any power granted to the Issuer Trustees in accordance with
such amendment will not affect the Trust's status as a grantor trust for United
States federal income tax purposes or the Trust's exemption from status as an
"investment company" under the Investment Company Act, provided that, without
the consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (i) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date or (ii)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Debenture Trustee with respect to
the Junior Subordinated Debentures, (ii) waive certain past defaults under the
Indenture, (iii) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures or (iv) consent to any amendment, modification or termination of the
Indenture
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or the Junior Subordinated Debentures, where such consent shall be required,
without, in each case, obtaining the prior approval of the holders of a majority
in Liquidation Amount of all outstanding Capital Securities; provided, however,
that where a consent under the Indenture would require the consent of each
holder of Junior Subordinated Debentures affected thereby, no such consent shall
be given by the Property Trustee without the prior approval of each holder of
the Capital Securities. The Issuer Trustees shall not revoke any action
previously authorized or approved by a vote of the holders of the Capital
Securities except by subsequent vote of such holders. The Property Trustee shall
notify each holder of Capital Securities of any notice of default with respect
to the Junior Subordinated Debentures. In addition to obtaining the foregoing
approvals of such holders of the Capital Securities, prior to taking any of the
foregoing actions, the Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust will not be classified
as an association taxable as a corporation for United States federal income tax
purposes on account of such action.
Any required approval of holders of Capital Securities may be given at a
meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote, or of any matter upon which
action by written consent of such holders is to be taken, to be given to each
holder of record of Capital Securities in the manner set forth in the Trust
Agreement.
No vote or consent of the holders of Capital Securities will be required for
the Trust to redeem and cancel the Capital Securities in accordance with the
Trust Agreement.
Notwithstanding that holders of the Capital Securities are entitled to vote
or consent under any of the circumstances described above, any of the Capital
Securities that are owned by the Company, the Issuer Trustees or any affiliate
of the Company or any Issuer Trustees, shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
FORM, DENOMINATIONS, BOOK-ENTRY PROCEDURES AND TRANSFER
The Capital Securities initially will be represented by one or more Capital
Securities in registered, global form (collectively, the "Global Capital
Securities"). The Global Capital Securities will be deposited upon issuance with
the Property Trustee as custodian for DTC, in New York, New York, and registered
in the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Global Capital Securities may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Global Capital Securities may
not be exchanged for Capital Securities in certificated form, except in the
limited circumstances described below. See "--Exchange of Book-Entry Capital
Securities for Certificated Capital Securities."
DEPOSITORY PROCEDURES
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
Indirect access to DTC's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own
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securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Capital Securities, DTC will
credit the accounts of Participants with portions of the Liquidation Amount of
the Global Capital Securities and (ii) ownership of such interests in the Global
Capital Securities will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Capital Securities).
Investors in the Global Capital Securities may hold their interests therein
directly through DTC if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants in
such system. All interest in a Global Capital Security will be subject to the
procedures and requirements of DTC. The laws of some states require that certain
persons take physical delivery in certified form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Capital
Security to such persons will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Capital Security to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the Capital Securities, see "--Exchange of Book-Entry Capital Securities for
Certificated Capital Securities"
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL CAPITAL
SECURITIES WILL NOT HAVE CAPITAL SECURITIES REGISTERED IN THEIR NAME, WILL NOT
RECEIVE PHYSICAL DELIVERY OF CAPITAL SECURITIES IN CERTIFICATED FORM AND WILL
NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE TRUST
AGREEMENT FOR ANY PURPOSE.
Payments in respect of the Global Capital Security registered in the name of
DTC or its nominee will be payable by the Property Trustee to DTC in its
capacity as the registered holder under the Trust Agreement. Under the terms of
the Trust Agreement, the Property Trustee will treat the persons in whose names
the Capital Securities, including the Global Capital Securities, are registered
as the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Property Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Capital Securities, or for maintaining, supervising or reviewing any of
DTC's records or any Participant's or Indirect Participant's records relating to
the beneficial ownership interests in the Global Capital Securities or (ii) any
other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Trust and the Company
that its current practice, upon receipt of any payment in respect of securities
such as the Capital Securities, is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in Liquidation Amount of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Capital
Securities will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Property Trustee, the Trust or the
Company. None of the Trust, the Company or the Property Trustee will be liable
for any delay by DTC or any of its Participants in identifying the beneficial
owners of the Capital Securities, and the Trust or the Company and the Property
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
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Secondary market trading activity in interests in the Global Capital
Securities will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Capital Securities (including, without
limitation, the presentation of Capital Securities for exchange as described
below) only at the direction of one or more Participants to whose account with
DTC interests in the Global Capital Securities are credited and only in respect
of such portion of the Liquidation Amount of the Capital Securities as to which
such Participant or Participants has or have given such direction. However, if
there is an Event of Default under the Trust Agreement, DTC reserves the right
to exchange the Global Capital Securities for legended Capital Securities in
certificated form and to distribute such Capital Securities to its Participants.
The information in this section concerning DTC and its book-entry system has
been obtained from sources that the Trust and the Company believe to be
reliable, but neither the Trust nor the Company takes responsibility for the
accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Capital Securities among Participants in DTC, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Trust, the Company
or the Property Trustee will have any responsibility for the performance by DTC,
or its Participants or Indirect Participants of its obligations under the rules
and procedures governing its operations.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A Global Capital Security is exchangeable for Capital Securities in
registered certificated form if (i) DTC (x) notifies the Trust that it is
unwilling or unable to continue as Depository for the Global Capital Security
and the Trust thereupon fails to appoint a successor Depository within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act,
(ii) the Company in its sole discretion elects to cause the issuance of the
Capital Securities in certificated form or (iii) there shall have occurred and
be continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default under the Trust Agreement. In
addition, beneficial interests in a Global Capital Security may be exchanged by
or on behalf of DTC for certificated Capital Securities upon request by DTC, but
only upon at least 20 days' prior written notice given to the Property Trustee
in accordance with DTC's customary procedures. In all cases, certificated
Capital Securities delivered in exchange for any Global Capital Security or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depository (in
accordance with its customary procedures).
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities held in global form shall be
made to the Depository, which shall credit the relevant accounts at the
Depository on the applicable Distribution Dates, or in respect of the Capital
Securities that are not held by the Depository, such payments shall be made by
check mailed to the address of the holder entitled thereto as such address shall
appear on the register. The paying agent (the "Paying Agent") shall initially be
the Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee, the Administrative Trustees and the Company. In the event that
the Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as Paying
Agent.
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REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required to register or cause to be registered
the transfer of the Capital Securities after they have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of an
Event of Default, undertakes to perform only such duties as are specifically set
forth in the Trust Agreement and, during the existence of an Event of Default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of Trust
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the Trust
Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of the Capital Securities
or the Common Securities are entitled under the Trust Agreement to vote, then
the Property Trustee shall take such action as is directed by the Company and,
if not so directed, shall take such action as it deems advisable and in the best
interests of the holders of the Trust Securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. In this connection, the Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture, as
supplemented from time to time (as so supplemented, the "Indenture"), between
the Company and , as trustee (the "Debenture Trustee"). The Indenture has
been qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to be complete, and
where reference is made to particular provisions of the Indenture, such
provisions, including the definitions of certain terms, some of which are not
otherwise defined herein, are qualified in their entirety by reference to all of
the provisions of the Indenture and the Trust Indenture Act.
GENERAL
Concurrently with the issuance of the Capital Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in Junior Subordinated Debentures issued by the
Company. The Junior Subordinated Debentures will bear interest from the Issue
Date at the annual rate of % of the principal amount thereof, payable
quarterly in arrears on April 15th, July 15th, October 15th, and January 15th of
each year (each, an "Interest Payment Date"), commencing , 1998, to the
person in whose name each Junior Subordinated Debenture is registered, subject
to certain exceptions, at the close of business on the 15th day of the month in
which the relevant payment date falls. It is anticipated that, until the
liquidation, if any, of the Trust, each Junior Subordinated Debenture will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Trust Securities. The amount of interest payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months and, for any
period of less than a full calendar month, the number of days elapsed in such
month. In the event that any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that if such next succeeding Business Day falls in the next succeeding
calendar year, then such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
date. Accrued interest that is not paid on the applicable Interest Payment Date
will bear additional interest on the amount thereof (to the extent permitted by
law) at the rate per annum of % thereof, compounded quarterly. The term
"interest," as used herein, shall include quarterly interest payments, interest
on quarterly interest payments not paid on the applicable Interest Payment Date
and Additional Sums (as defined below), as applicable. The Junior Subordinated
Debentures will mature on , 2028 (the "Stated Maturity Date").
The Junior Subordinated Debentures will rank PARI PASSU with all Other
Debentures and will be unsecured and will rank subordinate and junior in right
of payment to all Senior Indebtedness to the extent and in the manner set forth
in the Indenture. See "--Subordination."
The Company is a holding company and almost all of the operating assets of
the Company are owned by the Company's subsidiaries. The Company is a legal
entity separate and distinct from its subsidiaries. Holders of Junior
Subordinated Debentures should look only to the Company for payments on the
Junior Subordinated Debentures. The principal sources of the Company's income
are dividends, interest and fees from its subsidiaries. The Company relies
primarily on dividends from its subsidiaries to meet its obligations for payment
of principal and interest on its outstanding debt obligations and corporate
expenses. There are regulatory limitations on the payment of dividends directly
or indirectly to the Company from the Bank. As of March 31, 1998, under OTS
regulations, the total capital available for payment of dividends by the Bank to
the Company was approximately $ million. However, the OTS has the power
to prohibit any act, including the payment of dividends, if such act would
reduce bank capital to a point that, in its opinion, would render the Bank
undercapitalized and thus constitute an unsafe or unsound banking practice. In
addition, the Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, and certain other transactions with, the Company
and certain other
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affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by various types of collateral. Further,
such secured loans, other transactions and investments by the Bank are generally
limited in amount as to the Company and as to each of such other affiliates to
10% of the Bank's capital and surplus and as to the Company and all of such
other affiliates to an aggregate of 20% of the Bank's capital and surplus.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution),
is subject to the prior claims of creditors of that subsidiary (including
depositors, in the case of the Bank), except to the extent the Company may
itself be recognized as a creditor of that subsidiary. At March 31, 1998, the
subsidiaries of the Company had total liabilities (excluding liabilities owed to
the Company) of $ million. Accordingly, the Junior Subordinated
Debentures will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries (including the Bank's deposit
liabilities) and all liabilities of any future subsidiaries of the Company. The
Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the Company or any subsidiary, including Senior Indebtedness.
See "--Subordination."
FORM, REGISTRATION AND TRANSFER
If the Junior Subordinated Debentures are distributed to the holders of the
Trust Securities, the Junior Subordinated Debentures may be represented by one
or more global certificates registered in the name of Cede & Co. as the nominee
of DTC. The depository arrangements for such Junior Subordinated Debentures are
expected to be substantially similar to those in effect for the Capital
Securities. For a description of DTC and the terms of the depository
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Description of Capital Securities--Form,
Denomination, Book-Entry Procedures and Transfer."
PAYMENT AND PAYING AGENTS
Payment of principal of (and premium, if any) and interest on Junior
Subordinated Debentures will be made at the office of the Debenture Trustee in
or at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time, except that at the option of the Company payment of
any interest may be made, except in the case of Junior Subordinated Debentures
in global form, (i) by check mailed to the address of the Person entitled
thereto as such address shall appear in the register for Junior Subordinated
Debentures or (ii) by transfer to an account maintained by the Person entitled
thereto as specified in such register, provided that proper transfer
instructions have been received by the relevant Record Date. Payment of any
interest on any Junior Subordinated Debenture will be made to the Person in
whose name such Junior Subordinated Debenture is registered at the close of
business on the Record Date for such interest, except in the case of defaulted
interest. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, the Company will at all
times be required to maintain a Paying Agent in each place of payment for the
Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of (and premium,
if any) or interest on any Junior Subordinated Debenture and remaining unclaimed
for two years after such principal (and premium, if any) or interest has become
due and payable shall, at the request of the Company, be repaid to the Company
and the holder of such Junior Subordinated Debenture shall thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
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OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is continuing, the
Company will have the right under the Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time and from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period shall end on a date other
than an Interest Payment Date or extend beyond the Stated Maturity Date. At the
end of such Extension Period, the Company must pay all interest then accrued and
unpaid (together with interest thereon at the annual rate of %, compounded
quarterly to the extent permitted by applicable law ("Compounded Interest")).
During an Extension Period, interest will continue to accrue and, if the Junior
Subordinated Debentures have been distributed to holders of the Trust
Securities, holders of Junior Subordinated Debentures (or holders of the Trust
Securities while Trust Securities are outstanding) will be required to accrue
such deferred interest income for United States federal income tax purposes
prior to the receipt of cash attributable to such income. See "Certain Federal
Income Tax Consequences with Respect to the Capital Securities--Interest Income
and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including any Other
Debentures) that rank PARI PASSU with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company (including any Other Guarantees) if such guarantee ranks PARI PASSU with
or junior in right of payment to the Junior Subordinated Debentures (other than
(a) dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, the Common Stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, and (f) purchases of Common
Stock related to the issuance of Ccommon Sstock or rights under any of the
Company's benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans).
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, the Company may elect to begin a
new Extension Period, subject to the above requirements. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Trust Securities would have been payable except
for the election to begin or extend such Extension Period or (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or to holders of Capital Securities of the Record Date or the date such
Distributions are payable, but in any event not less than five Business Days
prior to such Record Date. The Debenture Trustee shall give notice of the
Company's election to begin or extend a new Extension Period to the holders of
the Capital Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
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OPTIONAL PREPAYMENT
The Junior Subordinated Debentures will be prepayable, in whole or in part,
at the option of the Company on or after the Initial Optional Prepayment Date,
subject to the Company having received any required regulatory approval, at 100%
of the principal amount thereon plus accrued and unpaid interest thereon to the
date of prepayment (the "Optional Prepayment Price").
SPECIAL EVENT PREPAYMENT
If a Special Event shall occur and be continuing prior to the Initial
Optional Prepayment Date, the Company may, at its option and subject to receipt
of any required regulatory approval, prepay the Junior Subordinated Debentures
in whole (but not in part) at any time (i) within 90 days of the occurrence of
such Special Event and (ii) prior to , at a prepayment price (the
"Special Event Prepayment Price") equal to the Make-Whole Amount (as defined
below). The "Make-Whole Amount" shall be equal to the greater of (x) 100% of the
principal amount of the Junior Subordinated Debentures to be prepaid or (y) the
sum, as determined by a Quotation Agent (as defined herein), of the present
values of the scheduled payments of principal and interest on the Junior
Subordinated Debentures from the prepayment date to the Initial Optional
Prepayment Date discounted to the prepayment date on a quarterly basis (assuming
a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury
Rate, plus, in the case of each of clauses (x) and (y), accrued and unpaid
interest thereon to the date of prepayment. If, following the occurrence of a
Special Event, the Company exercises its option to prepay the Junior
Subordinated Debentures, then the proceeds of that prepayment must be applied to
redeem a Like Amount of Trust Securities at the Special Event Redemption Price
(equal to the Special Event Prepayment Price in respect of the Junior
Subordinated Debentures). See "Description of Capital Securities-- Redemption."
A "Special Event" means a Tax Event or a Regulatory Capital Event, as the
case may be.
A "Tax Event" means the receipt by the Company and the Trust of an opinion
of counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws or any regulations thereunder of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the Issue Date, there is
more than an insubstantial risk that: (i) the Trust is, or will be within 90
days of the date of such opinion, subject to United States federal income tax
with respect to income received or accrued on the Junior Subordinated
Debentures; (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes; or (iii) the Trust is, or will be within 90 days of the date of
such opinion, subject to more than a DE MINIMIS amount of other taxes, duties or
other governmental charges.
A "Regulatory Capital Event" means that the Company shall have become, or
pursuant to law or regulation will become within 180 days, subject to capital
requirements under which, in the written opinion of counsel experienced in such
matters, the Capital Securities would not constitute Tier 1 Capital (as that
concept is used in the guidelines or regulations issued by the OTS as of the
date of this Prospectus) , or the then-equivalent of such Tier 1 Capital
(provided, however, that the distribution of the Junior Subordinated Debentures
in connection with the liquidation of the Trust by the Corporation shall not in
and of itself constitute a
Regulatory Capital Event unless such liquidation shall have occurred in
connection with a Tax Event).
"Adjusted Treasury Rate" means, with respect to any prepayment date, the
rate per annum equal to the quarterly equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date plus (i) basis points less than
the difference between the
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coupon of the Capital Securities at pricing and the yield on the U.S.
Treasury Bond due , if such prepayment date occurs prior to and (ii)
basis points less than the difference between the coupon of the Capital
Securities at pricing and the yield on the % U.S. Treasury Bond due
, in all other cases.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the Remaining
Life of the Junior Subordinated Debentures to be prepaid that would be utilized,
at the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
Remaining Life. If no United States Treasury security has a maturity which is
within a period from three months before to three months after the Remaining
Life, the two most closely corresponding United States Treasury securities as
selected by the Quotation Agent shall be used as the Comparable Treasury Issue,
and the Treasury Rate shall be interpolated or extrapolated on a straight-line
basis, rounding to the nearest month.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve Board and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption "Treasury Constant Maturities" for the maturity corresponding
to the Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month), or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the quarterly equivalent
yield to maturity of the Comparable Treasury Issue, calculated equal to the
Comparable Treasury Price for such prepayment date. The Treasury Rate shall be
calculated on the third Business Day preceding the prepayment date.
"Remaining Life" means the term of the Junior Subordinated Debenture from
the Prepayment Date to the Stated Maturity Date.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Company. "Reference Treasury Dealer" means a nationally-recognized U.S.
Government securities dealer in New York City selected by the Company.
"Comparable Treasury Price" means, with respect to any prepayment date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such prepayment date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, (A) the average
of the Reference Treasury Dealer Quotations for such prepayment date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Debenture Trustee obtains fewer than three such Reference Treasury
Dealer Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any prepayment date, the average, as determined by the
Debenture Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such prepayment date.
Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be prepaid at its registered address. Unless the Company defaults
in payment of the prepayment price, on and after the prepayment date interest
ceases to accrue on such Junior Subordinated Debentures called for prepayment.
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If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures such amounts as shall
be necessary in order that the amount of Distributions then due and payable by
the Trust on the outstanding Trust Securities shall not be reduced as a result
of any additional taxes, duties and other governmental charges to which the
Trust has become subject as a result of a Tax Event ("Additional Sums").
CERTAIN COVENANTS OF THE COMPANY
The Company will also covenant that it will not, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay or
repurchase or redeem any debt securities of the Company (including Other
Debentures) that rank PARI PASSU with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company (including under Other Guarantees) if such guarantee ranks PARI PASSU or
junior in right of payment to the Junior Subordinated Debentures (other than (a)
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, Common Stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, and (f) purchases of Common
Stock related to the issuance of Common Stock or rights under any of the
Company's benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans) if at such time (1) there shall have
occurred any event of which the Company has actual knowledge that (a) is, or
with the giving of notice or the lapse of time, or both, would be, a Debenture
Event of Default and (b) in respect of which the Company shall not have taken
reasonable steps to cure, (2) the Company shall be in default with respect to
its payment of any obligations under the Guarantee or (3) the Company shall have
given notice of its election of an Extension Period as provided in the Indenture
and shall not have rescinded such notice, and such Extension Period, or any
extension thereof, shall have commenced and be continuing.
So long as the Trust Securities remain outstanding, the Company also will
covenant: (i) to directly or indirectly maintain 100% direct or indirect
ownership of the Common Securities, provided, however, that any permitted
successor of the Company under the Indenture may succeed to the Company's
ownership of such Common Securities; (ii) to use its reasonable efforts to cause
the Trust (a) to remain a business trust, except in connection with the
distribution of Junior Subordinated Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Trust Agreement, and (b) to otherwise continue to be
classified as a grantor trust for United States federal income tax purposes; and
(iii) to use its reasonable efforts to cause each holder of Trust Securities to
be treated as owning an undivided beneficial interest in the Junior Subordinated
Debentures.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies provided that any such action
does not materially adversely affect the interest of the holders of Junior
Subordinated Debentures), and maintaining the qualification of the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Company and the Debenture Trustee, with the consent of the holders of a
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majority in principal amount of Junior Subordinated Debentures, to modify the
Indenture in a manner affecting the rights of the holders of Junior Subordinated
Debentures; provided that no such modification may, without the consent of the
holders of each outstanding Junior Subordinated Debenture so affected, (i)
change the Stated Maturity Date, or reduce the principal amount of the Junior
Subordinated Debentures or reduce the amount payable on redemption thereof or
reduce the rate or extend the time of payment of interest thereon except
pursuant to the Company's right under the Indenture to defer the payment of
interest as provided therein (see "--Option to Extend Interest Payment Date") or
make the principal of, or interest or premium on, the Junior Subordinated
Debentures payable in any coin or currency other than that provided in the
Junior Subordinated Debentures, or impair or affect the right of any holder of
Junior Subordinated Debentures to institute suit for the payment thereof, or
(ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including Compounded Interest
and Additional Sums, if any) on the Junior Subordinated Debentures or any
Other Debentures, when due (subject to the deferral of any due date in
the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on the Junior
Subordinated Debentures or any Other Debentures when due whether at
maturity, upon redemption, by declaration of acceleration of maturity or
otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of Junior Subordinated Debentures;
or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have, subject to certain exceptions, the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee. The Debenture Trustee or the holders of not
less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal (or premium, if any) on or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest (and premium, if any) and principal due otherwise than by acceleration
has been deposited with the Debenture Trustee) or a default in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each outstanding Junior Subordinated
Debenture.
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The Indenture requires the annual filing by the Company with the Debenture
Trustee of a certificate as to the absence of certain defaults under the
Indenture.
The Indenture provides that the Debenture Trustee may withhold notice of a
Debenture Event of Default from the holders of the Junior Subordinated
Debentures if the Debenture Trustee considers it in the interest of such holders
to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default shall have occurred and be continuing and
shall be attributable to the failure of the Company to pay the principal of (or
premium, if any), or interest (including Compounded Interest and Additional
Sums, if any) on the Junior Subordinated Debentures on the due date, a holder of
Capital Securities may institute a Direct Action. The Company may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Capital Securities.
Notwithstanding any payments made to a holder of Capital Securities by the
Company in connection with a Direct Action, the Company shall remain obligated
to pay the principal of (or premium, if any) or interest (including Compounded
Interest and Additional Sums, if any) on the Junior Subordinated Debentures, and
the Company shall be subrogated to the rights of the holder of such Capital
Securities with respect to payments on the Capital Securities to the extent of
any payments made by the Company to such holder in any Direct Action.
The holders of the Capital Securities will not be able to exercise directly
any remedies, other than those set forth in the preceding paragraph, available
to the holders of the Junior Subordinated Debentures unless there shall have
been an Event of Default under the Trust Agreement. See "Description of Capital
Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties as an entirety
or substantially as an entirety to any Person, and no Person shall consolidate
with or merge into the Company or convey, transfer or lease its properties as an
entirety or substantially as an entirety to the Company, unless: (i) in case the
Company consolidates with or merges into another Person or conveys or transfers
its properties substantially as an entirety to any Person, the successor Person
is organized under the laws of the United States or any State or the District of
Columbia, and such successor Person expressly assumes the Company's obligations
on the Junior Subordinated Debentures; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at maturity or called for redemption within one year, and the Company deposits
or causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity Date, as the case may be,
then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and to
provide the officers' certificates and opinions of counsel described therein),
and the Company will be deemed to have satisfied and discharged the Indenture.
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SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, all Senior Indebtedness must be paid in
full before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of such
Senior Indebtedness before the holders of Junior Subordinated Debentures will be
entitled to receive or retain any payment in respect of the Junior Subordinated
Debentures.
No payments on account of principal, or premium, if any, or interest, if
any, in respect of the Junior Subordinated Debentures may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Indebtedness, or an event of default with respect to any Senior Indebtedness
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Indebtedness" shall mean (i) every obligation of the Company for money
borrowed; (ii) every obligation of the Company evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation of the Company with respect to letters of credit,
banker's acceptances or similar facilities issued for the account of the
Company; (iv) every obligation of the Company issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business); (v) every
capital lease obligation of the Company; (vi) all indebtedness of the Company
whether incurred on or prior to the date of the Indenture or thereafter
incurred, for claims in respect of derivative products, including interest rate,
foreign exchange rate and commodity forward contracts, options and swaps and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another Person and all dividends of another Person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise.
"Indebtedness Ranking on a Parity with the Junior Subordinated Debentures"
shall mean (i) Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
indebtedness by its terms ranks equally with and not prior to the Junior
Subordinated Debentures in the right of payment upon the happening of the
dissolution or winding-up or liquidation or reorganization of the Company and
(ii) all other debt securities, and guarantees in respect of those debt
securities, issued to any other trust, or a trustee of such trust, partnership
or other entity affiliated with the Company that is a financing vehicle of the
Company (a "financing entity") in connection with the issuance by such financing
entity of equity securities or other securities guaranteed by the Company
pursuant to an instrument that ranks PARI PASSU with or junior in right of
payment to the Guarantee. The securing of any Indebtedness, otherwise
constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures, shall not be deemed to prevent such Indebtedness from constituting
Indebtedness Ranking on a Parity with the Junior Subordinated Debentures.
"Indebtedness Ranking Junior to the Junior Subordinated Debentures" shall
mean any Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
indebtedness by its terms ranks junior to and not equally with or prior to the
Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity
with the Junior Subordinated Debentures) in right of payment upon the happening
of the dissolution or winding-up or liquidation or
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reorganization of the Company. The securing of any Indebtedness, otherwise
constituting Indebtedness Ranking Junior to the Junior Subordinated Debentures,
shall not be deemed to prevent such Indebtedness from constituting Indebtedness
Ranking Junior to the Junior Subordinated Debentures.
"Senior Indebtedness" shall mean all Indebtedness, whether outstanding on
the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures,
and any deferrals, renewals or extensions of such Senior Indebtedness.
The Company is a holding company and the majority of the operating assets of
the Company are owned by the Company's subsidiaries. The Company relies
primarily on dividends from its subsidiaries to meet its obligations for payment
of principal and interest on its outstanding debt obligations and corporate
expenses. The Company is a legal entity separate and distinct from its
subsidiaries. Holders of Junior Subordinated Debentures should look only to the
Company for payments on the Junior Subordinated Debentures. There are regulatory
limitations on the payment of dividends directly or indirectly to the Company
from the Bank. See "--General." In addition, the Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, the Company and certain other affiliates, and on
investments in stock or other securities thereof. Such restrictions prevent the
Company and such other affiliates from borrowing from the Bank unless the loans
are secured by various types of collateral. Further, such secured loans, other
transactions and investments by the Bank are generally limited in amount as to
the Company and as to each of such other affiliates to 10% of the Bank's capital
and surplus and as to the Company and all of such other affiliates to an
aggregate of 20% of the Bank's capital and surplus. Accordingly, the Junior
Subordinated Debentures will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution),
is subject to the prior claims of creditors of that subsidiary (including
depositors, in the case of the Bank), except to the extent the Company may
itself be recognized as a creditor of that subsidiary. At March 31, 1998, the
subsidiaries of the Company had total liabilities (excluding liabilities owed to
the Company) of $213.9 million. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries (including the deposit liabilities of the Bank) and all
liabilities of any future subsidiaries of the Company. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of the
Company or any subsidiary, including Senior Indebtedness. See "--Subordination."
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Delaware.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee is subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
Subject to such provisions, the Debenture Trustee is under no obligation to
exercise any of the powers vested in it by the Indenture at the request of any
holder of Junior Subordinated Debentures, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
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DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the Capital Securities for the benefit of the
holders from time to time of the Capital Securities. will act as Guarantee
Trustee under the Guarantee. The Guarantee has been qualified under the Trust
Indenture Act. This summary of certain provisions of the Guarantee does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Guarantee, including the definitions
therein of certain terms, and the Trust Indenture Act. The Guarantee Trustee
will hold the Guarantee for the benefit of the holders of the Capital
Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Capital Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Trust may have or assert other than
the defense of payment. The following payments with respect to the Capital
Securities, to the extent not paid by or on behalf of the Trust (the "Guarantee
Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid
Distributions required to be paid on the Capital Securities, to the extent that
the Trust has funds on hand legally available therefore at such time, (ii) the
applicable Redemption Price with respect to the Capital Securities called for
redemption, to the extent that the Trust has funds on hand legally available
therefore at such time, and (iii) upon a voluntary or involuntary dissolution,
winding-up or liquidation of the Trust (other than in connection with the
distribution of the Junior Subordinated Debentures to holders of the Capital
Securities or the redemption of all Capital Securities), the lesser of (a) the
Liquidation Distribution, to the extent the Trust has funds legally available
therefore at the time, and (b) the amount of assets of the Trust remaining
available for distribution to holders of Capital Securities after satisfaction
of liabilities to creditors of the Trust as required by applicable law. The
Company's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Company to the holders of the Capital
Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will rank subordinate and junior in right of payment to all
Senior Indebtedness to the extent provided therein. See "--Status of the
Guarantee." Because the Company is a holding company, the right of the Company
to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the prior
claims of creditors of that subsidiary, except to the extent the Company may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee effectively will be subordinated to
all existing and future liabilities of the Company's subsidiaries (including the
Bank's deposit liabilities), and all liabilities of any future subsidiaries of
the Company. Claimants should look only to the assets of the Company for
payments under the Guarantee. See "Description of the Junior Subordinated
Debentures--General." The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, including Senior Indebtedness,
whether under the Indenture, any other indenture that the Company may enter into
in the future or otherwise.
The Company will, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Indenture, taken together, fully, irrevocably
and unconditionally guarantee all of the Trust's obligations under the Capital
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional Guarantee of the Trust's obligations under the
Capital Securities. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee."
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STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
in the same manner as the Junior Subordinated Debentures.
The Guarantee will rank PARI PASSU with all Other Guarantees issued by the
Company after the Issue Date with respect to capital securities (if any) issued
by Other Trusts. The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Capital Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by the Trust or upon distribution to the holders
of the Capital Securities of the Junior Subordinated Debentures. The Guarantee
does not place a limitation on the amount of additional Senior Indebtedness that
may be incurred by the Company.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, provided,
however, that except with respect to a default in payment of any Guarantee
Payment, the Company shall have received notice of default and shall not have
cured such default within 60 days after receipt of such notice. The holders of
not less than a majority in Liquidation Amount of the Capital Securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Guarantee Trustee in respect of the Guarantee or
to direct the exercise of any trust or power conferred upon the Guarantee
Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity.
The Company, as guarantor, will be required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Capital Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of a majority of the Liquidation Amount of such outstanding Capital
Securities. The manner of obtaining any such approval will be as set forth under
"Description of Capital Securities--Voting Rights; Amendment of the Trust
Agreement." All guarantees and agreements contained in the Guarantee Agreement
shall bind the successors, assigns, receivers, trustees and representatives of
the Company and shall inure to the benefit of the holders of the Capital
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the applicable Redemption Price of the Capital Securities, upon full
payment of the Liquidation Amount payable upon liquidation of the Trust or upon
distribution of Junior Subordinated Debentures to the holders of the Capital
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Capital Securities must
restore payment of any sums paid under the Capital Securities or the Guarantee.
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INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, will undertake to
perform only such duties as are specifically set forth in the Guarantee and, in
case a default with respect to the Guarantee has occurred, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee will be under no obligation to exercise any of the powers vested in it
by the Guarantee at the request of any holder of the Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Delaware.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Trust has funds on hand legally available for the payment of
such Distributions) will be irrevocably guaranteed by the Company as and to the
extent set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement and the Guarantee will provide, in the aggregate, a full, irrevocable
and unconditional guarantee of payments of Distributions and other amounts due
on the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. If and to the extent that the
Company does not make the required payments on the Junior Subordinated
Debentures, the Trust will not have sufficient funds to make the related
payments, including Distributions, on the Capital Securities. The Guarantee will
not cover any such payment when the Trust does not have sufficient funds on hand
legally available therefore. In such event, the remedy of a holder of Capital
Securities is to institute a Direct Action. The obligations of the Company under
the Guarantee will be subordinate and junior in right of payment to all Senior
Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because: (i) the aggregate principal amount or Prepayment Price of the Junior
Subordinated Debentures will be equal to the sum of the Liquidation Amount or
Redemption Price, as applicable, of the Trust Securities; (ii) the interest rate
and interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Trust Securities; (iii) the Company, as Sponsor, shall pay for all and any
costs, expenses and liabilities of the Trust except the Trust's obligations to
holders of Trust Securities under such Trust Securities; and (iv) the Trust
Agreement will provide that the Trust is not authorized to engage in any
activity that is not consistent with the limited purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.
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A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments may
be made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Trust Agreement.
LIMITED PURPOSE OF THE TRUST
The Capital Securities will represent beneficial interests in the Trust, and
the Trust exists for the sole purpose of issuing and selling the Trust
Securities, using the proceeds from the sale of the Trust Securities to acquire
the Junior Subordinated Debentures and engaging in only those other activities
necessary, advisable or incidental thereto. A principal difference between the
rights of a holder of a Capital Security and a holder of a Junior Subordinated
Debenture is that a holder of a Junior Subordinated Debenture will be entitled
to receive from the Company the principal amount of (and premium, if any) and
interest on Junior Subordinated Debentures held, while a holder of Capital
Securities is entitled to receive Distributions from the Trust (or, in certain
circumstances, from the Company under the Guarantee) if and to the extent the
Trust has funds on hand legally available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Unless the Junior Subordinated Debentures are distributed to holders of the
Capital Securities, upon any voluntary or involuntary termination, winding-up or
liquidation of the Trust, after satisfaction of the liabilities of creditors of
the Trust as required by applicable law, the holders of the Trust Securities
will be entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Capital Securities--Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." Upon any voluntary or
involuntary liquidation or bankruptcy of the Company, the Property Trustee, as
holder of the Junior Subordinated Debentures, would be a subordinated creditor
of the Company, subordinated in right of payment to all Senior Indebtedness as
set forth in the Indenture, but entitled to receive payment in full of principal
(and premium, if any) and interest, before any stockholders of the Company
receive payments or distributions. Since the Company will be the guarantor under
the Guarantee and will agree to pay for all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of its Capital
Securities), the positions of a holder of Capital Securities and a holder of
Junior Subordinated Debentures relative to other creditors and to stockholders
of the Company in the event of liquidation or bankruptcy of the Company are
expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
WITH RESPECT TO THE ISSUANCE OF THE CAPITAL SECURITIES
GENERAL
In the opinion of Patton Boggs, L.L.P., special federal income tax counsel
to the Company and the Trust ("Tax Counsel"), the following is a summary of
certain of the principal United States federal income tax consequences under
current law of the purchase, ownership and disposition of Capital Securities
held as capital assets by a holder who purchases such Capital Securities upon
initial issuance. It does not deal with special classes of holders such as
banks, thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
United States Alien Holders (as defined below) engaged in a U.S. trade or
business or persons that will hold the Capital Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Capital
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of
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any state or local government or of any foreign government that may be
applicable to the Capital Securities. This summary is based on the Code,
Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Tax Counsel is not
binding on the IRS or the courts. No rulings have been or are expected to be
sought from the IRS with respect to any of the transactions described herein and
no assurance can be given that the IRS will not take contrary positions.
Moreover, no assurance can be given that the opinions expressed herein will not
be challenged by the IRS or, if challenged, that such a challenge would not be
successful.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
In connection with the issuance of the Junior Subordinated Debentures, Tax
Counsel will render its opinion generally to the effect that, under then current
law and assuming full compliance with the terms of the Indenture (and certain
other documents), and based on certain facts and assumptions contained in such
opinion, the Junior Subordinated Debentures will be classified for United States
federal income tax purposes as indebtedness of the Company. The Company, the
Trust and the holders of the Capital Securities (by acceptance of a beneficial
interest in a Capital Security) will agree to treat the Junior Subordinated
Debentures as indebtedness of the Company for all United States federal income
tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel will
render its opinion generally to the effect that, under then current law and
assuming full compliance with the terms of the Trust Agreement and the Indenture
(and certain other documents), and based on certain facts and assumptions
contained in such opinion, the Trust will be classified for United States
federal income tax purposes as a grantor trust and not as an association taxable
as a corporation. Accordingly, for United States federal income tax purposes,
each holder of Capital Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures, and each holder will
be required to include in its gross income any interest (or OID accrued) with
respect to its allocable share of those Junior Subordinated Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the "Regulations") applicable to
debt instruments issued on or after August 13, 1996, a "remote" contingency that
stated interest will not be timely paid will be ignored in determining whether a
debt instrument is issued with OID. The Company believes that the likelihood of
its exercising its option to defer payments of interest is "remote" since
exercising that option would, among other things, prevent the Company from
declaring dividends on any class of its equity securities. Accordingly, the
Company intends to take the position based on the advice of Tax Counsel that the
Junior Subordinated Debentures will not be considered to be issued with OID and,
accordingly, stated interest on the Junior Subordinated Debentures generally
will be taxable to a holder as ordinary income at the time it is paid or accrued
in accordance with such holder's method of tax accounting.
Under the Regulations, if the Company were to exercise its option to defer
payments of interest, the Junior Subordinated Debentures would at that time be
treated as issued with OID, and all stated interest on the Junior Subordinated
Debentures would thereafter be treated as OID as long as the Junior Subordinated
Debentures remain outstanding. In such event, all of a holder's taxable interest
income with respect to the Junior Subordinated Debentures would thereafter be
accounted for on an economic accrual basis regardless of such holder's method of
tax accounting, and actual distributions of stated interest would not be
reported as taxable income. Consequently, a holder of Capital Securities would
be required to include in gross income OID even though the Company would not
make actual cash payments during an Extension Period. Moreover, under the
Regulations, if the option to defer the payment of interest was
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determined not to be "remote," the Junior Subordinated Debentures would be
treated as having been originally issued with OID. In such event, all of a
holder's taxable interest income with respect to the Junior Subordinated
Debentures would be accounted for on an economic accrual basis regardless of
such holder's method of tax accounting, and actual distributions of stated
interest would not be reported as taxable income.
The Regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation described herein.
Because income on the Capital Securities will constitute interest or OID,
corporate holders of the Capital Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Capital Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Company will have the right at any time to liquidate the Trust and cause
the Junior Subordinated Debentures to be distributed to the holders of the Trust
Securities. Under current law, such a distribution, for United States federal
income tax purposes, would be treated as a nontaxable event to each holder, and
each holder would receive an aggregate tax basis in the Junior Subordinated
Debentures equal to such holder's aggregate tax basis in its Capital Securities.
A holder's holding period in the Junior Subordinated Debentures so received in
liquidation of the Trust would include the period during which the Capital
Securities were held by such holder.
Under certain circumstances described herein (see "Description of Capital
Securities"), the Junior Subordinated Debentures may be redeemed for cash and
the proceeds of such redemption distributed to holders in redemption of their
Capital Securities. Under current law, such a redemption would, for United
States federal income tax purposes, constitute a taxable disposition of the
redeemed Capital Securities, and a holder could recognize gain or loss as if it
sold such redeemed Capital Securities for cash. See "--Sales of Capital
Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities (including a redemption of the
Capital Securities by the Company) will recognize gain or loss equal to the
difference between its adjusted tax basis in the Capital Securities and the
amount realized on the sale of such Capital Securities (other than with respect
to accrued and unpaid interest which has not yet been included in income, which
will be treated as ordinary income). A holder's adjusted tax basis in the
Capital Securities generally will be its initial purchase price increased by OID
(if any) previously includable in such holder's gross income to the date of
disposition and decreased by payments (if any) received on the Capital
Securities in respect of OID. Such gain or loss generally will be a capital gain
or loss and generally will be a long-term capital gain or loss if the Capital
Securities have been held for more than one year.
The Capital Securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder who uses the accrual method of accounting for
tax purposes (and a cash method holder, if the Junior Subordinated Debenture are
deemed to have been issued with OID) who disposes of his Capital Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Junior Subordinated Debentures
through the date of disposition in income as ordinary income (i.e., interest or,
if applicable, OID), and to add such amount to his adjusted tax basis in his pro
rata share of the underlying Junior Subordinated Debentures deemed disposed of.
To the extent the selling price is less than the holder's adjusted tax basis
(which will include all accrued but unpaid interest) a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
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UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S. holder
for United States federal income tax purposes.
A "U.S. Holder" is a holder of Capital Securities who or which is (i) a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for United States federal income tax purposes,
(ii) a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is includable in its gross income for United States federal
income tax purposes without regard to its source or (iv) a trust over which (A)
a court within the United States is able to exercise primary supervision over
the administration of the trust and (B) one or more United States trustees have
the authority to control all substantial decisions of the trust.
Under present United States federal income tax laws: (i) payments by the
Trust or any of its paying agents to any holder of a Capital Security who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that, (a) the beneficial owner of the Capital
Security does not actually or constructively own 10 percent or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(b) the beneficial owner of the Capital Security is not a controlled foreign
corporation that is related to the Company through stock ownership, and (c)
either (A) the beneficial owner of the Capital Security certifies to the Trust
or its agent, under penalties of perjury, that it is not a United States holder
and provides its name and address or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "Financial Institution"), and holds
the Capital Security in such capacity, certifies to the Trust or its agent,
under penalties of perjury, that such statement has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and furnishes the Trust or its agent with a copy thereof; and
(ii) a United States Alien Holder of a Capital Security will not be subject to
United States federal withholding tax on any gain realized upon the sale or
other disposition of a Capital Security.
As discussed above, changes in legislation affecting the United States
federal income tax treatment of the Junior Subordinated Debentures are possible,
and could adversely affect the ability of the Company to deduct the interest
payable on the Junior Subordinated Debentures. Moreover, any such legislation
could adversely affect United States Alien Holders by characterizing income
derived from the Junior Subordinated Debentures as dividends, generally subject
to a 30% income tax (on a withholding basis) when paid to a United States Alien
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a United States Alien Holder.
A United States Alien Holder that holds Capital Securities in connection
with the active conduct of a United States trade or business will be subject to
income tax on all income and gains recognized with respect to its proportionate
share of the Junior Subordinated Debentures.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to holders on
Forms 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities may
be subject to a "backup" withholding tax of 31 percent unless the holder
complies with certain identification requirements. Any withheld amounts will be
allowed as a credit against the holder's United States federal income tax,
provided the required information is provided to the IRS.
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THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Each of the Company (the obligor with respect to the Junior Subordinated
Debentures held by the Trust), and its affiliates and the Property Trustee may
be considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to many Plans that are subject to ERISA and certain employee
benefit-related provisions of the Code. The purchase and/or holding of Capital
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975 of the Code
(including individual retirement arrangements and other plans described in
Section 4975(e)(1) of the Code) and with respect to which the Company, the
Property Trustee or any affiliate is a service provider (or otherwise is a party
in interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Capital
Securities are acquired pursuant to and in accordance with an applicable
exemption, such as Prohibited Transaction Class Exemption ("PTCE") 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 95-60
(an exemption for transactions involving certain insurance company general
accounts) or PTCE 96-23 (an exemption for certain transactions determined by an
in-house asset manager). In addition, a Plan fiduciary considering the purchase
of Capital Securities should be aware that the assets of the Trust may be
considered "plan assets" for ERISA purposes. In such event, any persons
exercising discretion with respect to the Junior Subordinated Debentures may
become fiduciary parties in interest or disqualified persons with respect to
investing Plans. In order to avoid certain prohibited transactions under ERISA
and the Code that could thereby result, each investing Plan, by purchasing the
Capital Securities, will be deemed to have directed the Trust to invest in the
Junior Subordinated Debentures and to have consented to the appointment of the
Property Trustee. In this regard, it should be noted that, in an Event of
Default, the Company may not remove the Property Trustee without the approval of
a majority of the holders of the Capital Securities.
A Plan fiduciary should consider whether the purchase of Capital Securities
could result in a delegation of fiduciary authority to the Property Trustee,
and, if so, whether such a delegation of authority is permissible under the
Plan's governing instrument or any investment management agreement with the
Plan. In making such determination, a Plan fiduciary should note that the
Property Trustee is a U.S. bank qualified to be an investment manager (within
the meaning of Section 3(38) of ERISA) to which such a delegation of authority
generally would be permissible under ERISA. Further, prior to an Event of
Default with respect to the Junior Subordinated Debentures, the Property Trustee
will have only limited custodial and ministerial authority with respect to Trust
assets.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY THE
TRUST, THE COMPANY, THE PROPERTY TRUSTEE, THE UNDERWRITERS OR ANY OTHER PERSON
ASSOCIATED WITH THE SALE OF THE CAPITAL SECURITIES THAT SUCH SECURITIES MEET ALL
RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR
ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE APPROPRIATE FOR PLANS
GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING TO ACQUIRE CAPITAL
SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT WITH ITS COUNSEL.
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STOCKHOLDER AGREEMENT
On December 31, 1996, the Company entered into the Stock Purchase Agreement
with Deltec, whereby Deltec acquired 446,256 of the issued and outstanding
shares of Common Stock of the Company as of that date for an aggregate purchase
price of $4.2 million. The shares of Common Stock acquired by Deltec were not
registered with the Securities and Exchange Commission, however, the Stock
Purchase Agreement grants Deltec registration rights in respect of any shares of
Common Stock that Deltec decides to sell. The Stock Purchase Agreement was
entered into following the submission by Deltec of a Rebuttal of Control to the
OTS and the execution by Deltec International, S.A., the parent of Deltec, of a
Rebuttal Agreement with the OTS.
Pursuant to the Stock Purchase Agreement, the Company and Deltec also
entered into a stockholder agreement (the "Stockholder Agreement"). The
principal provision of the Stockholder Agreement stipulates that at any time
that the Company proposes to issue and sell any additional shares of its Common
Stock, it shall notify Deltec and shall offer to sell to Deltec concurrently
with the issuance and sale of the additional shares such number of additional
shares (including fractional shares) so that Deltec will continue to own 25% of
the outstanding shares of the Company's Common Stock. Generally, the additional
shares offered and sold to Deltec pursuant to the Stockholders Agreement will be
at a similar price and upon substantially the same terms and conditions as the
other additional shares sold. Deltec has indicated that it intends to purchase
shares of the Common Stock offered hereby. In addition, in the event that
the Company purchases or otherwise acquires any of its outstanding shares of
Common Stock, it shall offer to purchase from Deltec such number of shares that,
after the purchase, Deltec will continue to own 25% of the outstanding shares of
the Company's Common Stock. During the term of the Stockholder Agreement, and
for so long as Deltec holds at least 15% of the Company's Common Stock, Deltec
has the right to nominate one director to the Company's Board of Directors. John
G. Yedinak, the President and Chief Executive Officer of the Company, has agreed
that, during this time period, he will vote all shares of the Company's Common
Stock owned by him for the nominee designated by Deltec. During the term of the
Stockholder Agreement, Deltec has agreed to remain in compliance with the
Rebuttal Agreement between Deltec and the OTS.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
GENERAL
Certain provisions in the Company's Certificate of Incorporation and Bylaws
and in its management remuneration together with provisions of Delaware
corporate law, may have anti-takeover effects. In addition, regulatory
restrictions may make it difficult for persons or companies to acquire control
of the Company.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the provisions of
the Company's Certificate of Incorporation and Bylaws which might be deemed to
have a potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and
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Bylaws, which are incorporated herein by reference. See "Additional Information"
as to how to obtain a copy of these documents.
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, may be filled for the remainder of the
unexpired term exclusively by a two-thirds vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 70% of the outstanding shares of voting stock. In the
absence of these provisions, the vote of the holders of a majority of the shares
could remove the entire Board, with or without cause, and replace it with
persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company or an appropriate committee
designated by the Board of Directors. The Certificate of Incorporation also
provides that any action required or permitted to be taken by the stockholders
of the Company may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the issuance
of 9,000,000 shares of Common Stock and 1,000,000 shares of preferred stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Offering to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Other than this Offering, the Company's Board of Directors currently has no
plans for the issuance of additional shares.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH INTERESTED
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 70% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" by an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 70% of the shares of
capital stock entitled to vote thereon is required for any business combination
involving an Interested Stockholders except (i) in cases where the proposed
transaction has been approved by a majority of those members of the Company's
Board of Directors who are unaffiliated with the Interested Stockholder and
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were Directors prior to the time when the Interested Stockholder became an
Interested Stockholder or (ii) if the proposed transaction meets certain
conditions set forth therein which are designed to afford the stockholders a
fair price in consideration for their shares. In each such case, where
stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient. The term "Interested
Stockholder" is defined to include, among others, any individual, a group acting
in concert, corporation, partnership, association or other entity (other than
the Company or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of the
Company. A "Business Combination," is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an
Interested Stockholder or any corporation which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or
with any Interested Stockholder or Affiliate of 25% or more of the assets of the
Company or combined assets of the Company and its subsidiary; (iii) the issuance
or transfer to any Interested Stockholder or its Affiliate by the Company (or
any subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or exceeds
25% of the fair market value of the Common Stock of the Company; (iv) the
adoption of any plan for the liquidation or dissolution of the Company proposed
by or on behalf of any Interested Stockholder or Affiliate there; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company with any of its subsidiaries which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company or subsidiary owned directly or indirectly, by an
Interested stockholder or Affiliate thereof. Directors and executive officers of
the Company are purchasing in the aggregate approximately % of the shares of
the Common Stock in the Offering, and currently own % of the outstanding
Common Stock. Additionally, Directors and Executive Officers hold options in an
amount equal to % of the outstanding Common Stock. As a result, Directors and
Executive Officers have the potential to control the voting of approximately
% of the Company's Common Stock on a fully diluted basis after the Offering,
thereby enabling them to prevent the approval of the transactions requiring the
approval of at least 70% of the Company's outstanding shares of voting stock
described herein.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, those
factors that directors of any subsidiary (including the Bank) may consider in
evaluating any action that may result in a change or potential change of control
of such subsidiary, and the social and economic effects of acceptance of such
offer on: the Company's present and future customers and employees and those of
its subsidiaries (including the Bank); the communities in which the Company and
the Bank operate or are located; the ability of the Company to fulfill its
corporate objectives as a savings and loan holding company; and the ability of
the Bank to fulfill the objectives of a stock savings bank under applicable
statutes and regulations. By having these standards in the Certificate of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION. The Certificate of Incorporation provides that
specified provisions contained in the Certificate of Incorporation may not be
repealed or amended except upon the affirmative vote of the holders of not less
than 70% of the outstanding shares of the Company stock entitled to vote
generally in the election of directors. This requirement exceeds the majority
vote of the outstanding stock that would otherwise be
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<PAGE>
required by Delaware law for the repeal or amendment of the Certificate of
Incorporation provision. The specific provisions covered by such supermajority
voting requirement include the following: (i) the calling of special meetings of
stockholders, the absence of cumulative voting rights and the requirement that
stockholder action be taken only at annual meetings; (ii) the number and
classification of the Company's Board of Directors; (iii) removing directors;
(iv) the requirement for the approval of certain Business Combinations involving
"Interested Stockholders"; (v) the indemnification of directors, officers,
employees and agents of the Company; (vi) the limitation of voting rights; and
(vii) the required stockholder vote for amending the Certificate of
Incorporation or Bylaws of the Company. This provision is intended to prevent
the holders of less than 70% of the outstanding stock of the Company from
circumventing any of the foregoing provisions by amending the Certificate of
Incorporation to delete or modify one of such provisions. This provision would
enable the holders of more than 70% of the Company's voting stock to prevent
amendments to the Company's Certificate of Incorporation or Bylaws even if they
were favored by the holders of a majority of the voting stock.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment Agreements with Mr. Yedinak and Ms. Pitts and the
1998 Incentive Stock Option Plan may also discourage takeover attempts by
increasing the costs to be incurred by the Bank and the Company in the event of
a takeover. See "The Board of Directors and Management of the Bank--Executive
Compensation--Employment Agreements" and "--Benefits--Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans are in
the best interest of the Company and its stockholders. An unsolicited
non-negotiated proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interests of the Company and its stockholders to
encourage potential acquirors to negotiate directly with management and that
these provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the Board of Directors' view that these provisions
should not discourage persons from proposing a merger or other transaction at a
price that reflects the true value of the Company and that otherwise is in the
best interest of all stockholders.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
139
<PAGE>
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
Any proposal to acquire 10% of any class of equity security of the Company
generally would be subject to approval by the OTS under the Change in Bank
Control Act. The OTS requires all persons seeking control of a savings
institution, and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days" written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that: (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to three years after conversion but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 9,000,000 shares of Common Stock, and
1,000,000 shares of Preferred Stock. Currently, there are shares of Common
Stock issued and outstanding and no shares of Preferred Stock are issued or
outstanding.
THE CAPITAL STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL AND
WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
VOTING RIGHTS. The holders of Common Stock possess exclusive voting rights
in the Company, except to the extent that shares of Preferred Stock issued in
the future may have voting rights, if any. Each holder
140
<PAGE>
of Common Stock will be entitled to one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock.
DIVIDENDS. Subject to such preferences as may be applicable to any shares
of Preferred Stock which may be issued in the future, the holders of Common
Stock are entitled to such dividends as the Board of Directors may declare from
time to time out of funds legally available therefore and are entitled to share
pro rata in liquidating and other distributions to shareholders. For information
pertaining to cash dividends, see "Dividend Policy." Failure to pay dividends by
the Trust on the Capital Securities issued hereunder would restrict the
Company's ability to pay dividends. See "Description of Capital Securities--
Distributions."
OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive
rights with respect to any additional shares of Common Stock which may be
issued. Therefore, the Board of Directors may sell shares of capital stock of
the Company without first offering it to existing stockholders. The Common Stock
is not subject to call for redemption and the outstanding shares of Common Stock
when issued and upon receipt by the Company of the offering price will be fully
paid and non-assessable.
PREFERRED STOCK
None of the 1,000,000 authorized shares of Preferred Stock of the Company
will be issued in the Offering. The Board of Directors of the Company is
authorized to issue Preferred Stock and to fix and state voting powers,
designations, preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof. If and when issued, the
Preferred Stock is likely to rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The Board of Directors has no present intention to issue any additional
shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank, Chicago, Illinois is the transfer agent and
registrar for the Company's Common Stock.
141
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
9,000,000 shares of Common Stock. Upon completion of the Offering, there will be
outstanding shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option).
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company) . After the
Offering, shares of Common Stock held by affiliates will be considered to
be "control shares" and shares of Common Stock ( shares if the
Underwriters' over-allotment option is exercised in full) issuable upon the
exercise of options that the Company has granted or agreed to grant will be
"restricted securities" within the meaning of Rule 144, and are eligible for
sale in the public market in compliance with Rule 144. The Company intends to
file a registration statement on Form S-8 under the Securities Act registering
approximately shares of Common Stock issuable upon the exercise of options
granted or to be granted pursuant to the 1998 Incentive Stock Option Plan. Upon
effectiveness of the registration statement, shares issued to nonaffiliates upon
the exercise of the options generally will be freely tradeable without
restriction or further registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least one year has elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock ( shares based upon shares to be outstanding immediately
after the Offering), or (ii) if the Common Stock is quoted on the National
Market System of the Nasdaq Stock Market or a stock exchange, the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. However, a person who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person and who has
beneficially owned shares as to which at least two years has elapsed from the
later of the acquisition of such shares from the Company or an affiliate of the
Company is entitled to sell them without regard to the volume, manner of sale,
or notice requirements of Rule 144.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom Tucker Anthony Incorporated is acting as representative (the
"Representative"), has severally agreed to purchase from the Company the
aggregate number of shares of Common Stock and Capital Securities set forth
opposite its name below.
<TABLE>
<CAPTION>
CAPITAL
UNDERWRITER NUMBER OF SHARES SECURITIES
- ------------------------------------------------------------------------------------ ------------------------- -----------------
<S> <C> <C>
Tucker Anthony Incorporated.........................................................
Total...............................................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the Underwriters will
purchase all of the Common Stock and Capital Securities offered hereby if any
such Common Stock or Capital Securities are purchased.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Common Stock and Capital Securities to the public
at the Prices to the Public set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $
142
<PAGE>
per share with respect to the Common Stock and $ per share with respect
to the Capital Securities. The Underwriters may allow, and such dealer may
re-allow, a discount not in excess of $ per share with respect to the
Common Stock and per share with respect to the Capital Securities to
certain other dealers. The offering of the Common Stock and Capital Securities
are made for delivery when, as and if accepted by the Underwriters and is
subject to prior sale and to the Underwriters' right to reject any order in
whole or in part and to withdraw, cancel, or modify the offer without notice.
After the initial public offering of the Securities, the offering price and
other selling terms may be changed by the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Common Stock and additional Capital
Securities, in each case at the applicable Prices to the Public set forth on the
cover page of this prospectus less the applicable underwriting discount,. The
Underwriters may exercise such option and only to cover over-allotments, if any,
made in connection with the sale of shares of Common Stock or Capital Securities
offered hereby. If purchased, the Underwriters will offer such additional shares
of Common Stock and/or Capital Securities on the same terms as the shares
of Common Stock and Capital Securities are being offered. To the extent
that the Underwriters exercise such options, each of the Underwriters will be
obligated, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares of Common Stock and/or Capital
Securities to be purchased by it shown in the above table bears to and the
Company will be obligated, pursuant to the option, to sell such shares of Common
Stock and/or Capital Securities to the Underwriters.
The Company and the Trust have agreed, subject to certain conditions, prior
to 180 days following the Issue Date, neither will, directly or indirectly,
issue, sell, offer, or agree to sell, grant any option for the sale of, or
otherwise dispose of the Securities, any securities convertible into,
exchangeable or exerciseable for the Securities or the Junior Subordinated
Debentures or any debt securities substantially similar to the Junior
Subordinated Debentures or any equity security substantially similar to the
Common Stock, except with the prior written consent of Tucker Anthony
Incorporated.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the federal securities laws, or to
contribute to payments the Underwriter may be required to make in respect
thereof.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority to exceed 5% of the number of shares
offered.
Prior to the Offering, there has not been any public market for the Capital
Securities. The Price to the Public for the Capital Securities included in the
offering was determined by negotiations between the Company and Representatives.
Among the factors considered in determining that price were the history of and
prospects for the Company's business and the industry in which it competes, an
assessment of the Company's management and the present state of the Company's
development, the past and present revenues and earnings of the Company, the
prospects for growth of the Company's revenues and earnings, the current state
of the economy in the United States and the current level of economic activity
in the industry in which the Company competes and in related or comparable
industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies that are
comparable to the Company.
143
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information concerning the Company can be inspected and copied at
prescribed rates at the Commission's Public Reference Room, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as the following Regional
Offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained by mail from the
Commission's Public Reference Section, 450 Fifth Street, N.W.,Washington, D.C.
20549, at prescribed rates. If available, such reports and other information may
also be accessed through the Commission's electronic data gathering, analysis
and retrieval system ("EDGAR") via electronic means, including the Commission's
web site on the Internet (http://www.sec.gov). The Common Stock is quoted on the
Nasdaq Over-the-Counter Market and, consequently, such reports, proxy statements
and other information also may be inspected at the offices of the NASD, 1735 K
Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on Form S-1
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Securities offered hereby. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
EXPERTS
The Consolidated Financial Statements of the Company and its subsidiaries as
of December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997, have been included in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Company by
Patton Boggs, LLP, Washington, D.C., special counsel to the Company. Patton
Boggs LLP, Washington, D.C. will rely as to certain matters of Delaware law on
the opinion of Morris, Nichols, Arsht & Tunnell. Certain legal matters will be
passed upon for Tucker Anthony Incorporated by Elias, Matz, Tiernan & Herrick
L.L.P., Washington, D.C.
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Trust Agreement and the formation of the
Trust will be passed upon by Morris, Nichols, Arsht & Tunnell, special counsel
to the Company and to the Trust. The validity under Delaware Law of the Junior
Subordinated Debentures and the Guarantee will be passed upon for the Company
and the Trust by Patton Boggs LLP.
144
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition at March 31, 1998 (Unaudited) and
December 31, 1997.............................................................. F-2
Consolidated Statements of Income for the Three Months ended March 31, 1998 and
1997 (Unaudited)............................................................... F-3
Consolidated Statements of Comprehensive Income for the Three Months ended March
31, 1998 and 1997 (Unaudited).................................................. F-4
Consolidated Statement of Shareholders' Equity for the Three Months ended March
31, 1998 and 1997 (Unaudited).................................................. F-5
Consolidated Statements of Cash Flows for the Three Months ended March 31, 1998
and 1997 (Unaudited)........................................................... F-6
Notes to Consolidated (Unaudited) Financial Statements........................... F-7-F-10
Independent Auditors' Report..................................................... F-11
Consolidated Statements of Financial Condition at December 31, 1997 and 1996..... F-12
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996
and 1995....................................................................... F-13
Consolidated Statements of Stockholders' Equity for the Years ended December 31,
1997, 1996 and 1995............................................................ F-14
Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996
and 1995....................................................................... F-15
Notes to Consolidated Financial Statements....................................... F-17-F-41
</TABLE>
F-1
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
12/31/97
3/31/98 ----------
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash.................................................................................... $ 8,918 $ 6,211
Interest-earning deposits............................................................... 11,561 2,466
FHLB of Chicago Stock................................................................... 3,271 3,271
Securities Available-for-Sale........................................................... 5,348 4,974
Loans receivable, net................................................................... 153,199 153,808
Discounted loans receivable............................................................. 21,786 30,550
Accrued interest receivable............................................................. 1,614 1,725
Foreclosed real estate, net............................................................. 4,323 4,251
Premises and equipment, net............................................................. 10,898 11,235
Mortgage loan servicing rights, net..................................................... 6,779 6,706
Prepaid expenses and other assets....................................................... 10,809 11,101
----------- ----------
$ 238,506 $ 236,298
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits.............................................................................. $ 179,832 $ 172,469
Borrowed money........................................................................ 28,510 34,156
Interest-bearing custodial escrow balances for loans serviced......................... 1 1
Custodial escrow balances for loans serviced.......................................... 5,581 6,399
Advance payments by borrowers for taxes and insurance................................. 1,462 741
Other liabilities..................................................................... 4,492 4,428
----------- ----------
Total liabilities................................................................... $ 219,878 $ 218,194
----------- ----------
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
497,644 shares.................................................................... 5 5
Class B, $0.01 par value; Authorized 340,000 shares; none issued or outstanding..... -- --
Class C, $0.01 par value; Authorized 340,000 shares; none issued or outstanding..... -- --
Class D, $0.01 par value; Authorized 800,000 shares; none issued or outstanding..... -- --
Additional paid-in capital............................................................ 8,737 8,570
Retained earnings--substantially restricted........................................... 10,222 9,915
Accumulated other comprehensive income................................................ (1) (33)
Common stock acquired by:
Employee Stock Ownership Plan....................................................... (42) (57)
Management Recognition Plan......................................................... (293) (296)
----------- ----------
Total stockholders' equity........................................................ $ 18,628 $ 18,104
----------- ----------
----------- ----------
Total Liabilities and Stockholders' Equity.............................................. $ 238,506 $ 236,298
----------- ----------
----------- ----------
</TABLE>
Commitments and contingencies (Note E)
See notes to accompanying unaudited consolidated financial statements
F-2
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
--------------------
<S> <C> <C>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
<CAPTION>
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Interest income:
Loans receivable............................................................................. $ 3,341 $ 2,974
Discounted loans receivable.................................................................. 624 1,456
Securities Available-for-Sale................................................................ 115 80
Interest-earning deposits.................................................................... 107 146
--------- ---------
Total interest income...................................................................... 4,187 4,656
--------- ---------
Interest expense:
Deposits..................................................................................... 2,249 1,970
Custodial escrow balances for loans serviced................................................. -- 3
Borrowed money............................................................................... 555 772
--------- ---------
Total interest expense..................................................................... 2,804 2,745
--------- ---------
Net interest income before provision for loan losses........................................... 1,383 1,911
Provision for loan losses...................................................................... 185 60
--------- ---------
Net interest income after provision for loan losses........................................ 1,198 1,851
--------- ---------
Non-interest income:
Purchased mortgage servicing income, net..................................................... 112 102
Gain on sale of loans receivable, discounted loans receivable, securities available for sale,
mortgage-backed securities, and foreclosed real estate..................................... 676 382
Fees and service charges..................................................................... 479 240
Data processing income....................................................................... 3,080 2,605
Other........................................................................................ 243 32
--------- ---------
Total non-interest income.................................................................. 4,590 3,361
--------- ---------
Non-interest expense:
Compensation and benefits.................................................................... 2,105 2,273
Occupancy and equipment...................................................................... 1,367 1,090
Federal deposit insurance premiums........................................................... 28 22
Data processing cost of services............................................................. 838 439
Other general and administrative fees........................................................ 882 1,011
Amortization of goodwill..................................................................... 25 27
--------- ---------
Total non-interest expense................................................................. 5,245 4,862
--------- ---------
Earnings before provision for income tax expense............................................... 543 350
Income tax expense............................................................................. 157 93
--------- ---------
Net earnings............................................................................... 386 257
--------- ---------
--------- ---------
Basic earnings per share....................................................................... $ .79 $ .54
--------- ---------
--------- ---------
Diluted earnings per share..................................................................... $ .74 $ .51
--------- ---------
--------- ---------
</TABLE>
See notes to accompanying unaudited consolidated financial statements
F-3
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C> <C>
FOR THE THREE MONTHS
ENDED
MARCH 31,
--------------------
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net Income........................................................................................ $ 386 $ 257
Other Comprehensive Income:
Unrealized gains on available-for sale securities:
Unrealized holding gains (losses) arising during period, net of tax (expense)/benefit of
($30,000) in 1998 and $24,000 in 1997....................................................... 49 (40)
Less reclassification adjustment for gains included in net income net of tax benefit of $11,000 in
1998............................................................................................ (17) --
--------- ---------
Other comprehensive income........................................................................ 32 (40)
--------- ---------
Comprehensive income.............................................................................. $ 418 $ 217
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED COMMON
COMMON ADDITIONAL OTHER STOCK STOCK
STOCK PAID-IN RETAINED COMPREHENSIVE ACQUIRED ACQUIRED
CLASS A CAPITAL EARNINGS INCOME BY ESOP BY MRP
------------- ------------- ----------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1997
- --------------------------------------
Balance at December 31, 1996.......... $ 4 7,382 9,444 12 (117) (165)
Net income............................ -- -- 257 -- -- --
Proceeds from issuance of stock....... 1 399 -- -- -- --
Other comprehensive income, net of
tax................................. -- -- -- (40) -- --
Principal payments on ESOP loan....... -- -- -- -- 15 --
Amortization of purchase price of MRP
common stock........................ -- -- -- -- -- 27
Proceeds from exercise of stock
options............................. -- 494 -- -- -- --
Tax benefits of stock options......... -- 193 -- -- -- --
Fair value adjustment for committed
ESOP shares......................... -- 11 -- -- -- --
Cash dividends........................ -- -- (86) -- -- --
-- --
----- ----------- --- ---
Balance at March 31, 1997............. $ 5 8,479 9,615 (28) (102) (138)
-- --
-- --
----- ----------- --- ---
----- ----------- --- ---
THREE MONTHS ENDED MARCH 31, 1998
- --------------------------------------
Balance at December 31, 1997.......... $ 5 8,570 9,915 (33) (57) (296)
Net income............................ -- -- 386 -- -- --
Other comprehensive income, net of
tax................................. -- -- -- 32 -- --
Principal payments on ESOP loan....... -- -- -- -- 15 --
Amortization of purchase price of MRP
stock............................... -- -- -- -- -- 3
Proceeds from exercise of stock
options............................. -- 116 -- -- -- --
Tax benefits of stock options......... -- 39 -- -- -- --
Fair value adjustment for committed
ESOP shares......................... -- 12 -- -- -- --
Cash dividends........................ -- -- (79) -- -- --
-- --
----- ----------- --- ---
Balance at March 31, 1998............. $ 5 8,737 10,222 (1) (42) (293)
-- --
-- --
----- ----------- --- ---
----- ----------- --- ---
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
---------------
<S> <C>
THREE MONTHS ENDED MARCH 31, 1997
- --------------------------------------
Balance at December 31, 1996.......... 16,560
Net income............................ 257
Proceeds from issuance of stock....... 400
Other comprehensive income, net of
tax................................. (40)
Principal payments on ESOP loan....... 15
Amortization of purchase price of MRP
common stock........................ 27
Proceeds from exercise of stock
options............................. 494
Tax benefits of stock options......... 193
Fair value adjustment for committed
ESOP shares......................... 11
Cash dividends........................ (86)
------
Balance at March 31, 1997............. 17,831
------
------
THREE MONTHS ENDED MARCH 31, 1998
- --------------------------------------
Balance at December 31, 1997.......... 18,104
Net income............................ 386
Other comprehensive income, net of
tax................................. 32
Principal payments on ESOP loan....... 15
Amortization of purchase price of MRP
stock............................... 3
Proceeds from exercise of stock
options............................. 116
Tax benefits of stock options......... 39
Fair value adjustment for committed
ESOP shares......................... 12
Cash dividends........................ (79)
------
Balance at March 31, 1998............. 18,628
------
------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-5
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................................. $ 386 $ 257
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation.............................................................................. 591 484
Accretion of discounts and deferred loan fees............................................. (66) (227)
Provision for losses on loans receivable and foreclosed real estate....................... 185 75
(Gain) loss on sale of:
Securities available for sale........................................................... (165) (83)
Loans receivable........................................................................ 9 (3)
Discounted loans receivable............................................................. (541) (250)
Foreclosed real estate.................................................................. 21 (46)
Loans originated and purchased for sale..................................................... -- (7,419)
Proceeds from sale of loans receivable...................................................... 12,459 3,485
Proceeds from sale of discounted loans receivable........................................... 5,400 1,741
Amortization of goodwill.................................................................... 25 27
(Increase) decrease in purchased mortgage servicing rights.................................. (74) 44
Amortization of purchase price of MRP and ESOP stock........................................ 18 42
Recognition of fair value of ESOP shares scheduled to be released........................... 12 11
(Increase) decrease in accrued interest receivable, prepaid expenses, and other assets...... 437 478
Increase (decrease) in accrued interest payable and other liabilities....................... 64 1,158
--------- ---------
Net cash provided by (used in) operating activities....................................... 18,761 (226)
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio.............................................. (23,621) (27,940)
Discounted loans receivable purchased..................................................... (178) (8,529)
Principal repayments on:
Loans receivable and discounted loans receivable.......................................... 14,582 11,625
Mortgage-backed securities................................................................ 53 93
Proceeds from sale of:
Foreclosed real estate.................................................................... 1,014 540
Securities available for sale............................................................. 3,129 722
Purchase of:
Securities available for sale............................................................. (3,342) (1,570)
Premises and equipment.................................................................... (254) (489)
Loan servicing rights..................................................................... -- (1,570)
--------- ---------
Net cash provided by (used in) investing activities........................................... (8,617) (27,118)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits....................................................... 7,363 12,116
Proceeds from borrowed funds.............................................................. 5,650 43,014
Repayment of borrowed funds............................................................... (11,296) (35,971)
Proceeds from exercise of stock options................................................... 116 893
Dividends paid............................................................................ (79) (86)
Net increase (decrease) in advance payments by borrowers for taxes and insurance.......... 722 (11)
Net increase (decrease) in custodial escrow balances for loans serviced................... (818) 2,957
--------- ---------
Net cash provided by financing activities............................................... 1,658 22,912
--------- ---------
Net increase (decrease) in cash and cash equivalents...................................... 11,802 (4,432)
Cash and cash equivalents at beginning of period............................................ 8,677 13,276
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 20,479 $ 8,844
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense............................................................................ $ 2,805 $ 2,716
Income taxes................................................................................ $ -- $ --
Non-cash investing activity--transfer of loans to foreclosed real estate.................... $ 1,117 $ 1,035
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
F-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-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments including
normal recurring accruals, considered necessary for fair presentation have been
included. The results of operations for the three months ended March 31, 1998,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
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 corporation, Argo / Empire Mortgage LLC. Significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE B--STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan")
effective October 1, 1988, for the exclusive benefit of eligible employees of
the Savings Bank. The Plan is a qualified plan covering all employees of the
Savings Bank who have completed at least 1,000 hours of service within a twelve
(12) consecutive month period and are age twenty-one (21) or older. Participants
may make contributions to the Plan from 1.0% to 12.0% of their earnings, subject
to Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $17,000 and $21,000, to
the Plan for the three months ended March 31, 1998, and 1997. 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
participant contributions are made at On-Line's discretion each year. On-Line
contributions totaled $13,000 for both three-month periods ended March 31, 1998,
and 1997, 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.
In connection with the Merger Conversion, Argo Savings formed an Employee
Stock Ownership Plan ("ESOP") for eligible employees. The ESOP borrowed funds
from an unrelated third party lender in the amount of $60,180 in order to
purchase 7.0% of the Common Stock to be issued in the Merger Conversion (5,233
shares at $11.50 per share). The ESOP has subsequently borrowed additional funds
from the same third party lender in the amount of $245,000 in order to purchase
additional shares. The ESOP has purchased an additional 13,020 shares at an
average price of $18.79 per share. Argo Savings will make scheduled
discretionary cash contributions to the ESOP sufficient to service the amounts
borrowed. The unpaid balance of the ESOP loan 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
F-7
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--STOCK BENEFIT PLANS (CONTINUED)
$16,000 and $17,000 were made to the ESOP to fund principal and interest for the
three months ended March 31, 1998, and 1997, respectively.
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 increased by $12,000 for the
three months ended March 31, 1998.
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 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. During the year ended December 31, 1997, the Company sold
4,652 shares held by the Argo Bancorp MRP for $181,000 reducing the total shares
held by the plan to 7,848. Under this plan, employees in key management
positions with Argo Bancorp and all its subsidiaries are eligible for
participation. No shares were awarded during the three months ended March 31,
1998. During the three months ended March 31, 1997, 1,575 shares were awarded to
certain key On-Line employees. Amortization expense totaled $3,000 for each
three month period ended March 31, 1998, and 1997, respectively.
The Board of Directors of Argo Savings formed a Management Recognition Plan
and Trust ("MRP") effective October 31, 1991, which purchased 6.8% or 15,400
shares, of the Corporation's authorized but unissued common stock in December
1991. In addition, Argo Savings contributed $34,385 to allow the MRP to purchase
2,990 shares in the merger conversion or on the open market. All initial MRP
shares have been awarded to employees in key management positions with the
Savings Bank and are fully vested.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 24,498. An additional
3,797 and 1,907 shares were purchased in 1996 and 1995, respectively, under the
MRP. During the year ended December 31, 1997, the Company sold 5,604 shares held
by the plan for $219,000, reducing the total shares held by the plan to one
hundred (100). 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 amortized cost is reflected as a reduction of stockholders'
equity. No shares were awarded or vested during the three-months ended March 31,
1998. Amortization expense totaled $24,000 for the three months ended March 31,
1997.
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. Argo Bancorp awarded all 107,450
options 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 61,898 options exercised and 8,060 options of
which were exercised during the three months ended March 31, 1998. At March 31,
1998, options to purchase 45,552 shares were outstanding.
F-8
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--STOCK BENEFIT PLANS (CONTINUED)
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option
Plan for Non-Employee Directors (Non-Qualified Stock Option Plan), which was
approved by its shareholders effective December 23, 1991, under which up to
107,450 shares of Argo Bancorp's common stock were reserved for issuance by Argo
Bancorp upon exercise of non-incentive stock options to be granted to
non-employee directors of the Corporation and its subsidiaries from time to
time. At March 31, 1998, Argo Bancorp has awarded 62,100 options for shares
under the Non-Qualified Stock Option Plan. To date, options to acquire 13,200
shares have been exercised. No options were exercised during the three months
ended March 31, 1998. The exercise price for the options awarded was equal to
the fair market value of the common stock at the date of grant. At March 31,
1998, options to purchase 48,900 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 ratio of 3.0% core capital to total adjusted assets, and (3) a tangible
capital requirement of 1.5% tangible core capital to total assets. Although the
minimum capital requirement is 3.0%, the OTS Regulations provide that an
institution with less than 4.0% core capital is deemed to be
"under-capitalized." The following table summarizes, as of March 31, 1998, Argo
Savings' capital requirements under OTS regulations and its actual capital
ratios at that date:
<TABLE>
<CAPTION>
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
--------------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Risk-based............................................... 8.0% 11.90% $ 9,833 $ 14,622 $ 4,789
Core..................................................... 3.0 6.10 6,682 13,596 6,914
Tangible................................................. 1.5 6.10 3,341 13,596 10,255
</TABLE>
NOTE D--EARNINGS PER SHARE
Basic earnings per share is based on a weighted average number of shares of
outstanding of 490,905 and 472,388 for the three months ended March 31, 1998,
and 1997, respectively. Diluted earnings per share
F-9
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EARNINGS PER SHARE (CONTINUED)
for the three months ended March 31, 1998, and 1997, is based upon a weighted
average number of shares outstanding of 522,352 and 505,443, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net Income................................................................................ $ 386,000 $ 257,000
---------- ----------
---------- ----------
Weighted average common shares outstanding................................................ 490,905 472,388
Basic earnings per shares................................................................. $ .79 $ .54
---------- ----------
---------- ----------
Total weighted average common shares outstanding.......................................... 490,905 472,388
Additional dilutive shares................................................................ 31,447 --
---------- ----------
Total weighted average common shares and Equivalents outstanding for diluted
computation............................................................................. $ 522,352 $ 505,443
---------- ----------
---------- ----------
Diluted earnings per share................................................................ $ .74 $ .51
---------- ----------
---------- ----------
</TABLE>
NOTE E--COMMITMENTS AND CONTINGENCIES
At March 31, 1998, Argo Savings had loan commitments totaling $5.8 million
and $14.5 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 $3.2 million.
F-10
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Chicago, Illinois
March 24, 1998
F-11
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Cash....................................................................................... $ 6,211 12,518
Interest-earning deposits.................................................................. 2,466 758
Stock in Federal Home Loan Bank of Chicago, at cost........................................ 3,271 3,428
Securities available-for-sale, at fair value............................................... 4,974 5,788
Loans receivable, net of allowance for loan losses of $814 and $665 in 1997 and 1996,
respectively............................................................................. 153,808 125,704
Discounted loans receivable................................................................ 30,550 47,725
Accrued interest receivable................................................................ 1,725 2,089
Foreclosed real estate, net of allowance for losses of $92 and $189 in 1997 and 1996,
respectively............................................................................. 4,251 3,913
Premises and equipment, net................................................................ 11,235 9,856
Mortgage loan servicing rights............................................................. 794 1,089
Investment in limited partnerships......................................................... 5,912 4,175
Software licensing rights.................................................................. 1,338 1,663
Prepaid expenses and other assets.......................................................... 9,763 10,578
---------- ---------
$ 236,298 229,284
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................................................... 172,469 150,627
Borrowed money............................................................................. 34,156 50,879
Advance payments by borrowers for taxes and insurance...................................... 741 24
Accrued interest payable................................................................... 264 267
Interest-bearing custodial escrow balances for loans serviced for others................... 1 76
Custodial escrow balances for loans serviced for others.................................... 6,399 5,706
Other liabilities.......................................................................... 4,164 5,145
---------- ---------
Total liabilities.......................................................................... 218,194 212,724
---------- ---------
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 489,584
shares in 1997 and 446,254 shares in 1996............................................ 5 4
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............................................................... 8,570 7,382
Retained earnings--substantially restricted.............................................. 9,915 9,444
Common stock acquired by:
Employee Stock Ownership Plan.......................................................... (57) (117)
Management Recognition Plan............................................................ (296) (165)
Net unrealized gain (loss) on securities available-for-sale, net of income taxes......... (33) 12
---------- ---------
Total stockholders' equity................................................................. 18,104 16,560
Commitments and contingencies..............................................................
---------- ---------
$ 236,298 229,284
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Interest income:
Loans receivable............................................................ $ 12,072 11,370 11,836
Discounted loans receivable................................................. 5,249 3,687 1,174
Mortgage-backed securities available-for-sale............................... 293 354 405
Interest-earning deposits................................................... 364 421 67
Securities available-for-sale............................................... 288 242 505
--------- --------- ---------
Total interest income......................................................... 18,266 16,074 13,987
--------- --------- ---------
Interest expense:
Deposits.................................................................... 8,580 6,433 5,610
Custodial escrows........................................................... 1 78 224
Borrowed money.............................................................. 2,705 2,572 2,507
--------- --------- ---------
Total interest expense........................................................ 11,286 9,083 8,341
--------- --------- ---------
Net interest income before provision for loan losses.......................... 6,980 6,991 5,646
Provision for loan losses..................................................... 210 248 55
--------- --------- ---------
Net interest income after provision for loan losses........................... 6,770 6,743 5,591
--------- --------- ---------
Noninterest income:
Loan servicing income, net.................................................. 426 352 361
Net gain (loss) on sale of:
Loans held for sale....................................................... 217 246 226
Discounted loans receivable............................................... 279 1,843 1,062
Foreclosed real estate.................................................... 19 (366) (2)
Securities available-for-sale............................................. 710 235 219
Fees and service charges.................................................... 1,451 520 450
Data processing income...................................................... 11,528 11,111 1,836
Other....................................................................... 955 253 327
--------- --------- ---------
Total noninterest income...................................................... 15,585 14,194 4,479
--------- --------- ---------
Noninterest expense:
Compensation and benefits................................................... $ 8,799 8,731 3,648
Occupancy and equipment..................................................... 4,930 4,260 1,471
Federal deposit insurance premiums.......................................... 102 1,072 268
Loan servicing expense...................................................... 550 268 251
Professional fees........................................................... 1,261 788 431
Advertising and promotion................................................... 382 305 104
Goodwill amortization....................................................... 104 108 102
Data processing cost of services............................................ 2,806 1,542 231
Computer services........................................................... -- -- 181
Software expense............................................................ 865 705 119
Other....................................................................... 1,610 1,481 856
--------- --------- ---------
Total noninterest expense..................................................... 21,409 19,260 7,662
--------- --------- ---------
Income before income taxes.................................................... 946 1,677 2,408
Income tax expense............................................................ 123 343 667
--------- --------- ---------
Net income.................................................................... $ 823 1,334 1,741
--------- --------- ---------
--------- --------- ---------
Per share amounts:
Basic....................................................................... $ 1.70 4.24 5.88
Diluted..................................................................... 1.56 3.60 4.96
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON COMMON GAIN (LOSS)
COMMON ADDITIONAL STOCK STOCK ON SECURITIES
STOCK PAID-IN RETAINED ACQUIRED ACQUIRED AVAILABLE-
CLASS A CAPITAL EARNINGS BY ESOP BY MRP FOR-SALE
----------- ------------- ----------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1994........... $ 3 2,664 6,789 (237) (21) (224)
Net income............................. -- -- 1,741 -- -- --
Principal payments on ESOP loan........ -- -- -- 60 -- --
Amortization of purchase price of MRP
stock................................ -- -- -- -- 21 --
Proceeds from exercise of stock
options.............................. -- 49 -- -- -- --
Fair value adjustment for committed
ESOP shares.......................... -- 26 -- -- -- --
Cash dividends ($.68 per share)........ -- -- (208) -- -- --
Purchase of additional MRP shares...... -- -- -- -- (50) --
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... -- -- -- -- -- 266
----- ----- ----- --- --- ---
Balance at December 31, 1995........... 3 2,739 8,322 (177) (50) 42
Net income............................. -- -- 1,334 -- -- --
Proceeds from issuance of stock........ 1 4,026 -- -- -- --
Principal payments on ESOP loan........ -- -- -- 60 -- --
Proceeds from exercise of stock
options.............................. -- 430 -- -- -- --
Tax benefits of stock options
exercised............................ -- 149 -- -- -- --
Fair value adjustment for committed
ESOP shares.......................... -- 38 -- -- -- --
Cash dividends ($.68 per share)........ -- -- (212) -- -- --
Purchase of additional MRP shares...... -- -- -- -- (115) --
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... -- -- -- -- -- (30)
----- ----- ----- --- --- ---
Balance at December 31, 1996........... 4 7,382 9,444 (117) (165) 12
Net income............................. -- -- 823 -- -- --
Proceeds from issuance of stock........ 1 411 -- -- -- --
Principal payments on ESOP loan........ -- -- -- 60 -- --
Amortization of purchase price of MRP
stock................................ -- -- -- -- 12 --
Proceeds from exercise of stock
options.............................. -- 525 -- -- -- --
Tax benefits of stock options
exercised............................ -- 145 -- -- -- --
Fair value adjustment for committed
ESOP shares.......................... -- 50 -- -- -- --
Cash dividends ($.68 per share)........ -- -- (352) -- -- --
Purchase of additional MRP shares...... -- -- -- -- (486) --
Proceeds from sale of MRP stock........ -- 57 -- -- 343 --
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... -- -- -- -- -- (45)
----- ----- ----- --- --- ---
Balance at December 31, 1997........... $ 5 8,570 9,915 (57) (296) (33)
----- ----- ----- --- --- ---
----- ----- ----- --- --- ---
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1994........... 8,974
Net income............................. 1,741
Principal payments on ESOP loan........ 60
Amortization of purchase price of MRP
stock................................ 21
Proceeds from exercise of stock
options.............................. 49
Fair value adjustment for committed
ESOP shares.......................... 26
Cash dividends ($.68 per share)........ (208)
Purchase of additional MRP shares...... (50)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... 266
------
Balance at December 31, 1995........... 10,879
Net income............................. 1,334
Proceeds from issuance of stock........ 4,027
Principal payments on ESOP loan........ 60
Proceeds from exercise of stock
options.............................. 430
Tax benefits of stock options
exercised............................ 149
Fair value adjustment for committed
ESOP shares.......................... 38
Cash dividends ($.68 per share)........ (212)
Purchase of additional MRP shares...... (115)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... (30)
------
Balance at December 31, 1996........... 16,560
Net income............................. 823
Proceeds from issuance of stock........ 412
Principal payments on ESOP loan........ 60
Amortization of purchase price of MRP
stock................................ 12
Proceeds from exercise of stock
options.............................. 525
Tax benefits of stock options
exercised............................ 145
Fair value adjustment for committed
ESOP shares.......................... 50
Cash dividends ($.68 per share)........ (352)
Purchase of additional MRP shares...... (486)
Proceeds from sale of MRP stock........ 400
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes......................... (45)
------
Balance at December 31, 1997........... 18,104
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................................. $ 823 1,334 1,741
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 2,176 1,435 708
Accretion of discounts and deferred loan fees........................... (1,032) (774) (1,440)
Deferred income tax expense (benefit)................................... (37) 261 545
Provision for losses on loans receivable and foreclosed
real estate........................................................... 248 487 114
Loss (gain) on sale of:
Loans held for sale................................................... (217) (246) (226)
Discounted loans receivable........................................... (279) (1,843) (1,062)
Securities available-for-sale......................................... (710) (235) (219)
Foreclosed real estate................................................ (19) 366 2
Loans originated and purchased for sale................................. (14,428) (23,681) (57,769)
Proceeds from sale of loans held for sale............................... 40,312 36,040 45,850
Proceeds from sale of discounted loans receivable....................... 20,990 9,358 6,494
Goodwill amortization................................................... 104 108 102
Amortization of purchased loan servicing rights......................... 169 -- --
Amortization of purchase price of MRP and ESOP stock.................... 72 60 81
Recognition of fair value of ESOP shares committed to be released....... 50 38 26
FHLB stock dividends.................................................... -- -- (40)
Decrease (increase) in accrued interest receivable and prepaid expenses
and other assets...................................................... 1,571 (3,689) (3,985)
Increase in accrued interest payable and other liabilities.............. (948) 1,500 2,865
---------- ---------- ----------
Net cash provided by (used in) operating activities........................... 48,845 20,519 (6,213)
---------- ---------- ----------
Cash flows from investing activities:
Loans originated and purchased for portfolio................................ (100,742) (59,552) (35,633)
Discounted loans receivable purchased....................................... (8,858) (41,061) (19,904)
Principal repayments on:
Loans receivable and discounted loans receivable.......................... 48,232 46,231 35,928
Mortgage-backed securities available-for-sale............................. 855 735 936
Proceeds from maturities of investment securities........................... -- 625 4,100
Proceeds from sale of:
Securities available-for-sale............................................. 8,668 742 1,448
FHLB stock................................................................ 157 -- --
Foreclosed real estate.................................................... 4,543 1,968 600
Purchased loan servicing rights........................................... 120 -- --
Premises and equipment.................................................... -- 19 14
Purchase of:
Securities available-for-sale............................................. (8,088) (152) (830)
Premises and equipment.................................................... (3,553) (5,849) (3,691)
(CONTINUED)
</TABLE>
F-15
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stock in Federal Home Loan Bank of Chicago................................ -- (759) (53)
Loan servicing rights..................................................... (1,731) (1,231) --
Net cash (paid) received in purchase of subsidiary.......................... -- 67 (629)
---------- ---------- ----------
Net cash used in investing activities......................................... $ (60,397) (58,217) (17,714)
---------- ---------- ----------
Cash flows from financing activities:
Net increase in deposits.................................................... $ 21,842 27,143 22,787
Proceeds from borrowed money................................................ 88,433 118,671 145,718
Repayment of borrowed money................................................. (105,156) (105,974) (137,482)
Purchase of MRP shares...................................................... (486) (115) (50)
Proceeds from stock issuance................................................ 412 4,027 --
Proceeds from sale of MRP stock............................................. 400 -- --
Proceeds from exercise of stock options..................................... 525 430 49
Dividends paid.............................................................. (352) (212) (208)
Net increase (decrease) in advance payments by borrowers for taxes and
insurance................................................................. 717 (143) (17)
Net increase (decrease) in custodial escrow balances for loans service...... 618 (3,914) (4,995)
---------- ---------- ----------
Net cash provided by financing activities..................................... 6,953 39,913 25,802
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... (4,599) 2,215 1,875
Cash and cash equivalents at beginning of year................................ 13,276 11,061 9,186
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 8,677 13,276 11,061
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................................. $ 11,196 8,980 7,983
Income taxes.............................................................. 76 400 190
Noncash investing activity -
transfer of loans to foreclosed real estate............................... 4,955 4,285 1,820
Decrease in taxes payable from exercise of stock options.................... 145 149 --
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.
F-16
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(N) EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share" was issued in February 1997. This
statement was effective in the fourth quarter of 1997. All periods presented
have been adjusted to conform to SFAS No. 128. In accordance with SFAS No. 128,
earnings per share is determined by dividing net income for the period by the
weighted average number of shares outstanding. Stock options are regarded as
common stock equivalents and are considered in the earnings per share
calculations, and are the only adjustment made to average shares outstanding in
computing diluted earnings per share. Common stock equivalents are computed
using the treasury stock method. Weighted average shares used in calculating
earnings per share are summarized below for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
<S> <C> <C> <C> <C> <C> <C>
1997 1996
----------------------------------------- -----------------------------------------
<CAPTION>
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item.......... $ 823 $ 1,334
------ ------
------ ------
Basic earnings per share:
Income available to common
shareholders.......................... $ 823 482,893 $ 1.70 $ 1,334 313,256 $ 4.26
----- -----
----- -----
Effect of dilutive securities:
Options............................... -- 43,798 -- 57,523
------ ------------- ------ -------------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversion.......................... $ 823 526,691 $ 1.56 $ 1,334 370,779 $ 3.60
------ ------------- ----- ------ ------------- -----
------ ------------- ----- ------ ------------- -----
<CAPTION>
<S> <C> <C> <C>
1995
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -----------
<S> <C> <C> <C>
Income before extraordinary item.......... $ 1,741
------
------
Basic earnings per share:
Income available to common
shareholders.......................... $ 1,741 295,978 $ 5.88
-----
-----
Effect of dilutive securities:
Options............................... -- 55,186
------ -------------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversion.......................... $ 1,741 351,164 $ 4.96
------ ------------- -----
------ ------------- -----
</TABLE>
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest-bearing deposits and
federal funds sold. Generally, federal funds re sold for one-day periods and
interest-bearing deposits mature within one day to three months.
Reclassifications. Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
F-17
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(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
1996 and 1995 consolidated financial statements have been reclassified to
conform with the 1997 presentation.
(B) 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, adjusted for amortization of premiums and accretion of discounts.
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 unrealized gains or losses 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.
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.
(C) 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. Interest income is not recognized on
loans which are 90 days or greater delinquent or on loans which management
believes are uncollectible.
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
F-18
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 or
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.
(D) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Impaired loans are 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. 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
impairment provisions. At December 31, 1997 and 1996, the Company identified no
loans that were considered impaired as defined.
(E) DISCOUNTED LOANS RECEIVABLE
The Company purchases loans, predominately secured by single family homes,
at moderate to deep discounts. The moderate discount loans have been
historically performing loans whereas the deep discount loans have been
nonperforming. These loans receivable 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 the aggregate, is charged
to income. There was no impairment expense recorded in 1997, 1996, or 1995.
(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.
(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.
F-19
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Activity in the allowance for losses on foreclosed real estate is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- -----
<S> <C> <C> <C>
Balance at beginning of year............................................................... $ 189 412 399
Provision for losses....................................................................... 38 238 59
Transfer from allowance for loan losses.................................................... 50 77 45
Charge-offs................................................................................ (185) (538) (91)
--------- --- ---
Balance at end of year..................................................................... $ 92 189 412
--------- --- ---
--------- --- ---
</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 the Company 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.
(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 for banking
acquisitions and 20 years (straight-line method) for the On-Line acquisition
using the straight line method.
(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
F-20
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 4%. The Savings Bank exceeded the federal requirement
at December 31, 1997 and 1996.
(N) EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," in the fourth
quarter of 1997. All prior periods presented have been restated under the
provisions of SFAS No. 128. Under the provisions of SFAS No. 128, primary and
fully diluted earnings per share were replaced with basic and diluted earnings
per share. Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is calculated by dividing net income by the weighted average number of shares
adjusted for the diluted effect of outstanding stock options.
The following table sets forth the components of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income................................................................. $ 823 1,334 1,741
---------- ---------- ----------
---------- ---------- ----------
Denominator:
Basic earnings per share--weighted average shares outstanding.............. 482,893 313,256 295,978
Effect of dilutive stock options outstanding............................... 43,798 57,523 55,186
---------- ---------- ----------
Diluted earnings per share--weighted average shares outstanding.............. 526,691 370,779 351,164
---------- ---------- ----------
Basic earnings per share..................................................... $ 1.70 4.26 5.88
Diluted earnings per share................................................... 1.56 3.60 4.96
---------- ---------- ----------
</TABLE>
(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.
F-21
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(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 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 in 1996.
Financial terms of the transaction included a cash sweep to shareholders of
On-Line funds on hand on the closing date, less amounts necessary to establish
certain agreed-upon escrow balances; a two-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, which was paid in 1997, 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 $8.9 million. During 1997, the Company
asserted claims that the selling shareholders of On-Line had breached certain
representations and warranties in the purchase contract. Following a series of
negotiations, the selling shareholders agreed to reduce the purchase price by
$1,098,000. As a result, at December 31, 1997, the amounts paid or payable,
exclusive of the future contingent payments, for On-Line were $836,000 less than
the fair value of the net assets acquired. Any future contingent payments will
reduce this shortgage. In December, 1997, the Company purchased from certain of
the former shareholders their rights to 25.45% of the future contingent payment.
The Company paid $172,000 for these future contingent payments. Management
anticipates funding any required future payments with borrowed funds and excess
funds generated from operations and, to the extent necessary, earnings and
assets of the Company. 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>
F-22
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(3) SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- ----------------------------------------------------- ----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal Securities................................. $ 370 10 -- 380
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation............. 125 -- (1) 124
Federal National Mortgage Association.............. 2,837 -- (34) 2,803
Marketable equity securities......................... 1,695 7 (35) 1,667
-- --
----------- -----
$ 5,027 17 (70) 4,974
-- --
-- --
----------- -----
----------- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- ------------------------------------------------------------------- ----------- ------------- ------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal securities............................................... $ 557 45 -- 602
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
----------- --- --- -----
----------- --- --- -----
</TABLE>
The amortized cost and estimated fair value of securities
available-for-sale, by contractual maturity, at December 31, 1997, 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>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Due in one year or less.................................................................... $ 234 234
Due after one year through five years...................................................... 565 560
Due after five years through ten years..................................................... 50 52
Due after ten years........................................................................ 2,483 2,461
----------- -----
3,332 3,307
Marketable equity securities............................................................... 1,695 1,667
----------- -----
$ 5,027 4,974
----------- -----
----------- -----
</TABLE>
F-23
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(3) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Proceeds from sales of securities available-for-sale for the years ended
December 31, 1997, 1996, and 1995 were $8,668,000, $742,000, and $1,448,000,
respectively. Gross gains of $710,000, $235,000, and $219,000, respectively
during 1997, 1996, and 1995 there were no realized losses on security sales
during these years.
The Company leases office space and computer equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1997, 1996, and
1995 totaled $503,000, $574,000, and $149,000, respectively.
(4) LOANS RECEIVABLE
Loans receivable and loans held for sale, net are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
<S> <C> <C>
1997 1996
---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans....................................................................... $ 111,404 81,050
Participating investment in first mortgage loans........................................... 31,059 37,487
Commercial real estate loans............................................................... 1,951 4,019
Equity line of credit loans................................................................ 7,700 6,035
Other loans................................................................................ 3,649 1,297
---------- ---------
Total gross loans receivable............................................................... 155,763 129,888
Add (deduct):
Allowance for loan losses.................................................................. (814) (665)
Deferred loan costs........................................................................ 681 93
Unearned discounts......................................................................... (1,822) (3,612)
---------- ---------
$ 153,808 125,704
---------- ---------
---------- ---------
Weighted-average interest rate............................................................. 9.57% 9.95%
---------- ---------
---------- ---------
</TABLE>
Included in first mortgage loans are loans held for sale totaling
approximately $6.5 million and $6.2 million at December 31, 1997 and 1996,
respectively.
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- ----- -----
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................................................ $ 665 587 613
Provision for loan losses................................................................... 210 248 55
Transfer to allowance for losses on foreclosed real estate.................................. (50) (77) (45)
Charge-offs................................................................................. (11) (93) (36)
--------- --- ---
Balance at end of year...................................................................... $ 814 665 587
--------- --- ---
--------- --- ---
</TABLE>
F-24
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(4) LOANS RECEIVABLE (CONTINUED)
Loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER LOANS RECEIVABLE
OF LOANS AMOUNT NET OF DISCOUNT
----------- --------- -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
December 31, 1997............................................................. 104 $ 5,525 3.57%
December 31, 1996............................................................. 78 3,942 3.12
December 31, 1995............................................................. 57 1,987 1.54
--- --------- ---
--- --------- ---
</TABLE>
First mortgage loans at December 31, 1997 include approximately $90.9
million in out-of-area purchased participation and whole loans, which are
secured by single-family homes, with approximately 13% in California, 13% in New
York, and 74% 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
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans......................................................................... $ 36,310 60,276
Commercial real estate loans................................................................. -- 504
Other loans.................................................................................. 460 1,062
--------- ---------
Total discounted loans receivable............................................................ 36,770 61,842
Less unearned discount....................................................................... (6,220) (14,117)
--------- ---------
$ 30,550 47,725
--------- ---------
--------- ---------
</TABLE>
Discounted loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF DISCOUNT LOANS
AMOUNT RECEIVABLE, NET
------------- -----------------
<S> <C> <C>
(IN
THOUSANDS)
December 31, 1997................................................................ $ 6,220 20.36%
December 31, 1996................................................................ 15,454 32.38
------ -----
------ -----
</TABLE>
F-25
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Investment securities........................................................................... $ 61 58
Mortgage-backed securities...................................................................... 18 27
Loans receivable and discounted loans receivable................................................ 1,646 2,004
--------- ---------
$ 1,725 2,089
--------- ---------
--------- ---------
</TABLE>
(7) PREMISES AND EQUIPMENT
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Land......................................................................................... $ 537 537
Office buildings and improvements............................................................ 4,075 3,776
Leasehold improvements....................................................................... 1,994 1,293
Furniture, fixtures, and equipment........................................................... 17,082 15,331
Capital leases............................................................................... 6,593 5,811
--------- ---------
30,281 26,748
Less accumulated depreciation and amortization............................................... (19,046) (16,892)
--------- ---------
$ 11,235 9,856
--------- ---------
--------- ---------
</TABLE>
Included in occupancy and equipment expense is depreciation and amortization
expense of office properties and equipment of approximately $2,176,000,
$1,435,000, and $708,000 for the years ended December 31, 1997, 1996, and 1995,
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, 1997 the Company had capital lease obligations of $6.6
million relating to lease agreements for equipment and other space in connection
with On-Line. Interest expense with respect to these capital leases totaled
$402,000, $207,000, and $42,000 in 1997, 1996, and 1995, respectively.
The Company leases office space and computer equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1997, 1996, and
1995 totaled $503,000, $574,000, and $149,000, respectively.
F-26
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(7) PREMISES AND EQUIPMENT (CONTINUED)
At December 31, 1997, 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
- --------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
(IN THOUSANDS)
1998......................................................................................... $ 343 1,296
1999......................................................................................... 359 986
2000......................................................................................... 344 802
2001......................................................................................... 359 777
2002......................................................................................... 372 496
Thereafter................................................................................... 1,520 310
----------- -----
Total minimum lease payments................................................................. 3,297 4,667
Amount representing interest--capital leases................................................. 838
----------- -----
Present value of minimum capital lease payments.............................................. $ 3,829
----------- -----
----------- -----
</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 approximately $9.1 million, $8.9 million, and $10.3 million
at December 31, 1997, 1996, and 1995, 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, 1997
and 1996, Argo Savings held $794,000 and $1.1 million, respectively, in
purchased mortgage servicing rights (PMSR's) with an underlying principal
balance of approximately $62.2 million and $83.2 million, respectively. Service
fee income for the year ended December 31, 1997 totaled $84,000 net of
amortization of purchased mortgage servicing rights of $2,000. No income was
recorded in 1996. In 1995, Argo Bancorp had no independently purchased servicing
rights.
During the year ended December 31, 1997, PMSR's totaling $120,000 with an
underlying principal balance of $9.2 million were sold at cost from the Savings
Bank. There were no other sales of purchased mortgage servicing rights for the
years ended December 31, 1997, 1996, and 1995.
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, 1997, the entire balance of the custodial accounts of
$6,399,000 relates to loans serviced on behalf of the Savings Bank and Argo
Bancorp.
The balance of investment in limited partnerships of $5.9 million and $4.2
million at December 31, 1997 and 1996, respectively, represents Argo Savings'
investment in three divisions of a single limited partnerships. The single
business activity of this limited partnership is the purchase of current
mortgage servicing rights. There are several equity investors in each division
of the partnership. The purchase of the servicing rights is then leveraged
allowing the partnership to purchase additional servicing rights. At the
F-27
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(8) LOAN SERVICING AND PURCHASED MORTGAGE SERVICING RIGHTS (CONTINUED)
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 division is performed by the general partner. Argo Savings'
recorded income related to this partnership on the equity method of $341,000,
$352,000, and $360,000 during 1997, 1996, and 1995, respectively, is included in
servicing fee income, net of amortization of PMSR's, in the consolidated
statements of operations.
(9) DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -----------------------
AMOUNT WEIGHTED AMOUNT
IN AVERAGE IN
THOUSANDS PERCENT RATE THOUSANDS PERCENT
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Passbook accounts......................................... $ 17,607 10.2% 2.63% $ 18,349 12.2%
NOW accounts.............................................. 13,225 7.7 2.48 12,426 8.3
Money market accounts..................................... 6,223 3.6 3.50 4,957 3.3
---------- ----- --- ---------- -----
37,055 21.5 2.72 35,732 23.8
---------- ----- --- ---------- -----
---------- ----- --- ---------- -----
Certificate accounts:
3.99% or less........................................... 10 -- 2.50 52 --
4.00 - 4.99%............................................ 874 .5 4.85 769 .5
5.00 - 5.99%............................................ 62,935 36.5 5.55 71,169 47.2
6.00 - 6.99%............................................ 69,962 40.5 6.11 39,194 26.0
7.00 - 7.99%............................................ 1,513 .9 7.09 3,612 2.4
8.00 - 8.99%............................................ 120 .1 8.44 99 .1
---------- ----- --- ---------- -----
135,414 78.5 5.85 114,895 76.2
---------- ----- --- ---------- -----
$ 172,469 100.0% 5.18% $ 150,627 100.0%
---------- ----- --- ---------- -----
---------- ----- --- ---------- -----
<CAPTION>
WEIGHTED
AVERAGE
RATE
-----------
<S> <C>
Passbook accounts......................................... 2.76%
NOW accounts.............................................. 3.05
Money market accounts..................................... 4.30
---
3.07
---
---
Certificate accounts:
3.99% or less........................................... 2.50
4.00 - 4.99%............................................ 4.84
5.00 - 5.99%............................................ 5.50
6.00 - 6.99%............................................ 6.17
7.00 - 7.99%............................................ 7.05
8.00 - 8.99%............................................ 8.44
---
5.77
---
5.13%
---
---
</TABLE>
Contractual maturities of certificate accounts at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
(IN THOUSANDS)
Under 12 months............................................................................ $ 116,154 48,570
12 months to 36 months..................................................................... 13,313 57,111
Over 36 months............................................................................. 5,947 9,214
---------- ---------
$ 135,414 114,895
---------- ---------
---------- ---------
</TABLE>
The Savings Bank has pledged investment securities of approximately
$3,022,000 and $4,160,000 at December 31, 1997 and 1996, respectively, as
collateral to secure certain public deposits. At December 31, 1997 and 1996,
respectively, the Savings Bank also had letters of credit totaling $15,402,000
and
F-28
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(9) DEPOSITS (CONTINUED)
$14,523,000, respectively, as collateral to secure several State of Illinois
certificates of deposit totaling approximately $14,100,000. The aggregate amount
of deposit accounts with a balance greater than $100,000 was $40,607,000 and
$36,487,000 at December 31, 1997 and 1996, respectively.
Interest expense on deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook and certificate accounts...................................................... $ 8,064 5,934 5,162
NOW accounts........................................................................... 270 282 333
Money market accounts.................................................................. 246 217 115
--------- --------- ---------
$ 8,580 6,433 5,610
--------- --------- ---------
--------- --------- ---------
</TABLE>
(10) BORROWED MONEY
Borrowed money at December 31 is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED INTEREST
RATE BALANCE
DECEMBER 31 DECEMBER 31
-------------------- --------------------
MATURITY 1997 1996 1997 1996
----------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank of Chicago:
Open line.. 6.24% 5.59 $ 6,000 25,650
1/02/97 -- 6.14 -- 297
2/11/97 -- 4.80 -- 2,000
2/10/97 -- 4.80 -- 1,409
12/17/97 -- 6.30 -- 55
2/21/00 5.48 -- 5,000 --
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 6.58 10,000 10,000
----------- --- --------- --------- ---------
6.22 5.80 23,832 42,243
----------- --- --------- --------- ---------
Other borrowings:
ESOP note payable............................................. 4/27/99 8.08 8.02 57 117
Note payable.................................................. Open line 8.44 8.25 5,279 2,227
Note payable.................................................. 10/31/97 -- 5.90 -- 1,026
Note payable.................................................. Open line 8.44 8.25 830 975
Margin account................................................ Open line 8.49 -- 329 --
Capital lease obligations
(see note 7)................................................ various 8.96 9.28 3,829 4,291
----------- --- --------- --------- ---------
8.63 8.48 10,324 8,636
----------- --- --------- --------- ---------
6.95% 6.25 $ 34,156 50,879
----------- --- --------- --------- ---------
</TABLE>
F-29
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(10) BORROWED MONEY (CONTINUED)
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 and letters of credit 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,
1997 consist of two notes payable and an open line margin account. The note
payable of $5,279,000 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 (8.50% at December 31, 1997). The note payable of $830,000 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 (8.50% at December 31, 1997).
The margin account loan is from a third party securities broker. The rate of
interest on the loan adjusts daily at prime less .50% (8.00% at December 31,
1997). The margin account loan was secured at December 31, 1997 by securities
held by the broker having a market value of $1.1 million.
(11) INCOME TAXES
The provision for Federal and state income tax expense consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................................................... $ 496 82 122
Deferred.................................................................................. (242) 261 545
--------- --- ---
254 343 667
State:
Current................................................................................... (124) -- --
Deferred.................................................................................. (7) -- --
--------- --- ---
Total income tax expense.................................................................... $ 123 343 667
--------- --- ---
--------- --- ---
</TABLE>
F-30
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(11) INCOME TAXES (CONTINUED)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................................... $ 91 111
Unused tax credit.......................................................................... 212 --
Allowance for loan losses.................................................................. 374 259
Depreciation............................................................................... 215 159
Unrealized loss on securities available-for-sale........................................... 20 --
Other...................................................................................... 20 40
--------- ---------
Gross deferred tax assets.................................................................... 932 569
--------- ---------
Deferred tax liabilities:
Excess tax bad debt deduction.............................................................. (31) (31)
Limited partnership interest............................................................... (1,116) (988)
Unrealized gain on securities available-for-sale........................................... -- (7)
Other...................................................................................... (75) (108)
--------- ---------
Gross deferred tax liabilities............................................................... (1,222) (1,134)
--------- ---------
Net deferred tax liabilities................................................................. $ (290) (565)
--------- ---------
</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>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at statutory rate....................................................... $ 321 570 819
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net.............................................. 35 37 35
Net operating loss carryforwards utilized................................................ (124) (18) (19)
Net decrease in valuation allowance...................................................... -- (62) --
Municipal interest, net.................................................................. (14) (14) (13)
Tax credits.............................................................................. (208) (179) (306)
Other.................................................................................... 113 9 151
--------- --- ---
Income tax expense......................................................................... $ 123 343 667
--------- --- ---
--------- --- ---
</TABLE>
At December 31, 1997 Argo Bancorp has net operating loss carryforwards
available of approximately $267,000 expiring in 2004. Utilization of these net
operating losses is limited to approximately $55,000 per year.
At December 31, 1997, Argo Bancorp has low income housing tax credit
carryforwards in the amount of $212,000 expiring in 2011 and 2012.
Retained earnings at December 31, 1997 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.
F-31
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(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 $82,000, $73,000, and $64,000 to the Plan for the years ended
December 31, 1997, 1996, and 1995, 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 $49,000, $81,000, and $10,800 to the Plan for the
years ended December 31, 1997, 1996, and 1995, 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.
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 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 $67,000, $72,000, and $78,000 were made to the ESOP to
fund principal and interest payments for the years ended December 31, 1997,
1996, and 1995, respectively. At December 31, 1997, 18,253 shares were
allocated, 15,856 shares were committed to be released, and 2,397 shares were in
suspense. The fair value of unearned shares at December 31, 1997 was $93,483.
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 basic and 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 $50,000, $38,000, and $26,000 for the years
ended December 31, 1997, 1996, and 1995, 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.
F-32
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
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. No MRP shares were awarded or expensed during the years
ended December 31, 1997 and 1996. For the year ended December 31, 1995, the
Savings Bank expensed $21,000 of the funds relating to the MRP awards.
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. During the year ended December 31, 1997, the Company sold 5,604 shares held
by the Savings Bank MRP for $219,000, reducing the total shares held by the plan
to one hundred (100). The proceeds from this transaction were recorded as an
increase in capital at December 31, 1997. None of the remaining shares 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. During the
year ended December 31, 1997, 1,575 shares were awarded to certain key On-Line
employees. Amortization expense totaled $12,000 for the year ended December 31,
1997. No MRP shares were awarded or expensed during the year ended December 31,
1996. Also during the year ended December 31, 1997, the Company sold 4,652
shares held by the Argo Bancorp MRP plan for $181,000, reducing the total shares
held by the plan to 7,848. The proceeds from this transaction were recorded as
an increase in capital at December 31, 1997.
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 or greater
than the fair market value of the common stock on the date of grant. During
1997, 1996, and 1995, 23,997, 22,972, and 3,762 of the options were exercised,
respectively. The weighted average exercise price for the options exercised in
1997, 1996, and 1995 was $15.40, $16.76, and $14.21, respectively. At December
31, 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) 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,
F-33
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
1997, 62,100 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
1997, 1996, and 1995, 8,500, 3,200, and 500 of the options were exercised,
respectively. The weighted average exercise price for options exercised in 1997,
1996, and 1995 was $18.24, $14.31, and $11.50, respectively. At December 31,
1997, options to purchase 48,900 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 Stock Option
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, 1997 and 1996. 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Net income:
As reported........................................................ $ 823 1,334 1,741
Pro forma.......................................................... 583 1,115 1,375
Earnings per share:
Basic:
As reported...................................................... 1.70 4.26 5.88
Pro forma........................................................ 1.21 3.56 4.63
Diluted:
As reported...................................................... 1.56 3.60 4.96
Pro forma........................................................ 1.10 3.01 3.92
</TABLE>
Pro forma net income reflects only options granted in 1997, 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 immediately for
the Non Qualified Stock Option Plan. 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 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield................................................... 2.13% 2.37% 2.37%
Risk-free interest rate.......................................... 6.11% 6.10% 6.64%
Weighted average expected life................................... 8 yrs. 8 yrs. 8 yrs.
Expected volatility.............................................. 8.70% 6.95% 6.95%
</TABLE>
F-34
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average per share fair values of options granted during 1997,
1996, and 1995 were $10.72, $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 $5.8 million at December 31, 1997, at rates ranging from 6.25%
to 9.38%. 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 $7.8 million as of December
31, 1997. The Savings Bank also had Community Reinvestment Act (CRA) investment
commitments outstanding of $3.2 million. These commitments include $977,000 to
be funded over ten years for investment in the Chicago Equity Fund, $317,000 to
be funded over thirteen years for investment in the Community Investment
Corporation.
(14) CAPITAL CONTRIBUTIONS
Argo Bancorp contributed $2.4 million and $1.5 million to On-Line during the
years ended December 31, 1997 and 1996, respectively. These capital
contributions were used to fund software license purchases, leasehold
improvements, and to improve the cash flow position. Argo Bancorp contributed
$1.3 million and $2.3 million to the Savings Bank in December of 1997 and 1996,
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) 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, 1997 and
1996, that the Savings Bank meets all capital adequacy requirements to which it
is subject.
F-35
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(15) REGULATION AND SUPERVISION (CONTINUED)
As of December 31, 1997 and 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.
The Savings Bank's actual capital amounts (in thousands) and ratios are as
follows as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY
ACTUAL PURPOSES ACTION
-------------------- ------------------------ --------------------
DECEMBER 31, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------- --------- --------- ----------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets)................... $ 13,849 11.10% $ 9,981 8.00% $ 12,476 10.00%
Tier I capital (to risk-weighted assets).................. 13,035 10.45 N/A N/A 7,486 6.00
Tier I capital (core leverage) (to assets)................ 13,035 5.93 6,592 3.00 10,986 5.00
Tangible capital (to assets).............................. 13,035 5.93 3,296 1.50 N/A N/A
--------- --------- ----------- --- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY
ACTUAL PURPOSES ACTION
-------------------- ------------------------ --------------------
DECEMBER 31, 1996 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>
(16) 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, 1997 and 1996, the Savings Bank was a Tier I Savings Bank.
(17) 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. On-Line Financial provides data processing services to financial
institutions.
F-36
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(17) SEGMENT FINANCIAL INFORMATION (CONTINUED)
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 intercompany
allocations. The allocations are based upon various management estimates. The
data processing 1995 amounts represent a stub period of two months from the
acquisition date of On-Line.
<TABLE>
<CAPTION>
DATA CONSOLIDATED
BANKING PROCESSING TOTAL
---------- ----------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
1997:
Revenues.................................................................. $ 21,101 12,750 33,851
Earnings.................................................................. 698 125 823
Assets.................................................................... 225,129 11,169 236,298
---------- ----------- ------------
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>
(18) 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
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash....................................................................................... $ 146 538
Interest-bearing deposits.................................................................. 520 316
Securities available-for-sale.............................................................. 1,333 282
Loans receivable........................................................................... 62 5
Investment in subsidiaries................................................................. 20,185 18,583
Other assets............................................................................... 1,760 813
--------- ---------
Total assets................................................................................. $ 24,006 20,537
--------- ---------
--------- ---------
Liabilities and stockholders' equity:
Borrowed money............................................................................. 5,608 3,540
Other liabilities.......................................................................... 294 437
Total stockholders' equity................................................................... 18,104 16,560
--------- ---------
Total liabilities and stockholders' equity................................................. $ 24,006 20,537
--------- ---------
--------- ---------
</TABLE>
F-37
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(18) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income......................................................................... $ 23 9 23
Interest expense........................................................................ (335) (341) (286)
--------- --------- ---------
Net interest expense.................................................................... (312) (332) (263)
Dividends from subsidiaries............................................................. 2,242 1,818 973
Equity in undistributed earnings of subsidiaries........................................ (1,144) 148 1,097
Other noninterest income................................................................ 618 235 206
Noninterest expense..................................................................... (789) (683) (399)
--------- --------- ---------
Net income before income taxes.......................................................... 615 1,186 1,614
Income tax benefit...................................................................... (208) (148) (127)
--------- --------- ---------
Net income.............................................................................. $ 823 1,334 1,741
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-38
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(18) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 823 1,334 1,741
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.......................................................... (618) (235) (204)
Equity in undistributed earnings of subsidiaries................................. 1,144 (148) (1,097)
Amortization of purchase price of ESOP and MRP................................... 72 60 81
Recognition of fair value of ESOP shares scheduled to be released................ 50 38 26
Increase in other assets......................................................... (729) (586) (139)
Increase (decrease) in other liabilities......................................... (143) 370 (499)
--------- --------- ---------
Net cash provided by operating activities............................................ 599 833 44
--------- --------- ---------
Cash flows from investing activities:
Loans originated................................................................... (63) -- (135)
Principal repayments on loans receivable........................................... 6 3 3
Proceeds from the sale of investment securities.................................... 5,790 742 1,314
Purchase of investment securities.................................................. (6,306) (127) (760)
Net cash (paid) received in purchase of subsidiary................................. 916 -- (629)
Contribution to MRP and ESOP....................................................... (486) (115) (50)
--------- --------- ---------
Net cash provided by (used in) investing activities.................................. (143) 503 (257)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock issuance....................................................... 412 4,027 --
Proceeds from borrowed money....................................................... 11,108 1,943 5,173
Repayment of borrowed money........................................................ (9,040) (3,120) (2,573)
Capital contributions to subsidiaries.............................................. (3,698) (3,775) (2,517)
Proceeds from exercise of stock options............................................ 525 430 49
Proceeds from sale of MRP stock.................................................... 400 -- --
Dividends paid..................................................................... (351) (212) (208)
--------- --------- ---------
Net cash used in financing activities................................................ (644) (707) (76)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................. (188) 629 (289)
Cash and cash equivalents at beginning of year....................................... 854 225 514
--------- --------- ---------
Cash and cash equivalents at end of year............................................. $ 666 854 225
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-39
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(19) 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, 1997 and 1996 are set
forth in the following table, followed by the methods and assumptions used.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash................................................................ $ 6,211 6,211 12,518 12,518
Interest-bearing deposits........................................... 2,466 2,466 758 758
FHLB of Chicago stock............................................... 3,271 3,271 3,428 3,428
Securities available-for-sale....................................... 4,974 4,974 5,788 5,788
Loans receivable.................................................... 184,358 201,466 173,429 190,655
Accrued interest receivable......................................... 1,725 1,725 2,089 2,089
--------- --------- --------- ---------
--------- --------- --------- ---------
Financial liabilities:
Deposits without stated maturities.................................. $ 37,055 37,055 35,732 35,732
Deposits with stated maturities..................................... 135,414 135,582 114,895 115,184
Borrowed money...................................................... 34,156 34,205 50,879 50,018
Interest-bearing custodial escrow balances.......................... 1 1 76 76
Custodial escrow balances........................................... 6,399 6,399 5,706 5,706
Accrued interest payable............................................ 264 264 267 267
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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.
F-40
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(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.
F-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE BANK OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE
BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................ 5
Risk Factors................................... 15
Use of Proceeds................................ 27
Dividend Policy................................ 28
Market for Common Stock and Capital
Securities................................... 29
Dilution....................................... 29
Ratios of Earnings to Combined Fixed Charges... 30
Accounting Treatment........................... 30
Capitalization................................. 31
Argo Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income............ 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 33
Business of the Company........................ 49
Business of the Bank........................... 52
Business of On-Line Financial Services, Inc.... 77
Business of Empire/Argo, LLC................... 86
Federal and State Taxation..................... 86
Regulation..................................... 87
The Board of Directors and Management of the
Company...................................... 96
The Board of Directors and Management of the
Bank......................................... 98
Aggregated Option/Sar Exercise in the Last
Fiscal Year and Fiscal Year End Options/Sar
Values....................................... 104
Description of Capital Securities.............. 107
Description of the Junior Subordinated
Debentures................................... 118
Description of the Guarantee................... 128
Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the
Guarantee.................................... 130
Certain Federal Income Tax Consequences With
Respect to the Issuance of the Capital
Securities................................... 131
Erisa Considerations........................... 135
Restrictions on Acquisition of the Company..... 136
Description of Capital Stock of the Company.... 140
Transfer Agent and Registrar................... 141
Shares Eligible for Future Sale................ 142
Underwriting................................... 142
Additional Information......................... 144
Experts........................................ 144
Legal Matters.................................. 144
Argo Bancorp, Inc. Index to Financial
Statements................................... F-1
</TABLE>
------------------------
UNTIL , 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, IF
ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
ARGO BANCORP, INC.
SHARES OF COMMON STOCK
ARGO CAPITAL TRUST CO.
15,000,000 CAPITAL SECURITIES
$ OF % CAPITAL SECURITIES
---------------------
PROSPECTUS
---------------------
July , 1998
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
The following statement sets forth the estimated amount of expenses (other
than the underwriting discounts and commissions) to be incurred in connection
with the issuance and distribution of the securities being registered.
<TABLE>
<S> <C>
SEC filing fee(1)................................................................... $ 6,785
Nasdaq listing fee(1)............................................................... *
Printing and distribution........................................................... *
Legal fees and expenses............................................................. *
Accounting fees and expenses........................................................ *
Blue Sky fees and expenses.......................................................... *
Miscellaneous....................................................................... *
---------
TOTAL............................................................................... $ 6,785
</TABLE>
- ------------------------
(1) Actual expenses based upon the registration of 900,000 shares at $
per share and 15,000,000 aggregate liquidation amount of the % of Capital
Securities and $10.00 per share. All other expenses are estimated.
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 12 and 2 of the
Registrant's Certificate of Incorporation provide as follows:
ELEVENTH: ELIMINATION OF DIRECTORS' LIABILITY
Directors of the Corporation shall have no liability to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XI shall not eliminate liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not made in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which a director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after the effective date of this Certificate
to further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a director
of the Corporation existing at the time of such repeal or modification.
TWELVETH: INDEMNIFICATION
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
such proceeding is alleged action in an official capacity as a Director,
Officer, employee or agent or in any other capacity while serving as a
Director, Officer, employee or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith; provided,
however, that, except as provided in Section C hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article XII
shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or Officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, services to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not entitled to
be indemnified for such expenses under this Section or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections
A and B of this Article XII shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article XII is not paid in full by
the Corporation within sixty days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses
II-2
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article XII or
otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article XII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Certificate, Bylaws,
agreement, vote of stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent
of the provisions of this Article XII with respect to the indemnification
and advancement of expenses of Directors and Officers of the Corporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In accordance with Item 701 of Regulation S-K, the following information is
presented with respect to securities sold by the Registrant within the past
three years which were not registered under the Securities Act of 1933, as
amended ("Securities Act"):
(a) On December 31, 1996, the Company sold in a private placement an
aggregate of 446,256 shares of its Common Stock.
(b) Charles Webb & Company, a division of Keefe, Bruyette & Woods acted as
the Underwriter for the Company in connection with the private placement
transaction. The Common Stock was sold to one purchaser.
(c) The aggregate purchase price was $4.2 million.
(d) Based upon representations of the offerees and purchasers, the Common
stock was offered and sold in reliance upon an exemption from
registration under 4(2) of the Securities Act.
(e) not applicable
(f) not applicable
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
II-3
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
List of Exhibits (Filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.0 Underwriting Agreement *
3.1 Amended and Restated Certificate of Incorporation of ARGO Bancorp, Inc.
3.2 Bylaws of ARGO Bank Corp, Inc.
4.0 Form of Stock Certificate of ARGO Bancorp, Inc.
4.1 Form of Indenture of the Company relating to the Junior Subordinated Debentures *
4.2 Form of Certificate of Junior Subordinated Debenture *
4.3 Certificate of Trust of ARGO Capital Trust Co.
4.4 Declaration of Trust of ARGO Capital Trust Co.
4.5 Form of Capital Security Certificate for ARGO Capital Trust Co. *
4.6 Form of Guarantee of the Company relating to the Capital Securities *
4.7 Amended and Restated Declaration of Trust of ARGO Capital Trust Co. *
5.0 Opinion of Patton Boggs LLP as to legality of the Junior Subordinated Debentures and
the Guarantee to be issued by the Company *
5.1 Legal Opinion of Patton Boggs LLP as to the Legality of Common Stock *
5.2 Opinion of as to the legality of the Capital Securities to be issued by ARGO
Capital Trust Co. *
8.0 Opinion of Patton Boggs LLP as to certain federal income tax matters *
10.0 Stock Purchase Agreement & Stockholder Agreement between ARGO Bancorp, Inc., and the
Deltec Banking Corporation Limited dated December 31, 1996
10.1 Employment Agreement between ARGO Bancorp, Inc. and John G. Yedinak dated November 1,
1996
10.2 Employment Agreement between ARGO Bancorp, Inc. and Frances M. Pitts dated November 1,
1996
10.3 Amended and Restated Management Recognition and Retention Plan
10.4 ARGO Bancorp, Inc. 1998 Incentive Stock Option Plan
10.5 Employee Stock Option Plan *
23.1 Consent of KPMG Peat Marwick L.L.P. *
23.2 Consent of Patton Boggs LLP (included in Exhibit 5.1) *
23.3 Consent of (included in Exhibit 5.2) *
24.1 Power of Attorney of certain officers and directors of the Corporation (located on the
signature page hereto)
25.1 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Indenture *
25.2 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Declaration of Trust of ARGO Capital Trust Co. *
25.3 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Guarantee for the benefit of the holders of Capital Securities of ARGO
Capital Trust Co. *
27.0 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
II-4
<PAGE>
ITEM 17. UNDERTAKINGS. (CONTINUED)
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the Offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Summit,
State of Illinois, on July 20, 1998.
<TABLE>
<S> <C>
ARGO BANCORP, INC.
BY:
---------------------
John G. Yedinak
President and
Chief Executive Officer
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John G. Yedinak and Frances M. Pitts, jointly and
severally, each in his own capacity, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for such person
and in such person's name, place and stead, in any and all capacities, to sign
any or all amendments to this Registration Statement, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
or do cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME DATE
- ------------------------------ -------------------
President, Chief Executive
Officer and Director
- ------------------------------ (principal executive July 20, 1998
John G. Yedinak officer)
Interim Chief Financial
Officer (principal
- ------------------------------ accounting and financial July 20, 1998
George L. Koehm officer)
Director
- ------------------------------ July 20, 1998
Frances M. Pitts
Director
- ------------------------------ July 20, 1998
Arthur E. Byrnes
Director
- ------------------------------ July 20, 1998
Sergio Martinucci
Director
- ------------------------------ July 20, 1998
Donald G. Wittmer
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Summit,
State of Illinois, on July 20, 1998.
ARGO CAPITAL TRUST CO.
By:
---------------------------------------------
Administrative Trustee
By:
---------------------------------------------
Administrative Trustee
II-7
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Summit,
State of Illinois, on July , 1998.
<TABLE>
<S> <C> <C>
ARGO BANCORP, INC.
/s/ JOHN G. YEDINAK
-----------------------------------------
John G. Yedinak
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By:
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John G. Yedinak and Frances M. Pitts, jointly and
severally, each in his own capacity, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for such person
and in such person's name, place and stead, in any and all capacities, to sign
any or all amendments to this Registration Statement, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
or do cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE DATE
- ------------------------------ -------------------
President, Chief Executive
/s/ JOHN G. YEDINAK Officer and Director
- ------------------------------ (principal executive July 20, 1998
John G. Yedinak officer)
Interim Chief Financial
/s/ GEORGE L. KOEHM Officer
- ------------------------------ (principal accounting and July 20, 1998
George L. Koehm financial officer)
/s/ FRANCES M. PITTS Director
- ------------------------------ July 20, 1998
Frances M. Pitts
/s/ ARTHUR E. BYRNES Director
- ------------------------------ July 20, 1998
Arthur E. Byrnes
/s/ SERGIO MARTINUCCI Director
- ------------------------------ July 20, 1998
Sergio Martinucci
/s/ DONALD G. WITTMER Director
- ------------------------------ July 20, 1998
Donald G. Wittmer
II-8
<PAGE>
CONFORMED
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Summit,
State of Illinois, on July 20, 1998.
<TABLE>
<S> <C> <C> <C>
ARGO CAPITAL TRUST CO.
*By: /s/ JOHN G. YEDINAK
-------------------------
John G. Yedinak
ADMINISTRATIVE TRUSTEE
*By: /s/ FRANCES M. PITTS
-------------------------
Frances M. Pitts
ADMINISTRATIVE TRUSTEE
</TABLE>
II-9
<PAGE>
As filed with the Securities and Exchange Commission on July , 1998
Registration No. 333-
Registration No. 333-
-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
EXHIBITS
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ARGO BANCORP, INC.
ARGO CAPITAL TRUST CO.
(Exact name of registrants as specified in their certificates of incorporation)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
List of Exhibits (Filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.0 Underwriting Agreement *
3.1 Amended and Restated Certificate of Incorporation of ARGO Bancorp, Inc.
3.2 Bylaws of ARGO Bank Corp, Inc.
4.0 Form of Stock Certificate of ARGO Bancorp, Inc.
4.1 Form of Indenture of the Company relating to the Junior Subordinated Debentures *
4.2 Form of Certificate of Junior Subordinated Debenture *
4.3 Certificate of Trust of ARGO Capital Trust Co.
4.4 Declaration of Trust of ARGO Capital Trust Co.
4.5 Form of Capital Security Certificate for ARGO Capital Trust Co. *
4.6 Form of Guarantee of the Company relating to the Capital Securities *
4.7 Amended and Restated Declaration of Trust of ARGO Capital Trust Co. *
5.0 Opinion of Patton Boggs LLP as to legality of the Junior Subordinated Debentures and
the Guarantee to be issued by the Company *
5.1 Legal Opinion of Patton Boggs LLP as to the Legality of Common Stock
5.2 Opinion of as to the legality of the Capital Securities
8.0 Opinion of Patton Boggs LLP as to certain federal income tax matters *
10.0 Stock Purchase Agreement & Stockholder Agreement between ARGO Bancorp, Inc., and the
Deltec Banking Corporation Limited dated December 31, 1996
10.1 Employment Agreement between ARGO Bancorp, Inc. and John G. Yedinak dated November 1,
1996
10.2 Employment Agreement between ARGO Bancorp, Inc. and Frances M. Pitts dated November 1,
1996
10.3 Amended and Restated Management Recognition and Retention Plan
10.4 ARGO Bancorp, Inc. 1998 Incentive Stock Option Plan
10.5 Employee Stock Option Plan *
23.1 Consent of KPMG Peat Marwick L.L.P.
23.2 Consent of Patton Boggs LLP (included in Exhibit 5.1) *
23.3 Consent of (included in Exhibit 5.2) *
24.1 Power of Attorney of certain officers and directors of the Corporation (located on the
signature page hereto)
25.1 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Indenture *
25.2 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Declaration of Trust of ARGO Capital Trust Co. *
25.3 Form T-1 Statement of Eligibility of ARGO Capital Trust Company to act as trustee
under the Guarantee for the benefit of the holders of Capital Securities of ARGO
Capital Trust Co. *
27.0 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ARGO BANCORP, INC.
ARTICLE I
Name
The name of the corporation is ARGO BANCORP, INC. (herein the
"Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a holding
company and to transact all other lawful business for which corporations may be
incorporated pursuant to the laws of the State of Delaware. The Corporation
shall have all the powers of a corporation organized under said Act.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
ARTICLE V
Capital Stock
The aggregate number of shares of all classes of capital stock
which the Corporation has authority to issue is 10,000,000 of which 9,000,000
are to be shares of common stock, $.01 par value per share, and of which
1,000,000 are to be shares of serial preferred stock, $.01 par value per
share. The shares may be issued by the Corporation without the approval of
stockholders except as otherwise provided in this Article V or the rules of a
national securities exchange, if applicable. The consideration for the
issuance of the shares shall be paid to or received by the Corporation in
full before their issuance and shall not be less than the par value per
share. The consideration for the issuance of the shares shall be cash,
services rendered, personal property
<PAGE>
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the Board of Directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders of
the common stock shall exclusively possess all voting power.
Each holder of the common stock shall be entitled to one vote for each
share held by such holders.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and sinking fund or retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock, and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when as declared
by the Board of Directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any event, the full preferential amounts to which they
are respectively entitled, the holders of the common stock and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind. Each share of
common stock shall have the same relative powers, preferences and rights as, and
shall be identical in all respects with, all the other shares of common stock of
the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate, the
Board of Directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of
2
<PAGE>
the shares of such series, and the qualifications, limitations or
restrictions thereof, including, but not limited to determination of any of
the following:
1. the distinctive serial designation and the number of shares
constituting such series; and
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends and the
participating or other serial rights, if any, with respect to dividends; and
3. the voting powers, full or limited, if any, of the shares of such
series; and
4. whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such shares
may be redeemed; and
5. the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolutions or winding up of
the Corporation; and
6. whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or redemption
of such shares, and, if so entitled, the amount of such fund and the manner
of its application, including the price or prices at which such shares may be
redeemed or purchased through the application of such funds; and
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of
such conversion or exchange; and
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any
other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
3
<PAGE>
ARTICLE VI
Preemptive Rights
No holder of any of the shares of any class or series of stock or of options,
warrants or other rights to purchase shares of any class or series of stock or
of other securities of the Corporation shall have any preemptive right to
purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates of indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the Board of Directors of the Corporation to
such persons, firms, corporations, or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
ARTICLE VII
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the Bylaws
of the Corporation, no action required to be taken or which may be taken at
any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors of
the Corporation, or by a committee of the Board of Directors which has been
duly designated by the Board of Directors and whose powers and authorities,
as provided in a resolution of the Board of Directors or in the Bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide.
4
<PAGE>
ARTICLE VIII
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be fixed from time to time exclusively by the Board of Directors pursuant to
a resolution adopted by a majority of the Whole Board (the term "Whole Board"
shall mean the total number of authorized directorships, whether or not there
exist any vacancies in previously authorized directorships at the time any
such resolution is presented to the Board of Directors for adoption),
provided that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director, and provided further that no
action shall be taken to decrease or increase the number of directors from
time to time unless at least two-thirds of the directors then in office shall
concur in said action. Vacancies in the Board of Directors of the
Corporation, however caused, and newly created directorships shall be filled
by a vote of two-thirds of the directors then in office, whether or not a
quorum and any director so chosen shall hold office for a term expiring at
the annual meeting of stockholders at which the term of the class to which
the director has been chosen expires and when the director's successor is
elected and qualified.
B. Classified Board. The Board of Directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I,
Class II and Class III. The members of each class shall be elected for a term
of three years and until their successors are elected and qualified. Such
classes shall be as nearly equal in number as the then total number of
directors constituting the entire Board of Directors shall permit, with the
terms of office of all members of one class expiring each year. At the first
annual meeting of stockholders, directors in Class I shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
At the second annual meeting of stockholders, directors of Class II shall be
elected to hold office for a term expiring at the third succeeding meeting
thereafter. At the third annual meeting of stockholders, directors of Class
III shall be elected to hold office for a term expiring at the third
succeeding annual meeting thereafter. Thereafter, at each succeeding annual
meeting, directors whose term shall expire at any annual meeting shall
continue to serve until such time as his successor shall have been duly
elected and shall have qualified unless his position on the Board of
Directors shall have been abolished by action taken to reduce the size of the
Board of Directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of
the incumbent(s), the position(s) to be abolished. Notwithstanding the
foregoing, no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Should the number of directors
of the Corporation be increased, the additional directorships shall be
allocated among classes as appropriate so that the number of directors in
each class is as specified in the immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the
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Board of Directors shall consist of said directors so elected in addition to
the number of directors fixed as provided above in this Article VIII.
Notwithstanding the foregoing, and except as otherwise may be required by
law, whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
ARTICLE IX
Removal of Directors
Notwithstanding any other provision of this Certificate or the Bylaws of
the Corporation, any director or the entire Board of Directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 70% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of
the stockholders called for that purpose. Notwithstanding the foregoing,
whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the preceding provisions of this
Article IX shall not apply with respect to the director or directors elected
by such holders of preferred stock.
ARTICLE X
A. In addition to any affirmative vote required by law or this
Certificate, and except as otherwise expressly provided in this Article X:
1. any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with: (i) any Interested Stockholder (as hereinafter
defined); or (ii) any other corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined) equaling or exceeding 25% or more of
the combined assets of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation
or any Subsidiary to any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or other property (or
a combination thereof) having an aggregate Fair Market Value (as hereinafter
defined) equaling or exceeding 25% of the combined Fair Market Value of the
outstanding
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common stock of the Corporation and its Subsidiaries, except for any issuance
or transfer pursuant to an employee benefit plan of the Corporation or any
Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate of any Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which is directly
or indirectly owned by any Interested Stockholder or any Affiliate of any
Interested Stockholder; shall require the affirmative vote of the holders of
at least 70% of the voting power of the then-outstanding shares of stock of
the Corporation entitled to vote in the election of Directors (the "Voting
Stock"), voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or by any other provisions of this
Certificate or any Preferred Stock Designation in any agreement with any
national securities exchange or otherwise.
The term "Business Combination" as used in this Article X shall mean any
transaction which is referred to in any one or more of paragraphs 1 through 5
of Section A of this Article X.
B. The provisions of Section A of this Article X shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of the
outstanding shares of capital stock entitled to vote, or such vote (if any),
as is required by law or by this Certificate, if, in the case of any Business
Combination that does not involve any cash or other consideration being
received by the stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the following
paragraph 1 is met or, in the case of any other Business Combination, all of
the conditions specified in either of the following paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by a majority of
the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
a. The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other
than cash to be received per
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share by the holders of Common Stock in such Business Combination shall at
least be equal to the higher of the following:
(1) (if applicable) the Highest Per Share Price (as hereinafter
defined), including any brokerage commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested Stockholder or any of its Affiliates
for any shares of Common Stock acquired by it: (i) within the two-year period
immediately prior to the first public announcement of the proposal of the
Business Combination (the "Announcement Date"); or (ii) in the transaction in
which it became an Interested Stockholder, whichever is higher; or
(2) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder became
an Interested Stockholder (such latter date is referred to in this Article X
as the "Determination Date"), whichever is higher.
b. The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other
than cash to be received per share by holders of shares of any class of
outstanding Voting Stock other than Common Stock shall be at least equal to
the highest of the following (it being intended that the requirements of this
subparagraph (b) shall be required to be met with respect to every such class
of outstanding Voting Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as hereinafter
defined), including any brokerage commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested Stockholder for any shares of such
class of Voting Stock acquired by it: (i) within the two-year period
immediately prior to the Announcement Date; or (ii) in the transaction in
which it became an Interested Stockholder, whichever is higher; or
(2) (if applicable) the highest preferential amount per share to
which the holders of shares of such class of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation; or
(3) the Fair Market Value per share of such class of Voting Stock
on the Announcement Date or on the Determination Date, whichever is higher.
c. The consideration to be received by holders of a particular class of
outstanding Voting Stock (including Common Stock) shall be in cash or in the
same form as the Interested Stockholder has previously paid for shares of
such class of Voting Stock. If the Interested Stockholder has paid for shares
of any class of Voting Stock with varying forms of consideration, the form of
consideration to be received per share by holders of shares of such class of
Voting Stock shall be either cash or the form used to acquire the largest
number of shares of such class
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of Voting Stock previously acquired by the Interested Stockholder. The price
determined in accordance with subparagraph B.2 of this Article X shall be
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination of shares or similar event.
d. After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (1)
except as approved by a majority of the Disinterested Directors (as
hereinafter defined), there shall have been no failure to declare and pay at
the regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding stock having preference over the Common Stock
as to dividends or liquidation; (2) there shall have been: (i) no reduction
in the annual rate of dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except as approved by a
majority of the Disinterested Directors; and (ii) an increase in such annual
rate of dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding shares
of the Common Stock, unless the failure to so increase such annual rate is
approved by a majority of the Disinterested Directors, and (3) neither such
Interested Stockholder or any of its Affiliates shall have become the
beneficial owner of any additional shares of Voting Stock except as part of
the transaction which results in such Interested Stockholder becoming an
Interested Stockholder.
e. After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any
loans, advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided, directly or indirectly, by the
Corporation, whether in anticipation of or in connection with such Business
Combination or otherwise.
f. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, and the rules or regulations
thereunder) shall be mailed to stockholders of the Corporation at least 30
days prior to the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purposes of this Article X:
1. A "Person" shall include an individual, a firm, a group acting in
concert, a corporation, a partnership, an association, a joint venture, a
pool, a joint stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities or any other entity.
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2. "Interested Stockholder" shall mean any person (other than the
Corporation or any Holding Company or Subsidiary thereof) who or which:
a. is the beneficial owner, directly or indirectly, of more than 10% of
the voting power of the outstanding Voting Stock; or
b. is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding Voting Stock; or
c. is an assignee of or has otherwise succeeded to any shares of Voting
Stock which were at any time within the two-year period immediately prior to
the date in question beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering within
the meaning of the Securities Act of 1933, as amended.
3. For purposes of this Article X, "beneficial ownership" shall be
determined pursuant to Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, (or any successor rule or
statutory provision), or, if said Rule 13d-3 shall be rescinded and there
shall be no successor rule or provision thereto, pursuant to said Rule 13d-3
as in effect on the date of filing of this Certificate; provided, however,
that a person shall, in any event, also be deemed the "beneficial owner" of
any Common Stock:
(1) which such person or any of its affiliates beneficially owns,
directly or indirectly; or
(2) which such person or any of its affiliates has: (i) the right to
acquire (whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or understanding
(but shall not be deemed to be the beneficial owner of any voting shares
solely by reason of an agreement, contract, or other arrangement with this
Corporation to effect any transaction which is described in any one or more
of clauses 1 through 5 of Section A of this Article X, or upon the exercise
of conversion rights, exchange rights, warrants, or options or otherwise, or
(ii) sole or shared voting or investment power with respect thereto pursuant
to any agreement, arrangement, understanding, relationship or otherwise (but
shall not be deemed to be the beneficial owner of any voting shares solely by
reason of a revocable proxy granted for a particular meeting of stockholders,
pursuant to a public solicitation of proxies for such meeting, with respect
to shares of which neither such person nor any such Affiliate is otherwise
deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by any other
person with which such first mentioned person or any of its Affiliates acts as a
partnership, limited partnership, syndicate or other group pursuant to any
agreement, arrangement or understanding for the
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purpose of acquiring, holding, voting or disposing of any shares of capital
stock of this Corporation; and provided further, however, that: (1) no
Director or Officer of this Corporation (or any Affiliate of any such
Director or Officer) shall, solely by reason of any or all of such Directors
or Officers acting in their capacities as such, be deemed, for any purposes
hereof, to beneficially own any Common Stock beneficially owned by any other
such Director or Officer (or any Affiliate thereof); and (2) neither any
employee stock ownership or similar plan of this Corporation or any
subsidiary of this Corporation, nor any trustee with respect thereto or any
Affiliate of such trustee (solely by reason of such capacity of such
trustee), shall be deemed, for any purposes hereof, to beneficially own any
Common Stock held under any such plan. For purposes only of computing the
percentage of beneficial ownership of Common Stock of a person, the
outstanding Common Stock shall include shares deemed owned by such person
through application of this subsection but shall not include any other Common
Stock which may be issuable by this Corporation pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise. For
all other purposes, the outstanding Common Stock shall include only Common
Stock then outstanding and shall not include any Common Stock which may be
issuable by this Corporation pursuant to any agreement, or upon the exercise
of conversion rights, warrants or options, or otherwise.
4. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on the date of filing
of this Certificate.
5. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in Paragraph 2 of this Section C, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and any Director who is thereafter chosen to fill
any vacancy of the Board of Directors or who is elected and who, in either
event, is unaffiliated with the Interested Stockholder and in connection with
his or her initial assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the Board of
Directors.
7. "Fair Market Value" means:
a. in the case of stock, the highest closing sales price of the stock
during the 30-day period immediately preceding the date in question of a
share of such stock on the National Association of Securities Dealers
Automated Quotation System or any system then in use, or, if such stock is
admitted to trading on a principal United States securities exchange
registered
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under the Securities Exchange Act of 1934, as amended, Fair Market Value
shall be the highest sale price reported during the 30-day period preceding
the date in question, or, if no such quotations are available, the Fair
Market Value on the date in question of a share of such stock as determined
by the Board of Directors in good faith, in each case with respect to any
class of stock, appropriately adjusted for any dividend or distribution in
shares of such stock or any stock split or reclassification of outstanding
shares of such stock into a greater number of shares of such stock or any
combination or reclassification of outstanding shares of such stock into a
smaller number of shares of such stock; and
b. in the case of property other than cash or stock, the Fair Market
Value of such property on the date in question as determined by the Board of
Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.
9. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article X
shall include the shares of Common Stock and/or the shares of any other class
of outstanding Voting Stock retained by the holders of such shares.
D. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article X, on
the basis of information known to them after reasonable inquiry: (a) whether
a person is an Interested Stockholder; (b) the number of shares of Voting
Stock beneficially owned by any person; (c) whether a person is an Affiliate
or Associate of another; and (d) whether the assets which are the subject of
any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any Subsidiary in
any Business Combination has an aggregate Fair Market Value equaling or
exceeding 25% of the combined Fair Market Value of the Common Stock of the
Corporation and its Subsidiaries. A majority of the Disinterested Directors
shall have the further power to interpret all of the terms and provisions of
this Article X.
E. Nothing contained in this Article X shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of this Certificate or any
provision of law which might otherwise permit a lesser vote or no vote, but
in addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, this Certificate or any Preferred
Stock Designation, the affirmative vote of the holders of at least 70 percent of
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the voting power of all of the then-outstanding shares of the Voting Stock,
voting together as a single class, shall be required to alter, amend or
repeal this Article X.
ARTICLE XI
Elimination of Directors' Liability
Directors of the Corporation shall have no liability to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XI shall not eliminate liability of a
director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not made in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which a director derived an improper personal benefit.
If the Delaware General Corporation Law is amended after the effective date
of this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE XII
Indemnification
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
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connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
XII shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or Officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, services to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter
a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Section or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections A
and B of this Article XII shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article XII is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement
of expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden
of proving that the indemnitee is not entitled to be
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indemnified, or to such advancement of expenses, under this Article XII or
otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article XII shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Certificate,
Bylaws, agreement, vote of stockholders or Disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article XII with respect to the
indemnification and advancement of expenses of Directors and Officers of the
Corporation.
ARTICLE XIII
The Board of Directors of the Corporation, when evaluating any offer of
another Person (as defined in Article X hereof) to: (A) make a tender or
exchange offer for any equity security of the Corporation; (B) merge or
consolidate the Corporation with another corporation or entity; or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its
judgment in determining what is in the best interest of the Corporation and
its stockholders, give due consideration to all relevant factors, including,
without limitation, those factors that Directors of any subsidiary of the
Corporation may consider in evaluating any action that may result in a change
or potential change in the control of the subsidiary, and the social and
economic effect of acceptance of such offer: on the Corporation's present and
future customers and employees and those of its Subsidiaries (as defined in
Article X hereof); on the communities in which the Corporation and its
Subsidiaries operate or are located; on the ability of the Corporation to
fulfill its corporate objective under applicable laws and regulations; and on
the ability of its subsidiary savings association to fulfill the objectives
of stock savings association under applicable statutes and regulations.
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ARTICLE XIV
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the Corporation.
Notwithstanding any other provision of this Certificate or the Bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the Bylaws shall not be made, repealed, altered, amended
or rescinded by the stockholders of the Corporation except by the vote of the
holders of not less than 70% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the
notice of such meeting), or, as set forth above, by the Board of Directors.
ARTICLE XV
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are
granted subject to this reservation. Notwithstanding the foregoing, the
provisions set forth in Articles VII, VIII, IX, X, XI, XII, XIII, XIV and
this Article XV of this Certificate may not be repealed, altered, amended or
rescinded in any respect unless the same is approved by the affirmative vote
of the holders of not less than 70% of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as a single class) cast at a meeting
of the stockholders called for that purpose (provided that notice of such
proposed adoption, repeal, alteration, or rescission is included in the
notice of such meeting).
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IN WITNESS WHEREOF, Argo Bancorp, Inc. has caused this Amended and
Restated Certificate of Incorporation, which restates and integrates and
amend the provision of the Certificate of Incorporation and which has been
duly adopted by the Board of Directors of the Corporation and approved by the
shareholders of the Corporation in accordance with the provisions of Section
242 and 245 of the General Corporation Law of the State of Delaware, to be
executed and attested by its duly authorized officers this 16th day of July,
1998.
Argo Bancorp, Inc.
By: /s/ Frances M. Pitts
------------------------
Frances M. Pitts
Executive Vice President
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<PAGE>
Exhibit 3.2
BY-LAWS
OF
ARGO BANK CORP, INC.
A DELAWARE CORPORATION
ARTICLE I
Home Office
The home office of ARGO BANK CORP, INC. (herein the "Corporation") shall
be at 7600 West 63rd Street, in the Village of Summit, County of Cook, in the
State of Illinois. The Corporation may also have offices at such other places
within or without the State of Illinois as the Board of Directors shall from
time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the home office of the Corporation or at such
other place within or without the state in which the home office of the
Corporation is located as the Board of Directors may determine and as
designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any
other business of the Corporation shall be held annually at such date and
time as the Board of Directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the majority of the Board of
Directors or by a committee of the Board of Directors in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the
Board of Directors. The Board of Directors shall designate, when present,
either the chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing his duties,
not less than ten days nor more than sixty days before the meeting to each
stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the stockholder at his address as it appears on the stock
transfer books or records of the Corporation as of the record date prescribed
in Section 6 of this Article II, with postage thereon prepaid. If a
stockholder is present at a
<PAGE>
meeting, or in writing waives notice thereof before or after the meeting,
notice of the meeting to such stockholder shall be unnecessary. When any
stockholders' meeting, either annual or special, is adjourned for thirty
days, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than thirty days or of the
business to be transacted at such adjourned meeting, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders,
or any adjournment thereof, or stockholders entitled to receive payment of
any dividend, or in order to make a determination of stockholders for any
other proper purpose, the Board of Directors shall fix in advance a date as
the record date for any such determination of stockholders. Such date in any
case shall be not more than sixty days, and in case of a meeting of
stockholders, not less than ten days prior to the date on which the
particular action, requiring such determination of stockholders, is to be
taken. When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof.
SECTION 7. Voting Lists. The officer or agent, having charge of the stock
transfer books for shares of the Corporation shall make, at least ten days
before each meeting of stockholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by
each. The records, for a period of ten days before such meeting, shall be
kept on file at the principal office of the Corporation, and shall be
subject to inspection by any stockholder for any purpose germane to the
meeting at any time during usual business hours. Such record shall also be
produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any stockholder for any purpose germane to the
meeting during the whole time of the meeting. The original stock transfer
books shall be prima facie evidence as to who are the stockholders entitled
to examine such record or transfer books or to vote at any meeting of
stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted
at the meeting as originally notified. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
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SECTION 9. Proxies. At all meeting of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be
voted as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided
in the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each
share of stock held by him. Unless otherwise provided in the Certificate of
Incorporation, by statute, or by these By-laws, a majority of those votes
cast by stockholders at a lawful meeting shall be sufficient to pass on a
transaction or matter.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence
of written directions to the Corporation to the contrary, at any meeting of
the stockholders of the Corporation any one or more of such stockholders may
cast, in person or by proxy, all votes to which such ownership is entitled.
In the event an attempt is made to cast conflicting votes, in person or by
proxy, by the several persons in whose name shares of stock stand, the vote
or votes to which these persons are entitled shall be cast as directed by a
majority of those holding such stock and present in person or by proxy at
such meeting, but no votes shall be cast for such stock if a majority cannot
agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as
the by-laws of such corporation may prescribe, or, in the absence of such
provision, as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian trustee or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a receiver may be voted
by such receiver, and shares held by or under the control of a receiver may
be voted by such receiver without the transfer thereof into his name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the
pledgee and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares of its own stock held by the Corporation,
nor shares held by another corporation, if a majority of the shares entitled
to vote for the election of directors of such other corporation are held by
the Corporation, shall be voted at any meeting or counted in determining the
total number of outstanding shares at any given time for purposes of any
meeting.
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<PAGE>
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the Board of Directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three.
If the Board of Directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election
are not so appointed, the chairman of the board or the president may make
such appointment at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment by the Board of Directors in advance of the meeting or at the
meeting by the chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting,
the existence of a quorum, and the authenticity, validity and effect of
proxies; receiving votes, ballots or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; counting and tabulating all votes or consents; determining the result;
and such acts as may be proper to conduct the election or vote with fairness
to all stockholders.
SECTION 14. Nominating Committee. The Board of Directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the
death or other incapacity of a management nominee, the nominating committee
shall deliver written nominations to the secretary at least twenty days prior
to the date of the annual meeting. Provided such committee makes such
nominations, no nominations for directors except those made by the nominating
committee shall be voted upon at the annual meeting unless other nominations
by stockholders are made in writing and delivered to the secretary of the
Corporation in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's
Certificate of Incorporation. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees, but in connection with such reports no
new business shall be acted upon at such annual meeting unless stated and
filed as provided in the Corporation's Certificate of Incorporation.
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ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its Board of Directors. The Board of
Directors shall annually elect a president from among its members and may
also elect a chairman of the board from among its members. The Board of
Directors shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
SECTION 2. Number, Term and Election. The Board of Directors shall
initially consist of five (5) members and shall be divided into three classes
as nearly equal in number as possible. The members of each class shall be
elected for a term of three (3) years and until their successors are elected
or qualified. The Board of Directors shall be classified in accordance with
the provisions of the Corporation's Certificate of Incorporation. The Board
of Directors may increase the number of members of the Board of Directors but
in no event shall the number of directors be increased in excess of
twenty-five.
SECTION 3. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after, and at
the same place as, the annual meeting of stockholders. The Board of
Directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the Board of Directors may fix any place in the State of
Illinois as the place for holding any special meeting of the Board of
Directors called by such persons.
Members of the Board of Directors may participate in special
meetings by means of conference telephone or similar communications equipment
by with all persons participating in the meeting can hear each other. Such
participation shall constitute presence in person but directors will not
receive any compensation for participation in meetings by conference
telephone.
SECTION 5. Notice. Written notice of any special meeting shall be given
to each director at least two days previous thereto delivered personally or
by telegram or at least five days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid if mailed or when delivered to the
telegraph company if sent by telegram. Any director may waive notice of any
meeting by a writing filed with the secretary. The attendance of a director
at a meeting shall constitute a waiver of notice of such meeting, except
where a directors attends a
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<PAGE>
meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
SECTION 6. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall
be given in the same manner as prescribed by Section 6 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
Board of Directors, unless a greater number is prescribed by these By-laws,
the Certificate of Incorporation, or the laws of the State of Delaware.
SECTION 8. Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 9. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by
the chairman of the board or the president.
SECTION 10. Vacancies. Any vacancy occurring in the Board of Directors
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office. The term of such director shall be
in accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 11. Removal of Directors. Any director or the entire Board of
Directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive a stated fee
for their services. By resolution of the Board of Directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the Board of
Directors. Members of either standing or special committees may be allowed
such compensation for actual attendance at committee meetings as the Board of
Directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
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SECTION 13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who votes in favor of such action.
SECTION 14. Advisory Directors. The Board of Directors may by resolution
appoint advisory directors to the board, and shall have such authority and
receive such compensation and reimbursement as the Board of Directors shall
provide. Advisory director or directors emeriti shall not have the authority
to participate by vote in the transaction of business.
ARTICLE IV
Committees of the Board of Directors
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation,
and may prescribe the duties, constitution and procedures thereof. Each
committee shall consist of one or more directors of the Corporation. The
board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting
of the committee.
The Board of Directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the
board. Any member of any such committee may resign at any time by giving
notice to the Corporation provided, however, that notice to the board, the
chairman of the board, the chief executive officer, the chairman of such
committee, or the secretary shall be deemed to constitute notice to the
Corporation. Such resignation shall take effect upon receipt of such notice
or at any later time specified therein; and, unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective. Any member of any such committee may be removed at any time, either
with or without cause, by the affirmative vote of a majority of the
authorized number of directors at any meeting of the board called for that
purpose.
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ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the Board of Directors. The chief executive officer
unless the Board of Directors designates the chairman of the board as chief
executive officer. The president shall be a director of the Corporation. The
offices of the secretary and treasurer may be held by the same person and a
vice president may also be either the secretary or the treasurer. The Board
of Directors may designate one or more vice presidents as executive vice
president or senior vice president. The Board of Directors may also elect or
authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform
such duties as the Board of Directors may from time to time authorize or
determine. In the absence of action by the Board of Directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of
the Board of Directors held after each annual meeting of the stockholders. If
the election of officers is not held at such meeting, such election shall be
held as soon thereafter as possible. Each officer shall hold office until
his successor shall have been duly elected and qualified or until his death
or until he shall resign or shall have been removed in the manner hereinafter
provided. Election or appointment of an officer, employee or agent shall not
of itself create contract rights. The Board of Directors may authorize the
Corporation to enter into an employment contract with any officer in
accordance with state law; but no such contract shall impair the right of the
Board of Directors to remove any officer at any time in accordance with
Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of a majority of
the Board of Directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the
Board of Directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the Board of Directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director
of the Corporation.
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ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of
Incorporation or these By-laws with respect to certificates for shares, the
Board of Directors may authorize any officer, employee, or agent of the
Corporation to enter into any contract or execute and deliver any instrument
in the name of and on behalf of the Corporation. Such authority may be
general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name
unless authorized by the Board of Directors. Such authority may be general or
confined to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees
or agents of the Corporation in such manner as shall from time to time be
determined by resolution of the Board of Directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation if any
of its duly authorized depositories as the Board of Directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the Chairman of the Board of
Directors or by the president or a vice president and by the treasurer or by
the secretary of the Corporation, and may be sealed with the seal of the
corporation or a facsimile thereof. Any or all of the signatures upon a
certificate may be facsimiles if the certificate is countersigned by a
transfer agent, or registered by a registrar, other than the Corporation
itself or an employee of the Corporation. If any officer who has signed or
whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before the certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer at the
date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that
the Corporation will furnish to any stockholder upon request and without
charge a full statement of the designations, preferences, limitations, and
relative rights of the shares of each class authorized to be issued, the
variations in the relative rights and
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preferences between the shares of each such series so far as the same have
been fixed and determined and the authority of the Board of Directors to fix
and determine the relative rights and preferences of subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Delaware;
the name of the person to whom issued; the number and class of shares; the
date of issue; the designation of the series, if any, which such certificate
represents; the par value of each share represented by such certificate, or a
statement that the shares are without par value. Other matters in regard to
the form of the certificates shall be determined by the Board of Directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Corporation shall be deemed
by the Corporation to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 7. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate, or his legal representative, to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
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SECTION 8. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year: Annual Audit
The fiscal year of the Corporation shall end on the last day of October
of each year. The Corporation shall be subject to an annual audit as of the
end of its fiscal year by independent public accountants appointed by and
responsible to the Board of Directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the Board of Directors may, at any regular or special
meeting, declare dividends on the Corporation's outstanding capital stock.
Dividends may be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the Board
of Directors shall prescribe.
ARTICLE XI
Amendments
In accordance with the Corporation's Certificate of Incorporation, these
By-laws may be repealed, altered, amended or rescinded by the stockholders of
the Corporation only by vote of not less than 70% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
meeting of the stockholders called for that purpose (provided that notice of
such proposed repeal, alteration, amendment or rescission is included in the
notice of such meeting). In addition, the Board of Directors may repeal,
alter, amend or rescind these By-laws by vote of two-thirds of the Board of
Directors at a legal meeting held in accordance with the provisions of these
By-laws.
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Exhibit 4.0 Form of Stock Certificate of ARGO Bancorp, Inc.
COMMON STOCK COMMON STOCK
PAR VALUE $.01 SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
ARGO BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
S P E C I M E N
is the owner of:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE OF
----------------
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record thereof, or by his
duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation of the Corporation and any amendments thereto
(copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS THEREOF, Argo Bancorp, Inc. has caused this certificate to
be executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated: [SEAL]
President Secretary
<PAGE>
----------------
The Board of Directors of the Corporation is authorized by resolution(s),
from time to time adopted, to provide for the issuance of serial preferred stock
in series and to fix and state the voting powers, designations, preferences and
relative, participating, optional, or other special rights of the shares of each
such series and the qualifications, limitations and restrictions thereof. The
Corporation will furnish to any shareholder upon request and without charge a
full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively voted on
any matter. The affirmative vote of the holders of at least 70% of the voting
stock of the Corporation, voting together as a single class, shall be required
to approve certain business combinations and other transactions, pursuant to the
Certificate of Incorporation or to amend certain provisions of the Certificate
of Incorporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFTS MIN ACT - _____ custodian _____
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
--------------------
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF TRANSFEREE
- -------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
____________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
DATED ________________________
- -------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED: _________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE>
Exhibit 4.3 Certificate of Trust of ARGO Capital Trust Co.
CERTIFICATE OF TRUST OF
ARGO CAPITAL TRUST CO
THIS Certificate of Trust of Argo Capital Trust Co. ("Trust") is being
duly executed and filed on behalf of the Trust by the undersigned, as
trustee, to form a business trust under the Delaware Business Trust Act (12
Del. C. Section 3801 et seq.) (the "Act").
1. Name. the name of the business trust formed by this Certificate of
Trust is Argo Capital Trust Co.
2. Delaware Trustee. The name and business address of the trustee of
the Trust in the State of Delaware are Wilmington Trust Company, 1100 North
Market Street, Wilmington, Delaware 19890-0001, Attn: Corporate Trust
Administration.
3. Effective Date. This Certificate of Trust shall be effective upon
filing on July 16, 1998.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate
of Trust in accordance with Section 3811(a)(1) of the Act.
WILMINGTON TRUST COMPANY, not in its
individual capacity but soley as Trustee
By:
--------------------------------------
Name:
Title:
<PAGE>
Exhibit 4.4 Declaration of Trust of ARGO Capital Trust Co.
TRUST AGREEMENT, dated as of July 16, 1998 by and between Argo Bancorp,
Inc., a Delaware corporation, as "Sponsor", and Wilmington Trust Company, a
Delaware banking corporation, as "Trustee".
The Sponsor and the Trustee hereby agree as follows:
Section 1. The Trust. The trust created hereby shall be known as Argo
Capital Trust Co. (the "Trust"), in which name the Trustee, or the Sponsor to
the extent provided herein, may conduct the business of the Trust, make and
execute contracts, and sue and be sued.
Section 2. The Trust Estate. The Sponsor hereby assigns, transfers,
conveys and sets over to the Trustee the sum of $10. The Trustee hereby
acknowledges receipt of such amount in trust from the Sponsor, which amount
shall constitute the initial trust estate. The Trustee hereby declares that
it will hold the trust estate in trust for the Sponsor. It is the intention
of the parties hereto that the Trust created hereby constitute a business
trust under Chapter 39 of Title 12 of the Delaware Code, 12 Del. C. ss. 3801
et seq. (the "Business Trust Act"), and that this document constitute the
governing instrument of the Trust. The Trustee is hereby authorized and
directed to execute and file a certificate of trust with the Delaware
Secretary of State in accordance with the provisions of the Business Trust
Act.
Section 3. Amended and Restated Trust Agreement. The Sponsor and the
Trustee will enter into an amended and restated Trust Agreement, satisfactory
to each such party and substantially in the form to be included as an exhibit
to the 1933 Act Registration Statement (as defined below), to provide for the
contemplated operation of the Trust created hereby and the issuance of the
Capital Securities (as defined below). Prior to the execution and delivery of
such amended and restated Trust Agreement, the Trustee shall not have any
duty or obligation hereunder or with respect to the trust estate, except as
otherwise required by applicable law or as may be necessary to obtain prior
to such execution and delivery and licenses, consents or approvals required
by applicable law or otherwise.
Section 4. Certain Authorizations. The Sponsor and the Trustee hereby
authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file
with the Securities and Exchange Commission (the "Commission") and execute,
in each case on behalf of the Trust (a) the Registration Statement on Form
S-1 (the "1933 Act Registration Statement"), including any pre-effective or
post-effective amendments to such 1933 Act Registration Statement (including
the prospectus and the exhibits contained therein), relating to the
registration under the Securities Act of 1933, as amended, of the capital
securities of the Trust (the "Capital Securities") and certain other
securities of the Sponsor and (b) a Registration Statement on Form 8-A (the
"1934 Act Registration Statement") (including all pre-effective and
post-effective amendments thereto) relating to the registration of the
Capital Securities of the Trust under Section 12 of the Securities Exchange
Act of 1934, as amended; (ii) to file with one or more national securities
exchanges (each, an "Exchange") or the National Association of Securities
Dealers ("NASD") and execute on behalf of the Trust a listing application or
applications and all other applications, statements, certificates, agreements
and other instruments as shall be necessary or desirable to cause the Capital
Securities to be listed on any such Exchange or the NASD's Nasdaq National
Market ("NASDAQ"); (iii) to file and execute on behalf of the Trust such
applications, reports, surety
<PAGE>
bonds, irrevocable consents, appointments of attorney for service of process
and other papers and documents as the Sponsor on behalf of the Trust, may
deem necessary or desirable to register the Capital Securities under the
securities or "Blue Sky" laws; and (iv) to execute on behalf of the Trust
such Underwriting Agreements with one or more underwriters relating to the
offering of the Capital Securities as the Sponsor, on behalf of the Trust,
may deem necessary or desirable. In the event that any filing referred to in
clauses (i), (ii) or (iii) above is required by the rules and regulations of
the Commission, any Exchange, the NASD or state securities or "Blue Sky"
laws, to be executed on behalf of the Trust by a Trustee, the Sponsor and any
Trustee appointed pursuant to Section 6 hereof are hereby authorized to join
in any such filing and to execute on behalf of the Trust any and all of the
foregoing.
Section 5. Counterparts. This Trust Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
Section 6. Trustees. The number of Trustees initially shall be one (1)
and thereafter the number of Trustees shall be such number as shall be fixed
from time to time by a written instrument signed by the Sponsor, which may
increase or decrease the number of Trustees; provided, however, that to the
extent required by the Business Trust Act, one Trustee shall either be a
natural person who is a resident of the State of Delaware or, if not a
natural person, an entity which has its principal place of business in the
State of Delaware and otherwise meets the requirements of applicable Delaware
law. Subject to the foregoing, the Sponsor is entitled to appoint or remove
without cause any Trustee at any time. The Trustee may resign upon thirty
days' prior notice to the Sponsor.
Section 7. Governing Law. This Trust Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware (without
regard to conflicts of law principles).
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be duly executed as of the day and year first above written.
ARGO BANCORP, INC., as Sponsor
By:
----------------------------
Name:
Title:
WILMINGTON TRUST COMPANY, as Trustee
By:
-----------------------------
Name:
Title:
2
<PAGE>
Exhibit 10.0 Stock Purchase Agreement & Stockholder Agreement between ARGO
Bancorp, Inc. and Deltec Banking Corporation Limited
- -----------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BETWEEN
ARGO BANCORP, INC.
(the "Company")
and
THE DELTEC BANKING CORPORATION LIMITED
(the "Buyer")
Dated as of December 31, 1996
- ---------------------------------------------------------------------------
<PAGE>
STOCK PURCHASE AGREEMENT, dated as of December 31, 1996 (hereinafter,
together with the Annexes hereto, referred to as "this Agreement"), between
Argo Bancorp, Inc., a corporation organized under the laws of the State of
Delaware (the "Company"), and The Deltec Banking Corporation Limited, a
banking corporation organized under the laws of the Commonwealth of the
Bahamas (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Office of Thrift Supervision ("OTS") has accepted a
Rebuttal of Control Submission filed by Deltec International S.A., a
Panamanian corporation ("Deltec"), and has signed a Rebuttal Agreement with
Deltec and related parties permitting Deltec to acquire, through the Buyer,
25% of the outstanding voting stock of the Company;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements contained herein, the Company and
the Buyer hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE
1.1. Purchase and Sale. On the basis of the representations,
warranties and agreements herein contained, but subject to the terms and
conditions set forth herein, the Company agrees to issue and sell to the
Buyer, and the Buyer agrees to purchase from the Company, at a purchase price
of $38.00 per share, an aggregate of 111,563 2/3 shares (the "Shares") of the
Company's original common stock, par value $0.01 per share (the "Common
Stock"), or an aggregate consideration equal to $4,239,419.34.
1.2. Closing. The Company will deliver to the Buyer the certificates
for the Shares, registered in the name of "The Deltec Banking Corporation
Limited" and in such denominations (including fractional shares) as may be
requested by the Buyer, against payment of the purchase price by wire
transfer of New York Clearing House funds to the Company's Account #409278 at
Mid City National Bank of Chicago, ABA #071001737, on December 31, 1996 or
such other date as the Buyer and the Company may agree (the "Closing Date").
The certificates for the Shares and other documents to be delivered by the
company shall be delivered at the offices of Sullivan & Cromwell, 125 Broad
Street, New York, New York 10004, who shall hold the certificates in escrow
for delivery to the Buyer against payment therefor. The Buyer shall have the
right to rescind this Agreement unless an amended Rebuttal Agreement
satisfactory to the Buyer has been executed by the OTS within 60 days after
the execution and delivery of this Agreement or such later date as may be
mutually agreed by the parties hereto.
<PAGE>
1.3. Stockholder Agreement. At the Closing, the Company and the Buyer
will enter into the Stockholder Agreement, dated as of the Closing Date, in
substantially the form attached hereto as Annex 1 (the "Stockholder
Agreement").
1.4. Use of Proceeds. The Company will use the proceeds from the sale
of the Shares to maintain regulatory capital at well capitalized levels at a
subsidiary following growth of the subsidiary through its purchase of
mortgage pools prior to year-end 1996.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer, that, except as
specifically disclosed in a letter of the Company delivered to the Buyer
prior to or on the date hereof (the "Disclosure Letter") (and making specific
reference to the Section of this Agreement for which an exception is taken):
2.1. Incorporation, Capitalization, Etc. The Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the State of Delaware and is duly qualified to do business as a
foreign corporation in all jurisdictions where such qualification is
required. The Company has the authority to issue 5,000,000 shares of the par
value $0.01 per share, of which 4,500,000 shares are common stock and 500,000
shares are serial preferred stock. The Company's authorized common stock
consists of 3,020,000 shares designated as original common stock, 340,000
shares designated as Class B common stock, 340,000 shares designated as Class
C common stock and 800,000 shares designated as Class D common stock, of
which 334,691 shares designated as original common stock have been issued and
no shares of Class B common stock, Class C common stock or Class D common
stock have ever been issued or authorized to be issued. No shares of serial
preferred stock have ever been issued or authorized to be issued. All
outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable, and when issued to the Buyer in
accordance with this Agreement the Shares will be duly authorized, validly
issued, fully paid and nonassessable. The Company does not have any shares of
its capital stock of any class reserved for issuance for any purpose,
including for any outstanding option, warrant, call or commitment, nor does
the Company have any outstanding securities, obligations or agreements
convertible into or exchangeable for, or giving any person any right
(including, without limitation, preemptive rights) to subscribe for or
acquire, any shares of its capital stock, except for stock options to
purchase not more than 202,259 shares of Common Stock pursuant to Company
plans. The Company is a savings and loan holding company duly registered with
the OTS under Section 10 of the Home Owners' Loan Act, as amended.
2
<PAGE>
2.2 Subsidiaries. The Company owns of record and beneficially all of the
capital stock of Argo Federal Savings Bank, F.S.B. (the "Bank") and On-Line
Financial Services, Inc. ("On-Line") and is the managing member of
Empire/Argo Mortgage LLC ("Empire", and together with the Bank and On-Line,
the "Subsidiaries"). The Company has delivered to the Buyer a true and
complete list of all of its subsidiaries other than the Subsidiaries and of
all other entities (whether corporations, partnerships, trusts, limited
liability companies or other entities) in which the Company owns, directly or
indirectly, 10% or more of the ownership interests. Each of the Subsidiaries
has been duly incorporated, is validly existing as a corporation or limited
liability company, as the case may be, in good standing under the laws of the
jurisdiction of its incorporation and is duly qualified to do business as a
foreign corporation or foreign limited liability company, as the case may be,
in all jurisdictions where such qualification is required. All outstanding
shares of capital stock of the Subsidiaries have been duly authorized and
validity issued and are fully paid and nonassessable and are owned by the
Company free and clear of any lien, pledge, option, security interest, claim,
restriction or other encumbrance. None of the Subsidiaries has any shares of
its capital stock of any class reserved for issuance for any purpose,
including for any outstanding option, warrant, call or commitment, nor does
it have any outstanding securities, obligations or agreements convertible
into or exchangeable for, or giving any person any right (including, without
limitation, preemptive rights) to subscribed for or acquire, any shares of
its capital stock.
2.3. Authorization, Execution, Etc. The execution, delivery and
performance by the Company of this Agreement and the Stockholder Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all required action on the part of the Company and
its stockholders, and each of this Agreement and the Stockholder Agreement
has been duly executed and delivered by the Company and constitutes a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and other similar laws of general
applicability relating, to or affecting creditors' rights and to general
equity principles. The execution and delivery by the Company of this
Agreement and the Stockholder Agreement and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with or result in a breach or violation of or default under any law, rule or
regulation, the certificate of incorporation or by-laws of the Company or the
corresponding documents of any of the Subsidiaries, any judgement, decree,
order, license or permit issued by any governmental or regulatory body, board
or agency, or any agreement, indenture or instrument to which the Company or
any of its Subsidiaries (or any of their respective properties) is a party or
is otherwise subject.
2.4 Reports, Financial Statements, Etc. All reports other documents filed
by the Company with the Securities and Exchange Commission (the "SEC") under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Securities Exchange Act") (collectively, the "Reports"), are
accurate and complete
3
<PAGE>
in all material respects and do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. True and complete
copies of all Reports filed since January 1, 1995 have been furnished by the
Company to the Buyer. The financial statements contained or incorporated by
reference in the Reports fairly present the financial position, results of
operations and changes in financial position to which they relate as at the
dates and for the periods covered thereby (subject, in the case of unaudited
interim statements, to normal year-end audit adjustments) in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise stated therein. The Company
and its Subsidiaries have timely filed all required reports, registrations
and statements, together with any amendments thereto, with the SEC, THE OTS,
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, any state banking commission or other regulatory
authority, the National Association of Securities Dealers, Inc. and any other
self-regulatory organization.
2.5. No Material Adverse Change. Except as otherwise disclosed in the
Reports, since December 31, 1995, there has not been any material adverse
change in the financial condition, results of operations, properties, assets,
liabilities, business or prospects of the Company or any of its Subsidiaries.
2.6. Compliance with Law. To the best of its knowledge, the Company and
each of its Subsidiaries has conducted its operations in compliance with all
applicable laws, rules and regulations, has all material permits, licenses,
authorizations, orders and approvals of, and has made all material filings,
applications and registrations with, all federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as presently conducted, and all such material permits,
licenses, authorizations, orders and approvals are in full force and effect,
except in each case where the failure to do so or to have done so would not
have a material adverse effect on the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries is a party to any cease and
desist order, written agreement or memorandum of understanding with, or a
party to any commitment letter or similar undertaking to, or is subject to
any order or directive by, or is a recipient of any extraordinary supervisory
letter from, federal or state governmental authorities charged with the
supervision or regulation of depository institutions or depository
institution holding companies or engaged in the insurance of bank and/or
savings and loan deposits, nor has it been advised by any such authorities
that they are contemplating issuing or requesting (or are considering the
appropriateness of issuing or requesting) any such order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar undertaking.
4
<PAGE>
2.7. Tax Matters. To the best of the Company's knowledge, the provisions
made for taxes on the Company's balance sheets are sufficient for the payment
of all accrued federal, state, county and local taxes, whether or not
disputed, and all required tax returns have been timely and properly filed by
the Company and each of its Subsidiaries.
2.8. Litigation. There is no litigation, proceeding or governmental
investigation pending or, so far as known to the Company, in prospect or
threatened before any court, governmental agency or arbitrator against or
relating to or affecting the Company or any of its Subsidiaries, which might
result in a material adverse change in the financial condition, results of
operations, properties, assets, liabilities, business or prospects of the
Company or any of its Subsidiaries.
2.9. Brokers and intermediaries. Except as set forth in the Disclosure
Letter, the Company has not employed any broker, finder, consultant, adviser
or intermediary that would be entitled to a broker's, finder's or similar fee
or commission in connection herewith or upon the consummation hereof.
2.10. Antitakeover Provisions inapplicable. The provisions of Articles
XIII and XIV of the Company's restated certificate of incorporation do not
and will not apply to this Agreement or the Stockholder Agreement or the
transactions contemplated hereby or thereby, in the case of Article XIII,
because the time provision applicable to that article has expired, and in the
case of Article XIV, because the transactions contemplated thereby have
received all of the required approvals stated therein.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The buyer represents and warrants to the Company that:
3.1. Incorporation, Etc. The Buyer has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
Commonwealth of the Bahamas.
3.2. Authorization; Non-Contravention. The execution, delivery and
performance by the Buyer of this Agreement and the Stockholder Agreement and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by all required action on the part of the Buyer, and each of
this Agreement and the Stockholder Agreement has been duly executed and
delivered by the Buyer and constitutes a valid and binding obligation of the
Buyer, enforceable against the Buyer in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer,
5
<PAGE>
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles. The
execution and delivery by the Buyer of this Agreement and the Stockholder
Agreement and the consummation of the transactions contemplated hereby and
thereby do not and will not conflict with or result in a breach or violation
of or default under any law, rule or regulation, the certificate of
incorporation or bylaws of the Buyer, any judgment, decree, order, license or
permit issued by any government or regulatory body, board or agency, or any
agreement, indenture or instrument to which the Buyer is a party or is
otherwise subject.
3.3. Consents. Except for the filing of a Rebuttal of Control Submission
and entering into a Rebuttal Agreement with the OTS, no consent, license,
approval or authorization is required to be obtained by the Buyer from, and
no notice or filing is required to be given by the Buyer to or be made by
the Buyer with, any governmental or regulatory authority in connection with
the execution and delivery of this Agreement or the Stockholder Agreement and
the consummation of the transactions contemplated hereby or thereby.
3.4. Brokers and Intermediaries. The Buyer has not employed any broker,
finder, consultant, adviser or intermediary that would be entitled to a
broker's, finder's or similar fee or commission in connection herewith or
upon the consummation hereof.
3.5 Acquisition for Investment. The Shares are being acquired by the
Buyer for its own account solely for the purpose of investment without any
view to, or for sale in connection with, any distribution thereof in
violation of federal or state securities laws, and with no present intention
of distributing or reselling any part thereof.
ARTICLE 4
CONDITIONS PRECEDENT OF THE COMPANY
The obligation of the Company to sell the Shares to the Buyer is subject
to the satisfaction (or waiver) of each of the following conditions:
4.1. Representations and Warranties. The representations and warranties
of the Buyer contained in Article 3 shall be true and correct in all respects
as if made at and as of the Closing, and the Buyer shall have performed and
compiled in all respects with all undertakings and agreements required by
this Agreement to be performed or compiled with by the Buyer prior to the
Closing.
6
<PAGE>
4.2. Compliance with Law. No law, regulation, order or injunction of any
court or governmental authority of competent jurisdiction shall be in effect
which prohibits the consummation of the transactions contemplated hereby.
ARTICLE 5
CONDITIONS PRECEDENT OF THE BUYER
The obligation of the Buyer to purchase the Shares at the Closing is
subject to the satisfaction (or waiver) of each of the following conditions:
5.1. Representations and Warranties. The representations and warranties
of the Company contained in Article 2 shall be true and complete in all
respects as if made at and as of the Closing, and the Company shall have
performed and complied in all respects with all undertakings and agreements
required by this Agreement to be performed or complied with by the Company
prior to the Closing.
5.2. Compliance with Law. No law, regulation, order or injunction of any
court or governmental authority of competent jurisdiction shall be in effect
which prohibits the consummation of the transactions contemplated hereby.
5.3. Legal Opinion. At the Closing, the Buyer shall have received the
opinion of Muldoon, Murphy & Faucette, counsel to the Company, substantially
in the form attached as Annex 2 hereto.
ARTICLE 6
MISCELLANEOUS
6.1. Further Assurances. From time to time after the Closing, the
Company shall execute and deliver, or cause to be executed and delivered,
such documents to the Buyer as the Buyer shall reasonably request in order to
consummate more effectively the transactions contemplated by this Agreement
or the Stockholder Agreement, and from time to time after the Closing, the
Buyer will execute and deliver, or cause to be executed and delivered, such
documents to the Company as the Company shall reasonably request in order to
consummate more effectively the transactions contemplated by this Agreement
or the Stockholder Agreement.
6.2. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAW OF
THE STATE OF
7
<PAGE>
DELAWARE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
6.3. Notices. All notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when received if delivered by hand, facsimile transmission or by
United States mail (registered, return receipt requested), properly addressed
and postage prepaid:
If to the Company, to:
Argo Bancorp, Inc.
7600 West 63rd Street
Summit, Illinois 60501
Attn: Frances Pitts, Esq.
General Counsel
Tel.: 708-496-7178
Fax: 708-496-2946
with a copy to:
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Attn: Mary M. Sjoquist, Esq.
Tel.: 202-362-0840
Fax: 202-966-9409
If to the Buyer, to:
The Deltec Banking Corporation Limited
Deltec House, P.O. Box N-3229
Lyford Cay, Nassau, Bahamas
Attn: Matthew F. Gibbons, President
Tel.: 242-362-4549
Fax: 242-362-4623
8
<PAGE>
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attn: Richard R. Howe, Esq.
Tel.: 212 558-3612
Fax : 212 558-3111
Such names and addresses may be changed by such notice.
6.4. ENTIRE AGREEMENT. This Agreement and the Stockholder Agreement
contain the entire understanding of the parties hereto with respect to the
subject matter contained herein, and supersede and cancel all prior
agreements, negotiations, correspondence, undertakings and communications of
the parties, oral or written, regarding such subject matter.
6.5. AMENDMENTS. This Agreement may be amended only by a written
instrument executed by the parties or their respective successors or
permitted assigns.
6.6. HEADINGS; REFERENCES. The article, section and paragraph headings
and table of contents contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
6.7. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original.
6.8. PARTIES IN INTEREST; ASSIGNMENT. This Agreement shall inure to the
benefit of and be binding upon the Company and the Buyer and their respective
successors and permitted assigns. Nothing in this Agreement, express or
implied, is intended to confer upon any Person not a party to this Agreement
any rights or remedies under or by reason of this Agreement. No party to this
Agreement may assign or delegate all or any portion of its rights,
obligations or liabilities under this Agreement without the prior written
consent of the other party to this Agreement.
6.9. SEVERABILITY; ENFORCEMENT. Whenever possible, each provision of this
Agreement will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable under any applicable law or rule in any
jurisdiction, such provision will be ineffective only to the extent of such
invalidity, illegality or unenforceability in such jurisdiction, without
invalidating the remainder of this Agreement in such jurisdiction or any
provision hereof in any other jurisdiction.
-9-
<PAGE>
6.10. JURISDICTION. The Buyer and the Company hereby irrevocably and
unconditionally submit to the exclusive jurisdiction of the federal and state
courts located in the State of Delaware, for any actions, suits or
proceedings arising out of or relating to this Agreement and the transactions
contemplated hereby (and the Buyer and the Company agree not to commence any
action, suit or proceeding relating thereto except in such courts), and
further agree that service of any process, summons, notice or document by
U.S. registered mail to its address set forth above shall be effective
service of process of any action, suit or proceeding brought against it in
any such court. The Buyer and the Company hereby irrevocably and
unconditionally waive any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in such courts as aforesaid and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum. The Company and the Buyer waive
any rights they may have to a jury trial.
6.11. WAIVER. Any of the conditions to Closing set forth in this
Agreement may be waived in writing at any time prior to or at the Closing
hereunder by the party entitled to the benefit thereof. The failure of any
party hereto to enforce at any time any of the provisions of this Agreement
shall in no way be construed to be a waiver of any such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right
of such party thereafter to enforce each and every such provisions. No waiver
of any breach of or non-compliance with this Agreement shall be held to be a
waiver of any other or subsequent breach or non-compliance.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
ARGO BANCORP, INC.
By: /s/ Frances M. Pitts
----------------------------------
Name: Frances M. Pitts
Title: Executive Vice President &
Corporate Secretary
THE DELTEC BANKING CORPORATION LIMITED
By: /s/ Matthew F. Gibbons
----------------------------------
Name: Matthew F. Gibbons
Title: President
-11-
<PAGE>
STOCKHOLDER AGREEMENT, dated as of December 31, 1996, among Argo
Bancorp, Inc., a corporation organized under the laws of the State of
Delaware (the "Company"), The Deltec Banking Corporation Limited, a banking
corporation organized under the laws of the Commonwealth of the Bahamas
("Deltec"), and John G. Yedinak, the controlling stockholder of the Company
(the "Controlling Stockholder"), who is signing this Agreement solely for the
purposes of Section 1.1 hereof.
W I T N E S S E T H
WHEREAS, concurrently with the execution and delivery hereof, Deltec has
purchased 111,563 2/3 shares (the "Shares") of original common stock, par
value $0.01 per share (the "Common Stock") of the Company, pursuant to the
Stock Purchase Agreement, dated as of December 31, 1996 (the "Stock Purchase
Agreement"), between the Company and Deltec;
WHEREAS, as of the date hereof, the Company has the authority to issue
5,000,000 shares of the par value $0.01 per share, of which 4,500,000 shares
are common stock and 500,000 shares are serial preferred stock, and the
Company's authorized common stock consists of 3,020,000 shares designated as
original common stock, 340,000 shares designated as Class B common stock,
340,000 shares designated as Class C common stock and 800,000 shares
designated as Class D common stock, of which 446,254 2/3 shares of Common
Stock have been issued (after giving effect to Deltec's purchase of the
Shares) and no shares of Class B common stock, Class C common stock or Class
D common stock have ever been issued or authorized to be issued, and no
shares of serial preferred stock have ever been issued or authorized to be
issued; and
WHEREAS, by entering into this Agreement and the Stock Purchase
Agreement, the Company, Deltec and the Controlling Stockholder understand
that Deltec's acquisition of the Shares is solely for Deltec's own account
for the purpose of investment and for the purpose of owning up to, but not
more than, 25% of the outstanding voting stock of the Company and with no
purchase or effect of controlling or exercising a controlling influence over
the management or policies of the Company;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
and in order to induce Deltec to purchase the Shares as contemplated by the
Stock Purchase Agreement, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE I
BOARD OF DIRECTORS
1.1 Directors. So long as this Agreement shall continue in effect and
so long as Deltec shall own at least 15% of the outstanding Common Stock of
the Company, Deltec shall have the right to nominate one director to serve on
the Board of Directors of the Company, and so long as Deltec shall remain in
compliance with Section 1.2 of this Agreement, the Controlling Stockholder
shall vote (or cause to be voted) all shares of Common Stock owned by him for
the election as a director of the Company of the nominee designated by Deltec
at any annual or special meeting called for such purpose.
1.2 Rebuttal Agreement. While this Agreement continues in effect,
Deltec shall remain in compliance with the Rebuttal Agreement between Deltec
and the Office of Thrift Supervision.
ARTICLE II
SALE OR PURCHASE OF CAPITAL STOCK
2.1 Issuance of Capital Stock. If the Company shall at any time propose
to issue or sell any additional shares of its Common Stock (the "Additional
Shares"), whether such shares are authorized but previously unissued shares
or are treasury shares, then the Company shall notify Deltec thereof as
promptly as practicable and shall offer to sell to Deltec, concurrently with
the issuance and sale of the Additional Shares, such number of additional
shares of Common Stock (including fractional shares) so that Deltec shall
continue, after giving effect to such sales, to own exactly 25% of the
outstanding shares of Common Stock. In case such sale of Additional Shares is
for cash, the Company's offer to Deltec shall be at a purchase price equal to
the price per share paid for the Additional Shares and shall be upon
substantially the same other terms and conditions, except that in the case of
the exercise of employee stock options, the Company's offer to Deltec shall
be at a price equal to the Market Price (as hereinafter defined) on the date
of sale. In case such sale of Additional Shares is for consideration other
than cash, the Company's offer to Deltec shall be a price equal to the fair
market value per share of such other consideration, as determined by the
Board of Directors of the Company for purposes of the Company's financial
statements. "Market Price" as of any date shall mean the average of the high
and low sale prices of the Company's Common Stock as reported on the NASDAQ
Stock Market (the "Average") for the 30 business days immediately preceding
the date in question, provided that (i) prior to the issuance of stock
pursuant to a public offering (the "Public Offering") expected to occur prior
to June 30, 1997, or such later date as the Company and its underwriters may
determine, the Market Price shall equal 94.7% of the book value of the
Company as set forth on the Company's most recent balance sheet prior to the
date in question, (ii) the Market Price of stock purchased in connection with
the Public
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Offering shall equal the public offering price, (iii) during the 30-day
period following the Public Offering the Market Price will equal the greater
of the public offering price or the Average for the period from the date of
the Public Offering to the date in question, and (iv) the Market Price of
stock purchased in connection with any subsequent public offering shall equal
the public offering price in such subsequent public offering.
2.2 Purchase or Acquisition of Common Stock. If at any time the Company
shall propose to purchase or otherwise acquire any outstanding shares of its
Common Stock, then the Company shall notify Deltec thereof as promptly as
practicable and shall offer to purchase from Deltec, concurrently with such
purchase or other acquisition, such number of shares (including fractional
shares) that, after giving effect thereto, Deltec will own exactly 25% of the
outstanding shares of Common Stock.
2.3 Other Classes of Stock. If at any time the Company shall propose to
issue or sell any shares of Class B common stock, Class C common stock, Class
D common stock or serial preferred stock authorized by its certificate of
incorporation or any other class of common stock hereafter authorized by the
Company, then the Company shall notify Deltec thereof as promptly as
practicable and shall offer to sell to Deltec, concurrently with the issuance
of such shares such number of such shares as will enable Deltec to maintain
ownership of 25% of such other class of stock.
2.4 Registration Rights. The Company hereby grants Deltec the following
rights with respect to registration under the Securities Act of 1933 (the
"Securities Act") of any shares of Common Stock or other equity securities
(hereinafter referred to as the "Registrable Securities") acquired by Deltec
from the Company under the Stock Purchase Agreement or this Agreement. If
Deltec desires to sell any Registrable Securities at any time after the
earlier of the completion of the Public Offering or June 30, 1997, Deltec
shall give the Company at least 30 days' notice thereof, specifying the
approximate number of Registrable Securities Deltec desires to sell and the
intended method of disposition thereof, and if the opinion of Deltec or the
Company such intended method of disposition requires registration under the
Securities Act, the Company will promptly prepare and file a Registration
Statement under the Securities Act covering the Registrable Securities and
will use its best efforts to cause such Registration Statement to become
effective as promptly as practicable. If at any time after the completion of
the Public Offering the Company shall propose to file a Registration
Statement under the Securities Act, the Company shall give Deltec at least 10
days' notice thereof and shall afford Deltec the opportunity to include any
Registrable Securities it proposes to sell in such Registration Statement. In
connection with any such Registration Statement, the Company shall indemnify
and hold harmless Deltec and any underwriter or placement agent of such
Registrable Securities (each an "Underwriter") against any losses, claims,
damages or liabilities, joint or several, or actions in respect thereof
("Claims"), to which Deltec or such Underwriter may become subject, under the
Securities Act or otherwise, insofar as such Claims arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, the related prospectus, any
preliminary prospectus or any
3
<PAGE>
amendment or supplement thereto (collectively, "Registration Documents") or
the omission or alleged omission to state in any Registration Document a
material fact required to be stated therein or necessary to make the
statements made therein not misleading, and will reimburse Deltec or any such
Underwriter for any legal or other expenses reasonably incurred in
investigating or defending any such Claim as such expenses are incurred;
provided, that the Company shall not be liable in any such case to the extent
that any such Claim arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Registration Document in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Deltec or any such
Underwriter specifically for use in such Registration Document. In
connection with any such Registration Statement, Deltec shall indemnify and
hold harmless the Company and any Underwriter against any Claims to which the
Company or such Underwriter may become subject, under the Securities Act or
otherwise, insofar as such Claims arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
written information furnished to the Company by or on behalf of Deltec
specifically for use therein, and will reimburse the Company or any such
Underwriter for any legal or other expenses reasonably incurred in
investigating or defending any such Claim as such expenses are incurred. In
connection with only the first two Registration Statements filed by the
Company pursuant to the second sentence of this Section 2.4 and all
Registration Statements filed by the Company pursuant to the third sentence
of this Section 2.4, the Company shall be responsible for all expenses and
fees incident to the preparation of such Registration Statement, including
all registration and filing fees, the cost of preparing and printing the
Registration Documents and any other documents used in connection with the
offering, purchase, sale and delivery of the Registrable Securities, the
costs and charges of any transfer agent, registrar, custodian or
attorneys-in-fact and the fees and disbursements of counsel for the Company
and the Company's independent public accountants, including the expenses of
any "comfort" letters; provided that Deltec shall be responsible for the
fees and disbursements of its own counsel, if any, and all underwriting
discounts and commissions relating to the sale or disposition of the
Registrable Securities.
ARTICLE III
MISCELLANEOUS
3.1 Amendments, Termination, Transfer, etc. Neither this Agreement nor
any provision hereof may be changed, waived, discharged or terminated orally,
but only by an instrument in writing signed by each of the Company, Deltec,
and the Controlling Stockholder.
3.2 Notices. All notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when received if delivered by hand, facsimile transmission or by
United States mail (registered, return receipt requested), properly addressed
and postage prepaid:
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If to the Company or the Controlling Stockholder, to:
Argo Bancorp, Inc.
7600 West 63rd Street
Summit, Illinois 60501
Attn: Frances Pitts, Esq.
General Counsel
Tel: 708-496-7178
Fax: 708-496-2946
with a copy to:
Muldoon, Murphy & Faucette
5101 Wisconcin Avenue, N.W.
Washington, D.C. 20016
Attn: Mary M. Sjoquist, Esq.
Tel: 202-362-0840
Fax: 202-966-9409
If to Deltec, to:
The Deltec Banking Corporation Limited
Deltec House, P. O. Box N-3229
Lyford Cay, Nassau, Bahamas
Attn: Matthew F. Gibbons, President
Tel: 242-362-4549
Fax: 242-362-4623
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attn: Richard R. Howe, Esq.
Tel: 212-558-3612
Fax: 212-558-3111
Such names and addresses may be changed by such notice.
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3.3 Binding Effect; Benefit. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors,
legal representatives and permitted assigns. Nothing in this Agreement,
expressed or implied, is intended to confer upon any person other than the
parties hereto and their respective successors, legal representatives and
permitted assigns, any rights, obligations or liabilities under or by reason
of this Agreement.
3.4 Assignability. This Agreement shall not be assignable by any party
without the prior written consent of each other party hereto.
3.5 Headings. The headings contained in this Agreement are for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
3.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
3.7 APPLICABLE LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAW OF
THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF
LAW.
IN WITNESS WHEREOF, the undersigned have hereto set their hands as of the
day and year first above written.
ARGO BANCORP, INC.
By:
-------------------------------------
Name: Frances M. Pitts
Title: Senior Vice President &
Corporate Secretary
THE DELTEC BANKING CORPORATION LIMITED
By:
-------------------------------------
Name: Matthew F. Gibbons
Title: President
----------------------------------------
JOHN G. YEDINAK
6
<PAGE>
Annex 2
[Letterhead of Muldoon, Murphy & Faucette]
[December 31, 1996]
The Deltec Banking Corporation Limited
Deltec House, P.O. Box N-3229
Lyford Cay, Nassau, Bahamas
Ladies and Gentlemen:
We have acted as counsel for Argo Bancorp, Inc., a Delaware
corporation (the "Company"), in connection with the Stock Purchase Agreement,
dated as of [December 30, 1996] (the "Stock Purchase Agreement"), between the
Company and The Deltec Banking Corporation Limited, a Bahamas banking
corporation (the "Buyer"), and the Stockholder Agreement among the Company,
the Buyer and John G. Yedinak, dated as of December [31], 1996 (the
"Stockholder Agreement"). Unless otherwise defined herein, capitalized terms
used herein have the respective meanings ascribed to them in the Stock
Purchase Agreement. We have examined the Stock Purchase Agreement and such
corporate records, certificates and other documents, and such questions of
law, as we have considered necessary or appropriate for the purposes of this
opinion. Upon the basis of such examination, it is our opinion that:
1. The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware. The Company is duly registered as a savings and loan holding
company with the Office of Thrift Supervision under Section 10 of the
Home Owners' Loan Act, as amended. The Company has all requisite power
and authority to enter into the Stock Purchase Agreement and the
Stockholder Agreement and to perform its respective obligations
thereunder.
2. The Company has the authority to issue 5,000,000 shares of the
par value $0.01 per share, of which 4,500,000 shares are common stock and
500,000 shares are serial preferred stock. The Company's authorized
common stock consists of 3,020,000 shares designated as original common
stock (herein, the "Common Stock"), 340,000 shares designated as Class B
common stock, 340,000 shares designated as Class C common stock and
800,000 shares designated as Class D common stock, of which 334,691
shares designated as original common stock have been issued prior to the
date hereof. All outstanding shares of Common Stock have been duly
authorized and validly
<PAGE>
The Deltec Banking Corporation Limited 2
issued and are fully paid and nonassessable, and the Shares issued to
the Buyer have been duly authorized and validly issued and are fully
paid and nonassessable.
3. The execution, delivery and performance by the Company of
the Stock Purchase Agreement and the Stockholder Agreement and the
consummation of the transactions completed thereby have been duly
authorized by all required action on the part of the Company and its
stockholders, and each of the Stock Purchase Agreement and the
Stockholder Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and other similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles. The execution and
delivery by the Company of the Stock Purchase Agreement and the
Stockholder Agreement and the consummation of the transactions
contemplated thereby do not and will not conflict with or result in a
breach or violation of or default under any law, rule or regulation, the
certificate of incorporation or by-laws of the Company, any judgment,
decree, order, license or permit, known to us, issued by any governmental
or regulatory body, board or agency, or any agreement, indenture or
instrument, known to us, to which the Company is a party or is otherwise
subject.
4. The provisions of Articles XIII and XIV of the Company's
restated certificate of incorporation do not and will not apply to the
Stock Purchase Agreement or the Stockholder Agreement or the
transactions contemplated thereby, in the case of Article XIII,
because the time provision applicable to that article has expired, and
in the case of Article XIV, because the transactions contemplated
thereby have received all of the approvals required by that article.
In rendering the foregoing opinion, we have relied as to certain
matters upon information obtained from public officials, officers of the
Company and other sources believed by us to be responsible, and we have
assumed that the signatures on all documents examined by us are genuine,
assumptions which we have not independently verified.
Very truly yours,
<PAGE>
Exhibit 10.1 Employment Agreement between ARGO Bancorp, Inc. and John G.
Yedinak
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, 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 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
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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 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.
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3. COMPENSATION AND REIMBURSEMENT.
(a) The Holding Company shall pay Executive 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 form 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 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
form 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 liming 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
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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 provision 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 bases, except to the extent paid under the terms of the
Bank Agreement. The
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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 to 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:
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(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
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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 value
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
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to the product of (i) the number of 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 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 of 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
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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
stock holders 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 form 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 dependents 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 form 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. The 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 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 a 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 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 0F 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 form 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 ATTORNEY'S 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 in 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.
18
<PAGE>
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/ Sy Martin
- -------------------------- -----------------------------
Secretary On Behalf of the Entire Board of
Directors
[SEAL]
WITNESS:
/s/ Donna L. Bowling /s/ Joe G. Yedenl
- --------------------------- ----------------------------------
Executive
19
<PAGE>
Exhibit 10.2 Employment Agreement between ARGO Bancorp, Inc. and Frances
Pitts
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 the community and civic
organizations; provided, however, that, with the approval of the Board, as
evidence 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 of 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.
<PAGE>
(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 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 an 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 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 dependents 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 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 option 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 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. section 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 the 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. section 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. section 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. section
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.
section 1828(k) and 12 C.F.R. section 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. Section 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 R. Garcia BY: /s/ J.G. Yedinak
- ----------------------------------- ------------------------------------
Secretary, Assistant
[SEAL]
ATTEST: ARGO BANCORP, INC.
/s/ Maria R. Garcia BY: /s/ Sergio Martinucci
- ----------------------------------- ------------------------------------
Secretary, Assistant
[SEAL]
WITNESS: EXECUTIVE:
/s/Donna L. Bowling /s/ Hanus M. Pitts
- ----------------------------------- ----------------------------------------
<PAGE>
Exhibit 10.3
Management Recognition and Retention Plan
ARGO FEDERAL SAVINGS BANK, FSB
AMENDED AND RESTATED
MANAGEMENT RECOGNITION PLAN AND TRUST
<PAGE>
TABLE OF CONTENTS
GENERAL
1.1 Establishment and Purpose .................................... 1
1.2 Plan Administration, Trust Agreement ......................... 1
1.3 Affiliated Company ........................................... 1
1.4 Aggregate Account ............................................ 2
1.5 Argo Bancorp ................................................. 2
1.6 Beneficiary .................................................. 2
1.7 Company ...................................................... 2
1.8 Common Stock ................................................. 2
1.9 Board of Directors ........................................... 2
1.10 Disability Retirement ........................................ 2
1.11 Eligible Employee ............................................ 2
1.12 ERISA ........................................................ 2
1.13 Internal Revenue Code ........................................ 2
1.14 Key Employee ................................................. 2
1.15 Management Recognition Plan and Trust ........................ 3
1.16 Merger Conversion ............................................ 3
1.17 O.T.S. ....................................................... 3
1.18 Participant .................................................. 3
1.19 Plan Year .................................................... 3
1.20 Regular Accounting Date ...................................... 3
1.21 Retirement Date .............................................. 3
1.22 Stock Award .................................................. 3
1.23 Termination Date ............................................. 3
1.24 Trustee ...................................................... 3
1.25 Trust Fund ................................................... 3
1.26 Unallocated Shares Account ................................... 3
1.27 Year of Vested Service ....................................... 3
PARTICIPATION
2.1 Eligibility of Participation .................................. 4
2.2 Participation not Contract of Employment ..................... 4
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<PAGE>
AWARD OF SHARES
3.1 Stock Awards ................................................. 4
3.2 Shares Subject to Plan ....................................... 5
3.3 Date of Grant ................................................ 5
PAYMENT OF ACCOUNT BALANCES
4.1 Fully Vested Benefits ........................................ 6
4.2 Partially Vested Benefits .................................... 7
4.3 Forfeitures .................................................. 7
4.4 Fractional Shares ............................................ 7
4.5 Designation of Beneficiaries ................................. 7
WITHHOLDING OF TAXES
5.1 Tax Withholding .............................................. 8
5.2 Supplemental Withholding Payment ............................. 8
DIVIDENDS AND VOTING RIGHTS
6.1 Payment of Dividends ......................................... 9
6.2 Voting Rights ................................................ 9
THE COMMITTEE
7.1 Membership and Authority ..................................... 9
7.2 Delegation by Committee ...................................... 10
7.3 Information to be Furnished to Committee ..................... 10
7.4 Committee's Decision Final ................................... 10
7.5 Remuneration and Expenses .................................... 11
7.6 Indemnification of Committee Member .......................... 11
7.7 Resignation or Removal of Committee Member ................... 11
7.8 Appointment of Successor Committee Members ................... 11
AMENDMENTS OF THE PLAN
8.1 Board of Directors ........................................... 11
PERMANENCY OF THE PLAN
9.1 Termination of Plan and Trust ................................ 11
9.2 Suspension of Plan ........................................... 12
RIGHTS, RESTRICTIONS AND OPTIONS ON COMMON STOCK
10.1 Distribution of Common Stock Under Federal Securities Law .... 12
10.2 Adjustments to Common Stock .................................. 13
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<PAGE>
TRUST AGREEMENT
11.1 The Trust Fund ............................................... 13
11.2 General Powers ............................................... 14
11.3 Determination of "Value" ..................................... 15
11.4 Compensation and Expenses .................................... 15
11.5 Action by Trustee ............................................ 15
11.6 Exercise of Trustee's Duties ................................. 16
11.7 Limit of Trustee's Responsibility ............................ 16
11.8 Indemnification of Trustee by the Company .................... 16
11.9 Resignation .................................................. 16
11.10 Removal of Trustee and Appointment of Successor Trustee ...... 17
11.11 Duties of Resigning or Removed Trustee and of Successor
Trustees ..................................................... 17
11.12 Amendment .................................................... 17
11.13 Termination .................................................. 17
MISCELLANEOUS
12.1 Company Action ............................................... 17
12.2 Company Records .............................................. 17
12.3 No Guarantee of Interests .................................... 18
12.4 Evidence ..................................................... 18
12.5 Waiver of Notice ............................................. 18
12.6 Gender and Number ............................................ 18
12.7 Controlling Law .............................................. 18
12.8 Tax Status of Trust .......................................... 18
12.9 Approval ..................................................... 18
12.10 Compliance with Section 16 ................................... 18
iii
<PAGE>
AMENDED AND RESTATED
ARGO FEDERAL SAVINGS BANK, FSB
MANAGEMENT RECOGNITION PLAN AND TRUST
SECTION 1
GENERAL
1.1 Establishment and Purpose.
(a) ARGO FEDERAL SAVINGS BANK, FSB ("Company") hereby establishes the
ARGO FEDERAL SAVINGS BANK, FSB MANAGEMENT RECOGNITION PLAN AND
TRUST ("Plan") effective on October 1, 1991 ("Effective Date").
Said Plan shall amend and restate in its entirety the Argo Federal
Savings Bank, FSB Management Recognition Plan and Trust adopted by
the Board of Directors of the Company on December 23, 1991,
effective as of the Effective Date, shall amend and restate in its
entirety and incorporate herein as amended and restated the
Management Recognition Plan and Trust Agreement adopted by the
Board of Directors on December 29, 1992, effective as of May 27,
1992, the closing date of the Merger Conversion, and shall amend
and restate in its entirety and incorporate herein as amended and
restated the plan adopted by the Board of Directors on March 20,
1995.
(b) The purpose of this Plan is to promote the interest of the Company,
Argo Bancorp, Inc. ("Argo Bancorp") and the stockholders of Argo
Bancorp by providing a method to reward those eligible employees
who hold key positions within the Company and have provided the
Company outstanding service with their experience and ability. This
Plan will reward these Key Employees by providing them an ownership
interest in Argo Bancorp to compensate them for their contributions
to the Company and provide an additional incentive to remain in the
employ of the Company and increase their personal interest in its
continued success and progress.
1.2 Plan Administration, Trust Agreement. The authority to control and
manage the operation and administration of the Plan shall be vested in a
Committee as described in Section 7.
All contributions made under the Plan will be held, managed and controlled by
a Trustee (the "Trustee") acting under the Trust which forms a part of the
Plan. The terms of the Trust are set forth in this document.
1.3 Affiliated Company shall mean (a) a member of a controlled group of
corporations of which Argo Bancorp is a member, or (b) an unincorporated
trade or business which is under common control with Argo Bancorp as
determined in accordance with Section 414(c) of the Internal Revenue Code of
1986, as amended (the "Code") and regulations issued thereunder, or (c) any
organization (whether or not incorporated) which is a member of an affiliated
service group (as
1
<PAGE>
defined in Code Section 414(m)) which includes Argo Bancorp, and any other
entity required to be aggregated with Argo Bancorp pursuant to regulations
under Code Section 414(o). For purposes hereof, a "controlled group of
corporations" shall mean a controlled group of corporations as defined in
Code Section 1563(a), determined without regard to Code Section 1563(a)(4)
and (e)(3)(C). Unless the context clearly indicates otherwise, whenever
reference is made to Company, Affiliated Companies are included.
1.4 Aggregate Account means, with respect to each Participant, the value of
all non-vested Stock Awards held in Trust maintained on behalf of such
Participant including stock dividends and cash dividends received or interest
income earned on such cash dividends.
1.5 ARGO Bancorp shall refer to Argo Bancorp, Inc., the holding company of
Argo Federal Savings Bank, FSB.
1.6 Beneficiary means the person or persons to whom a deceased Participant's
benefits are payable under Section 4.5 of the Plan.
1.7 Company shall refer to Argo Federal Savings Bank, FSB.
1.8 Common Stock shall mean the common stock issued by Argo Bancorp.
1.9 Board of Directors shall refer to the members of the Board of Directors
of the Company.
1.10 Disability Retirement means the date the Participant is retired from the
employ of the Company or an Affiliated Company because of disability,
irrespective of his age. A Participant will be considered disabled for
purposes of the Plan if, on account of total and permanent physical or mental
disability, he no longer is capable of performing the duties assigned to him
by the Company or an Affiliated Company and if, in the opinion of a physician
who is mutually acceptable to the Participant and the Company, such total and
permanent disability is likely to continue for the remainder of the
Participant's life.
1.11 Eligible Employee shall mean officers or Key Employees of the Company or
an Affiliated Company.
1.12 ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time. This Plan, a non-qualified restricted Stock Award
plan, is not intended to be subject to ERISA.
1.13 Internal Revenue Code or Code shall mean the Internal Revenue Code of
1986, as amended from time to time. References to any section of the Internal
Revenue Code shall include any successor provision thereto.
1.14 Key Employee means an officer of the Company or Affiliated Company that
is involved in policy making decisions on behalf of the Company, Affiliated
Company or Argo Bancorp.
2
<PAGE>
1.15 Management Recognition Plan and Trust shall mean the plan adopted in
connection with the merger conversion which Plan is hereby merged into and
consolidated with the Plan.
1.16 Merger Conversion shall mean the conversion of Dolton-Riverdale Savings
and Loan Association (the "Association") from the mutual to the stock form of
organization and the merger of the Association with and into the Company.
1.17 O.T.S. shall mean the Office of Thrift Supervision.
1.18 Participant shall mean an Eligible Employee of the Company or an
Affiliated Company who has been granted Stock Awards.
1.19 Plan Year shall be the 12 month period beginning January 1 and ending
December 31.
1.20 Regular Accounting Date shall mean each September 30 in each Plan Year.
1.21 Retirement Date means the date the Participant retires pursuant to
"Normal Retirement" or "Early Retirement" under the 401(K) Plan for the
Company.
1.22 Stock Award shall mean the granting of an award of Common Stock to vest
over a period of time.
1.23 Termination date means the Participant's date of Normal Retirement,
Disability Retirement, death, resignation, or dismissal, as applicable to
such Participant.
1.24 Trustee shall mean American National Bank of Waukegan or such successor
thereto as shall be appointed by the Company.
1.25 Trust Fund shall mean all non-vested assets held under the Plan by the
Trustee as the same shall exist from time to time. Trust Fund shall also
include vested assets which have not yet been distributed to Participants.
1.26 Unallocated Shares Account shall mean an account within the Trust which
holds all shares of Common Stock subject to the Plan which have not yet been
granted to any participant.
1.27 Year of Vested Service means with respect to any Participant, each 12
month period beginning on the day after Date of Grant and all anniversaries
thereafter in which the Participant provides services to the Company or any
Affiliated Company as an employee.
3
<PAGE>
SECTION 2
PARTICIPATION
2.1 Eligibility of Participation. All officers and Key Employees of the
Company or an Affiliated Company are eligible to participate in the Plan.
Eligibility does not guarantee any employee the right to receive any Stock
Award hereunder. The Award of such shares are at the total discretion of the
Committee pursuant to Section 3.
2.2 Participation not Contract of Employment. The Plan does not constitute a
contract of employment, and participation in the Plan will not give any
employee the right to continue in the employ of the Company or to provide
services thereto nor shall participation in the Plan interfere in any way
with the right of the Company to terminate the employment of the Participant
or give any right or claim to any benefit under the terms of the Plan unless
such right or claim has specifically vested under the terms of the Plan.
SECTION 3
AWARD OF SHARES
3.1 Stock Awards.
(a) The Committee will determine which Eligible Employees referenced in
Section 2 will be granted Stock Awards and the number of shares of
Common Stock to be granted under the Stock Award.
(b) The Committee's decision will take into account the Participant's
position, responsibilities and value of services provided to the
Company or an Affiliated Company. In addition, the Committee will
take into account all other factors in its decision process which
it deems relevant. The Committee may request recommendations from
the Chief Executive Officer and other senior management members of
the Company.
(c) However, Stock Awards made by the Committee subsequent to June 1,
1995, to the Chief Executive Officer and the next four most highly
paid executive officers who are listed in the most current summary
compensation table in the proxy for the Annual Meeting of
Stockholders ("Named Executive Officers") are intended to be
Performance Based Compensation as defined in Section 162(m) of the
Code and therefore excluded from the determination under that
section of compensation for which no corporate deduction from income
is allowed. No Stock Award shall be made except upon successful
completion of the individual "Performance Goal" set within the Stock
Award to any Named Executive Officer.
4
<PAGE>
(d) The Performance Goal shall be the attainment by the Company of a
pre-established return on assets ("ROA"). The Performance Goal will
be set when the outcome of the Performance Goal is substantially
uncertain, as determined in accordance with Section 162(m) of the
Code. Successfully meeting the Performance Goal will result in the
granting of 100% of the Stock Award as set by the Committee for the
named Executive subject further to the general vesting provisions of
the Plan.
(e) The maximum number of shares granted under a Stock Award subject to
a Performance Goal is 4,000 individual Named Executive Officer. The
compensation resulting from such a Stock Award would be the fair
market value of the underlying shares at the time to the extent to
which they became vested.
(f) Once a Stock Award subject to a Performance Goal is granted, no
vesting of such Stock Award will occur until the Committee has
certified attainment of the Performance Goal. However, the period of
time for vesting of such Stock Awards shall be measured from the
Date of Grant after such certification. Any vesting which would have
occurred except for absence of a certification by the Committee will
vest on the next date that vesting would have otherwise occurred.
For example a Stock Award made on July 1, 19X1, with a Performance
Goal measured on June 30, 19X2 would, without the Performance Goal
have a portion of the Stock Award vest on December 31, 19X1 and
June 30, 19X2. However, because of the effect of the Performance
Goal, both of those portions of the Stock Award would vest on June
30, 19X2 if the Committee certified attainment of the Performance
Goal on that date.
(g) All stock Awards by the Committee shall be subject to review and
approval or rejection of the Board of Directors.
3.2 Shares Subject to Plan. The number of shares of Common Stock subject to
this Plan shall be 24,498. Such shares of Common Stock shall be placed in the
Trust's Unallocated Shares Account. Shares of Common Stock shall remain in
the unallocated shares Account until a Stock Award has been granted under
this Section 3 or returned to the Company pursuant to Section 9.
In the event shares of Common Stock are forfeited pursuant to Section 4.3,
the shares of Common Stock subject to such forfeiture shall be placed in the
Unallocated Shares Account and will be available for future awards by the
Committee pursuant to this Section 3.
3.3 Date of Grant. Date of Grant is the date on which the Board of Directors
approves the Stock Award. The Committee will notify the recipient of the
determination as soon as practicable after the Date of Grant at which time the
Participant and the Company shall execute a Stock Award Agreement outlining
the number of shares of Common Stock subject to the Stock Award and other
terms of the Stock Award. The Committee will notify the Trustee of the
granting of shares of Common Stock. Upon said notification, the Trustee shall
transfer shares of Common Stock equal to the number granted, from the
Unallocated Shares Account to an Aggregate Account for the benefit of the
Participant.
5
<PAGE>
Shares granted will remain in this separate Aggregate Account in Trust until
such time as the Participant's rights to the shares become vested pursuant to
Sections 4.1 and 4.2 or forfeiture pursuant to Section 4.3
SECTION 4
PAYMENT OF ACCOUNT BALANCES
4.1 Fully Vested Benefits.
(a) If a Participant retires on or after his Normal or Early Retirement
Date, dies while in the employ of the Company or an Affiliated
Company or becomes disabled in accordance with the Plan or in the
event of a Change in Control, as hereinafter defined, then the
Participant shall be fully vested in all benefits under this Plan,
regardless of the number of Years of Vested Service. The entire
balance in the Participant's Aggregate Account shall become
distributable to or for his benefit, or to or for the benefit of his
Beneficiary, as the case may be, in accordance with this Section 4.
(b) A "Change in Control" of the Company or Argo Bancorp means a "Change
in Control" 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 (the "Exchange Act"); or (ii)
results in a Change in Control of the Company or Argo Bancorp within
the meaning of the Home Owners Loan Act of 1933 and the Rules and
Regulations promulgated by the OTS (or its predecessor agency), as
in effect on the effective date of this Plan; 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 Company or Argo Bancorp's
outstanding securities ordinarily having the right to vote at the
election of directors except for any securities of the Company
purchased by Argo Bancorp and any securities purchased by the
Company's employee stock benefit plans; or (b) individuals who
constitute the Board on the date hereof (the "Incumbent Board"),
cease for any reason to constitute a 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 who
nomination for election by Argo Bancorp'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, a merger, consolidation, sale of all or
substantially all the assets of the Company or Argo Bancorp or
similar
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transaction in which the Company or Argo Bancorp is not the surviving
institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of Argo Bancorp, by someone other than the current
management of Argo Bancorp, seeking stockholder approval of a plan of
reorganization, merger or consolidation of Argo Bancorp or the
Company or similar transaction 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
Company or Argo Bancorp shall be distributed or (e) a tender offer
is made for 20% or more of the voting securities of the Company or
Argo Bancorp.
4.2 Partially Vested Benefits. After each Year of Vested Service, the
Trustee will distribute from the Trust, to the Participant, the shares of
Common Stock which have become vested. The Participant will vest in
thirty-three and one-third (33 1/3%) percent of the number of shares of
Common Stock granted on each 12 month anniversary of the Date of Grant.
However, with reference to any awards made subsequent to June 1, 1995, the
Participant will have a vested interest in 1/6th (plus or minus 16.66%) of
the number of shares of Common Stock granted in a particular Stock Award,
inuring to the Participant on the last day of each six-month period following
the Date of Grant until the vested interest reaches 100% of the shares of
Common Stock granted in such Stock Award. Pursuant to Section 6.1, the
Participant will also vest in stock and cash dividends paid on the shares and
any interest thereon between the date of grant and the date of vesting.
4.3 Forfeitures. Upon termination of employment, except for terminations
under Section 4.1, all non-vested shares of Common Stock will be forfeited.
Shares of Common Stock forfeited will be kept in Trust but moved to the
Unallocated Shares Account and will be available to be awarded to other
Participants at the Committee's discretion.
4.4 Fractional Shares. In calculating the number of shares of Common Stock
vested, fractional shares shall be rounded down to the nearest whole number.
4.5 Designation of Beneficiaries. Each Participant from time to time, by
signing a form furnished by the Committee, may designate any person or
persons (who may be designated concurrently, contingently or successively) to
whom his benefits under the Plan are to be paid if he dies before he
receives all of such benefits. A Beneficiary designation form will be
effective only when the form is filed in writing with the Committee while the
Participant is alive and will cancel all Beneficiary designation forms
previously signed and filed by the Participant.
If a Participant fails to designate a Beneficiary before his death as
provided above, or if the Beneficiary designated by a deceased Participant
dies before him, the Committee, in its discretion, may direct the Trustee to
make distribution of the Participant's benefits as follows:
(a) First, to the Participant's spouse;
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(b) Then, if there is no spouse,
(i) To or for the benefit of any one or more of his relatives by
adoption, blood or marriage, and in such proportions as the
Committee determines; or
(ii) To the legal representative or representatives of the estate of
the last to die of the Participant and his Designated Beneficiary.
SECTION 5
WITHHOLDING OF TAXES
5.1 Tax Withholding. The Trustee shall have the right to retain and withhold
from payment of the vested portion of the Stock distribution, the amount of
taxes required by any government to be withheld or otherwise be deducted and
paid with respect to such payment.
A Participant receiving shares of Common Stock may reimburse the Trustee for
any such taxes required to be withheld by the Trustee. The Trustee shall
remit to the Company any tax withheld. The Company will have the
responsibility of remitting the funds to the proper governmental agency.
Alternatively, the Participant may elect to have the above withholding taken
from any payroll compensation made to the Participant through the normal
administrative payroll systems of the Company.
5.2 Supplemental Withholding Payment. Upon the vesting of any part of a Stock
Award, for any reason, the Savings Bank shall make an additional payment to
the Participant ("Supplemental Withholding Payment"). The Supplemental
Withholding Payment shall be an amount equal to (i) all applicable
withholding for federal taxes, (ii) all applicable withholding for state,
local or other taxes, on the then vesting portion of the Stock Award, and
(iii) all applicable withholding on (i) and (ii) including withholding
applicable on stock dividends, cash dividends and any earnings thereon
associated with the then vesting portion of the Stock Award. Notwithstanding
the above, final determination of the appropriate amount of the Supplemental
Withholding Payment is the sold discretion of the Committee.
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SECTION 6
DIVIDENDS AND VOTING RIGHTS
6.1 Payment of Dividends. An amount equal to dividends declared and paid on
Stock Awards granted to a Participant but not yet vested will be held by the
Trustee in an interest bearing account for the benefit of the Participant.
When corresponding shares of Common Stock are vested and distributed, cash
dividends with any applicable interest earned will be paid out to the
Participant. These dividend payments are subject to withholding under Section
5.1.
Stock dividends paid on shares of Common Stock during the vesting period will
attach to the awarded shares and will vest when said shares are vested
pursuant to Section 4.
6.2 Voting Rights. After a Stock Award has been granted, the Participant
shall be entitled to direct the voting of the Common Stock subject to the
Stock Award and which have not yet been earned and distributed pursuant to
Section 4.2, subject to rules and procedures adopted by the Committee for this
purpose. With respect to all shares of Common Stock held by the Trust as to
which Participants are not entitled to direct, or have not directed, the
voting, the Committee shall direct the Trustee that such shares shall be
voted by the Trustee in the same proportion as the Common Stock Subject to
Stock Awards for which a direction from Participants have been received by
the Trustee was voted.
SECTION 7
THE COMMITTEE
7.1 Membership and Authority. The Committee referred to in Section 1.2 shall
consist of one or more members who shall be appointed by the Board of
Directors of the Company and such Committee shall be comprised solely of
Directors not otherwise employed by the Company, all of whom are
"disinterested directors" as that term is defined under Rule 16(b)-3 under
the Securities Exchange Act of 1934, as amended, promulgated by the
Securities and Exchange Commission and also who are "Outside Directors" as
defined under Section 162(m) of the Code. Except as otherwise specifically
provided in this Section 7, in controlling and managing the operation and
administration of the Plan, the Committee shall act by a majority of its
then members, by meeting or by writing filed without meeting, and shall have
the following powers, rights and duties in addition to those vested in it
elsewhere in the Plan:
(a) To award shares of Common Stock pursuant to Section 3 of the Plan
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(b) To adopt such rules of procedure and regulations as, in its opinion,
may be necessary for the proper and efficient administration of the
Plan and as are consistent with the provisions of the Plan.
(c) To enforce the Plan in accordance with its terms and with such
applicable rules and regulations as may be adopted by the Committee.
(d) To determine all questions arising under the Plan, including the
power to determine the rights or eligibility of employees or
Participants and their Benficiaries and their respective benefits,
and to remedy ambiguities, inconsistencies or omissions.
(e) To give such directions to the Trustee with respect to the Trust Fund
as may be provided in the Trust Agreement.
(f) To maintain and keep adequate records concerning the Plan and
concerning its proceedings and acts in such form and detail as the
Committee may decide.
(g) To direct all payments of benefits under the Plan. The certificate of
a majority of the members of the Committee that the Committee has
taken or authorized any action shall be conclusive in favor of any
person relying on the certificate.
(h) To set Performance Goals as set out in Section 3.1 as required, to
monitor attainment of such Performance Goals and to notify Named
Executives of the Committee's certification of their attainment.
7.2 Delegation by Committee. In exercising its authority to control and
manage the operation and administration of the Plan, the Committee may employ
agents and counsel (who may also be employed by the Company) and to delegate
to them such powers as the Committee deems desirable.
7.3 Information to be Furnished to Committee. The Company shall furnish the
Committee such data and information as may be required. The records of the
Company as to an employee's or Participant's period of employment,
termination of employment and the reason therefore, leave of absence and
compensation will be conclusive on all persons unless determined to be
incorrect.
7.4 Committee's Decision Final. To the extent permitted by law, any
interpretation of the Plan and any decision on any matter within the
discretion of the Committee made by the Committee in good faith is binding on
all persons. A misstatement or other mistake of fact shall be corrected when
it becomes known, and the Committee shall make such adjustment on account
thereof as it considers equitable and practicable.
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7.5 Remuneration and Expenses. No remuneration shall be paid to any Committee
member as such. However, the reasonable expenses of a Committee member
incurred in the performance of a Committee function shall be reimbursed by
the Company.
7.6 Indemnification of Committee Member. The Committee and the individual
members thereof shall be indemnified by the Company against any and all
liabilities, losses, costs, and expences (including fees and expenses)
whatsoever kind and nature which may be imposed on, incurred by or asserted
against the Committee or the members by reason of the performance of a
Committee function if the Committee or such members did not act dishonestly
or in willful or negligent violation of the law or regulations under which
such liability, loss, cost or expense arises.
7.7 Resignation or Removal of Committee Member. A Committee member may resign
at any time by giving ten (10) days advance written notice to the Company,
the Trustee and the other Committee members. The Company may remove a
Committee member by giving advance written notice to him, the Trustee and
other Committee members.
7.8 Appointment of Successor Committee Members. The Board of Directors may
fill any vacancy in the membership of the Committee and shall give prompt
written notice thereof to the other Committee members and the Trustee. While
there is a vacancy in the membership of the Committee, the remaining
Committee members shall have the same powers as the full Committee until the
vacancy is filled.
SECTION 8
AMENDMENTS OF THE PLAN
8.1 Board of Directors. The Board of Directors of the Company may amend the
Plan at any time pursuant to written resolutions adopted by such Board of
Directors. No such amendment, however, shall have the effect of reducing any
then nonforfeitable percentage of benefits of any Participant as computed in
accordance with the vesting schedule under Section 4 of the Plan.
SECTION 9
PERMANENCY OF THE PLAN
9.1 Termination of Plan and Trust. The Company contemplates that the Plan
shall be permanent and that it shall be able to continue to grant shares of
Common Stock under the Plan. Nevertheless, in recognition of the fact that
future conditions and circumstances cannot now be
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entirely foreseen, the Company reserves the right to terminate either the
Plan or the Plan and the Trust by action of the Board of Directors.
The termination of this Plan shall not affect the rights of Participants
under Stock Awards theretofore granted to receive Common Stock under the Plan,
and, all such awards shall continue in force and operation after termination
of the Plan until which time the Participant receives the distributed shares
of Common Stock due to vesting or forfeits such shares of Common Stock
pursuant to Section 4.2.
Upon termination of the Plan and after all vesting and distributions of all
allocated shares, the Trust shall return and unallocated shares of Common
Stock and any unallocated dividends and interest earnings, if any, to the
Company.
Prior to termination, the Company shall have the right, at any time, to
request the Trustee to return to the Company any unallocated Common Stock
held in Trust.
9.2 Suspension of Plan. Due to the Company's status as an insured thrift
institution, which is subject to the regulatory oversight of such
governmental agencies as the OTS and the Federal Deposit Insurance
Corporation, the Company reserves the right to suspend the Plan in the event
the Company shall fail to maintain compliance with minimum capital tests
and/or requirements, as those requirements may be established by law,
regulation, guideline or agreement to which the Company is now, or hereafter
may be, subject.
SECTION 10
RIGHTS, RESTRICTIONS AND OPTIONS ON COMMON STOCK
10.1 Distribution of Common Stock Under Federal Securities Laws. If at the
time of any distribution hereunder of Common Stock to any Participant or his
Beneficiary, a Form S-8 Registration Statement in respect to those shares of
Common Stock not acquired by the Trust in the Merger Conversion or following
the Merger Conversion, or their issuance under the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder, ("Act"), or
under any similar form of registration, is not then in effect with the
Securities and Exchange Commission ("SEC"), or if no other exemption under
the Act is available or a "no action" letter has not been issued by the SEC,
with respect to such securities (the "Unregistered Securities"), then:
(a) Investment Representation. At the time of any such distribution, the
distributee shall be deemed to have agreed, for himself and for his
heirs, personal or legal representatives, that he or such successors
in interest will represent and shall be deemed to have represented
that he or such successors will hold the Unregistered Securities
solely for investment and with no present intention to resell or
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distribute the same and the distributee, or such successors, as the
case may be, shall sign a certificate to such effect at the time of
any distribution, but the neglect or failure to execute such
certificate shall not be a limitation of the foregoing agreements
and representations.
(b) Legend on Certificates. At the time of the issuance of any
certificate or certificates representing the "Unregistered
Securities" to any distributee, or other persons, as a result of a
distribution under this Plan when there is no available exemption
under the Act, such certificate(s) shall have endorsed thereon a
legend reading substantially as follows:
"These shares are not registered under the Securities Act of 1933, as amended
("Act"). Said shares may not be transferred, assigned, hypothecated or
otherwise disposed of unless: (i) a Registration Statement has been filed and
becomes effective under the Act, or (ii) until the registration provisions of
the Act have otherwise been complied with, or (iii) in the opinion of counsel
for the Company such proposed transfer or other disposition will not violate
the registration provisions of the Act."
(c) Resubmissions. Any distributee, or any successor in interest, who is
notified by the Committee that counsel for the Company considers
said distributee or successor a statutory underwriter under the Act,
shall resubmit any share certificate or certificates issued
previously without the above legend to the Company, so that said
legend may be imposed thereon. Any such distributee or successor in
interest further agrees to comply with the provisions of said legend.
10.2 Adjustments to Common Stock. The aggregate number of shares of Common
Stock of the Company on which Stock Awards may be granted hereunder, and the
number of shares thereof covered by each Stock Award may all be appropriately
adjusted, as the Board of Directors may determine, for any increase or
decrease in the number of shares of Common Stock resulting from a subdivision
or consolidation of shares whether through reorganization, recapitalization,
stock split-up or combination of shares, or the payment of a stock dividend
or other increase or decrease in such shares effected without receipt of
consideration by Argo Bancorp.
SECTION 11
TRUST AGREEMENT
11.1 The Trust Fund. The Trust Fund as of any date means all property of
every kind then held by the Trustee.
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11.2 General Powers. As to the Trust Fund and the Plan, the Trustee shall
have the following powers, rights and duties in addition to those provided
elsewhere in this Trust Agreement, the Plan or by law:
(a) To adopt such rules of procedure and regulations as in his opinion may
be necessary for the proper administration of the Trust and as are
consistent with this Agreement and the Plan.
(b) To enforce the Trust and the rules and regulations adopted by the
Trustee.
(c) To determine questions arising under this Agreement, including the
power to remedy ambiguities, inconsistencies or omissions.
(d) To receive and hold all contributions paid to them under the Plan;
provided, however, that the Trustee shall have no duty to require
that contributions be made to him or to determine that the
contributions received by him comply with any resolution of the
Board of Directors of the Company.
(e) To have the authority and discretion to invest in Common Stock or
interest bearing savings accounts.
(f) To make payments or distributions from the Trust Fund in accordance
with the administration of the Plan and this Trust Agreement.
(g) To begin, maintain and defend any litigation necessary in connection
with the administration of the Plan or this Trust.
(h) To compromise, contest, arbitrate and abandon claims or demands.
(i) To have all rights of an individual owner, including the power to
give proxies to vote stocks and other voting securities, to join in
or oppose (alone or jointly with others) voting trusts, mergers,
consolidations, foreclosures, reorganizations and liquidations, or
other changes in the financial structure of any corporation, and to
exercise or sell stock subscription and conversion rights.
(j) To hold securities and other property in the name of a nominee, or in
any other form, with or without disclosing the Trust relationship.
(k) To determine on each Accounting Date, or as soon thereafter as
practicable, the then Net Worth of the Trust Fund, that is the fair
market value of all assets comprising the Trust Fund, less
liabilities, if any, other than liabilities to persons entitled to
benefits under the Plan.
(l) To furnish the Company an annual account or an account for such
other fiscal period as the Company may designate, or as may be
required under this
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Agreement or the Plan, showing the Net Worth of the Trust Fund at
the end of the period, all investments, receipts, disbursements and
other transactions made by the Trustee during the accounting period.
(m) To pay any estate, inheritance, income or other tax, charge or
assessment attributable to any benefit payable under the Plan out of
such benefit after giving the Company notice as far in advance as
practicable; to defer making payment of any such tax, charge or
assessment if they are indemnified to their satisfaction in the
premises; and to require before making any payment such release or
other document from any lawful taxing authority and such indemnity
from the intended payee as the Trustee considers necessary for their
protection.
(n) To employ reputable agents, attorneys, accountants, investment counsel
or other persons (who also may be employed by the Company) and to
delegate to them such powers as the Trustee considers desirable.
(o) To furnish the Company with such information in the Trustee's
possession as the Company may need for tax or other purposes.
(p) To perform any and all other acts in their judgment necessary or
appropriate for the proper and advantageous management, investment
and distribution of the Trust Fund and for the proper administration
of the Plan.
11.3 Determination of "Value". In determining the Net Worth of the Trust Fund
the Trustee shall use available current market prices or quotations when
available. Otherwise, the Trustee shall use such current market value as he
deems fair and reasonable and his judgment with reference thereto shall be
conclusive upon all persons. The Trustee, with direction from the Company,
shall select the overall method of accounting whether cash, accrual or a
hybrid. Once a method of accounting is established it shall be used
consistently until a change in the method of accounting is approved by the
Company and, if necessary, by the Internal Revenue Service.
11.4 Compensation and Expenses. Except as otherwise expressly provided herein
and in the Plan, all reasonable costs, charges and expenses incurred in the
administration of this Trust and the Plan, including compensation to the
agents, attorneys, accountants and other persons employed by the Trustee,
will be paid by the Company. Expenses incurred in connection with the sale,
investment and reinvestment of the Trust Fund (such as brokerage, postage,
express and insurance charges, and transfer taxes) shall be paid from the
Trust Fund unless paid by the Company.
11.5 Action by Trustee. During any period in which two or more Trustees are
acting, the following provisions apply where the context admits:
(a) The Trustee, by writing filed with the Company, may select a
secretary if he believes is advisable, who may, but need not be a
Trustee.
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(b) The Trustee qualified to act may act by meeting, or by writing
signed without meeting, and may execute any document relating to the
Trust Fund by signing one document or concurrent documents.
(c) The certificate of the secretary of the Trustees or of a majority of
the Trustees that they have taken or authorized any action shall be
conclusive in favor of any person relying on the certificate.
Notwithstanding the provisions of paragraph (b) of this Section 11.5
requiring that action be taken by a majority of the Trustees
qualified to act, the Trustees may allocate to any one or more
Trustees the responsibility for controlling and managing one or more
phases of the operation and administration of the Plan other than
the authority and discretion to manage and control the assets of the
Plan. The functions so allocated shall be identified in writing, and
the Trustee or Trustees to whom they are allocated shall have sole
responsibility for such functions. No allocation of responsibilities
shall be made pursuant to this subsection except upon the unanimous
vote of all Trustees then having the authority to act.
11.6 Exercise of Trustee's Duties. Subject to the provisions of this Section
11, the Trustee shall discharge his duties hereunder and under the Plan solely
in the interest of the Plan Participants and their Beneficiaries and
(a) For the exclusive purpose of:
(i) Providing benefits to Plan Participants and their
Beneficiaries; and
(ii) Defraying reasonable expenses of administering the Plan not
paid for by the Company.
(b) With the care, skill, prudence and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character and with like aims.
11.7 Limit of Trustee's Responsibility. No power, duty or responsibility is
imposed on the Trustee by or under the Plan except as set forth in this Trust
Agreement.
11.8 Indemnification of Trustee by the Company. The Company hereby agrees to
indemnify the Trustee and to hold the Trustee harmless against any and all
liabilities, losses, costs or expenses (including legal fees and expenses) of
whatsoever king and nature which may be imposed on, incurred by or asserted
against the Trustee at any time by reason of Trustee's service under this
Trust Agreement if the Trustee did not act dishonestly or in willful or
negligent violation of the law or regulation under which such liability,
loss, cost or expense arises.
11.9 Resignation. A Trustee may resign at any time by giving thirty days
advance written notice to the Company.
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11.10 Removal of Trustee and Appointment of Successor Trustee. The Company
may remove any Trustee by written notice to that Trustee. The Company shall
fill a vacancy, however, arising in the office of Trustee as soon as
practicable by a writing filed with the person or corporation appointed to
fill the vacancy.
11.11 Duties of Resigning or Removed Trustee and of Successor Trustees. If
the Trustee resigns or is removed, he shall promptly furnish to the successor
Trustee and the Company an account of his administration of the Trust from
the date of his last account. Each successor Trustee shall succeed to the
title to the Trust Fund vested in his predecessor without the signing or
filing of any instrument, but a resigning or removed Trustee shall execute
all documents and do all acts necessary to vest such title of record in the
successor Trustee. Each successor Trustee shall have all the powers conferred
by this Trust Agreement and the Plan as if originally named Trustee. No
successor Trustee shall be personally liable for any act or failure to act of
a predecessor Trustee.
11.12 Amendment. This Trust Agreement may be amended from time to time by the
Company, except as follows:
(a) The duties and liabilities of the Trustee cannot be substantially
changed without his consent; and
(b) Under no condition shall any such amendment result in the return or
repayment to the Company of any part of the Trust Fund or the
income from it or result in the distribution of the Trust Fund for
the benefit of anyone other than Participants and their
Beneficiaries, except as provided in Section 4 and Section 9.
11.13 Termination. If the Plan is terminated, this Trust Agreement, including
all rights, titles, powers, duties, discretion and immunities imposed upon or
reserved to the Trustee and the Company nevertheless shall continue in effect
until all assets have been distributed by the Trustee in accordance with the
Plan.
SECTION 12
MISCELLANEOUS
12.1 Company Action. Except as may be specifically provided herein, any
action required or permitted to be taken by the Company may be taken on
behalf of the Company by any officer of the Company.
12.2 Company Records. Records of the Company as to an employee's or
Participant's period of employment, termination of employment and the reason
therefore, leaves of absence,
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reemployment and Compensation will be conclusive on all persons, unless
determined to be incorrect.
12.3 No Guarantee of Interests. None of the Trustee, the Company or the
Committee in any way guarantees the Trust Fund from loss or depreciation, nor
do they guarantee any payment to any person. The liability of the Trustee,
the Company and the Committee to make any payments hereunder is limited to
the available assets of the Trust Fund.
12.4 Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
12.5 Waiver of Notice. Any notice required under the Plan may be waived by
the person entitled to notice.
12.6 Gender and Number. Where the context admits, words in the masculine
gender shall include the feminine and neuter genders, the plural shall
include singular, and the singular shall include the plural.
12.7 Controlling Law. The law of the State of domicile of the Company shall be
the controlling state law in all matters relating to the Plan and shall apply
to the extent that it is not preempted by the laws of the United States of
America.
12.8 Tax Status of Trust. The Trust herein created is designated as
constituting a part of a plan intended to be taxed as a grantor trust under
Subchapter J of the Internal Revenue Code, with the Company as grantor.
12.9 Approval. The Plan shall be presented to stockholders of Argo Bancorp
for ratification for purposes of obtaining favorable treatment under Section
16(b) of the Securities Exchange Act of 1934 and to qualify as performance
based compensation under Section 162(m) of the Code; provided, however, that
the failure to obtain stockholder ratification will not affect the validity
of the Plan and the Stock Awards thereunder.
12.10 Compliance with Section 16. If this Plan is qualified under 17 C.F.R.
Section 240.16b-3 of the Exchange Act Rules, with respect to persons subject
to Section 16 of the Exchange Act, transactions under this Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its successors
under the Exchange Act. To the extent any provision of the Plan fails to so
comply, it shall be deemed null and void, to the extent permitted by law.
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Exhibit 10.4 ARGO BANCORP, INC. 1998 INCENTIVE STOCK OPTION PLAN
<PAGE>
Exhibit 10.4
ARGO BANCORP, INC.
1998 INCENTIVE STOCK OPTION PLAN
1. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations of
which the Company is a member or (ii) an unincorporated trade or business which
is under common control with the Company as determined in accordance with
Section 414(c) of the Internal Revenue Code of 1986, as amended, (the "Code")
and the regulations issued thereunder. For purposes hereof, a "controlled group
of corporations" shall mean a controlled group of corporations as defined in
Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and
(e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 13 hereof. These mechanisms include: broker assisted cashless exercise
and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more
Non-statutory Stock Options, Incentive Stock Options and Option related rights
under the provisions of this Plan.
(d) "Bank" means Argo Federal Savings Bank.
(e) "Board of Directors" or "Board" means the board of directors of the
Company.
(f) "Change in Control" means a change in control of the Bank or the
Company 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 within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA") 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 such rules and
regulations 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 Company, representing 20% or more of the Bank's or Company's
outstanding securities except for any securities of the Bank purchased by the
Company formed by the Bank for that purpose in connection with the
reorganization of the Bank and any securities purchased by any tax qualified
employee benefit plan of the Bank or 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
<PAGE>
Incumbent Board, or whose nomination for election by the 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 Company or similar
transaction occurs in which the Bank or Company is not the resulting entity; or
(D) a solicitation of shareholders of the Company, by someone other than the
current management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Bank or Company or similar
transaction with one or more corporations, as a result of which the outstanding
shares of the class of securities then subject to the plan are exchanged for or
converted into cash or property or securities not issued by the Bank or Company;
or (E) a tender offer is made for 20% or more of the voting securities of the
Bank or Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are non-employee directors as such term is defined under Rule 16b-3(b)(3)(i)
under the Exchange Act as promulgated by the Securities and Exchange Commission.
(i) "Common Stock" means the Common Stock of the Company, par value, $.01
per share or any stock exchanged for shares of Common Stock pursuant to Section
14 hereof.
(j) "Company" means Argo Bancorp, Inc.
(k) "Date of Grant" means the effective date of an Award.
(l) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him, or in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(m) "Effective Date" means June 1, 1998, the effective date of the Plan.
(n) "Employee" means any person who is currently employed by the Company or
an Affiliate, including officers, but such term shall not include Outside
Directors.
(o) "Employee Participant" means an Employee who holds an outstanding Award
under the terms of the Plan.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(q) "Exercise Price" means the purchase price per share of Common Stock
deliverable
<PAGE>
upon the exercise of each Option in order for the option to be exchanged for
shares of Common Stock.
(r) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the New York Stock Exchange ("NYSE") or
the American Stock Exchange ("AMEX") (as published by the Wall Street Journal,
if published) on such date or if the Common Stock was not traded on such date,
on the next preceding day on which the Common Stock was traded thereon or the
last previous date on which a sale is reported. If the Common Stock is not
reported on the NASDAQ, AMEX or the NYSE, the Fair Market Value of the Common
Stock is the value so determined by the Board in good faith.
(s) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(t) "Limited Right" means the right to receive an amount of cash based upon
the terms set forth in Section 8 hereof.
(u) "Non-statutory Stock Option" means an Option granted by the Committee
to a Participant pursuant to Section 6 hereof, which is not designated by the
Committee as an Incentive Stock Option or which is redesignated by the Committee
under Section 7 as a Non-Statutory Stock Option.
(v) "Option" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Section 6 or 7 hereof.
(w) "Outside Director" means a member of the Board of Directors of the
Company or its Affiliates, who is not also an Employee.
(x) "Outside Director Participant" means an Outside Director who holds an
outstanding Award under the terms of the Plan.
(y) "Participant" means any Employee or Outside Director who holds an
outstanding Award under the terms of the Plan.
(z) "Retirement" with respect to an Employee Participant means termination
of employment which constitutes retirement under any tax qualified plan
maintained by the Bank or the Company. However, "Retirement" will not be deemed
to have occurred for purposes of this Plan if a Participant continues to serve
on the Board of Directors of the Company or its Affiliates even if such
Participant is receiving retirement benefits under any retirement plan of the
Bank or the Company. With respect to an Outside Director Participant
"Retirement" means the termination of service from the Board of Directors of the
Company or its Affiliates following
<PAGE>
written notice to the Board as a whole of such Outside Director's intention to
retire or retirement as determined by the Bank (or the Company's) bylaws, or by
reaching age 65, except that an Outside Director shall not be deemed to have
retired for purposes of the Plan in the event he continues to serve as a
consultant to the Board or as an advisory director.
(aa) "Termination for Cause" shall mean, in the case of an Outside
Director, removal from the Board of Directors, or, in the case of an Employee,
termination of employment, in both such cases as determined by the Board of
Directors, because of a material loss to the Company or one of its Affiliates
caused by the Participant's intentional failure to perform stated duties,
personal dishonesty, willful violation of any law, rule, regulation, (other than
traffic violations or similar offenses) or final cease and desist order. No act,
or the failure to act, on Participant'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 Bank or one of its
Affiliates.
2. ADMINISTRATION.
(a) The Plan as regards Awards to employees of the Company or its
Affiliates, shall be granted and administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to grant awards to Employees
and Outside Directors and to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make whatever
determinations and interpretations in connection with the Plan it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all Participants in the Plan and on
their legal representatives and beneficiaries.
(b) Awards to Outside Directors shall be granted and administered by the
Committee, pursuant to the terms of this Plan.
3. TYPES OF AWARDS AND RELATED RIGHTS.
The following Awards and related rights as described in Sections 6 through
11 hereof may be granted under the Plan:
(a) Non-statutory Stock Options;
(b) Incentive Stock Options;
(c) Limited Rights
4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for Awards under the Plan is 100,000 shares of the Common Stock.
Subject to adjustment as provided in Section 14, the maximum number of shares
subject to options that may be awarded annually is 10,000 shares of Common
Stock, plus any shares of the previous years' allotment that remained unawarded
at the end of any previous year. These shares of Common Stock may be either
authorized but unissued shares or authorized shares previously issued and
reacquired by the Company. To the extent that
<PAGE>
Awards are granted under the Plan, the shares underlying such Awards will be
unavailable for any other use including future grants under the Plan except
that, to the extent that Awards terminate, expire, are forfeited or are canceled
without having been exercised (in the case of Limited Rights, exercised for
cash), new Awards may be made with respect to these shares.
5. ELIGIBILITY.
Subject to the terms herein all Employees and Outside Directors shall be
eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Non-statutory Stock Options to Employees and Outside Directors and, upon
such terms and conditions as the Committee may determine, grant Non-statutory
Stock Options in exchange for and upon surrender of previously granted Awards
under this Plan. Non-statutory Stock Options granted under this Plan are subject
to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
shall be determined by the Committee on the date the option is granted. Such
Exercise Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the Date of Grant. Shares may be purchased only upon full
payment of the Exercise Price or upon operation of an Alternate Option Payment
Mechanism set out in Section 9 hereof.
(b) Terms of Options. The term during which each Non-statutory Stock Option
may be exercised shall be determined by the Committee, but in no event shall a
Non-statutory Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. The Committee shall determine the date on which each
Non-statutory Stock Option shall become exercisable. The shares comprising each
installment may be purchased in whole or in part at any time during the term of
such Option after such installment becomes exercisable. The Committee may, in
its sole discretion, accelerate the time at which any Non-statutory Stock Option
may be exercised in whole or in part. The acceleration of any Non-statutory
Stock Option under the authority of this paragraph creates no right, expectation
or reliance on the part of any other Participant or that certain Participant
regarding any other unaccelerated Non-statutory Stock Options.
(c) Termination of Employment or Service. Unless otherwise determined by
the Committee, upon the termination of a Participant's employment or service
for any reason other than Disability, Retirement, death or Termination for
Cause, a Non-statutory Stock Option shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of one year following termination.
Notwithstanding any provisions set forth herein or contained in any Agreement
relating to an award of an Option, in the event of termination for
Disability, death or Retirement all Options shall immediately vest and be
exercisable for one year after such termination, and in the event of
Termination for Cause
<PAGE>
all rights under the Participant's Non-Statutory Stock Options shall expire
immediately upon termination.
(d) Change in Control. Unless otherwise determined by the Committee, in the
event of a Change in Control, all Non-statutory Stock Options held by the
Participant, whether or not exercisable at such time, shall become exercisable
by the Participant or his legal representatives or beneficiaries and remain
exercisable for one year or such longer period as determined by the Committee
following the Change in Control, provided that in no event shall the period
extend beyond the expiration of the term of the Non-statutory Stock Option.
7. INCENTIVE STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Incentive Stock Options to Employees. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option shall
be not less than 100% of the Fair Market Value of the Common Stock on the Date
of Grant. However, if at the time an Incentive Stock Option is granted to a
Participant, the Participant owns Common Stock representing more than 10% of the
total combined voting securities of the Bank (or, under Section 424(d) of the
Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all classes of stock of the Bank, by reason of the
ownership of such classes of stock, directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such Participant, or
by or for any corporation, partnership, estate or trust of which such
Participant is a shareholder, partner or beneficiary), ("10% Owner"), the
Exercise Price per share of Common Stock deliverable upon the exercise of each
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Date of Grant. Shares may be purchased only upon payment
of the full Exercise Price or upon operation of an Alternate Option Payment
Mechanism set out in Section 9 hereof.
(b) Amounts of Options. Incentive Stock Options may be granted to any
Employee in such amounts as determined by the Committee; provided that the
amount granted is consistent with the terms of Section 422 of the Code. In the
case of an option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Participant during any calendar year
(under all plans of the Participant's employer corporation and its parent and
subsidiary corporations) shall not exceed $100,000. The provisions of this
Section 7(b) shall be construed and applied in accordance with Section 422(d) of
the Code and the regulations, if any, promulgated thereunder. To the extent an
award under this Section 7 exceeds this $100,000 limit, the portion of the
Options in excess of such limit shall be deemed a Non-statutory Stock Option.
The Committee shall have discretion to redesignate Options granted as Incentive
Stock Options as Non-Statutory Stock Options. Such redesignation shall not be
deemed to be a new grant or a regrant of such Options. Such Non-statutory Stock
Options shall be subject to Section 6 hereof.
<PAGE>
(c) Terms of Options. The term during which each Incentive Stock Option may
be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If at the time an Incentive Stock Option is granted to a
Participant who is a 10% Owner, the Incentive Stock Option granted to such
Employee Participant shall not be exercisable after the expiration of five years
from the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable in his lifetime only by the Employee Participant to whom it is
granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable. The shares comprising each installment may be
purchased in whole or in part at any time during the term of such option after
such installment becomes exercisable. The Committee may, in its sole discretion,
accelerate the time at which any Incentive Stock Option may be exercised in
whole or in part. The acceleration of any Incentive Stock Option under the
authority of this paragraph creates no right, expectation or reliance on the
part of any other Participant or that certain Participant regarding any other
unaccelerated Incentive Stock Options.
(d) Termination of Employment. Unless otherwise determined by the
Committee, upon the termination of an Employee Participant's service for any
reason other than Disability, Retirement, death, Change in Control or
Termination for Cause, the Employee Participant's Incentive Stock Options shall
be exercisable only as to those shares that were immediately exercisable by the
Employee Participant at the date of termination and only for a period of three
months following termination. Notwithstanding any provisions set forth herein or
contained in any Agreement relating to an award of an Option, in the event of
termination for Disability, Retirement or death, all Options shall immediately
vest and be exercisable for one year after such termination, (however, in the
event of Retirement, exercising after three months will result in loss of
incentive stock option treatment under the Code) and in the event of Termination
for Cause all rights under the Employee Participant's Incentive Stock Options
shall expire immediately upon termination.
(e) Change in Control. Unless otherwise determined by the Committee, in the
event of the termination of the Employee Participant's employment following a
Change in Control, all Incentive Stock Options held by the Participant, whether
or not exercisable at such time, shall become exercisable by the Participant or
his legal representatives or beneficiaries and remain exercisable for one year
or such longer period as determined by the Committee following the date of
termination of the Employee Participant's employment, provided however, that
such option shall not be eligible for treatment as an Incentive Stock Option in
the event such option is exercised more than three months following the date of
termination of employment, and provided further, that in no event shall the
period extend beyond the expiration of the term of the Incentive Stock Option.
(f) Compliance with Code. The Options granted under this Section are
intended to qualify as incentive stock options within the meaning of Section 422
of the Code, but the Company makes no warranty as to the qualification of any
option as an incentive stock option
<PAGE>
within the meaning of Section 422 of the Code. All Options that do not so
quality shall be treated as Nonstatutory Stock Options.
8. LIMITED RIGHTS.
Simultaneously with the grant of any Option to an Employee, the Committee
may grant a Limited Right with respect to all or some of the shares covered by
such Option. Limited Rights granted under this Plan are subject to the following
terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable
in whole or in part before the expiration of six months from the Date of Grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
receive from the Company an amount of cash or some other payment option found in
Section 12, equal to the difference between the Exercise Price of the underlying
option and the Fair Market Value of the Common Stock subject to the underlying
Option on the date the Limited Right is exercised, multiplied by the number of
shares with respect to which such Limited Right is being exercised. Payments
shall be less an applicable tax withholding as set forth in Section 15.
9. ALTERNATE OPTION PAYMENT MECHANISM
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the Award Agreement covering such Options or may reserve its decision
to the time of exercise. No Option is to be considered exercised until payment
in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
<PAGE>
(c) Exchange of Common Stock.
(i) The Committee may permit payment by the tendering of previously
acquired shares of Common Stock. This includes the use of "pyramiding
transactions" whereby some number of Options are exercised. The shares gained
through the exercise are then tendered back to the Bank as payment for some
other number of Options. This transaction may be repeated as needed to exercise
all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of the Common Stock
on the date prior to the date of exercise.
10. RIGHTS OF A SHAREHOLDER
No Participant shall have any rights as a shareholder with respect to any
shares covered by an Option until the date of issuance of a stock certificate
for such shares. Nothing in this Plan or in any Award granted confers on any
person any right to continue in the employ or service of the Company or its
Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate a Participant's services as an officer or other employee
at any time.
11. NON-TRANSFERABILITY
Except to the extent permitted or restricted by the Code, the rules
promulgated under Section 16(b) of the Exchange Act or any successor statutes or
rules:
(i) The recipient of an Award shall not sell, transfer, assign,
pledge, or otherwise encumber shares subject to the Award until full vesting of
such shares has occurred. For purposes of this section, the separation of
beneficial ownership and legal title through the use of any "swap" transaction
is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a qualified domestic relations
order, an Award is not transferable and may be earned in his lifetime only by
the Participant to whom it is granted. Upon the death of a Participant, an Award
is transferable by will or the laws of intestate succession. The designation of
a beneficiary does not constitute a transfer.
(iii) If a recipient of an Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject to such Award may
not, without the written consent of the Committee (which consent may be given in
the Stock Award Agreement), be sold or otherwise disposed of within six months
following the date of grant of the Award.
12. AGREEMENT WITH GRANTEES.
Each Award will be evidenced by a written agreement, executed by the
Participant and the Company or its Affiliates that describes the conditions for
receiving the Awards including the
<PAGE>
date of Award, the Exercise Price, the terms or other applicable periods, and
other terms and conditions as may be required or imposed by the Plan, the
Committee, the Board of Directors, tax law considerations or applicable
securities law considerations.
13. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by and
delivered to the Company and may be revoked in writing. If a Participant fails
effectively to designate a beneficiary, then the Participant's estate will be
deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Company, the Committee may make such
adjustments to previously granted Awards, to prevent dilution or enlargement of
the rights of the Participant including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
underlying Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such
Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All awards under
this Plan shall be binding upon any successors or assigns of the Company.
15. TAX WITHHOLDING.
Awards under this Plan shall be subject to tax withholding to the extent
required by any governmental authority. Any withholding shall comply with Rule
16b-3, if applicable, or any amendment or successor rule. Shares of Common Stock
withheld to pay for tax withholding amounts shall be valued at their Fair Market
Value on the date the Award is deemed taxable to the Participant.
16. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify or
amend the
<PAGE>
Plan in any respect, prospectively or retroactively; provided however, that
provisions governing grants of Incentive Stock Options, unless permitted by the
rules and regulations or staff pronouncements promulgated under the Code, shall
be submitted for shareholder approval to the extent required by such law,
regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan will
remain in full force and effect.
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.
17. EFFECTIVE DATE OF PLAN.
The Effective Date of the Plan shall be June 1, 1998.
18. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the earlier of
ten (10) years after the Effective Date of the Plan or the exercise of Options,
or related Limited Rights equivalent to the maximum number of shares reserved
under the Plan as set forth in Section 4. The Board of Directors has the right
to suspend or terminate the Plan at any time, provided that no such action will,
without the consent of a Participant or Outside Director Participant, adversely
affect his vested rights under a previously granted Award.
19. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State of
Illinois to the extent not superseded by federal law.
20. SUCCESSORS AND ASSIGNS.
All awards under this Plan shall be binding upon any successors or assigns
of the Company including any holding company that may be formed by the Company.
<PAGE>
21. DELEGATION OF AUTHORITY.
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Award
Agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the Plan to the executive officer(s) of the
Company. The Committee may rely on the descriptions, representations, reports
and estimates provided to it by the management of the Company for determinations
to be made pursuant to the Plan.
IN WITNESS WHEREOF, the Company has established this Plan, to be executed
by its duly authorized executive officer and the corporate seal to be affixed
and duly attested, effective as of the ___ day of ______, 1998.
[CORPORATE SEAL] ARGO BANCORP, INC.
- ------------------------- By:
Date ----------------------------------
President and Chief Executive Officer
ADOPTED BY THE BOARD OF DIRECTORS:
- ------------------------- By:
Date ----------------------------------
Secretary
<PAGE>
Exhibit 23.1
The Board of Directors
Agro Bancorp, Inc.:
We consent to the use of our report dated March 24, 1998 included herein and
to the reference to our firm under the heading "Experts" in the registration
statement.
/s/ KPMG Peat Marwick L.L.P.
- ----------------------------------
KPMG Peat Marwick L.L.P.
Chicago, Illinois
July 17, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,918
<INT-BEARING-DEPOSITS> 11,561
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,348
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<LOANS> 174,985
<ALLOWANCE> 984
<TOTAL-ASSETS> 238,506
<DEPOSITS> 179,832
<SHORT-TERM> 28,510
<LIABILITIES-OTHER> 11,536
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0
0
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<TOTAL-LIABILITIES-AND-EQUITY> 238,506
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<INTEREST-DEPOSIT> 2,249
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<NET-INCOME> 386
<EPS-PRIMARY> .20
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