<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File No.: 0-19829
ARGO(R) BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 458-4800
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by the
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___.
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B and no disclosure will be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB |_|
Issuer's revenue for its most recent fiscal year was $33,851,206.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, i.e., persons other than directors and executive officers of the
Registrant is $2,873,944 and is based upon the last sales price as quoted on
NASDAQ for March 25, 1998.
The Registrant had 497,644 shares outstanding as of March 25, 1998.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_.
================================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1997, are incorporated by reference into Part II of this Form 10-KSB.
Portions of the Proxy Statement for the 1997, Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-KSB.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I Page No.
- ------ --------
<S> <C>
Item 1. Description of Business.............................. 1
Item 2. Description of Property.............................. 43
Item 3. Legal Proceedings.................................... 43
Item 4. Submission of Matters to a Vote
of Security Holders.................................. 43
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholders Matters.............. 44
Item 6. Management's Discussion and Analysis
or Plan Operations................................... 44
Item 7. Financial Statements ................................ 44
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................................. 44
Part III
Item 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance with
Section 16(a) of the Exchange Act.................... 44
Item 10. Executive Compensation............................... 45
Item 11. Security Ownership of Certain
Beneficial Owners and Management..................... 45
Item 12. Certain Relationships and Related
Transactions......................................... 45
Item 13. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.................... 45
SIGNATURES........................................... 48
</TABLE>
<PAGE>
BUSINESS OF ARGO(R) BANCORP, INC.
Item 1. Description of Business
Argo Bancorp, Inc. ("Argo Bancorp", "Holding Company", or "Company") was
incorporated in August 1987, for the purpose of acquiring Argo Federal Savings
Bank, FSB ("Argo Savings", or the "Savings Bank"). Argo Bancorp was originally
capitalized through the sale of 300 shares (which split in December of 1991 at
700/1) of common stock to three investors for total proceeds of $60,000. Argo
Bancorp acquired Argo Savings on November 17, 1987, for a capital infusion of
$1.1 million. On August 29, 1991, the Board of Directors of Dolton-Riverdale
Savings and Loan Association ("Dolton", or "Dolton-Riverdale Savings") and Argo
Savings adopted a Plan of Merger Conversion ("Plan"), whereby Dolton agreed to
convert from a state-chartered mutual association to a federally-chartered stock
association and merge with and into Argo Savings with Argo Savings as the
surviving entity. Pursuant to the Plan, shares of common stock of Argo Bancorp
were first sold to the members of Dolton in a Subscription Offering and the
shares not subscribed were then offered to the public in a Community Offering.
The Subscription and Community Offering were held concurrently and were
completed on April 27, 1992. Final regulatory approval was received on May 26,
1992, at which time the merger conversion was completed. The transaction was
accounted for under a pooling of interests method. There was no goodwill or
other intangible assets recorded as a result of the transaction. As part of the
merger conversion with Dolton-Riverdale Savings, the Company sold an additional
74,750 shares of common stock at a issuance price of $11.50. Net proceeds from
the merger conversion were $326,000 after the deduction of the conversion
expenses. The Company retained 50.0% of the net proceeds from the merger
conversion and injected the remaining 50.0% into Argo Savings. Prior to the
merger conversion, the Management Recognition Plan ("MRP") purchased 15,400
shares of Argo Bancorp's authorized but unissued common stock. The Company is a
unitary savings and loan holding company and is registered as such with the
Office of Thrift Supervision ("OTS"), Federal Deposit Insurance Corporation
("FDIC") and the Securities and Exchange Commission ("SEC").
On October 31, 1995, Argo Bancorp acquired On-Line Financial Services, Inc.
("On-Line"), an Oak Brook, Illinois based computer services bureau, serving bank
and thrift clients throughout the Midwest. The purchase transaction was
consummated through the use of a wholly-owned subsidiary, OLF Acquisition
Corporation, which acquired shares of three separate state chartered savings and
loan service corporations which owned, in the aggregate, 98.90% of the
outstanding shares of On-Line. Sale of the remaining 1.10% of On-Line shares was
made by a single institutional stockholder that held shares in the Company
directly. The intervening acquisition subsidiary and state chartered savings and
loan service corporations' shells were liquidated and merged by Argo Bancorp
during 1996.
Financial terms of the transaction included a cash sweep of On-Line funds
on hand to shareholders, less amounts necessary to establish certain agreed upon
escrows; a two (2) year asset note of $1,026,000, representing the closing date
net book value of On-Line assets; a twenty-six (26) month escrow note in the
amount of $460,000, representing funds held for future performance 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.
1
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On May 29, l996, Argo Savings incorporated a Tier I subsidiary, Margo
Financial Services, LLC ("Margo"). Margo is an Illinois chartered limited
liability corporation whose members are Argo Savings and Nip`n Tuck, Inc., an
Illinois corporation. Margo's primary objectives are to increase loan
origination volume and to serve as a wholesale mortgage banking operation using
a network of brokers, correspondents and conduits. Argo Savings has a 50.l%
interest in Margo.
On December 31, l996, Argo Bancorp entered into a stock purchase agreement
with The Deltec Banking Corporation Limited ("Deltec"), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms of
the agreement, Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$38.00 per share. Total proceeds from this transaction were approximately
$4,239,000. A five (5.0%) percent investment advisory fee totaling $212,000 was
paid to Charles E. Webb and Company reducing the net proceeds of the transaction
to $4,027,000.
Unlike many savings and loan holding companies, Argo Bancorp is an active
holding company with only a portion of its future anticipated operating income
dependent upon the earnings of Argo Savings. As an operating company, Argo
Bancorp has assets, liabilities and income that are unrelated to the operations
of Argo Savings. Among the assets of Argo Bancorp is its investment in the
Empire/Argo Mortgage LLC, which engages in the purchase and disposition of
deeply discounted mortgage loans. Argo Bancorp's assets at December 31, 1997, on
an unconsolidated basis consisted of its investment in Argo Savings of $13.7
million, its investment in On-Line of $5.2 million, its investment in the
majority owned Empire/Argo Mortgage LLC of $1.5 million, securities available
for sale of $1.3 million, cash and other interest-earning deposits of $666,000,
and other assets of $1.7 million. Argo Bancorp also had outstanding borrowings
on an unconsolidated basis in the amount of $5.6 million at December 31, 1997,
incurred in connection with capital infusions to its subsidiaries. Argo Bancorp
is a Federal Housing Authority ("FHA") approved originator and servicer, a
licensed Illinois mortgage banker and an approved Federal National Mortgage
Association ("FNMA") servicer.
BUSINESS OF ON-LINE FINANCIAL SERVICES, INC.
On-Line is a third party provider of on-line, real time, electronic data
processing services to financial institutions located throughout the Midwest.
On-Line currently provides data processing services to thrifts, community banks,
savings banks, and mortgage brokers representing over 1.2 million customer
accounts in six Midwestern states. On-Line has historically marketed its
services to institutions with assets of less than $1.0 billion, where the
Company's orientation toward superior customer service and specialized products
allows it to effectively compete. On-Line's customer base include institutions
with total assets ranging from $13.0 million to $850.0 million, with an average
of approximately $95.0 million. The acquisition by Argo Bancorp will promote the
development and sale of technological advances in the systems, programs, and
services offered by On-Line, which include resale of software produced by
Information Technology Incorporated, integrated check and document imaging
systems, and computer output laser disc storage technology. These services are
in addition to new offerings by the Company in the planning and deployment of
wide area and local area network systems, the sale of all related hardware and
services, expanded technical and communications support, consultation and
training, and the maintenance of in-house systems. The Company's strategy to
implement and offer computer output laser disc storage technology and a full
line of document imaging services has been realized and is now being marketed to
a wide array of
2
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users of advanced technology. Together with aggressive marketing to small and
mid-size commercial and community banks, On-Line's business plan to expand its
traditional thrift institution client base is being implemented.
BUSINESS OF ARGO(R) FEDERAL SAVINGS BANK, FSB
The discussion that follows relates primarily to the business of Argo
Savings, a federally chartered depository institution. Argo Savings undertakes
the primary lending activities of Argo Bancorp, accordingly, the discussion
under the caption "Lending Activities" materially relates only to Argo Savings.
Argo Bancorp does, however, have certain investments in loans on an
unconsolidated basis at the holding company level, as well as certain borrowings
unrelated to the activities of Argo Savings. Accordingly, there are certain
references to Argo Bancorp's activities under the section caption "Sources of
Funds and Borrowings." Unless otherwise stated, all other descriptions of the
business of Argo Bancorp that follow relate to the business of Argo Savings.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois. Argo Savings converted to a federal stock
charter in 1982 and was determined to be insolvent by the Federal Savings and
Loan Insurance Corporation ("FSLIC") in 1987. On November 17, 1987, the FSLIC
placed Argo Savings into receivership, whereupon Argo Bancorp acquired one
hundred percent of Argo Savings' issued and outstanding common stock (10,000
shares) in exchange for an injection of capital in the amount of $1.1 million
bringing Argo Savings into capital compliance. In June 1989, Argo Bancorp
infused an additional $1.5 million of capital into Argo Savings in order to
facilitate the acquisition of Federal National Mortgage Association ("FNMA")
mortgage servicing rights in July 1989. Argo Savings is a member of the Federal
Home Loan Bank ("FHLB") System and its deposits are insured by the FDIC under
the Savings Association Insurance Fund ("SAIF"). The principal executive offices
of Argo Bancorp and home office of Argo Savings are located at 7600 West 63rd
Street, Summit, Illinois. Argo Savings has four branch offices, located in Cook
and Lake County, Illinois.
Argo Savings' primary business is the solicitation of savings deposits from
the general public and the purchase or origination of loans secured by
residential real estate. Through its subsidiaries Argo Mortgage Corporation and
Margo Financial Services, LLC, Argo Savings has engaged in mortgage brokerage
activities that focus on the origination, purchase and sale of mortgage loans in
the secondary market. Argo Savings generates income by the sale of these
mortgage loans on a "servicing released" basis into the secondary market and
through investment in Purchased Mortgage Servicing Rights ("PMSRs"). To a lesser
extent, Argo Savings invests funds in securities approved for investment by
federal regulations, including obligations of the United States Government and
its agencies. Argo Savings continues to expand its operations to include
consumer lending, limited commercial real estate lending, commercial checking,
money market deposit accounts and additional consumer investment products. The
expansion into consumer lending and limited commercial real estate lending has
allowed Argo Savings to remain competitive in its primary market area. Such
lending, however, involves greater risk than one-to-four family residential
mortgage lending.
Through activities conducted by its Argo Mortgage Corporation subsidiary,
in recent years Argo Savings has acquired mortgage loans at a deep discount for
which the borrowers are either not current as to principal and interest payments
or there is doubt to the borrower's ability to pay in full
3
<PAGE>
the contractual principal and interest outstanding. In determining the amount it
will bid to acquire such loans at private sales and auctions, the Company
estimates the amounts it will realize through foreclosure, collection efforts,
or other resolution of each loan and the length of time required to complete the
collection process. Investment in these assets has resulted in higher then
market interest yields and significant gains as a result of the ultimate sale of
properties acquired through these purchases. However, losses have also been
incurred from certain properties through other real estate owned activity.
During 1997, the Company began to focus its resources on traditional loans
receivable originated through its majority owned subsidiary Margo and began to
reduce its position in discounted loans receivable. 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 to $30.6 million or 12.9%
of total assets at December 31, 1997.
Income is also derived from interest and fees generated in connection with
Argo Savings' lending and mortgage activities, as well as net fees generated
from investments in PMSRs. Argo Savings' principal expenses are interest paid on
savings deposits, borrowing and operating costs.
Market Area
Argo Savings considers its primary market area to be the greater Chicago
metropolitan area (hereinafter referred to as its "primary market area"). Argo
Savings maintains its headquarters in Summit with four branch offices in
Bridgeview, the near West side of Chicago, Dolton, and Gurnee, Illinois.
Argo Savings' primary market area is urban and is comprised of high-density
residential neighborhoods interspersed with mixed-use and heavily industrialized
areas. The primary market area is fully developed with a relatively large number
of generally older homes. Argo Savings' newest branch is located in Gurnee,
which is currently undergoing rapid growth and residential expansion. All branch
locations have excellent access to major transportation routes, including
Interstates 290, 294, 94 and 55, as well as public transportation, both rail and
bus.
Selected Consolidated Historical Financial Data
The following tables set forth selected consolidated historical financial
data for Argo Bancorp during the periods ended and at the dates indicated. This
information should be read in conjunction with the Consolidated Financial
Statements of Argo Bancorp and notes thereto in the 1997 Annual Report to
Shareholders, which is incorporated herein by reference.
4
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA Year Ended December 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Loans receivable, net ....................................... $ 184,358 $ 173,429 $ 142,380 $ 118,063 $ 90,139
FHLB of Chicago Stock ....................................... 3,271 3,428 2,669 2,576 2,576
Securities .................................................. 4,974 5,788 7,573 12,491 15,009
Cash equivalents ............................................ 8,677 13,276 11,061 9,286 6,905
Purchased loan servicing rights ............................. 6,706 5,264 4,033 3,641 2,508
Foreclosed real estate ...................................... 4,251 3,913 2,234 359 554
Other assets ................................................ 24,061 24,186 16,518 9,601 8,038
--------- --------- --------- --------- ---------
Total assets ................................................ $ 236,298 $ 229,284 $ 186,468 $ 156,017 $ 125,729
Deposits .................................................... 172,469 150,627 123,484 100,697 88,220
Borrowed money .............................................. 34,156 50,879 38,181 30,820 9,064
Custodial escrow balances for loans serviced ................ 6,400 5,782 9,696 14,691 20,031
Other liabilities ........................................... 5,169 5,436 4,228 835 619
--------- --------- --------- --------- ---------
Stockholders' equity ........................................ $ 18,104 $ 16,560 $ 10,879 $ 8,974 $ 7,795
========= ========= ========= ========= =========
<CAPTION>
Year Ended December 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ............................................. $ 18,266 $ 16,074 $ 13,987 $ 10,282 $ 9,477
Interest expense ............................................ 11,286 9,083 8,341 5,012 3,822
--------- --------- --------- --------- ---------
Net interest income ....................................... 6,980 6,991 5,646 5,270 5,655
Provision for loan losses ................................... 210 248 55 48 270
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ....... 6,770 6,743 5,591 5,222 5,385
Non-interest income ......................................... 15,585 3,083 2,643 1,838 1,738
Non-interest expense ........................................ 21,409 17,718 7,431 5,383 4,587
Income before income taxes ................................ 946 1,677 2,408 1,677 2,536
Income tax expense .......................................... 123 343 667 281 952
--------- --------- --------- --------- ---------
Income before extraordinary item
and cumulative effect of change in
accounting principle ...................................... 823 1,334 1,741 1,396 1,584
Cumulative effect of change in accounting for
income taxes .............................................. -- -- -- -- 460
Net income .................................................. $ 823 $ 1,334 $ 1,741 $ 1,396 $ 2,044
========= ========= ========= ========= =========
Basic earning
per share--before extraordinary item 1.70 4.26 5.88 4.62 5.27
Basic earning per share...................................... 1.70 4.26 5.88 4.62 6.80
Income per share - diluted before
extraordinary item ........................................ 1.56 $ 3.60 $ 4.96 $ 4.08 $ 4.81
========= ========= ========= ========= =========
Net income per share - diluted .............................. $ 1.56 $ 3.60 $ 4.96 $ 4.08 $ 6.21
========= ========= ========= ========= =========
<CAPTION>
At December 31
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Return on average assets .................................... 0.35% 0.68% 1.00% 1.00% 1.59%
Return on average equity .................................... 4.62 10.89 17.09 16.17 27.88
Average equity to average assets ............................ 7.53 6.26 5.85 6.10 5.71
Equity to total assets ...................................... 7.66 7.22 5.83 5.75 6.20
Interest rate spread during period .......................... 3.81 4.61 3.69 4.25 4.82
Net interest margin ......................................... 3.54 4.44 3.65 4.24 4.93
Non-interest expense to average assets ...................... 9.05 9.83 4.40 3.86 3.58
Non-performing loans, to loans receivable,
and loans held for sale (1) ............................... 3.57 3.12 1.35 1.93 1.19
Non-performing assets to total assets (1) ................... 4.14 3.43 2.26 1.72 1.31
Allowance for loan losses to non-performing
loans (1) ................................................. 14.73 16.87 29.54 26.38 55.88
Average interest-earning assets to average
interest-bearing liabilities .............................. .95x .94x .99x 1.00x 1.03x
Book value per share ........................................ 36.98 37.11 36.72 30.91 27.38
Full-service customer service facilities .................... 5 5 5 4 3
</TABLE>
(1) Excludes balances related to the portfolio of discounted loans receivable.
5
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Lending Activities
General. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and discounted loans receivable totaled $184.4
million, excluding accrued interest, at December 31, 1997, representing 78.0% of
its total assets. On that date, $177.5 million of total loans outstanding or
92.2% of its total gross loan portfolio, consisted of loans secured by first
mortgages on one-to-four family residential properties and $1.3 million, or .7%,
of total outstanding loans consisting of first lien loans secured by
multi-family properties. At December 31, 1997, Argo Savings had commercial real
estate loans outstanding in the amount of $2.0 million or 1.0% that are secured
by commercial buildings primarily in suburban Cook and Lake County.
Argo Savings has focused its lending activities on the generation of
profits from the sale of loans, as well as increasing the interest-rate
sensitivity of its loan portfolio. Argo Savings originates long-term, fixed-rate
mortgage loans with 15 and 30 year maturities for immediate sale in the
secondary mortgage market. Such loans are originated directly by Argo Savings,
as well as through its mortgage brokerage subsidiaries, Argo Mortgage
Corporation and Margo Financial Services, LLC. See "-- Subsidiaries."
Historically, Argo Savings' lending activity has also included the origination
and purchase of adjustable rate mortgages. The majority of the growth in the
Argo Savings' 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. Argo Savings originated
and purchased approximately $115.2 million of loans both for portfolio and for
sale, and $8.9 million of discounted loans receivable during 1997. Argo Savings'
policy of purchasing adjustable rate loans and seasoned higher yielding fixed
rate loans is intended to increase the interest rate sensitivity of its assets
without decreasing the yield on its interest-earning assets. See "-- Loan
Origination, Purchases and Sales."
Argo Savings is engaged in numerous community lending and development
activities. Argo Savings created the Heritage Corridor Community Development
Corporation ("CDC"), an Illinois not-for-profit corporation serving southwest
Cook County communities. Two other banks and a local municipality have invested
in CDC. The primary purpose of the CDC is to act as a catalyst to promote local
affordable housing and economic development projects through participation in
approved ventures. The CDC's first, and on-going project is the development and
operation of a loan fund for the revitalization of the Archer Road Business
District in Summit, Illinois. CDC has no activity in 1997 and 1996.
Additionally, Argo Savings is a member of CIC 2000, a revolving loan pool
organized by Community Investment Corporation to fund loans to rehabilitate
affordable housing in Chicago and Cook County through note sales. Single family
homeowners in Argo Savings' delineated service areas are also served under
several low down payment mortgage programs including the FannieMae Community
HomeBuyers program. Community outreach related to first time homebuyers
continues to include educational seminars and individual counseling on financing
a home purchase, in conjunction with local not-for-profit organizations. Using
Community Investment Program advances and Affordable Housing Program funds from
the FHLB, funding has been made available to expand the availability of funds
for single family mortgages and loans to small business customers within Argo
Savings' delineated services areas. Argo Savings is one of four participating
lenders in a $1.5 million line of credit to Harvey-based New Cities Community
Development Corporation, a not-for-profit corporation, to rehabilitate fifty
(50) homes for low
6
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income families in the south suburbs. Argo Savings also participates in the City
of Chicago Mortgage Bond Program, the Illinois League of Financial Institutions
Affordable Housing Grant Program and the Chicago Homeowners Tax Savings Program
to enhance its ability to originate mortgages to low and moderate income
purchasers or targeted census tracts.
Analysis of Loan Portfolio. The following table sets forth the composition
of the mortgage and other loan portfolios and mortgage-backed securities
portfolio in dollar amounts and in percentages at the dates indicated.
7
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<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1993 1994 1995
-----------------------------------------------------------------
% of % of % of
Amt. Total Amt. Total Amt. Total
---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family.................... $ 80,059 86.92% $112,393 93.57% $144,518 93.49%
Multi-family.......................... 1,799 1.95 1,177 .98 1,180 .76
Commercial real estate................ 1,454 1.59 1,684 1.40 2,552 1.65
------ ------ ------ ------ ------- ------
Total mortgage loans............... 83,312 90.46 115,254 95.95 148,250 95.90
Other loans:
Automobile............................ 102 .11 28 .02 5 .00
Mobile home........................... 636 .69 472 .39 379 .25
Other (1)............................. 8,052 8.74 4,364 3.64 5,941 3.85
------ ------ ------ ------ ------- ------
Total other loans.................. 8,790 9.54 4,864 4.05 6,325 4.10
------ ------ ------ ------ ------- ------
Total loans receivable (2)......... 92,102 100.00% 120,118 100.00% 154,575 100.00%
====== ====== ======
Less:
Unearned discounts, premiums and
deferred loan fees, net............. 1,350 1,442 10,847
Allowance for loan losses............. 613 613 587
-------- ------- -------
Loans receivable, net................. 90,139 118,063 143,141
======== ======= =======
Mortgage-backed securities:
CMO................................... 23 .27 $ 5 0.08 -- --
FHLMC................................. 2,069 24.36 1,382 20.95 1,164 20.56
FNMA.................................. 6,017 70.84 4,901 74.29 4,339 76.65
GNMA.................................. 385 4.53 309 4.68 158 2.79
------ ------ ------ ------ ------- ------
Total mortgage-backed securities... 8,494 100.00% 6,597 100.00% 5,661 100.00%
====== ====== ======
Net premium (discount)............. 115 98 78
Unrealized loss on securities
available for sale............... -- (300) (27)
------- -------- -------
Net mortgage-backed
securities....................... $ 8,609 $ 6,395 $ 5,712
======= ======== =======
<CAPTION>
At December 31,
--------------------------------------------
1996 1997
--------------------------------------------
% of % of
Amt. Total Amt. Total
---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family.................... $177,345 92.50% $177,521 92.20%
Multi-family.......................... 1,468 .77 1,252 .65
Commercial real estate................ 4,523 2.36 1,951 1.01
-------- ------ --------- -------
Total mortgage loans............... 184,398 95.63 180,724 93.86
Other loans:
Automobile............................ 4 .00 4 .00
Mobile home........................... 248 .13 208 .11
Other (1)............................. 8,142 4.24 11,597 6.03
-------- ------ --------- -------
Total other loans.................. 8,394 4.37 11,809 6.14
-------- ------ --------- -------
Total loans receivable (2)......... 191,730 100.00% 192,533 100.00%
====== ======
Less:
Unearned discounts, premiums and
deferred loan fees, net............. 17,636 7,361
Allowance for loan losses............. 665 814
------- -------
Loans receivable, net................. 173,429 184,358
======= =======
Mortgage-backed securities:
CMO................................... -- -- -- --
FHLMC................................. 826 16.76 125 4.28
FNMA.................................. 3,949 80.15 2,798 95.72
GNMA.................................. 152 3.09 --- ---
-------- ------ --------- -------
Total mortgage-backed securities... 4,927 100.00% 2,923 100.00%
====== ======
Net premium (discount)............. 60 39
Unrealized loss on securities
available for sale............... (83) (35)
------- -------
Net mortgage-backed
securities....................... $ 4,904 $ 2,927
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Consists primarily of home equity loans secured by one-to-four family
properties.
(2) Includes loans held for sale, portfolio loans receivable, and discounted
loans receivable.
8
<PAGE>
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of Argo Savings' loans, discounted loans, and
mortgage-backed securities portfolio at December 31, 1997. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $35.9 million, $46.2 million, and $48.2
million for the years-ended December 31, 1995, 1996, and 1997, respectively.
<TABLE>
<CAPTION>
Loans
---------------------------------------------------------------------------------------
One-to- Total Mortgage
four Multi- Commercial Other Loans backed
Family Family Real Estate Loans(1) Receivable Securities Total
------ ------ ----------- -------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within one year ......................... $ 54,211 $ 78 $ 187 $ 8,465 $ 62,941 $ 2,923 $ 65,864
--------- --------- --------- --------- --------- --------- ---------
After one year:
One to three years ..................... 13,928 751 864 208 15,751 -- 15,751
Three to five years .................... 2,469 384 900 86 3,839 -- 3,839
Five to 10 years ....................... 12,381 39 -- 500 12,920 -- 12,920
10 to 20 years ......................... 17,738 -- -- 2,217 19,955 -- 19,955
Over 20 years .......................... 76,794 -- -- 333 77,127 -- 77,127
--------- --------- --------- --------- --------- --------- ---------
Total due after one year ................. 123,310 1,174 1,764 3,344 129,592 -- 129,592
--------- --------- --------- --------- --------- --------- ---------
Total amounts due ........................ $ 177,521 $ 1,252 $ 1,951 $ 11,809 $ 192,533 $ 2,923 $ 195,456
========= ========= ========= ========= ========= ========= =========
LESS:
Unearned discounts, premiums
and deferred loan fees, net ............ (7,361) 39 (7,322)
Unrealized loss on securities
available for sale ..................... -- -- (35) (35)
Allowance for loan losses ................ (814) -- (814)
--------- --------- ---------
Loans receivable, net .................... $ 184,358 $ 2,927 $ 187,285
========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
(1) Consists primarily of home equity loans secured by one-to-four-family
properties.
9
<PAGE>
The following table sets forth at December 31, 1997, the dollar amount of all
loans and mortgage-backed securities due after December 31, 1998, and whether
such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------
Fixed Adjustable
Rates Rates Total
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Due after December 31, 1998:
Mortgage loans:
One-to-four family ................... $108,059 $ 15,251 $123,310
Multi-family ......................... 1,174 -- 1,174
Commercial real estate ............... 1,764 -- 1,764
Other loans .......................... 3,344 -- 3,344
-------- -------- --------
Total loans receivable (1) .............. 114,341 15,251 129,592
Mortgage-backed securities .............. -- -- --
-------- -------- --------
Total loans receivable
and mortgage-backed securities ....... 114,341 15,251 129,592
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes portfolio loans receivable, loans held for sale, and discounted
loans receivable.
10
<PAGE>
One-to-Four Family Residential Loans. At December 31, 1997, approximately
92.20% of Argo Savings' loan portfolio were comprised of one-to-four family
residential mortgage loans. Permanent conventional residential mortgage loans
are made for up to 95.0% of the appraised value of the property when the loan is
secured by real estate improved by not more than four family units.
The loan-to-value ratio, maturity and other provisions of the loans made by
Argo Savings have generally reflected a policy of making available to the public
the maximum loan permissible consistent with applicable regulations, market
conditions, and the lending practices and underwriting standards established by
Argo Savings. Mortgage loans made by Argo Savings are generally long-term loans,
amortized on a monthly basis, with principal and interest due each month. The
initial contractual loan payment period for a residential loan is typically
thirty (30) years. Borrowers may refinance or prepay loans at their option. Most
of Argo Savings' one-to-four family fixed-rate residential loan originations are
sold in the secondary market. See "-- Loan Origination, Purchases and Sales."
All conventional loans with a loan-to-value ratio in excess of 80.0% are
required to have private mortgage insurance covering that portion of the loan in
excess of 80.0% of appraised value.
Multi-Family Residential Real Estate Lending and Commercial Real Estate
Lending. Argo Savings also originates loans for the acquisition of existing
multi-family residences or refinancing of such properties, such as five to
twelve unit apartment buildings located in the greater Chicago metropolitan
area. At December 31, 1997, Argo Savings had loans secured by multi-family
properties in the amount of $1.3 million, or .65% of the total loan portfolio.
Loans originated on multi-family dwellings are generally 5-year fixed-rate
balloon mortgages amortized over thirty (30) years. An origination fee is
generally charged on such loans. Multi-family residential real estate lending
entails additional risk as compared with one-to-four family residential property
lending. Multi-family real estate loans typically involve large loan balances to
a single borrower or groups of affiliated borrowers. The payment experience on
such loans is typically dependent on the successful operation of the real estate
project. Argo Savings evaluates all aspects of multi-family real estate loan
transactions in order to mitigate risk to the greatest extent possible. To
minimize these risks, Argo Savings generally limits its multi-family lending to
properties used solely for residential purposes. Argo Savings seeks to ensure
that the property securing the loan will generate cash flow to adequately cover
operating expenses and debt service payments. To this end, multi-family real
estate loans generally are made at a loan-to-value ratio no greater than 75.0%
and Argo Savings generally imposes a conservative debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service).
Argo Savings requires title insurance to insure the priority of its lien on
all of its mortgage loans, as well as requires fire and casualty insurance on
all its properties securing loans provided by the Savings Bank.
Commercial Real Estate Lending. The commercial real estate loan portfolio
originated or purchased is primarily secured by office buildings and
income-producing commercial properties and amounted to $2.0 million or 1.0% of
the total loan portfolio at December 31, 1997. Argo Savings does not originate
or purchase out of area commercial real estate loans.
11
<PAGE>
Argo Savings will continue on a limited basis to originate loans secured by
commercial real estate in its primary market area. In underwriting these loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower. An
appraisal report is prepared in accordance with OTS regulation by an outside
appraiser qualified by federal and state law to substantiate property values for
every multi-family and commercial real estate loan. These appraisal reports are
reviewed by Argo Savings prior to the closing of the loan to assure compliance
with OTS appraisal standards and policies and the adequacy of the value of the
security property. Argo Savings also typically obtains full personal loan
guarantees from the borrowers. Argo Savings validates such personal loan
guarantees through an investigation of the borrower's personal finances.
Commercial real estate lending entails significant additional risks as
compared with one-to-four family residential property lending. Commercial real
estate loans typically involve larger loan balances to a single borrower or
groups of affiliated borrowers. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such may be subject to a greater
extent to adverse conditions in the economy generally.
Consumer and Other Loans. Federal regulations also permit thrift
institutions to make secured and unsecured consumer loans for up to 35.0% of the
Savings Bank's assets. Additionally, a federal association has lending authority
above the 35.0% maximum category for certain consumer loans, such as property
improvement loans, mobile home loans, savings account secured loans and other
secured and unsecured personal loans.
Argo Savings generates various types of secured consumer loans, primarily
home equity loans and mobile home loans. The home equity loans are made for
terms of up to ten (10) years, while mobile home loans have terms of up to
fifteen (15) years. At December 31, 1997, Argo Savings' consumer loan portfolio
totaled $11.8 million, or 6.1%, of Argo Savings' total loan portfolio.
Management considers consumer loans to involve more credit risk than
secured single family residential mortgage loans and, therefore, consumer loans
generally yield a higher return to Argo Savings and generally provide Argo
Savings with a shorter maturity than single-family residential mortgage loans.
Discounted Loans Receivable. Through activities conducted by its
subsidiary, Argo Mortgage Corporation, Argo Savings has acquired mortgage loans
at a deep discount for which the borrowers are either not current as to
principal and interest payments or there is doubt to the borrower's ability to
pay, in full, the contractual principal and interest outstanding. The purchased
discounted loans are primarily comprised of one-to-four family residential
loans. During the year ended December 31, 1997, Argo Savings sold approximately
$20.7 million in
12
<PAGE>
discounted loans receivable and purchased $8.9 million, decreasing its
investment in discounted loans receivable from $47.7 million at December 31,
1996, to $30.6 million at December 31, 1997. The investment in discounted loans
receivable has resulted in $5.2 million and $3.7 million of interest income, and
$279,000 and $1.8 million of gains on the sale of these assets, for the years
ended December 31, 1997, and 1996, respectively.
Loan Solicitation and Processing. Loan originations are derived primarily
from referrals, existing customers, advertisements and the mortgage broker
network established through Margo. Both Margo personnel as well as employees of
Argo Savings accept loan applications. Upon receipt of a loan application,
credit reports are ordered to verify specific information relating to a loan
applicant's employment, income, assets and credit standing, and independent
verification of all credit, income and liability information provided by the
applicant is completed. In the case of a real estate loan originated by Argo
Savings, or by Margo for Argo Savings, an independent appraiser approved by the
Savings Bank's Board of Directors undertakes an appraisal of the real estate
intended to secure the proposed loan. For loans originated by Margo for third
parties, an independent appraiser approved by the third party is used.
The loan documentation and processing activities utilized by Argo Savings /
Margo in connection with the origination of real estate loans conforms to
standards imposed by the FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), as well as third party investor guidelines. Loan documentation and
processing activities utilized by Argo Savings / Margo conforms to both FNMA and
FHLMC requirements, as well as standards promulgated by the Federal Housing
Authority ("FHA"), the Department of Housing and Urban Development ("HUD") and
the Veterans Administration ("VA"). Additionally, written policies and
procedures governing the origination of mortgage and other loans conforming to
regulatory guidelines promulgated by the OTS are in place and utilized by Argo
Savings.
Upon completion of loan application processing activities, files are
presented to Argo Savings' loan underwriters if the loan is originated on behalf
of Argo Savings, or to third party investors if the loan is originated for
immediate sale. In the case of Argo Savings, certain senior officers have
lending authority and may approve loans of up to $350,000 after completion of
the underwriting process. Loans in excess of $350,000, as well as multi-family
and commercial real estate loans, are subject to approval by the Board of
Directors or a Committee of the Board of Argo Savings.
Both Argo Savings and Margo promptly notify loan applicants in writing of
the final determination of the loan request. 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. If denied, disclosure of the reasons relating to
denial is made pursuant to the requirements of applicable federal and state law.
13
<PAGE>
Statistics regarding all loan applications, both denied and approved, are
retained by Argo Savings and Margo, and reported annually under the Home
Mortgage Disclosure Act. Quality control procedures verifying data obtained
through loan processing activities are in place at Argo Savings and Margo.
Loan Originations, Purchases, and Sales. Argo Savings purchases loans when
its savings inflows exceed the Savings Bank's ability to originate loans or when
Argo Savings determines to restructure its loan portfolio. During 1997, the
growth in loan originations generated by Margo has allowed the Savings Bank to
decrease its loan purchasing activities. The Savings Bank purchasing activities
are primarily directed at seasoned high yield fixed mortgage loans with low loan
to values. Argo Savings originated and purchased a total of approximately $115.2
million of portfolio loans receivable and loans held for sale, and purchased
$8.9 million of discounted loans receivable, during the year ended December 31,
1997.
Currently, most fixed rate, long-term mortgage loans originated are sold in
the secondary mortgage market. These sales have been made to the FNMA, FHLMC,
and other investors. Originated loans sold on a non-recourse basis amounted to
$23.7 million in 1997, $3.5 million in 1996 and $568,300 in 1995.
The success of these secondary mortgage market activities is dependent upon
Argo Savings' ability to originate loans at yields, which are competitive with
other loans in the secondary market. The proceeds from the sale of such loans
are reinvested in adjustable rate mortgage loans.
In an effort to make the yields on its loan portfolio and investments more
responsive to its cost of money, Argo Savings has implemented a number of
policies. Those measures include the origination of long-term, fixed-rate
mortgage loans where such loans can be sold in the secondary market, the
granting of adjustable rate mortgage loans and the origination of consumer,
commercial real estate, and multi-family loans with shorter maturities.
14
<PAGE>
Set forth below is a table showing Argo Savings' loan originations and loan and
mortgage backed securities purchases, sales and principal repayments for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of period ...................................... $ 67,267 $ 83,312 $ 115,254 $ 147,490 $ 183,336
--------- --------- --------- --------- ---------
Mortgage loans originated:
One-to-four family .......................................... 29,496 11,646 10,292 12,904 56,318
Multi-family ................................................ -- 179 -- 455 333
Commercial real estate ...................................... -- 1,100 890 1,440 --
--------- --------- --------- --------- ---------
Total mortgage loans originated ........................... 29,496 12,925 11,182 14,799 56,651
One-to-four family mortgage loans purchased ................. 155,050 134,444 95,275 99,920 48,379
--------- --------- --------- --------- ---------
Total mortgage loans originated and purchased ............ 184,546 147,369 106,457 114,719 105,030
Transfer of mortgage loans:
to/from foreclosed real estate ............................. (868) (256) (2,871) (4,422) (4,955)
to mortgage-backed securities .............................. (7,679) -- -- -- --
Principal repayments ......................................... (27,150) (19,541) (21,885) (27,386) (33,510)
Mortgage loans sold .......................................... (132,804) (95,630) (49,465) (46,293) (69,177)
--------- --------- --------- --------- ---------
At the end of period ....................................... $ 83,312 $ 115,254 $ 147,490 $ 183,336 $ 180,724
========= ========= ========= ========= =========
Other loans:
At beginning of period ...................................... 9,121 8,790 4,864 6,325 8,394
Other loans originated ...................................... 11,860 12,385 15,504 20,914 18,137
Principal repayments ........................................ (12,191) (12,395) (14,043) (18,845) (14,722)
Other loans sold ............................................ -- (3,916) -- -- --
--------- --------- --------- --------- ---------
At end of period ........................................... $ 8,790 $ 4,864 $ 6,325 $ 8,394 $ 11,809
========= ========= ========= ========= =========
Mortgage-backed securities available for sale (gross):
At beginning of period ...................................... 15,384 8,494 6,597 5,661 4,927
Mortgage-backed securities purchased ........................ -- -- -- -- --
Mortgage-backed securities sold ............................. (10,226) -- -- -- (1,149)
Mortgage-backed securities transferred ...................... 7,679 -- -- -- --
Principal repayments ........................................ (4,343) (1,897) (936) (734) (855)
--------- --------- --------- --------- ---------
At end of period ........................................... $ 8,494 $ 6,597 $ 5,661 $ 4,927 $ 2,923
========= ========= ========= ========= =========
Mortgage-backed securities held for sale:
At beginning of period ..................................... 3,075 -- -- -- --
Securities transferred ..................................... -- -- -- -- --
Principal repayments ....................................... -- -- -- -- --
Securities sold .............................................. (3,075) -- -- -- --
--------- --------- --------- --------- ---------
At end of period ........................................... $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
Loan Origination and Other Fees. In addition to interest earned on loans
and commitments for making loans, Argo Savings earns fees in connection with
originating loans. Origination fees are a percentage of the principal amount of
the mortgage loan charged to the borrower for the granting of the loan. Loan
fees are accounted for by deferring all loan origination fees and certain direct
costs associated with originations. Net deferred fees or costs are amortized as
yield adjustments over the custodial life of the related loans using the
interest method, adjusted for estimated prepayment based on the Savings Bank's
historical prepayment experience. At December 31, 1997, Argo Savings had
$681,000 in net deferred loan costs that will be recognized in future periods.
Loan origination and commitment fee income vary with the volume and type of
loans and commitments made and purchased and with competitive conditions in
mortgage markets, which in turn tend to vary in response to the demand and
availability of money.
Argo Savings also receives other fees and charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in borrower or other loan modifications.
Problem Assets and Asset Classification. Loans are reviewed on a regular
basis and an allowance for loan losses is established when, in the opinion of
management, the net realizable value of the property collateralizing the loan is
less than the outstanding principal, and interest and the collectibility of the
loan's principal and interest becomes doubtful. Argo Savings' procedures provide
that when a loan becomes delinquent fifteen (15) days or more, the borrower is
contacted. Typically, Argo Savings' will initiate foreclosure action against a
borrower when principal and interest become ninety (90) days or more past due.
Argo Savings' policy is to stop accruing interest for any loan in excess of
ninety (90) days delinquent separate from management's analysis as to the future
collectibility of the interest. It is the opinion of management that this policy
is an appropriately conservative approach.
Real estate acquired by Argo Savings as a result of foreclosure is carried
at the lower of cost or fair value, net of estimated selling costs.
The following table sets forth information with respect to the Company's
non-performing assets as of the dates indicated. All non-performing loan totals
exclude discounted loans receivable.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more delinquent ........................ $ 1,097 $ 2,324 $ 1,987 $ 3,942 $ 5,525
======== ======== ======== ======== =========
Loans 90 days or more delinquent as
a percentage of portfolio loans and loans
held for sale, net of discount ........................ 1.19% 1.98% 1.54% 3.12% 3.57%
======== ======== ======== ======== =========
Foreclosed real estate, net of related reserves ........ $ 554 $ 359 $ 2,234 $ 3,913 $ 4,251
======== ======== ======== ======== =========
Total loans 90 days or more delinquent and
foreclosed real estate to total assets ................ 1.31% 1.72% 2.26% 3.43% 4.14%
======== ======== ======== ======== =========
</TABLE>
16
<PAGE>
At December 31, 1997, the Company had $5.5 million of portfolio loans
receivable and loans held for sale and $6.2 million of discounted loans
receivable ninety (90) days or more delinquent. Discounted loans, which are
often purchased with the intent to foreclose and sell the underlying property,
are excluded from non-performing loans. In general, loans greater than ninety
(90) days delinquent are first liens on loans secured by one-to-four family
residences. The Company's policy is to cease accruing interest on loans over
ninety (90) days delinquent. Therefore, there were no loans ninety (90) days
delinquent and accruing interest.
At December 31, 1997, the Company had $4.3 million of foreclosed real
estate, which consisted of one hundred thirteen (113) properties. The largest
single balance was $283,000 secured by a single family residence in New York.
The increase is primarily the result of the Company's investment in discounted
loans. These loans were acquired with the intention of ultimate foreclosure and
sale.
OTS regulations require that each insured institution shall classify its
owned assets on a regular basis. Additionally, in connection with examinations
of insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require assets to be classified. There are three
classifications for problem assets: Substandard, Doubtful and Loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuation as an asset of the institution is not warranted. The OTS recently
discontinued classifying assets as "special mention" if such assets possessed
weakness but did not expose the institution to sufficient risk to warrant
classification in the Substandard category. Argo Savings, however, currently
continues to designate assets as special mention.
At December 31, 1997, Argo Savings had $5.5 million of loans and $4.3
million of foreclosed real estate classified as Substandard or Doubtful,
respectively. Excluded from this total is the $6.2 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 analysis and
from all general valuation allowance analysis. If an asset or portion thereof is
classified Loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100 percent of the portion of the
asset classified Loss, or charge off such amount. At December 31, 1997, Argo
Savings had no assets classified as Loss. General loss allowances established to
cover possible losses related to assets classified Substandard or Doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital. A
savings institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS, which
can order the establishment of additional general or specific loss allowances.
If an institution does not agree with an examiner's classification of an asset,
it may appeal the determination. The OTS, in conjunction with the other federal
banking agencies, has adopted an interagency policy statement on the allowance
for loan and lease losses. The policy statement provides guidance to financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation allowances. Generally,
the policy statement requires that institutions have effective systems and
controls to identify, monitor and address asset quality problems, have analyzed
all significant factors that affect the collectibility of the loan portfolio in
a reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
17
<PAGE>
Analysis of Allowance for Loan Losses. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb future
charge-offs of loans deemed uncollectible. During the year ended December 31,
1997, the Savings Bank experienced an increase in the percentage of loans ninety
(90) days or more delinquent from 3.12% of portfolio loans receivable and loans
held for sale to 3.57% of portfolio loans receivable and loans held for sale at
December 31, 1997. Management believes that the allowances for loan losses are
currently adequate. Currently, management is unaware of any identifiable
charge-offs. In addition to the allowance for loan losses, the Savings Bank
maintains an allowance for losses on foreclosed real estate. The balance at
December 31, 1997, represents specific reserves currently in place on foreclosed
real estate. As of December 31, 1997, all of the allowance for loan losses
pertains to a general allowance. Argo Savings had no specific reserves
established at December 31, 1997, other than the reserves against foreclosed
real estate. The allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off.
Determination of an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and mix of the loan
portfolio, adverse situations which may affect a borrower's ability to repay,
size of the loan portfolio, business and economic conditions and management's
estimate of potential losses. While management uses all available information,
including the monitoring of the economic conditions in the geographic regions in
which the loan portfolio is located, future additions to the allowance may be
necessary based on estimates that are susceptible to significant revision as a
result of changes in economic conditions and other factors. Additionally,
various regulatory agencies, as an integral part of their examination process,
periodically review Argo Savings' allowance for loan losses. Such agencies may
require Argo Savings to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
18
<PAGE>
The following table sets forth information with respect to the Argo Savings'
allowance for loan losses by loan category for the periods and at the dates
indicated.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:
One-to-four family ..................................... $ 138 $ 313 $ 315 $ 330 $ 412
Multi-family ........................................... 14 14 14 14 14
Commercial loans ....................................... 216 216 216 216 216
Other loans ............................................ 13 70 68 27 23
----- ----- ----- ----- -----
Total ................................................. 381 613 613 587 665
----- ----- ----- ----- -----
Provision for loan losses
One-to-four family .................................... 175 48 96 248 210
Multi-family .......................................... -- -- -- -- --
Commercial loans ...................................... -- -- -- -- --
Other loans ........................................... 70 -- (41) -- --
----- ----- ----- ----- -----
Total ................................................ 245 48 55 248 210
----- ----- ----- ----- -----
Transfer to allowance for losses on foreclosed
real estate ........................................... -- (43) (45) (77) (50)
----- ----- ----- ----- -----
Charge-offs
One-to-four family .................................... -- (5) (36) (89) (11)
Multi-family .......................................... -- -- -- -- --
Commercial loans ...................................... -- -- -- -- --
Other loans ........................................... (13) -- -- (4) --
----- ----- ----- ----- -----
Total ................................................ (13) (5) (36) (93) (11)
----- ----- ----- ----- -----
Balance at end of period
One-to-four family ..................................... 313 315 330 412 561
Multi-family ........................................... 14 14 14 14 14
Commercial loans ....................................... 216 216 216 216 216
Other loans ............................................ 70 68 27 23 23
----- ----- ----- ----- -----
Total ................................................. $ 613 $ 613 $ 587 $ 665 $ 814
===== ===== ===== ===== =====
Ratio of net charge-offs during the period to
loans receivable, excluding discounted loans ........... .01% .04% .04% --% .01%
===== ===== ===== ===== =====
Ratio of allowance for loan losses to net
loans receivable, excluding discounted loans ........... .68% .52% .45% .53% .53%
===== ===== ===== ===== =====
</TABLE>
19
<PAGE>
Mortgage-Backed Securities
The Savings Bank has an investment in mortgage-backed securities and has,
at times, utilized such investments as an alternative to mortgage lending. All
of the mortgaged-backed securities are insured or guaranteed by the Government
National Mortgage Association ("GNMA"), FNMA or FHLMC. At December 31, 1997,
gross mortgaged-backed securities, totaled $2.9 million or 1.24% of total
assets.
Purchased Mortgage Servicing Rights
Purchase Mortgage Servicing Rights ("PMSRs") represent the right to receive
a fee for the collection and administration of the mortgage payments on the
loans being serviced for others. The servicing of mortgages primarily consists
of the collection of monthly principal and interest payments, collection and
disbursement of escrow funds for taxes and insurance, providing various customer
services and account maintenance, reporting, foreclosure processing, and
investor notification. For performing these administrative tasks, the servicer
retains a monthly servicing fee generally calculated as a percentage of the
outstanding loan balance, and holds the escrowed payments for taxes and
insurance in non-interest-bearing custodial accounts. The servicing fee is
intended to cover anticipated operating expenses incurred in servicing the loans
and to provide for an adequate profit margin. Argo Bancorp uses an independent
servicing company to perform the administrative activities discussed above under
a subservicing agreement. Argo Bancorp's primary administrative task associated
with PMSRs is to review monthly analyses of all servicing and accounting reports
prepared by the subservicer and to perform regular on-site inspections and
reviews of the subservicer's operations.
Prior to completing any acquisition of servicing rights, Argo Bancorp
analyzes a wide range of parameters with respect to each portfolio under
consideration. This review includes the projected revenues and expenses,
geographic distribution, interest rate distribution, loan-to-value ratios,
outstanding balances, delinquency history and other statistics. Due diligence is
either performed by Argo Savings' employees or a designated independent
contractor on a representative sample of the mortgages involved. The purchase
price is based on the present value of the expected future stream of cash flows,
computed by using a discount rate that management considers to appropriately
reflect the risk associated with the investment, and using a loan prepayment
assumption that management considers to be conservative relative to the
characteristics of the serviced loans. Management does not purchase PMSRs with
recourse servicing, thus Argo Bancorp is not subject to the risk of and costs
(including foreclosure costs) associated with borrower default on the underlying
loans.
Mortgage servicing activities carry interest rate risk since the total
amount of servicing fees earned, as well as the amortization of the investment
in the servicing rights, fluctuate based on loan prepayments which generally
result from 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.
20
<PAGE>
The value of PMSRs decreases in a decreasing interest rate environment and
increases in an increasing interest rate environment due to the actual or
anticipated fluctuation in the prepayment speeds of the underlying mortgage
loans. The value of the PMSRs reacts inversely with the other interest-earning
assets of Argo Savings. The value of mortgage loans, comprising the majority of
Argo Savings' assets, decreases in a rising interest rate environment and
increases in a declining interest rate environment. Thus, the PMSRs act as a
natural hedge against the mortgage loans in Argo Savings' portfolio in a
changing interest rate environment.
A portion of Argo Bancorp and Argo Savings' business consists of servicing
loans for others. Mortgage loans serviced for others are an off-balance sheet
item and, therefore, the principal balance of the serviced loans is not included
on Argo Bancorp's Consolidated Statements of Financial Condition. The cost of
acquiring the right to service the mortgage loans is carried as a capitalized
asset. The cost of the acquisition of PMSRs represents the right to receive a
future cash flow. The cost of acquiring servicing rights purchased is amortized
in proportion to and over the period of estimated servicing income based on
management's estimate of remaining loan lives. Other loan servicing costs are
netted against servicing income as incurred.
Argo Savings has invested $5.9 million for an equity interest 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 equal to two times the equity investment by its
partners. The cost of the borrowings, as well as the service fee income and
expense and related amortization, is recorded at the limited partnership level.
Each quarter, financial statements are issued to the investors and the pro-rata
share of the income for each investor is calculated. At the end of five years,
or at such time as the investors may agree, the servicing rights will be sold
and the proceeds divided pro-rata among the investors. As with a direct
investment in PMSRs, the collateral behind the equity investment is the
servicing rights. All limited partnership purchases of servicing rights must be
approved by all equity investors and undergo the same stringent guidelines
outlined previously for direct purchases of servicing. The task of finding and
acquiring the servicing rights controlled by the partnership as well as all
associated administrative duties, is assigned to Dovenmuehle Mortgage, Inc.
("DMI"), the general partner of the limited partnership. DMI also services the
PMSRs in the partnership. Each division is audited annually by an independent
auditor and an independent third party valuation is performed annually. The
results of both reviews are sent directly to each investor.
The return on the Savings Bank's PMSRs investment for the year ended
December 31, 1997, was approximately 6.6%. This investment constitutes 48.5% of
Argo Savings' capital at December 31, 1997. Another benefit derived from the
PMSRs is the interest free custodial accounts comprised of the borrowers' taxes
and insurance escrows and, for a short time period, the float on their principal
and interest payments. The custodial balances are maintained in interest free
accounts and are not affected by changes in interest rates. The custodial
balances relating to the servicing owned at December 31, 1997, were $6.4
million.
21
<PAGE>
Investment Activities
The Savings Bank must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Savings Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 1997, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 6.51%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Sources of Funds and Liquidity and Capital Resources"
in the 1997 Annual Report incorporated by reference herein.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Savings Bank is to invest funds
among various categories of investments and maturities based upon the Savings
Bank's asset/liability management policies, investment quality and
marketability, liquidity needs and performance objectives. It is the Savings
Bank's general policy to invest in certificates of deposit, overnight funds, and
securities, which are U.S. Government securities and federal agency obligations,
and other issues that are rated investment grade. At December 31, 1997, Argo
Bancorp had $5,027,000 of investment securities available for sale with an
aggregate market value of $4,974,000.
22
<PAGE>
The following table sets forth the carrying value of Argo Bancorp's consolidated
investment securities and securities held for sale, and short-term investments,
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1995 1996 1997
------------------- -------------------- --------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits:
FHLB daily investment ................................ 2,537 2,537 356 356 1,322 1,322
Other Investments ................................... 1,300 1,300 402 402 1,144 1,144
------ ------ ------ ------ ------ ------
Total interest-earning deposits ................... $3,837 $3,837 $ 758 $ 758 $2,466 $2,466
====== ====== ====== ====== ====== ======
Investment Securities:
FHLB-Chicago stock
(investment required by law) ....................... 2,669 2,669 3,428 3,428 3,271 3,271
------ ------ ------ ------ ------ ------
Investment securities available for sale:
U.S. Government obligations and
agencies ........................................ 603 603 -- -- -- --
Municipal and state Governments
and agencies ...................................... 619 619 602 602 380 380
Marketable equity securities ......................... 639 639 282 282 1,667 1,667
Mortgage-backed securities ........................... 5,712 5,712 4,904 4,904 2,927 2,927
------ ------ ------ ------ ------ ------
Total investment securities available for sale ....... $7,573 $7,573 $5,788 $5,788 $4,974 $4,974
====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and maturities of securities available for sale at
December 31, 1997.
<TABLE>
<CAPTION>
Weighted
Amortized Average
Maturing Cost Yield
- -------- --------- --------
<S> <C> <C>
Within one year ..................................... $ 234 8.81%
After one year through five years .................. 565 6.15
Due after five through ten years .................... 50 9.50
Due after ten years ................................. 2,483 6.99
Marketable equity securities ........................ 1,695 --
Federal Home Loan Bank of Chicago stock
(investment required by law) ...................... 3,271 --
------ ----
Total ............................................... $8,298 --%
====== ====
</TABLE>
24
<PAGE>
Sources of Funds and Borrowings
General. Deposits are the major source of Argo Savings' funds for lending
and other investment purposes. In addition to deposits, Argo Savings derives
funds from loan principal repayments, proceeds from sales of loans, borrowings,
and the custodial balances on loans serviced for others. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in the availability of other
sources of funds. They may also be used on a longer term basis for general
business purposes.
Deposits. Argo Savings offers a number of deposit accounts, including
tiered passbook, NOW accounts, money market accounts and certificate accounts
currently ranging in maturity from seven days to ten years. Deposit accounts
vary as to terms, with the principal differences being the minimum balance
required, the period the funds must remain on deposit and the interest rate.
Argo Savings in the past has utilized brokered deposits, and will continue to
use this source of funds as needed in the future. Argo Savings had $6.5 million
in brokered deposits at December 31, 1997. Argo Savings has traditionally priced
its deposit products at or near market rates in its primary market.
25
<PAGE>
Deposit Flow. The following table sets forth the change in dollar amount of
savings accounts offered by Argo Savings between the dates indicated.
<TABLE>
<CAPTION>
Amount at Percent Amount at Percent Amount at Percent
Dec. 31, of Total Increase Dec. 31, of Total Increase Dec. 31, of Total Increase
1995 Deposits (Decrease) 1996 Deposits (Decrease) 1997 Deposits (Decrease)
-------- ----- -------- -------- ----- -------- -------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts ......... $ 18,516 15.0% $ (2,680) $ 18,349 12.2% $ (167) $ 17,607 10.2 (742)
NOW accounts .............. 12,830 10.4 (951) 12,426 8.3 (404) 13,225 7.7 799
Money market accounts ..... 4,483 3.6 400 4,957 3.3 474 6,223 3.6 1,266
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total ..................... 35,829 29.0 (3,231) 35,732 23.8 (97) 37,055 21.5 1,323
-------- ----- -------- -------- ----- -------- -------- ----- --------
Certificate accounts:
3.99% or less ............ 18 -- (5,993) 52 -- 34 10 -- (42)
4.00% to 4.99% ........... 5,457 4.4 (11,733) 769 0.5 (4,688) 874 .5 105
5.00% to 5.99 ............ 36,937 30.0 13,828 71,169 47.2 34,232 62,935 36.5 (8,234)
6.00% to 6.99 ............ 30,560 24.7 17,785 39,194 26.0 8,634 69,962 40.5 30,768
7.00% to 7.99 ............ 14,550 11.8 12,298 3,612 2.4 (10,938) 1,513 .9 (2,099)
8.00% to 8.99 ............ 133 .1 (167) 99 .1 (34) 120 .1 21
9.00% to 9.99 ............ -- -- -- -- -- -- -- -- --
----- -------- -------- ----- -------- -------- ----- --------
Total ................... 87,655 71.0 26,018 114,895 76.2 27,240 135,414 78.5 20,519
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total deposits ............ $123,484 100.0% $ 22,787 $150,627 100.0% $ 27,143 $172,469 100.0% $ 21,842
======== ===== ======== ======== ===== ======== ======== ===== ========
Weighted Average Rate...... 5.13% 5.13% 5.18%
===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
(1) See Note 9 in the 1997 Annual Report to the Stockholders, incorporated by
reference herein for a weighted average percentage by deposit type.
26
<PAGE>
Certificate Accounts. The following table presents the amount of
certificate accounts outstanding at December 31, 1997, and the periods to
maturity or repricing.
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
------ ----
(Dollars in thousands)
<S> <C> <C>
Within one year (1) ....................... $116,154 5.85%
One to three years ........................ 13,313 5.98
Thereafter ................................ 5,947 6.36
-------- ----
Total ..................................... $135,414 5.85%
======== ====
</TABLE>
(1) Includes a $13.0 million certificate that reprices annually and matures in
one (1) year.
At December 31, 1997, Argo Savings had outstanding $42.7 million of
certificate of deposit accounts in amounts of $100,000 or more maturing or
repricing as follows:
<TABLE>
<CAPTION>
Amount
------
(In thousands)
<S> <C>
Three months or less ....................................... $ 3,216
Over three through six months .............................. 1,102
Over six through 12 months ................................. 20,354
Over 12 months ............................................. 17,978
-------
Total ...................................................... $42,650
=======
</TABLE>
Certificate Accounts Classified by Rates. The following table sets forth
the certificate accounts of Argo Savings classified by rates as of the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
(In thousands)
Rate 1995 1996 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
3.99% or less............................ $ 18 $ 52 $ 10
4.00% to 4.99%........................... 5,457 769 874
5.00% to 5.99:........................... 36,937 71,169 62,935
6.00% to 6.99%........................... 30,560 39,194 69,962
7.00% to 7.99%........................... 14,550 3,612 1,513
8.00% to 8.99%........................... 133 99 120
------- -------- --------
Total.................................... $87,655 $114,895 $135,414
======= ======== ========
</TABLE>
27
<PAGE>
Deposit Activity. The following table sets forth the savings deposit
activities of Argo Bancorp for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
December 31
-------------------------------
1995 1996 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Deposits in excess of (withdrawals) ........ $17,177 $18,123 $13,352
Interest credited .......................... 5,610 9,020 8,490
------- ------- -------
Net increase (decrease) in
savings deposits ......................... $22,787 $27,143 $21,842
======= ======= =======
</TABLE>
Substantially all of Argo Savings' depositors are residents of Illinois and
Indiana.
Borrowings. Argo Bancorp's other borrowings at December 31, 1997 consist
of three (3) notes payable. The first note payable for $5,279,000 is drawn on a
$6.0 million open line with a third party financial institution and is
collateralized by Argo Savings' stock. The interest rate on this note adjusts
monthly at prime. Also included is On-Line's note payable of $830,000, which is
an open line of credit totaling $1.0 million with a third party financial
institution. This note also adjusts monthly at prime. The third note payable is
an ESOP note payable, which has a balance of $57,000 and the interest on this
note is 8.0%. The 18,253 shares of common stock of Argo Bancorp held by the ESOP
are pledged as collateral for the ESOP note. Also included in other borrowings
is the $329,000 margin account loan from a third party securities broder. The
rate of interest on this loan adjusts daily at prime less .50%. The margin
account loan was secured at December 31, 1997 by securities held by the broker
having a market value of $1.1 million.
Included in other borrowings for the year ended December 31, 1997, is $3.8
million in capital lease obligations for premises and equipment arising from the
acquisition of On-Line.
Savings deposits are the primary source of funds of Argo Savings' lending
and investment activities and for its general business purposes. Argo Savings
can also borrow funds from the FHLB of Chicago to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB has served
as Argo Savings' primary borrowing source. Advances from the FHLB are secured by
Argo Savings' stock in the FHLB and a portion of Argo Savings' portfolio of
first mortgage loans. The rates on these advances vary from time to time in
response to general economic conditions. At December 31, 1997, Argo Savings had
$17.8 million of fixed rate advances from the FHLB with interest rates ranging
from 5.48% to 8.43%. At December 31, 1997, Argo Savings had overnight advances
outstanding of $6.0 million at a weighted interest rate of 6.24%. The FHLB
functions as a central reserve bank providing credit for savings and loan
associations and certain other member financial institutions. As a member, Argo
Savings is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States Government or its agencies) provided certain standards related
to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and the amount
of advances is based either on a fixed percentage of an association's net worth
or on the FHLB's assessment of an association's creditworthiness.
28
<PAGE>
The following table sets forth contain information regarding borrowings by
Argo Bancorp on a consolidated basis at the end of and during the periods
indicated. The borrowings at and during the periods consisted of FHLB advances,
and promissory notes. The weighted average was computed on a monthly average
basis.
<TABLE>
<CAPTION>
At December 31,
---------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average interest rate at end of year paid on:
FHLB advances ......................................... 5.85% 5.80% 6.22%
Other borrowings ...................................... 8.91 8.48 8.63
</TABLE>
<TABLE>
<CAPTION>
During the Year
At December 31,
-------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
FHLB advances .......................... $38,416 $45,257 $49,587
Other borrowings ....................... 8,120 8,760 11,541
</TABLE>
<TABLE>
<CAPTION>
During the Year
At December 31,
--------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average borrowings outstanding with respect to:
FHLB advances ................................ $ 32,852 $ 34,608 30,191
Other borrowings ............................. 5,916 7,669 10,621
---------- ---------- ----------
TOTAL ..................................... $ 38,768 $ 42,277 $ 40,812
========== ========== ==========
Weighted average interest rate during the year
paid on:
FHLB advances ................................ 6.06% 5.69% 5.98%
Other borrowings ............................. 7.86 8.60 8.43
---------- ---------- ----------
TOTAL WEIGHTED AVERAGE .................... 6.34% 6.20% 6.50%
========== ========== ==========
</TABLE>
29
<PAGE>
Subsidiaries
Argo Savings has two wholly-owned subsidiaries, Argo Mortgage Corp. and
Dolton-Riverdale Savings Service Corp. Argo Mortgage Corp. engages in mortgage
brokerage activities that focus on the purchase and sale of deeply discounted
mortgage loans into the secondary market. Dolton-Riverdale Savings Service Corp.
sells insurance annuities to the customer base of Argo Savings. Argo Savings
also has a majority interest in a limited liability corporation, Margo Financial
Services, LLC ("Margo"). The primary activity of Margo is the origination of
mortgage loans for portfolio and sale into the secondary market. At December 31,
1997, Argo Savings' had an equity investment in Argo Mortgage, Dolton-Riverdale
Savings Service Corp., and Margo of $34.6 million, $160,000 and $49,000,
respectively.
Competition
Argo Savings faces strong competition in attracting deposits and in
originating real estate loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions, and savings
banks and from commercial banks located in its primary market area. Particularly
in times of high interest rates, Argo Savings also faces additional significant
competition for investor funds from short-term money market securities and other
corporate and government securities. Argo Savings' competition for real estate
loans comes principally from other thrift institutions, commercial banks and
mortgage banking companies. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial institutions.
Argo Savings competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts, and
convenient office locations.
Argo Savings is a community oriented savings institution and competes with
many financial institutions in its primary market area, most of which have
assets which are significantly larger than the assets of Argo Savings.
Management considers the Savings Bank's reputation for financial strength and
customer service as its major competitive advantage in attracting and retaining
customers in its market area. The Savings Bank also believes it benefits from
its community bank orientation as well as it has a relatively high core deposit
base.
Personnel
As of December 31, 1997, the Savings Bank including its subsidiaries, had
forty-one (41) full-time employees and fourteen (14) part-time employees.
On-Line had eighty-one (81) full-time employees and one (1) part-time employees.
A collective bargaining unit does not represent the employees. The Company
believes its relationship with its employees and auditors is good.
30
<PAGE>
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports, and otherwise comply, with the rules and regulations of the OTS
under the Home Owners' Loan Act, as amended (the "HOLA"). Additionally, the
activities of savings institutions, such as the Savings Bank, are governed by
the HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. Argo Savings is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Savings Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition, in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Savings Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Company, the Savings Bank and their
operations. Certain of the regulatory requirements applicable to the Savings
Bank and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-KSB does not
purport to be a complete description of such statutes and regulations and their
effects on the Savings Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that Argo Savings continues
to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and activities authorized
by OTS regulation. Recently proposed legislation could restrict the activities
of unitary savings and loan holding companies.
31
<PAGE>
The Company's acquisition of On-Line in 1995 was in compliance with
existing laws and did not impact the unitary savings and loan holding company
status.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5.0% of a nonsubsidiary company engaged in activities
other than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Savings Bank must notify the OTS
thirty (30) days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3.0% leverage (core) capital ratio and an 8.0% risk-based capital
ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2.0% tangible capital standard, a 4.0% leverage
(core) capital ratio (3.0% for institutions receiving the highest rating on the
CAMEL financial institution rating system) and, together with the risk-based
capital standard itself, a 4.0% Tier I risk-based capital standard. Core capital
is defined as common stockholder's equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain purchased mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the leverage
ratio, tangible and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
32
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighting
ranging from 0.0% to 100.0%, as assigned by the OTS capital regulation based on
the risks OTS believes are inherent in the type of asset. The components of Tier
I (core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100.0% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities, and off-balance sheet contracts) that would result
from a hypothetical 200 basis point increase or decrease in market interest
rates divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1997, the
Savings Bank met each of its capital requirements, and it is anticipated that
Argo Savings will not be subject to the interest rate risk component.
The following table presents the Savings Bank's capital position at
December 31, 1997:
<TABLE>
<CAPTION>
Capital
---------------------------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible................... $13,035 $ 3,296 $ 9,739 5.93% 1.5%
Core (Leverage)............ 13,035 6,592 6,443 5.93 3.0
Risk-based:
Tier I (core)............ 13,035 -- -- 10.45 4.0
Total.................... 13,849 9,981 3,868 11.10 8.0
</TABLE>
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<PAGE>
A reconciliation between regulatory capital and GAAP capital at December
31, 1997, in the accompanying consolidated financial statements is presented
below:
<TABLE>
<CAPTION>
Total
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(In thousands)
<S> <C> <C> <C>
GAAP capital originally reported to regulatory
authorities and on accompanying consolidated
financial statements .......................... $ 13,731 $ 13,731 $ 13,731
Regulatory capital adjustments:
Adjustment for net unrealized gains (losses) in
available for sale securities ............... (16) (16) (16)
General valuation allowances .................. -- -- 814
Purchase mortgage servicing rights ............ (531) (531) (531)
Goodwill ...................................... $ (149) $ (149) $ (149)
-------- -------- --------
Regulatory Capital ............................ $ 13,035 $ 13,035 $ 13,849
======== ======== ========
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6.0%, its ratio of core capital to total assets is at least
5.0% and it is not subject to any order or directive by the OTS to meet a
specific capital level. A savings institution generally is considered
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8.0%, its ratio of Tier I (core) capital to risk-weighted assets is
at least 4.0% and its ratio of core capital to total assets is at least 4.0%
(3.0% if the institution receives the highest CAMEL rating). A savings
institution that has a ratio of total capital to risk weighted assets of less of
than 8.0%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4.0% or a ratio of core capital to total assets of less than 4.0% (3.0% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6.0%, a Tier I risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized". A savings institution that has a tangible capital to assets
ratio equal to or less than 2.0% is deemed to be "critically undercapitalized."
Subject to a narrow exception, the banking regulator is required to appoint a
receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within forty-five (45) days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. Additionally, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS may also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. The Savings Bank is
considered well capitalized under prompt corrective action regulations.
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<PAGE>
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. 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 Savings
Bank, to recapitalize the SAIF. The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980's by the Financing Corporation ("FICO") to recapitalize the
predecessor to 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
Savings Bank recognized the SAIF Special Assessment as an expense in the quarter
ended September 30, 1996, and was generally tax deductible. The SAIF Special
Assessment recorded by the Savings Bank amounted to $789,000 on a pre-tax basis
and $489,000 on an after-tax basis.
The Funds Act also spreads the obligation for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning January 1, 1997, BIF
deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 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 voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. 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 Savings Bank's assessment rate for fiscal 1997 was approximately 6.0
basis points and the premium paid for this period was $102,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Savings Bank.
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 Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999, if there are no more savings association as
of that date. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date or
they would automatically become national banks. Under some bills converted
federal
35
<PAGE>
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two (2) year period, subject to two possible one year
extensions. State chartered thrifts would become subject to the same federal
regulation as applies to state commercial banks. A more recent bill passed by
the House Banking Committee would allow savings institutions to continue to
exercise activities conducted when they convert to a bank regardless of whether
a National Bank could engage in the activity. Holding companies for savings
institutions would become subject to the same regulation as holding companies
that control commercial banks, with some limited grandfathered provision for
unitary including savings and loan holding company activities. The
grandfathering would be lost under certain circumstances such as a change in
control of the Company. Argo Savings is unable to predict whether such
legislation would be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15.0% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10.0% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1997, the Savings Bank's largest aggregate outstanding balance of loans to one
borrower consisted of loans totaling $1.7 million, which does not exceed the
Savings Bank's loan to one borrower limit. All loans to this borrower were
current.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association either must qualify as a "domestic
building and loan association" as defined in the Internal Revenue Code or be
required to maintain at least 65.0% of its "portfolio assets" (total assets less
(i) specified liquid assets up to 20.0% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed securities) in at least
nine (9) months out of each twelve (12) month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1997, the Savings Bank maintained 99.0% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extend to which education loans, credit card loans,
and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier I Association") and has not been advised by the OTS that it
is in need of more than normal supervision may, after prior notice but without
obtaining approval of the OTS, make
36
<PAGE>
capital distributions during a calendar year equal to the greater of (i) 100.0%
of its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(ii) 75.0% of its net income for the previous four quarters. Any additional
capital distributions require prior regulatory approval. In the event the
Savings Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. In December 1994,
the OTS proposed amendments to its capital distribution regulation that would
generally authorize the payment of capital distributions without OTS approval
provided the payment does not make the institution undercapitalized within the
meaning of the prompt corrective action regulation. However, institutions in a
holding company structure would still have a prior notice requirement. At
December 31, 1997, the Savings Bank was a Tier I Association.
Liquidity. The Savings Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4.0%, but may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10.0%
depending upon economic conditions and the savings flows of member institutions.
Penalties may be imposed for failure to meet these liquidity requirements. The
Savings Bank's liquidity ratio for December 31, 1997, was 6.51%, respectively,
which exceeded the then applicable requirements. The Savings Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Savings Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Savings Bank for
the fiscal year ended December 31, 1997, totaled $68,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10.0% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20.0% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A, and the purchase
of low quality assets from
37
<PAGE>
affiliates is generally prohibited. Section 23B generally provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. Additionally, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10.0% shareholders ("insiders"), as well as entities controlled by
such persons, is governed by Sections 22(g) and 22(h) of the FRA and Regulation
O thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans the Savings Bank may make to
insiders based, in part, on the Savings Bank's capital position and requires
certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order, to removal of officers and/or
directors, to placement of an institution into receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and amount to $25,000 per day, or even $1.0 million per day in
especially severe cases. Under the FDI Act, the FDIC has the authority to
recommend to the Director of the OTS enforcement action to be taken with respect
to a particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal law
also establishes criminal penalties for certain violations.
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<PAGE>
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Federal Home Loan Bank System
The Savings Bank is a member of the FHLB System, which consists of seven
(7) regional FHLBS. The FHLB provides a central credit facility primarily for
member institutions. The Savings Bank, as a member of the FHLB-Chicago, is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20th of its advances (borrowings) from the FHLB-Chicago, whichever is
greater. The Savings Bank was in compliance with this requirement, with an
investment in FHLB-Chicago stock at December 31, 1997, of $3.3 million. FHLB
advances must be secured by specified types of collateral and may be obtained
primarily for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLB
imposing a higher rate of interest on advances to their members. Dividends from
the FHLB-Chicago to the Savings Bank amounted to $226,000 and $188,000 for the
year ended December 31, 1997, and 1996, respectively. If dividends were reduced,
or interest on future advances increased, the Savings Bank's net interest income
might also be reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required for most of 1997, that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board), the
reserve requirement is 3.0%; for accounts greater than $49.3 million, the
reserve requirement is $1.48 million plus 10.0% (subject to adjustment by the
Federal Reserve Board between 8.0% and 14.0%) against that portion of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the
39
<PAGE>
Federal Reserve Board) were exempted from the reserve requirements. The Savings
Bank is in compliance with the foregoing requirements. For 1998, the Federal
Reserve Bank has decreased from $49.3 million to $47.8 million the amount of
transaction accounts subject to the 3.0% reserve requirement and to increase the
amount of exempt reservable balances from $4.4 million to $4.7 million. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to Argo
Savings or Argo Bancorp. The Companies have not been audited by the IRS during
the last ten (10) years. For federal income tax purposes Argo Bancorp and its
subsidiaries (except Margo) file consolidated income tax returns and report
their income on a calendar year basis using the accrual method of accounting and
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the tax reserve for bad debts, discussed
below. Margo Financial Services, LLC files a separate partnership income tax
return.
Recent Tax Legislation Regarding Tax Bad Debt Reserves
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act'), for federal income tax
purposes, thrift institutions such as Argo Savings, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specific limitations, be
deducted in arriving at their taxable income. Argo Savings' deduction with
respect to "qualifying loans", which are generally loans secured by certain
interests in real property, could be computed using an amount based on a six (6)
year moving average of Argo Savings' actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of Argo Savings' taxable income (the
"PTI Method"), computed without regard to this deduction and with additional
modifications and reduced by the amounts of any permitted addition to the
non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and Argo Savings
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning after December 31, 1995. In addition,
Argo Savings will be required to recapture (i.e., take into taxable income) over
a six (6) year period, beginning with the Savings Bank's taxable year beginning
January 1, 1996, the excess of the balance of its bad debt reserves (other than
the supplemental reserve) as of December 31, 1995, over the greater of (s) its
"base year reserve," i.e., the balance of such reserves as of December 31, 1987,
or (b) an amount that would have been the balance of such reserves as of
December 31, 1995, had Argo Savings always computed the additions to its
reserves using the Experience Method. However, under the Small Business Act such
recapture requirements will be suspended for each of the two (2) successive
taxable years beginning January 1, 1996, in which the Savings Bank originates a
minimum amount of certain residential loans during such years that is not
40
<PAGE>
less than the average of the principal amounts of such loans made by Argo
Savings during its six (6) taxable years preceding January 1, 1996.
Distributions. To the extent that Argo Savings makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from Argo Savings base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Savings Bank's taxable income.
Nondividend distributions include distributions in excess of Argo Savings'
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute nondividend
distributions and, therefore, will not be included in Argo Savings' income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, in certain instances,
approximately one and one-half times the nondividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34.0%
federal corporate income tax rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20.0%. Only 90.0% of AMTI can be offset by net operating
loss carryovers of which Argo Savings currently has about $267,000. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, Argo Savings' AMTI is increased by an amount equal to 75.0% of the
amount by which the Savings Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). AMT cannot be reduced by tax credits, other than foreign tax
credits. Accordingly, the Bank's low income housing tax credits may not be used
to reduce AMT. The AMT has limited the utilization of these tax credits in 1997
and 1996. In addition, for taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on corporations,
including Argo Savings, whether or not an AMT is paid. Under pending legislative
proposals, the environmental tax would be extended to taxable years beginning
before January 1, 2007. Argo Savings does not expect to be subject to the AMT,
but may be subject to the environmental tax liability.
Elimination of Dividends; Dividends Received Deduction. Argo Bancorp may
exclude from its income 100.0% of dividends received from Argo Savings as a
member of the same affiliated group of corporations. A 70.0% dividends received
deduction generally applies with respect to dividends received from domestic
corporations that are not members of such affiliated group, except that an 80.0%
dividends received deduction applies if Argo Bancorp and Argo Savings own more
than 20.0% of the stock of the corporation paying a dividend. Under pending
legislative proposals, the 70.0% dividends received deduction would be reduced
to 50.0% with respect to dividends paid after enactment of such legislation.
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<PAGE>
State and Local Taxation
State of Illinois. Argo Bancorp and Argo Savings filed an Illinois income
tax return. For Illinois income tax purposes, Argo Bancorp and Argo Savings are
taxed at an effective rate equal to 7.3% of Illinois Taxable Income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing the Illinois taxable income of the
Savings Bank.
As a Delaware holding company, Argo Bancorp has registered as a foreign
corporation authorized to transact business in Illinois. As such, it files an
Illinois Foreign Corporation Annual Report and pays an annual franchise tax to
the State of Illinois.
State of Delaware. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but files
an annual report with and pays an annual franchise tax to the State of Delaware.
Recent and Proposed Changes in Accounting Rules
The Financial Accounting Standards Board ("FASB") recently adopted or
issued proposals and guidelines which may have a significant impact on the
accounting practices of commercial enterprises in general and financial
institutions in particular.
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<PAGE>
In June 1997, the FASB issued 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. Management of the Company does not expect
that adoption of SFAS No. 130 will have a material 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 year beginning after December 15, 1997, with earlier
application permitted.
Item 2. Description of Property
The Company is located and conducts its business at its home office in
Summit, Illinois, located at 7600 W. 63rd Street, Summit, and four (4) branch
offices located in Bridgeview, the near West Side of Chicago, Dolton, and
Gurnee, Illinois. The Savings Bank conducts its business through its home
office. On-Line is located and conducts its business at its office in Oak Brook,
Illinois located at 900 Commerce Drive. The Company believes that the Argo
Savings' and On-Line's current facilities are adequate to meet the present and
immediately foreseeable needs of the Company. See Note 5 to the Notes to
Consolidated Financial Statements for the net book value of the property of the
Company.
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Item 3. Legal Proceedings
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended December 31, 1997, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
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PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" in the 1997
Annual Report to Stockholders on pages 51 through 54 is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition" of the 1997 Annual Report to
Stockholders on pages 3 through 16 and is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1997, and 1996, together with the report thereon
by KPMG Peat Marwick LLP appears in the Registrant's 1997 Annual Report to
Stockholders, on pages 17 through 50 incorporated herein by reference.
Item 8. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information regarding the directors of the Holding Company is omitted from
this Report as the Holding Company intends to file a definitive proxy statement
for the Annual Meeting of Stockholders scheduled to be held on May 20, 1998, and
the information to be included therein under the heading "Information with
respect to the Nominees, Continuing Directors and Certain Executive Officers"
and "Beneficial Ownership Reporting Compliance with Section 16(a)" is
incorporated herein by reference.
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Item 10. Executive Compensation
The information relating to executive compensation is omitted from this
Report as the Holding Company intends to file a definitive proxy statement for
the Annual Meeting of Stockholders scheduled to be held on May 20, 1998, and the
information to be included therein under headings "Director's Compensation" and
"Executive Compensation" is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is omitted from this Report as the Holding Company intends to
file a definitive proxy statement for the Annual Meeting of Stockholders
scheduled to be held on May 20, 1998, and the information to be included therein
under the headings "Security Ownership of Certain Beneficial Owners" and
"Information with Respect to the Nominees, Continuing Directors and Certain
Executive Officers" is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is omitted from this Report as the Company intends to file a definitive proxy
statement for the Annual Meeting of Stockholders scheduled to be held on May 20,
1998, and the information to be included therein under the heading "Indebtedness
of Management and Transactions with Certain Related Persons" is incorporated
herein by reference.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant and its
subsidiaries, together with the report thereon of KPMG Peat Marwick LLP
dated March 24, 1998, appearing in the 1997 Annual Report of Stockholders
are incorporated herein by reference.
Consolidated Statements of Financial Condition as of December 31, 1997, and
1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
46
<PAGE>
The remaining information appearing in the Annual Report is not deemed to
be filed as a part of this report, except as expressly provided herein.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 2. Acquisition
(a) On-Line Stock Purchase Agreement dated as of October 31, 1995, between
Argo Bancorp, Inc., I.S.C. Incorporation, Savings and Loan Service
Bureau of Indiana, Inc., O and H Services, Inc., Superior Savings
Bank, and OLF Acquisition Corp. *
Exhibit No. 3. Certificate of Incorporation and By-Laws.
(a) Certificate of Incorporation of Argo Bancorp, Inc.**
(b) By-Laws of Argo Bancorp, Inc.**
Exhibit No. 4.
(a) Stockholder Agreement dated as of December 31, 1996, between Argo
Bancorp, Inc., The Deltec Corporation Limited, and John G. Yedinak.
***
(b) Stock Certificate of Argo Bancorp, Inc.**
Exhibit No. 10. Material Contracts.
(a) Argo Federal Savings Bank, FSB Employee Stock Ownership Plan and
Trust.**
(b) Argo Federal Savings Bank, FSB Amended and Restated Management
Recognition Plan and Trust.****
(c) Argo Bancorp, Inc. 1990 Incentive Stock Option Plan.**
(d) Argo Bancorp, Inc. 1990 Stock Option Plan for Outside Directors.**
(e) 1996 Argo Bancorp, Inc. Management Recognition and Retention Plan.
*****
(f) Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and John G. Yedinak.
(g) Amended and Restated Employment Agreement between Argo Federal Savings
Bank, FSB and John G. Yedinak.
(h) Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and Frances M. Pitts.
(i) Amended and Restated Employment Agreement between Argo Federal Savings
47
<PAGE>
Bank, FSB and Frances M. Pitts.
(j) Employment Agreement between Argo Bancorp, Inc. and Lawrence H. Chlum
(filed herewith).
(k) Employment Agreement between Argo Federal Savings Bank, FSB and George
L. Koehm (filed herewith)
Exhibit No. 11.
Computation of earnings per share (filed herewith).
Exhibit No. 13.
Portion of the 1997 Annual Report to Stockholders are incorporated herein
by reference. Portions of the Annual Report to Stockholders have been
incorporated by reference into the Form 10-KSB. (filed herewith).
Exhibit No. 21.
Subsidiary information is incorporated herein by reference to "Part I -
Subsidiaries."
Exhibit No. 23.
Consent of KPMG Peat Marwick LLP (filed herewith).
Exhibit No. 27.
(a) Financial Data Schedule (filed herewith)
(b)(1) Reports on Form 8-K
The Registrant filed a Report on Form 8-K on January 8, 1997, announcing
the sale of 111,563 shares of Argo Bancorp stock to The Deltec Banking
Corporation Limited in a negotiated private offering.
- --------------------------------------------------------------------------------
* Incorporate herein by reference into this document from the Form 10-K
for the fiscal year ended December 31, 1995.
** Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, and filed on January 28, 1992,
any amendments thereto, Registration No. 33-45222.
*** Incorporate herein by reference into this document from the Form 8-K
dated January 8, 1997.
**** Incorporated herein by reference into this document from the Proxy
Statement for the 1995 Annual Meeting of Stockholders filed on March
29, 1996.
***** Incorporate herein by reference into this document from the Form S-8
filed on September 30, 1996, (Registration No. 333-13047).
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARGO BANCORP, INC.
--------------------------------------------
(Registrant)
Date: March , 1998 By: /s/ John G. Yedinak
--------------------- ------------------------------------------
John G. Yedinak, Chairman of the
Board, President, Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Date: March , 1998 By: /s/ John G. Yedinak
--------------------- ------------------------------------------
John G. Yedinak, Chairman of the
Board, President, Chief Executive
Officer, and Director
Date: March , 1998 By: /s/ Sergio Martinucci
--------------------- ------------------------------------------
Sergio Martinucci, Vice President
and Director
Date: March , 1998 By: /s/ Arthur Byrnes
--------------------- ------------------------------------------
Arthur Byrnes, Director
Date: March , 1998 By: /s/ Donald G. Wittmer
--------------------- ------------------------------------------
Donald G. Wittmer, Director
Date: March , 1998 By: /s/ Frances M. Pitts
--------------------- ------------------------------------------
Frances M. Pitts, Secretary and
Director
<PAGE>
Exhibit No. 11 Statement re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Income ................................................. $ 823,000 $1,334,000 $1,741,000
========== ========== ==========
Weighted average shares outstanding ........................ 482,893 313,256 295,978
Basic earnings per share ................................... $ 1.70 $ 4.26 $ 5.88
========== ========== ==========
Total weighted average common shares
outstanding ............................................. 482,893 313,256 295,978
Additional dilutive shares ................................. 43,798 57,523 55,186
---------- ---------- ----------
Total weighted average common shares
and equivalents outstanding for
diluted computation ................................... 526,691 370,779 351,164
========== ========== ==========
Diluted earnings per share ................................. $ 1.56 $ 3.60 $ 4.96
========== ========== ==========
</TABLE>
<PAGE>
ARGO BANCORP, INC.
Corporate Profile
- --------------------------------------------------------------------------------
Argo Bancorp, Inc. (Argo Bancorp or the Company) is a Delaware corporation
organized in August 1987 for the purpose of acquiring Argo Federal Savings
Bank, FSB (Argo Savings). Argo Bancorp acquired Argo Savings on November 17,
1987 for a capital infusion of $1.1 million. On May 26, 1992 Argo Bancorp
completed a merger conversion with Dolton-Riverdale Savings and Loan
Association (Dolton) and, as part of the conversion, Argo Bancorp sold an
additional 74,750 shares of common stock at an issuance price of $11.50, which
increased the outstanding common stock to 300,150 shares. There were 489,584
shares of common stock outstanding at December 31, 1997. Argo Bancorp is a
unitary savings and loan holding company and is registered as such with the
Office of Thrift Supervision (OTS). Argo Bancorp's common stock is publicly
traded on the Nasdaq Stock Market Over the Counter Market. The current market
makers of the stock are R. W. Baird, Incorporated, ABN AMRO Incorporated and
Kemper Securities.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois and converted to a federal stock charter
in 1982. Argo Savings is headquartered in Summit, Illinois and conducts
business as a traditional savings and loan from four locations in Cook County,
Illinois and one location in Lake County, Illinois.
On October 31, 1995, Argo Bancorp acquired On-Line Financial Services, Inc.
(On-Line), an Oak Brook, Illinois based third-party provider of on-line, real-
time, electronic data processing services to financial institutions. The
purchase of On-Line was structured as a revenue sharing agreement covering
seven years from the acquisition date, with annual payouts and a maximum cap
of $10 million to be paid to the former shareholders of On-Line. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the consolidated financial statements include the results of
operations since the date of acquisition.
On December 31, 1996 Argo Bancorp entered into a stock purchase agreement with
The Deltec Banking Corporation Limited, (Deltec), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms
of the agreement Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price
$38 per share. Total proceeds from this transaction were approximately
$4,239,000. A 5% investment advisory fee totaling approximately $212,000 was
paid to Charles E. Webb & Company resulting in net proceeds of $4,027,000.
1
<PAGE>
ARGO BANCORP, INC.
Selected Financial Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
At December 31
--------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Loans receivable and discounted loans receivable, net $ 184,358 173,429 142,380 118,063 90,139
FHLB of Chicago stock 3,271 3,428 2,669 2,576 2,576
Securities available for sale 4,974 5,788 7,573 12,491 15,009
Cash and interest-earning deposits 8,677 13,276 11,061 9,286 6,905
Purchased loan servicing rights 6,706 5,264 4,033 3,641 2,508
Foreclosed real estate, net 4,251 3,913 2,234 359 554
Other assets 24,061 24,186 16,518 9,601 8,038
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Total assets 236,298 229,284 186,468 156,017 125,729
Deposits 172,469 150,627 123,484 100,697 88,220
Borrowed money 34,156 50,879 38,181 30,820 9,064
Custodial escrow balances for loans serviced for others 6,400 5,782 9,696 14,691 20,031
Other liabilities 5,169 5,436 4,228 835 619
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Stockholders equity $ 18,104 16,560 10,879 8,974 7,795
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Year ended
Selected Operating Data: December 31
---------- --------- -------- --------- --------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Interest income $ 18,266 16,074 13,987 10,282 9,477
Interest expense 11,286 9,083 8,341 5,012 3,822
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net interest income before provision for loan losses 6,980 6,991 5,646 5,270 5,655
Provision for loan losses 210 248 55 48 270
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net interest income after provision for loan losses 6,770 6,743 5,591 5,222 5,385
Noninterest income 15,585 14,194 4,479 1,838 1,738
Noninterest expense 21,409 19,260 7,662 5,383 4,587
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Income before income taxes 946 1,677 2,408 1,677 2,536
Income tax expense 123 343 667 281 952
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Income before extraordinary item and cumulative effect of change
in accounting principle 823 1,334 1,741 1,396 1,584
Cumulative effect of change in accounting for income taxes - - - - 460
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net income $ 823 1,334 1,741 1,396 2,044
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Basic earnings per share $ 1.70 4.26 5.88 4.62 6.80
Diluted earnings per share $ 1.56 3.60 4.96 4.08 6.21
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Selected Financial Ratios and Other Data: Year ended December 31
---------- --------- -------- --------- --------
1997 1996 1995 1994 1993
---------- --------- -------- --------- --------
Return on average assets 0.35% 0.68 1.00 1.00 1.59
Return on average equity 4.62 10.89 17.09 16.17 27.88
Average equity to average assets 7.53 6.26 5.85 6.10 5.71
Equity to total assets 7.66 7.22 5.83 5.75 6.20
Interest rate spread during period 3.81 4.61 3.69 4.25 4.82
Net interest margin 3.54 4.44 3.65 4.24 4.93
Noninterest expense to average assets 9.05 9.83 4.40 3.86 3.58
Nonperforming loans to total loans (1) 3.57 3.12 1.54 1.98 1.19
Nonperforming assets to total assets (1) 4.14 3.43 2.26 1.72 1.31
Allowance for loan losses to nonperforming loans (1) 14.73 16.87 29.54 26.38 55.88
Average interest-earning assets to average
interest-bearing liabilities 0.95x 0.94x .99x 1.00x 1.03x
Book value per share $ 36.98 37.11 36.72 30.91 27.38
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Full-service customer service facilities 5 5 5 4 3
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
</TABLE>
(1) Excludes balances related to portfolio of discounted loans receivable.
2
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this Annual Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, an increase in loan delinquencies or foreclosures, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal, state and local tax
authorities, changes in interest rates, a decline in real estate values, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1997 Form 10-K.
GENERAL
Argo Bancorp was incorporated in August 1987 for the purpose of acquiring Argo
Savings. The Company was originally capitalized through the sale of 300 shares
(which split in December 1991 at 700/1) of common stock to three investors for
total proceeds of $60,000. Argo Bancorp acquired argo Savings on November 17,
1987 with a capital infusion of $1.1 million. On August 29, 1991 the Board of
Directors of Dolton and Argo Savings adopted a Plan of Merger Conversion (Plan)
whereby Dolton agreed to convert from a state-chartered mutual association to a
federally-chartered stock association and merge with and into Argo Savings, with
Argo Savings as the surviving entity. Pursuant to the Plan, shares of common
stock of Argo Bancorp were first sold to the members of Dolton in a subscription
offering and the shares not subscribed were then offered to the public in a
community offering. The subscription and community offering were held
concurrently and were completed on April 27, 1992. Final regulatory approval
was received on may 26, 1992, at which time the merger conversion was completed.
The transaction was accounted for as a pooling-of-interests. As a result, no
goodwill or other intangible assets were recorded. As part of the merger
conversion with Dolton, the Company sold an additional 74,750 shares of common
stock at an issuance price of $11.50 per share. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Company retained 50% of the net proceeds from the merger conversion and injected
the remaining 50% into Argo Savings.
On December 31, 1996 Argo Bancorp entered into a Stock Purchase Agreement with
The Deltec Banking Corporation Limited (Deltec), a banking corporation organized
under the laws of the Commonwealth of the Bahamas. Under the terms of the
purchase agreement, Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized but unissued common stock to Deltec at a purchase price of
$38 per share. Total proceeds from this transaction were approximately
$4,239,000. A 5% investment advisory fee totaling $212,000 was paid to Charles
E. Webb & Company resulting in net proceeds of $4,027,000. The Company also
entered into a Stockholder Agreement with Deltec which stipulates, in material
part that on any occasion the Company shall determine to issue additional
shares, Argo Bancorp shall offer to sell to Deltec such number of shares
required to allow Deltec to continue to own 25% of the outstanding common stock
in the Company.
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Company is an active holding company with assets
consisting of Argo Savings' common stock, On-Line Financial Services Inc. common
stock, marketable securities, interest-earning deposits, and an investment in a
majority-owned limited liability corporation whose primary purpose is to
purchase residential loans. Argo Bancorp is a Federal Housing Authority (FHA)
approved originator and servicer, a licensed Illinois mortgage banker, and an
approved Federal National Mortgage Association (FNMA) servicer.
3
<PAGE>
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with deposits associated
with purchased mortgage servicing rights (PMSRs) and funds generated internally,
primarily in one-to-four family mortgage loans. Argo Savings is a member of the
Federal Home Loan Bank (FHLB) System, and its deposits are insured to the
maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC).
Argo Savings operates two wholly-owned service corporation subsidiaries. Argo
Mortgage Corporation engages in mortgage brokerage activities that focus on the
purchase and sale of deeply discounted mortgage loans into the secondary market.
Dolton-Riverdale Savings Service Corp. offers life insurance annuities to the
customer base of Argo Savings. Argo Savings also has a majority interest in a
limited liability corporation, Margo Financial Services, LL. (Margo). The
primary activity of Margo is the origination of mortgage loans for portfolio and
for sale into the secondary market.
Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities, and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows, and borrowings, and the income generated by its investment in PMSRs.
Argo Savings' operating results are also affected by the profit recognized on
the sale of mortgage loans, investment securities customer service charges, and
other income. Argo Savings' operating expenses consist of employee compensation,
occupancy expenses, federal deposit insurance premiums, amortization of
goodwill, and other general and administrative expenses.
Results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates, real
estate values, government policies, and actions of regulatory authorities.
DISCOUNTED LOANS RECEIVABLE
In recent years the Company has acquired through private sales and auctions,
mortgage loans at a discount for which the borrowers are either not current as
to principal and interest payments or there is doubt to the borrowers' ability
to pay in full the contractual principal and interest. The Company estimates
the amounts it will realize through foreclosure, collection efforts or other
resolution of each loan and the length of time required to complete the
collection process in determining the amounts it will bid to acquire such loans.
Investment in these assets has generally resulted in higher than market interest
yields and significant gains as a result of the ultimate sale of properties
acquired through these purchases. Losses have also been incurred from certain
properties through other real estate owned activity.
During 1997, the Company began to focus its resources on traditional loans
receivable originated through its majority-owned subsidiary, Margo, and began to
reduce its portfolio of discounted loans receivable. Sales of discounted loans
receivable totaled $21.0 million in 1997, compared to $9.4 million in 1996. As a
result of the Company's business strategy, the balance of the discounted loans
receivable portfolio decreased from $47.7 or 20.8% of total assets to $30.6
million or 12.9% of total assets at December 31, 1997.
ON-LINE FINANCIAL SERVICES
On October 31, 1995 Argo Bancorp acquired On-Line Financial Services, Inc. (On-
Line), an Oak Brook, Illinois based computer services bureau, serving bank and
thrift clients throughout the Midwest. The purchase transaction was consummated
through the use of a wholly-owned subsidiary, OLF Acquisition Corporation, which
acquired shares of three separate state chartered savings and loan service
corporations which owned, in the aggregate, 98.9% of the outstanding shares of
On-Line. Sale of the remaining 1.1% of On-Line shares was made by a single
institutional stockholder which held shares in OnLine directly. The intervening
acquisition subsidiary and state chartered savings and loan service corporation
shells were liquidated and merged by Argo Bancorp in June 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. In December, 1997, the Company purchased
4
<PAGE>
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.
On-Line is a third party provider of electronic data processing services,
primarily to financial institutions located throughout the midwest. On-Line
currently provides data processing services to thrifts, community banks and
savings banks, representing over 1.2 million customer accounts in six midwestern
states. On-Line has historically marketed its services to institutions with
assets of less than $1 billion, where the company's orientation toward superior
customer service and specialized products allows it to effectively compete. The
acquisition by Argo Bancorp has promoted the development and sale of
technological advances in the systems, programs, and services offered by On-
Line, which includes resale of software produced by Information Technology
Incorporated, integrated check and document imaging systems, and computer output
laser disc storage technology. These services are in addition to new offerings
by On-Line in the planning and deployment of wide area and local area network
systems, the sale of all related hardware and services, expanded technical and
communications support, consultation, and training, and the maintenance of in-
house systems. On-Line's business plans include aggressive marketing to small
to mid-size commercial and community banks, as well as other corporate users of
advanced technology, as it moves to expand its traditional thrift institution
client base.
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolio,
custodial deposit accounts related to loans serviced for others, maturing
investments and borrowed money. The most liquid assets are cash and short-term
investments. The levels of these assets are dependent on operating, financing,
and investing activities during any given period. Cash and interest-earning
deposits totaled $8.7 million at December 31, 1997. Additional sources of funds
have included FHLB advances, and loan sales. Argo Savings has adequate
alternative funding sources if short-term liquidity needs arise.
The primary investing activity at Argo Savings is the origination and purchase
of mortgage loans. During the years ended December 31, 1997 and 1996, Argo
Savings originated and purchased $115.2 million and $83.2 million of loans
receivable, respectively, and $8.9 million and $41.1 million of discounted loans
receivable, respectively. Purchase of securities available for sale totaled
$8.1 million and $152,000 for 1997 and 1996, respectively. Income earned from
limited partnership investments in purchase mortgage servicing rights totaled
$341,000 for the year ended December 31, 1997. These investing activities were
primarily funded by principal repayments on loans and mortgage-backed securities
of $49.1 million, and $47.0 million, respectively, and an increase in deposits
of $21.8 million and $27.1 million for 1997 and 1996, respectively. Also
providing funding was the $74.5 million in total proceeds that resulted from the
sale of loans receivable, discounted loans receivable, securities available for
sale, and foreclosed real estate in 1997.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At December 31, 1997 Argo Savings' liquid assets represented
6.51% of its liquidity base as compared to the required level of 4%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and current loan
demand. Cash flow projections are updated regularly to assure necessary
liquidity.
Liquidity management for Argo Savings is both a daily and long-term function of
Argo Savings' management. Argo Savings' management meets on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments.
At December 31, 1997 Argo Savings' capital exceeded all capital requirements of
the OTS. Argo Savings' tangible, core, and risk-based capital ratios were
5.93%, 5.93%, and 11.10%, respectively. Argo Savings is considered "well
capitalized" under OTS prompt corrective action regulations.
5
<PAGE>
At December 31, 1997 , Argo Savings had outstanding loan commitments and unused
lines of credit of $5.4 million and $7.8 million, respectively. Argo Savings
also had Community Reinvestment Act investment commitments outstanding of $3.2
million. These commitments include $977,000 to be funded over 8 years for the
investment in the Chicago Equity Fund, $317,000 to be funded over twelve years
for investment in the Community Investment Corporation, $1.0 million to be
funded for the Great West Side Loan Fund, $498,000 to be funded over five years
for investment in the Keidze Ltd Partnership, and $182,000 to be funded
for investment in the Westward III Limited Partnership.
FINANCIAL CONDITION
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 is due
primarily to an increase of $21.8 million in deposits, partially offset by a
$15.7 million decrease in borrowed money. The increase in total assets of $42.8
million to $229.3 million at December 31, 1996 from $186.5 million at December
31, 1995 was due primarily to an increase of $27.1 million in deposits and $12.7
million in borrowed money.
Loans receivable, which include loans receivable, 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 and
1996 is due to the origination and purchase of seasoned fixed rate and
adjustable 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 of $99.1 million were primarily funded by the $27.1
million increase in deposits, and $8.2 million increase in borrowings, principal
repayments of $48.2 million and proceeds from the sale of loans receivable and
discounted loans receivable of $45.4 million.
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
dollar increase in marketable equity securities.
Deposits increased $21.8 million to $172.5 at December 31, 1997, while deposits
increased $27.1 million to $150.6 million at December 31, 1996 from $123.5
million at December 31, 1995. The increase for both years is attributable to
increased focus on attracting deposits.
Borrowings decreased $16.7 million to $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. Borrowing increased $12.7
million to $50.9 million at December 31, 1996 from $38.2 million at December 31,
1995. The increase was primarily attributable to the increased funding needs
related to the purchase of seasoned loan packages and loan originations.
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 Argo Savings or on behalf of others by an independent
mortgage servicing operation. The custodial accounts related to loans serviced
by others are maintained at Argo Savings in interest-bearing accounts. The
custodial accounts associated with loans or purchased mortgage servicing rights
serviced for Argo Savings are maintained in noninterest-bearing accounts. At
December 31, 1997 and 1996, $6.4 million and $5.8 million, respectively, of all
custodial escrow balances pertain to loans subserviced on behalf of Argo Saving
for portfolio loans, servicing retained loans, and purchased mortgage servicing
rights. Due to the nature of custodial escrow deposits, balances may fluctuate
widely on a day-to-day basis.
Common shares outstanding increased 43,330 shares to 489,584 at December 31,
1997. The increase is due to the exercise of 32,497 stock options and the
issuance of 10,833 shares under the stock purchase agreement with The Deltec
Banking Corporation Limited. The shares were issued from authorized but
unissued common stock.
6
<PAGE>
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by seeking a match between the interest rate
sensitivity of its assets and liabilities. The major strategies Argo Savings
has implemented are (i) the origination and purchase of adjustable rate loans
and mortgage-backed securities; (ii) the origination of balloon mortgages; (iii)
the sale of newly originated long-term fixed rate mortgages; (iv) the investment
in PMSRs, which provide a source of noninterest income and also act as a hedge
against the decline in the value of fixed rate mortgages in a rising interest
rate environment; (v) the maintenance of noninterest-bearing custodial accounts
related to the PMSRs; and (vi) the control of deposit growth and maintenance of
long-term deposits. The strategies listed have been implemented by Argo Savings
and are monitored on a quarterly basis by management. Argo Savings does not use
any derivatives to reduce its exposure to interest rate risk.
Argo Savings had an excess of interest-sensitive liabilities which mature or
reprice within one year over interest-sensitive assets of $73.1 million or 30.9%
of total assets at December 31, 1997. As a result of the excess of interest-
sensitive liabilities over interest-sensitive assets, Argo Savings is "net
liability sensitive," which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining its gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, and money market accounts are withdrawn based on
industry averages provided by the OTS. The assumptions used, although
standardized, may not be indicative of the actual withdrawals experienced by
Argo Savings. Fixed maturity deposits reprice at maturity. The combined effect
of these assumptions on passbook, NOW, and money market accounts has 27% of
these accounts withdrawn within one year. Management believes that these decay
rate assumptions are reasonable.
7
<PAGE>
The following table presents Argo BancorpAEs interest sensitivity gap between
interest-earning assets, excluding premiums and discounts, and interest-bearing
liabilities at December 31, 1997. The information provided in the table below is
based on asset maturity for fixed rate assets and repricing dates for adjustable
rate assets. No prepayment assumptions have been included.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------------------------
More Than More Than More Than More Than
1 Year 1 Year 3 Years 5 Years 10 Years More Than
or Less to 3 Years to 5 Years to 10 Years to 20 Years 20 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1) (2) $ 56,085 15,258 2,469 12,381 17,738 71,316 175,247
Other loans (1) 8,417 208 86 500 2,217 333 11,761
Interest-earning deposits 2,466 - - - - - 2,466
Mortgage-backed securities 2,923 - - - - - 2,923
Investment securities 1,571 - - - 370 3,271 5,212
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 71,462 15,466 2,555 12,881 20,325 74,920 197,609
Less unearned discount, premium, and deferred fees (2,142) (616) (100) (500) (716) (3,249) (7,323)
- ----------------------------------------------------------------------------------------------------------------------------------
Total net interest-earning assets 69,320 14,850 2,455 12,381 19,609 71,671 190,286
Interest-bearing liabilities:
Passbook accounts 2,993 4,402 2,465 4,578 2,289 880 17,607
NOW accounts (3) 4,896 2,643 3,835 874 976 - 13,224
Money market accounts 4,917 683 311 247 43 22 6,223
Certificate accounts 116,154 13,314 5,747 200 - - 135,415
Custodial escrows 1 - - - - - 1
FHLB advances and other borrowings 13,435 6,464 1,197 13,060 - - 34,156
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 142,396 27,506 13,555 18,959 3,308 902 206,626
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(73,076) (12,656) (11,100) (6,578) 16,301 70,769 (16,340)
==================================================================================================================================
Cumulative interest sensitivity gap $(73,076) (85,732) (96,832) (103,410) (87,109) (16,340)
==================================================================================================================================
Cumulative interest sensitivity gap as a percentage of
total assets (30.93)% (36.28) (40.98) (43.76) (36.86) (6.91)
==================================================================================================================================
Cumulative net interest-sensitive assets as a
percentage of interest-sensitive liabilities 48.68 % 49.54 47.22 48.91 57.66 92.09
==================================================================================================================================
</TABLE>
(1) For purpose of the GAP analysis, mortgage and other loans are not reduced
for allowance for loan losses, but are reduced for nonperforming loans.
(2) Mortgage loans include loans held for sale, portfolio loans receivable and
discount loans receivable.
(3) Does not include noninterest-bearing NOW accounts of $2.9 million and
noninterest-bearing accounts associated with loans serviced for others of
$6.1 million.
8
s
<PAGE>
The following table sets forth certain information relating to Argo Bancorp's
consolidated average balance sheets and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management believes that the use of month-end balances
instead of daily average balances has not caused a material difference in the
information presented.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable (1) $ 180,964 17,321 9.57% $ 151,384 15,057 9.95% $ 139,194 13,010 9.35%
Mortgage-backed securities 4,423 292 6.60 5,294 354 6.68 6,108 405 6.63
Interest-earning deposits 6,573 364 5.54 2,103 421 4.84 1,459 67 4.58
Investment securities 5,247 289 5.51 4,176 242 5.80 7,837 505 6.45
-------------------------- -------------------------- --------------------------
Total interest-earning assets 197,207 18,266 9.26 162,957 16,074 9.86 154,598 13,987 9.05
Noninterest-earning assets (2) 39,260 32,927 19,444
--------- --------- ---------
Total assets $ 236,467 $ 195,884 $ 174,042
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits 165,669 8,580 5.18 130,163 6,433 4.94 113,857 5,610 4.93
Custodial escrows 21 1 5.10 1,209 78 6.45 3,126 224 7.17
FHLB advances and other borrowings 41,140 2,705 6.58 41,909 2,572 6.14 38,768 2,507 6.47
-------------------------- -------------------------- --------------------------
Total interest-bearing liabilities 206,830 11,286 5.46 173,281 9,083 5.24 155,751 8,341 5.36
Other liabilities 11,827 10,340 8,103
--------- --------- ---------
Total liabilities 218,657 183,621 163,854
Equity 17,810 12,263 10,188
--------- --------- ---------
Total liabilities and equity $ 236,467 195,884 174,042
========= ========= =========
Net interest income/interest
rate spread (3) 6,980 3.80% 6,991 4.62% 5,646 3.69%
============= ============= =============
Net interest-earning assets/(liabilities)/
net interest margin (4) $ (9,623) 3.54% $ (10,324) 4.44% $ (1,153) 3.65%
========= ====== ========= ====== ========= ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 0.95x 0.94x .99x
========= ========= =========
</TABLE>
(1) Loans receivable include loans held for sale, portfolio loans receivable
and discount loans receivable.
(2) Included in the balances are PMSRs of approximately in $6.7, $5.3 million
and $4.0 million in 1997, 1996, and 1995, respectively.
(3) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-
bearing liabilities .
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
9
<PAGE>
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest, and the collectibility of the loan's
principal and interest becomes doubtful. The allowance for loan losses totaled
$814,000 and $685,000 at December 31, 1997 and 1996, respectively.
The total amount of loans (excluding discounted loans) 90 days or more past due
at December 31, 1997 was $5.5 million or 3.57% of total loans receivable as
compared to $3.9 million or 3.12% on December 31, 1996. The total amount of
discounted loans 90 days or more past due at December 31, 1997 was $6.2 million
or 20.4% of total discounted loans receivable. The total amount of discounted
loans 90 days or more past due at December 31, 1996 was $15.5 million or 32.4%
of total discounted loans receivable.
At December 31, 1997, Argo Bancorp had 113 properties totaling $4.3 million
classified as foreclosed as compared to 95 properties totaling $3.9 million on
December 31, 1996. The underlying properties at December 31, 1997 consist
primarily of single family residences. The foreclosed real estate has been
written down to its net realizable value at December 31, 1997. The Savings Bank
maintains an allowance for losses on foreclosed real estate. The balance totaled
$92,000 and $189,000 at December 31, 1997 and 1996, respectively. The provision
for losses and chargeoffs totaled $38,000 and $185,000, respectively, during
1997, compared to $238,000 and $538,000 during 1996.
RESULTS OF OPERATIONS
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 million
- --------
or $1.56 per share (on a diluted basis), compared to net income of $1.3 million,
or $3.60 per share (on a diluted basis), in 1996.
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 $34.2 million in the average balance of interest-earning assets
to $197.2 million in 1997 from $163.0 million in 1996. Partially offsetting
this increase was a 60 basis point decrease in the 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 24.25% 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. Also contributing to the increase in interest expense
was a 22 basis point increase in the average cost of funds from 5.24% in 1996 to
5.46% in 1996.
Net Interest Income. Net interest income for the year remained relatively
- --------------------
unchanged from 1996 at $7.0 million. The net interest margin decreased from
4.44% in 1996 to 3.54% in 1997. The interest rate spread decreased to 3.80% in
1997 from 4.62% in 1996.
The table below sets forth certain information regarding changes in interest
income and interest expense of Argo Bancorp for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change
in volume
10
<PAGE>
multiplied by prior rate); (2) changes in rates (change in rate multiplied by
prior volume); and (3) net changes in rate-volume. The change attributable to
the combined impact of volume and rate have been allocated proportionately to
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1997 compared to 1996 1996 compared to 1995
---------------------------------- ----------------------------------
Increase (decrease) due to Increase (decrease) due to
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
---------- ----------- --------- ---------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $2,943 (679) 2,264 1,220 828 2,048
Mortgage-backed securities (58) (3) (61) (54) 3 (51)
Interest-earning deposits
and investment securities 304 (315) (11) (84) 174 90
---------- ----------- --------- ---------- ----------- ---------
Total 3,189 (997) 2,192 1,082 1,005 2,087
---------- ----------- --------- ---------- ----------- ---------
Interest-bearing liabilities:
Deposits 1,755 392 2,147 805 18 823
Custodial escrows (77) - (77) (124) (22) (146)
FHLB advances and other
borrowings (47) 180 133 193 (128) 65
---------- ----------- --------- ---------- ----------- ---------
Total 1,631 572 2,203 874 (132) 742
---------- ----------- --------- ---------- ----------- ---------
Net change in interest income $1,558 (1,569) (11) 208 1,137 1,345
========== =========== ========= ========== =========== =========
</TABLE>
Provision for Loan Losses. A provision 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 $148,000 and the allowance for loan
losses balance at December 31, 1996 was $665,000 or .53% of loans receivable,
excluding discounted loans receivable. In the determination of the provision for
loan losses and adequacy of the corresponding allowance for loan losses,
management considers changes in the asset quality, charge off experience and
economic conditions.
Noninterest Income. Noninterest income increased $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 operation; 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 increased $670,000 primarily due to significant
leasehold improvement at On-Line, as well as the opening of Argo Savings'
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 due to
significant increases in hardware and software cost of sale 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 during the year ended December 31, 1996.
11
<PAGE>
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.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995
General. Net income for the year ended December 31, 1996 was $1.3 million or
- --------
$3.64 per share (on a diluted basis), compared to net income of $1.7 million, or
$4.96 per share (on a diluted basis), in 1995.
Interest Income. Interest income increased $2.1 million or 14.9% to $16.1
- ----------------
million in 1996 from $14.0 million in 1995. The increase is primarily due to
the increase of $8.4 million in the average balance of interest-earning assets
to $163.0 million in 1996 from $154.6 million in 1995, and an increase in the
average yield on interest-earning assets to 9.86% in 1996 from 9.05% in 1995.
This increase in average yield was primarily due to the significant growth in
the higher yielding discounted loans receivable portfolio during 1996.
Interest Expense. Interest expense increased $742,000 or 8.90% to $9.1 million
- -----------------
in 1996 from $8.3 million in 1995, primarily as a result of a higher average
balance of interest-bearing liabilities. The average balance of interest-
bearing liabilities increased $17.5 million to $173.3 million in 1996 from
$155.8 million in 1995. Partially offsetting this increase as a 12 basis point
decrease in the average cost of funds from 5.36% in 1995 to 5.24% in 1996.
Net Interest Income. Net interest income totaled $7.0 million for the year
- --------------------
ended December 31, 1996, reflecting an increase of $1.4 million from the $5.6
million recorded in 1995. The net interest margin increased from 3.65% in 1995
to 4.44% in 1996. The interest rate spread increased to 4.62% in 1996 compared
to 3.69% in 1995, primarily as a result of the purchase of higher yielding
discounted loans.
Provision for Loan Losses. A general loan loss provision of $248,000 was
- --------------------------
recorded during 1996, bringing the allowance for loan losses to $665,000 or .53%
of total loans receivable, excluding discounted loans receivable and 16.87% of
total nonperforming loans, excluding discounted loans receivable, at December
31, 1996. The loan loss provision in 1995 was $55,000 and the allowance for
loan losses balance at December 31, 1995 was $587,000, or .45% of loans
receivable, excluding discounted loans receivable. In the determination of the
provision for loan losses and adequacy of the corresponding allowance for loan
losses, management considers changes in the asset quality, charge off experience
and economic conditions.
Noninterest Income. Noninterest income increased $9.7 million during 1996 to
- -------------------
$14.2 million in 1996 from $4.5 million in 1995. The increase is primarily due
to the November 1995 acquisition of On-Line Financial Services, Inc., which
generated $11.1 million in data processing revenue for the year ended December
31, 1996 as compared to the $1.8 million generated for the two months ending
December 31, 1995. Also contributing to the increase in noninterest income was
a $781,000 increase in gains on sale of discounted loans receivable. This
increase was due to increased loan sale activity at Argo Mortgage. Offsetting
these increases was a $364,000 increase in losses realized on the sale of
foreclosed assets.
Noninterest Expense. Noninterest expense increased $11.5 million to $19.2
- --------------------
million in 1996 from $7.7 million in 1995. This increase was primarily due to
the acquisition of On-Line Financial Services in the fourth quarter of 1995.
The full year of operations of On-Line Financial Services resulted in increases
of $3.8 million in compensation, $2.7 million in occupancy, $1.3 million in data
servicing costs, and $1.3 million in other general and administrative, $586,000
in software expenses, $140,000 in advertising and $194,000 in legal and
professional fees. Also contributing to the increase in noninterest expense in
1996 was the $804,000 increase in Federal deposit insurance premiums. This was
primarily the result of the special recapitalization assessment of $789,000
accrued on September 30, 1996.
12
<PAGE>
Income Tax Expense. The provision for income tax expense decreased $324,000 to
- -------------------
$343,000 for the year ended December 31, 1996. The decrease was primarily due
to a decrease of pretax income of $731,000 and the utilization of approximately
$179,000 in available tax credits primarily attributable to the Company's
investment in low-income housing partnerships.
Fourth Quarter 1996 Results. Income for the fourth quarter of 1996 totaled
- ---------------------------
$404,000, representing a decrease of $353,000 from 1995 net income of $757,000.
Results for the fourth quarter of 1996 include adjustments made to the
previously reported results for the year ended December 31, 1996. The
adjustments impacted various accounts, including the following: loan interest
income, the gain on sale of assets and data processing revenue were decreased by
$280,000, $44,000, and $38,000, respectively; compensation expense and other
noninterest expense increased by $118,000 and $451,000, respectively; interest
expense on borrowings decreased by $40,000; other data processing income
increased by $98,000. The related tax impact of these adjustments totaled
$367,000, resulting in a net decrease to net income of $426,000.
LEGISLATIVE MATTERS
On September 30, 1996 legislation was enacted which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Savings
Bank, to recapitalize the SAIF and spread the payments of Financing Corporation
Bonds ("FICO") across all SAIF and BIF members. The recapitalization assessment
levied was 65.7 basis points on the amount of SAIF assessable deposits held as
of March 31, 1995. The special assessment was recognized in the third quarter
of 1996 and was tax deductible. The Savings Bank paid $789,000 in connection
with the FDIC special assessment.
Under legislation, the FDIC estimated that BIF members will be paying a portion
of the FICO payment equal to 1.3 basis points on BIF-insured deposits on January
1, 1997, compared to 6.5 basis points on SAIF-insured deposits. Pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The
legislation also requires the BIF and SAIF to be merged by January 1, 1999
provided that subsequent legislation is adopted to eliminate the savings
association charter and there are no remaining savings associations as of that
date.
The FDIC also lowered the SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis or whether the BIF and SAIF will eventually be merged.
The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. That
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applied to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
Legislation regarding bad debt recapture was enacted into law on August 20,
1996. The legislation requires recapture of reserves accumulated after 1987.
The recapture tax on post 1987 reserves must be paid over a six year period
starting in 1996. The payment of the tax can be deferred in each of 1996 and
1997 if an institution originates at least the same average annual principal
amount of mortgage loans that it originated in the six years prior to 1996.
Management does not believe that this legislation will have a material impact on
the operations of the Company.
13
<PAGE>
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
The Financial Accounting Standards Board ("FASB") recently adopted or issued
proposals and guidelines which may have a significant impact on the accounting
practices of commercial enterprises in general and financial institutions in
particular.
In June 1997, the FASB issued 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 is required. Management of the Company does
not expect that the adoption of SFAS 130 will have a material 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 year beginning after December 15, 1997, with earlier
application permitted. The Company will be adopting SFAS No. 131 in 1998.
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 which could affect a company's ability to do
business prior to, at, or after December 31, 1999.
Financial service organizations such as Argo Savings 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 complaint", assuming the costs
associated with necessary changes, keeping the Company appraised 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.
14
<PAGE>
In 1996, the Company established an internal technology committee to identify
and/or resolve issues related to the year 2000 change. The technology
committee has inventoried all of the systems used by the Company, and has
identified those which 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 to verify that 1) testing is
performed regularly, and 2) necessary changes are being identified and
addressed. The Savings Bank management estimates that the year 2000 compliance
expense will total approximately $100,000.
On-Line has initiated a Company-wide program to prepare On-Line's computer
systems and applications for the year 2000. On-Line expects to incur
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. Testing and conversion of system applications is expected to
cost approximately $600,000 to $800,000 over the next three years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The 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 Savings Bank maintains. The overall goal is
to manage this interest rate risk to most efficiently utilize the Savings Bank's
capital, as well as to maintain an acceptable level of change to its net
portfolio value ("NPV"), and net interest income. The Savings Bank strategy is
to minimize the impact of sudden and substained 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 Savings 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 Savings 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.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans. The Savings Bank, from time to
time, also invests in long-term fixed-rate mortgages provided it is compensated
with an acceptable spread.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from 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 the
market value of portfolio equity and is computed as the difference between the
market value of assets and the 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 shocks as of December 31, 1997.
The Bank does not maintain any securities for trading purposes.
<TABLE>
<CAPTION>
Estimated increase
(decrease) in NPV
Change in Estimated -----------------
Interest rate NPV Amount Percent
------------- --------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
400 basis point risk $19,624 (8,816) (31)%
300 basis point risk 23,536 (4,903) (17)
200 basis point rise 26,708 (1,731) (6)
100 basis point rise 28,501 62 -
Base scenario 28,440 - -
100 basis point decline 27,246 (1,194) (4)
200 basis point decline 25,956 (2,483) (9)
300 basis point decline 24,978 (3,462) (12)
400 basis point decline 24,296 (4,144) (15)
</TABLE>
15
<PAGE>
The NPV is calculated by the Savings Bank using guidelines established by the
OTS 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, and (iii) 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.
The Savings Bank does not currently engage in trading activities or use
derivative instruments to control interest rate risk. In addition, interest
rate risk is the most significant market risk affecting the Savings Bank.
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.
16
<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.
/s/ KPMG
Chicago, Illinois
March 24, 1998
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Assets 1997 1996
- ----------------------------------------------------------------------------------------- ---------
(in thousands)
<S> <C> <C>
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 taxe (33) 12
- ----------------------------------------------------------------------------------------- ---------
Total stockholders' equity 18,104 16,560
Commitments and contingencies
- ----------------------------------------------------------------------------------------- ---------
$ 236,298 229,284
- ----------------------------------------------------------------------------------------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
(in thousands, except
per share data)
<S> <C> <C> <C>
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.
20
<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 Total
stock paid-in Retained acquired acquired available- stockholders
Class A capital earnings by ESOP by MRP for-sale equity
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 3 2,664 6,789 (237) (21) (224) 8,974
Net income - - 1,741 - - - 1,741
Principal payments on ESOP loan - - - 60 - - 60
Amortization of purchase price of
MRP stock - - - - 21 - 21
Proceeds from exercise of stock options - 49 - - - - 49
Fair value adjustment for committed
ESOP shares - 26 - - - - 26
Cash dividends ($.68 per share) - - (208) - - - (208)
Purchase of additional MRP shares - - - - (50) - (50)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes - - - - - 266 266
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1995 3 2,739 8,322 (177) (50) 42 10,879
Net income - - 1,334 - - - 1,334
Proceeds from issuance of stock 1 4,026 - - - - 4,027
Principal payments on ESOP loan - - - 60 - - 60
Proceeds from exercise of stock options - 430 - - - - 430
Tax benefits of stock options exercised - 149 - - - - 149
Fair value adjustment for committed
ESOP shares - 38 - - - - 38
Cash dividends ($.68 per share) - - (212) - - - (212)
Purchase of additional MRP shares - - - - (115) - (115)
Change in unrealized gain (loss) on securities
available-for-sale, net of income taxes - - - - - (30) (30)
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1996 4 7,382 9,444 (117) (165) 12 16,560
Net income - - 823 - - - 823
Proceeds from issuance of stock 1 411 - - - - 412
Principal payments on ESOP loan - - - 60 - - 60
Amortization of purchase price of
MRP stock - - - - 12 - 12
Proceeds from exercise of stock options - 525 - - - - 525
Tax benefits of stock options exercised - 145 - - - - 145
Fair value adjustment for committed
ESOP shares - 50 - - - - 50
Cash dividends ($.68 per share) - - (352) - - - (352)
Purchase of additional MRP shares - - - - (486) - (486)
Proceeds from sale of MRP stock - 57 - - 343 - 400
Change in unrealized gain (loss) on securities
available-for-sale, net of income taxes - - - - - (45) (45)
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1997 $ 5 8,570 9,915 (57) (296) (33) 18,104
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(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 (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)
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)
- -------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
22
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
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 servic 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.
(Continued)
23
<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 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
(Continued)
24
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
(Continued)
25
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------
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 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
(Continued)
26
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 482,893 313,256 295,987
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>
(Continued)
27
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(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.
(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>
(Continued)
28
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 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
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ------------------------------------------------------------------------------------------------
(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>
(Continued)
29
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of securities available-for-
sale, by contractual maturity, at December 31, 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
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
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>
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.
(Continued)
30
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) LOANS RECEIVABLE
Loans receivable and loans held for sale, net are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31
-------------------
1997 1996
- --------------------------------------------------------------------------------
(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 $8.2 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
--------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(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>
(Continued)
31
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage of
Number loans receivable
of loans Amount net of discount
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
December 31, 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
------------------
1997 1996
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(in thousands)
<S> <C>
December 31, 1997 $6,220 20.36%
December 31, 1996 15,454 32.38
================================================================================
</TABLE>
(Continued)
32
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31
-------------
1997 1996
- --------------------------------------------------------------------------------
(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
-------------------
1997 1996
- --------------------------------------------------------------------------------
(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.
(Continued)
33
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
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.
(Continued)
34
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 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 Weighted
in average in average
thousands Percent rate thousands Percent rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 17,607 10.2% 2.63% $ 18,349 12.2% 2.76%
NOW accounts 13,225 7.7 2.48 12,426 8.3 3.05
Money market accounts 6,223 3.6 3.50 4,957 3.3 4.30
- ------------------------------------------------------------------------------------------
37,055 21.5 2.72 35,732 23.8 3.07
- ------------------------------------------------------------------------------------------
Certificate accounts:
3.99% or less 10 2.50 52 2.50
4.00 4.99% 874 .5 4.85 769 .5 4.84
5.00 5.99% 62,935 36.5 5.55 71,169 47.2 5.50
6.00 6.99% 69,962 40.5 6.11 39,194 26.0 6.17
7.00 7.99% 1,513 .9 7.09 3,612 2.4 7.05
8.00 8.99% 120 .1 8.44 99 .1 8.44
- ------------------------------------------------------------------------------------------
135,414 78.5 5.85 114,895 76.2 5.77
- ------------------------------------------------------------------------------------------
$172,469 100.0% 5.18% $150,627 100.0% 5.13%
- ------------------------------------------------------------------------------------------
</TABLE>
(Continued)
35
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Contractual maturities of certificate accounts at December 31 are as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
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 $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
-----------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(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>
(Continued)
36
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) BORROWED MONEY
Borrowed money at December 31 is summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted interest rate Balance
December 31 December 31
------------------- -------------------
Maturity 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>
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).
(Continued)
37
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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>
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 carryforwards 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 $ (502) (565)
================================================================================
</TABLE>
(Continued)
38
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
(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.
(Continued)
39
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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.
(Continued)
40
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 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.
(Continued)
41
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
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>
The weighted average per share fair values of options granted during 1997,
1996, and 1995 were $10.72, $9.99, and $8.49, respectively.
(Continued)
42
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(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.
(Continued)
43
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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-
For capital capitalized under
adequacy prompt corrective
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>
(Continued)
44
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
To be well-
For capital capitalized under
adequacy prompt corrective
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.
(Continued)
45
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
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>
(Continued)
46
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(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
---------------
1997 1996
- --------------------------------------------------------------------------------
(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>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
--------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(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>
(Continued)
47
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
--------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(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>
(Continued)
48
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(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
---------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------------
(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>
(Continued)
49
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following methods and assumptions are used by Argo Bancorp in
estimating the fair value amounts for its financial instruments.
(A) CASH AND INTEREST-BEARING DEPOSITS
The carrying value of cash and interest-bearing deposits approximates
fair value due to the short period of time between origination of the
instruments and their expected realization.
(B) SECURITIES AVAILABLE-FOR-SALE
and FHLB of Chicago Stock
The fair value of these securities available-for-sale were estimated
using quoted market prices. The fair value of FHLB stock is based on its
redemption value.
(C) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the
secondary market. The loan portfolio is segmented into fixed and adjustable
interest rate categories. For fixed rate loans, fair value is estimated
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. For adjustable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The carrying amount of accrued interest receivable approximates its
fair value due to the relatively short period of time between accrual and
expected realization.
(D) DEPOSITS, CUSTODIAL ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook
savings, NOW, and money market accounts and custodial escrows are disclosed
as the amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being
offered for deposits with similar remaining terms to maturity.
The carrying amount of interest payable approximates its fair value due
to the relatively short period of time between accrual and expected
realization.
(E) BORROWED FUNDS
The fair value of borrowed funds is the present value of the contractual
cash flows, discounted by the current rate offered for similar remaining
maturities.
50
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ARGO BANCORP, INC.
<TABLE>
<CAPTION>
<S> <C>
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer President and Owner, Coldwell Banker
Chairman of the Board Stanmeyer Realtors
Vice President and Director
Frances M. Pitts Donald G. Wittmer
Executive Vice President, Secretary and Director President and Owner, Wittmer Financial Services,
Ltd.
Director
Lawrence H. Chlum Arthur E. Byrnes
Executive Vice President and Chairman, Deltec Asset Management Corporation
Chief Financial Officer Director
<CAPTION>
ARGO FEDERAL SAVINGS BANK, FSB
John G. Yedinak Sergio Martinucci
President, Chief Executive Officer and Director President and Owner, Coldwell Banker
Stanmeyer Realtors
Frances M. Pitts Chairman of the Board
Senior Vice President, General Counsel and Secretary
Richard B. Duffner
President and Owner, RBD & Associates, Ltd.
Ruth M. Louie Director
Senior Vice President and
Director of Community Lending and Development Emil T. Sergo
Mayor, McCook, Illinois
George L. Koehm Director
Senior Vice President and Chief Operating Officer
Dennis G. Carroll
Frank J. Lis Detective, City of Chicago Police Department
Vice President and Director
Chief Financial Officer
Raymond E. Froula
Patricia E. Reid Retired
Assistant Vice President, Controller Director
Maria L. Horstmann Mary Ann Gearhart
Assistant Secretary Member, Will County Board of Commissioners
Director
</TABLE>
51
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ON-LINE FINANCIAL SERVICES, INC.
<S> <C>
John G. Yedinak Gordon L. Grevengoed
Chief Executive Officer and Chairman of the Board Vice Chairman and CEO
Ameribank, fsb
Colleen Kitch Director
Senior Vice President
Chief Operating Officer Dennis Kosobucki
President and Chairman of the Board
Frances M. Pitts West Town Savings Bank
Senior Vice President and Secretary Director
David Birk Sergio Martinucci
Vice President, President and Owner, Coldwell Banker
Information Systems Development Stanmeyer Realtors
Director
Greg Wright
Vice President, Sales Thomas F. Prisby
Chairman
Steve Szopa Citizens Financial Services FSB
Vice President, Director
Information Systems
Joseph J. Renn
Edward E. Whalen President, Chairman of the Board and
Chairman of the Board Chief Executive Officer
Lincoln Federal Savings Bank Lisle Savings & Loan
Director Director
Donald G. Wittmer David H. Stack
President and Owner, President
Wittmer Financial Services, Ltd. Superior Savings Bank
Director Director
</TABLE>
52
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
STOCKHOLDER REFERENCE
<TABLE>
<S> <C>
Corporate Headquarters Independent Auditors
Argo Bancorp, Inc. KPMG Peat Marwick LLP
7600 W. 63rd Street 303 E. Wacker Drive
Summit, Illinois 60501 Chicago, Illinois 60601
(708) 496-6010
Washington Counsel Transfer Agent and Registrar
Patton Boggs, L.L.P. Harris Trust and Savings Bank
2550 M. Street, N.W. Shareholder Services Division
20037-1350 311 W. Monroe 11th floor
Chicago, Illinois 60690
312-461-2545
Chicago Counsel Annual Report on Form 10-K
Kemp & Grzelakowski, Ltd. Copies of Argo Bancorp, Inc.'s 1997 Annual
1900 Spring Road Report on Form 10-K filed without exhibits
Suite 500 with the Securities and Exchange Commission
Oak Brook, Illinois 60523-14495 are available without charge to stockholders,
upon written request to:
Market Makers
R. W. Baird, Incorporated Frances M. Pitts, Corporate Secretary
Chicago, Illinois Argo Bancorp, Inc.
(312) 578-2060 7600 W. 63rd Street
Summit, Illinois 60501
Investor Information
Stockholders, investors, and analysts interested Annual Meeting
in additional information may contact: The annual meeting of stockholders will be held at
John G. Yedinak, President 3:00 p.m. on May 20, 1998, at Argo Federal Savings Bank,
and CEO at the Corporate FSB, 7600 W. 63rd Street, Summit, Illinois 60501.
Headquarters
Stockholders are encouraged to attend.
</TABLE>
<TABLE>
<CAPTION>
OFFICE LOCATIONS
<S> <C> <C>
Home Office Branch Offices
7600 W. 63rd Street 8267 S. Roberts Road 2154 W. Madison Street
Summit, Illinois 60501 Bridgeview, Illinois 60455 Chicago, Illinois 60612
(708) 496-6010 (708) 496-6020 (312) 563-5500
14076 Lincoln Avenue 6121 Washington Street
Dolton, Illinois 60419 Gurnee, Illinois 60031
(708) 849-3770 (847) 855-2100
</TABLE>
53
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
STOCK PRICE INFORMATION
Argo Bancorp's Inc.'s common stock is traded on the NASDAQ Over the Counter
Market under the symbol ARGO. The table shows the reported high and low sale
prices of common stock and the dividends per share during the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Low Dividends
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1997:
First Quarter $32 3/4 31 1/4 .18
Second Quarter 33 7/8 32 3/4 .18
Third Quarter 34 1/8 33 7/8 .18
Fourth Quarter 39 34 1/8 .18
- --------------------------------------------------------------------------------
Year ended December 31, 1996:
First Quarter $ 30 26 3/4 .17
Second Quarter 30 1/4 30 1/8 .17
Third Quarter 30 1/2 30 1/4 .18
Fourth Quarter 31 1/4 30 1/2 .18
- --------------------------------------------------------------------------------
Year ended December 31, 1995:
First Quarter $ 25 25 .17
Second Quarter 25 1/4 25 .17
Third Quarter 26 1/4 25 1/4 .17
Fourth Quarter 26 1/4 26 1/4 .17
- --------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
The Board of Directors
Argo Bancorp, Inc.
We consent to incorporation by reference in the Registration Statements on Forms
S-8 (File Numbers 33-59856, 33-59858, 33-59860, 33-87202, and 33-13047) of Argo
Bancorp, Inc. of our report dated March 24, 1998, relating to the consolidated
statements of financial condition of Argo Bancorp, Inc. and subsidiaries 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, which report appears on Form 10-K of
Argo Bancorp, Inc.
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,211
<INT-BEARING-DEPOSITS> 2,466
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,974
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 184,358
<ALLOWANCE> 814
<TOTAL-ASSETS> 236,298
<DEPOSITS> 172,469
<SHORT-TERM> 34,156
<LIABILITIES-OTHER> 11,569
<LONG-TERM> 0
5
0
<COMMON> 0
<OTHER-SE> 18,099
<TOTAL-LIABILITIES-AND-EQUITY> 236,298
<INTEREST-LOAN> 17,321
<INTEREST-INVEST> 293
<INTEREST-OTHER> 652
<INTEREST-TOTAL> 18,266
<INTEREST-DEPOSIT> 8,580
<INTEREST-EXPENSE> 11,286
<INTEREST-INCOME-NET> 6,770
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 710
<EXPENSE-OTHER> 21,409
<INCOME-PRETAX> 946
<INCOME-PRE-EXTRAORDINARY> 946
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 823
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 0
<LOANS-NON> 11,745
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 665
<CHARGE-OFFS> 11
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 814
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 814
<FN>
<F1> This information is not disclosed in the Form 10-KSB
</FN>
</TABLE>
