<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
- -------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No.: 0-19829
ARGO BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 West 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)
Indicate by checkmark whether the Registrant (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__ .
Indicate by checkmark if there is disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K and is not contained herein and will not 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-K or
any amendment to this Form 10-K [ X ]
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 $2,225,435 and is based upon the last sales price as quoted in
NASDAQ for March 29, 1999.
<PAGE>
The Registrant had 2,004,896 shares outstanding as of March 19, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1998, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1999, Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
2
<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I PAGE NO.
--------
<S> <C>
Item 1. Business.................................................................. 4
Item 2. Properties................................................................ 41
Item 3. Legal Proceedings......................................................... 41
Item 4. Submission of Matters to a Vote
of Security Holders....................................................... 41
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.................................... 41
Item 6. Selected Financial Data................................................... 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ....................................... 42
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk......................................................... 42
Item 8. Financial Statements and Supplementary Data............................... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................................ 42
Item 11. Executive Compensation.................................................... 42
Item 12. Security Ownership of Certain
Beneficial Owners and Management.......................................... 43
Item 13. Certain Relationships and Related
Transactions.............................................................. 43
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K......................................... 43
SIGNATURES................................................................ 46
</TABLE>
3
<PAGE>
BUSINESS OF ARGO BANCORP, INC.
ITEM 1. BUSINESS
Argo Bancorp, Inc. (the "Argo Bancorp" or "Company") was incorporated in
Delaware in August 1987, for the purpose of acquiring Argo Federal Savings Bank,
FSB ("Argo Savings" or "Savings Bank"). The Company 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.
Final regulatory approval of the transaction 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. The Company retained
50.0% of the net proceeds from the merger conversion and injected the remaining
50.0% into Argo Savings. 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 which, at the
time of the acquisition, served only bank, thrift and mortgage banking clients
throughout the Midwest. Financial terms of the transaction included a cash sweep
of ON-LINE funds on hand to shareholders, 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, was not to exceed $8.9 million.
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 446,256 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$9.50 per share. Total proceeds from this transaction were approximately $4.2
million. A five (5.0%) percent investment advisory fee was paid to Charles E.
Webb and Company reducing the net proceeds of the transaction to approximately
$4.0 million. The stock purchase agreement also provides that Deltec may acquire
additional shares of common stock from the Company when the Company issues or
sells additional shares to third parties in order that Deltec can maintain 25%
ownership in the Company's common stock.
In October of 1998, the Company formed Argo Capital Trust Co. ("Argo
Capital Trust"), a statutory business trust formed under the laws of the State
of Delaware. In November 1998, the Company and Argo Capital Trust offered 11%
Capital Securities with a liquidation amount of $10.00 per security. The
proceeds from the offering were $17,250,000. Argo Capital Trust used the gross
proceeds from the sale of the Capital Securities to purchase Junior Subordinated
Debentures of the Company. The Junior Subordinated Debentures carry an interest
rate of 11% paid quarterly in arrears and are scheduled to mature on November 6,
2028. The costs of the debt issuance were approximately $1,669,000, and were
capitalized by the Company. The expenses are being amortized over 30 years.
However, the debentures, under certain circumstances may be prepaid prior to
maturity date. The proceeds from the sale of the Junior Subordinated Debentures
are being used by Argo Savings for general lending purposes and enhancements of
operational
4
<PAGE>
capabilities, and by the Company for general corporate purposes, the enhancement
of operational capabilities and the potential purchase of loans.
Unlike many savings and loan holding companies, the Company is an active
holding company with only a portion of its future anticipated operating income
dependent upon the earnings of Argo Savings. As an operating company, Argo
Bancorp has assets, liabilities and income that are unrelated to the operations
of Argo Savings. Argo Bancorp's assets at December 31, 1998, on an
unconsolidated basis consisted of its investment in Argo Savings of $17.6
million, its investment in ON-LINE of $6.5 million, its investment in the
majority owned Empire/Argo Mortgage LLC ("Empire") of $837,000, securities
available for sale of $2.5 million, cash and other interest-earning deposits of
$250,000, and other assets of $4.2 million which includes $1.7 million of debt
issuance costs associated with the Junior Subordinated Debentures. Argo Bancorp
also had outstanding borrowings on an unconsolidated basis in the amount of
$319,000 at December 31, 1998, 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 broker and an approved
Federal National Mortgage Association ("FNMA") servicer.
BUSINESS OF ON-LINE FINANCIAL SERVICES, INC.
ON-LINE is a third party provider of electronic data processing services to
thrifts, community banks, savings banks, and other companies located throughout
the Midwest. Prior to the Company's acquisition, ON-LINE's business focus was
primarily on data processing only, utilizing the existing applications in place
at the time, and ON-LINE generally did not have the personnel or technological
infrastructure to meet the future technological needs of its clients, nor was
there an active pursuit to solicit new clients outside or within the financial
institution arena. Company management believed that it had acquired a mature,
but limited, technology company that required a new strategic vision and
enhanced technological capabilities to meet the needs of its evolving
marketplace. The Company's primary strategy during its 1996 and 1997 period of
transition was to evaluate the existing technological and operational
environment, including the internal business processes, existing products and
services, and technical viability of the equipment and resources. The Company's
strategy since the acquisition has been to enhance ON-LINE's strong foundation
as a data processing and data communications network provider by implementing
tools to continue supporting existing services, as well as evolve into a
provider of electronic commerce, Intranet and Internet services, technical
training services, and document management and imaging services.
BUSINESS OF EMPIRE/ARGO, LLC
In recent years, the Company has acquired Discounted Loans through Empire.
The Company estimates the amounts it will realize through foreclosure,
collection efforts or other resolution of each loan and the length of time
required to complete the collection process in determining the amounts it will
bid to acquire such loans. Investments in these assets has generally resulted in
higher yields and gains. Losses have also been incurred from certain properties
through REO activity. Discounted Loans receivable have also been acquired
through Argo Mortgage, Corp. ("Argo Mortgage"), a wholly-owned subsidiary of
Argo Savings.
BUSINESS OF ARGO 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 the Company, accordingly, the discussion under
the caption "Lending Activities" materially relates only to Argo Savings. The
Company does, however, have certain investments in loans on an unconsolidated
basis at the holding company level,
5
<PAGE>
as well as certain borrowings unrelated to the activities of Argo Savings.
Accordingly, there are certain references to the Company's activities under the
section caption "Sources of Funds and Borrowings." Unless otherwise stated, all
other descriptions of the business of the Company 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 Company
acquired Argo Savings. Argo Savings is a member of the Federal Home Loan Bank
("FHLB") System and its deposits are insured by the FDIC. The principal
executive offices of the Company and home office of Argo Savings are located at
7600 West 63rd Street, Summit, Illinois. Argo Savings has four additional branch
offices in Cook County, Illinois.
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%
ownership interest in Margo.
Argo Savings' primary business is the solicitation of savings deposits from
the general public and the purchase or origination of both conventional and
portfolio loans secured by one to four-family residential real estate. Through
its subsidiaries, Argo Mortgage and Margo, 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, through Margo, also
offers, to a much lesser extent, Expanded Criteria Loans. These one-to
four-family loans are generally not Agency Qualified, due to the borrower's
credit profile, and are not as readily saleable in the secondary market as
Conventional Loans. The Expanded Criteria Loans also include home equity lines
of credit. 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"). More recently, Argo Savings also
generates fee income from an expanding network of ATMs in the Chicago area and
service fees.
Through Argo Mortgage, Argo Savings also has acquired Discounted Loans for
which the borrowers may not be current as to principal and interest payments. In
determining the amount it will bid to acquire such loans at public sales and
auctions, Argo Savings estimates the amounts it will realize through
foreclosure, collection efforts, or other resolution of each loan and the length
of time required to complete the collection process. Investment in these assets
has often resulted in higher yields and gains. However, Argo Savings has also
incurred losses on certain properties which have become real estate owned.
Argo Savings continues to expand its operations to include additional ATMs,
and real estate secured consumer lending. Argo Savings also plans to expand, on
a limited basis, its commercial real estate lending and commercial checking.
Argo Savings also invests funds in securities approved for investment by federal
regulations, including obligations of the United States Government and its
agencies.
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 and a branch office in Summit, Illinois. It
also has branch offices in Bridgeview, the West side of Chicago, Dearborn
Station in the South Loop business district of downtown Chicago and Dolton,
Illinois.
6
<PAGE>
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.
In recent periods, Argo Savings has expanded the origination of loans
outside of its primary market area through its network of Margo correspondents.
As of December 31, 1998, Argo Savings was originating loans in numerous states,
with a primary focus in Illinois.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following tables set forth selected consolidated historical financial
data for the Company during the periods ended and at the dates indicated. This
information should be read in conjunction with the Consolidated Financial
Statements of the Company and notes thereto in the 1998 Annual Report to
Stockholders, portions of which are incorporated herein by reference.
7
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Loans receivable, net ...................... $245,189 $184,358 $173,429 $142,380 $118,063
FHLB of Chicago Stock, at cost ............. 1,911 3,271 3,428 2,669 2,576
Securities ................................. 7,901 4,974 5,788 7,573 12,491
Cash and cash equivalents .................. 10,156 8,677 13,276 11,061 9,286
Mortgage loan servicing rights ............. 5,062 6,706 5,264 4,033 3,641
Foreclosed real estate ..................... 3,875 4,251 3,913 2,234 359
Other assets ............................... 32,924 24,061 24,186 16,518 9,601
-------- -------- -------- -------- --------
Total assets ............................... $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Deposits ................................... $232,980 $172,469 $150,627 $123,484 $100,697
Borrowed money ............................. 25,227 34,156 50,879 38,181 30,820
Custodial escrow balances for loans serviced 5,340 6,400 5,782 9,696 14,691
Other liabilities .......................... 7,273 5,169 5,436 4,228 835
Junior subordinated debt ................... 17,784 -- -- -- --
Stockholders' equity ....................... 18,414 18,104 16,560 10,879 8,974
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity . $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income ................... $ 17,627 $ 18,266 $ 16,074 $ 13,987 $ 10,282
Interest expense .................. 11,777 11,286 9,083 8,341 5,012
-------- -------- -------- -------- --------
Net interest income .............. 5,850 6,980 6,991 5,646 5,270
Provision for loan losses ......... 355 210 248 55 48
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ................. 5,495 6,770 6,743 5,591 5,222
Non-interest income ............... 17,675 15,585 14,194 4,479 1,838
Non-interest expense .............. 22,847 21,409 19,260 7,662 5,383
-------- -------- -------- -------- --------
Income before income taxes ........ 323 946 1,677 2,408 1,677
Income tax expense (benefit) ...... (208) 123 343 667 281
-------- -------- -------- -------- --------
Net income ....................... $ 531 $ 823 $ 1,334 $ 1,741 $ 1,396
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per share .......... $ .27 $ .43 $ 1.07 $ 1.47 $ 1.16
Diluted earnings per share ........ $ .26 $ .39 $ .90 $ 1.24 $ 1.02
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
<S> <C> <C> <C> <C> <C>
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Return on average assets ..................... 0.21% 0.35% 0.68% 1.00% 1.00%
Return on average equity ..................... 2.86 4.62 10.89 17.09 16.17
Average equity to average assets ............. 7.40 7.53 6.26 5.85 6.14
Stockholders' equity to total assets ......... 6.00 7.66 7.22 5.83 5.75
Interest rate spread during period ........... 2.97 3.80 4.62 3.69 4.25
Net interest margin .......................... 2.76 3.54 4.29 3.65 4.24
Non-interest expense to average assets ....... 9.09 9.05 9.83 4.40 3.83
Non-interest expense (exclusive of ON-LINE) to
average assets ............................. 3.80 4.28 4.99 3.61 --
Non-performing loans to net loans
receivable (2) ............................. 2.80 3.57 3.12 1.54 1.93
Non-performing assets to total assets (3) .... 3.39 4.14 3.43 2.26 1.72
Allowance for loan losses to non-performing
loans (2) ................................. 14.42 14.73 16.87 29.54 26.38
Allowance for loan losses to net loans
receivable (3) ............................. .40 .53 .53 .45 .52
Ratio of net charge-offs during the period to
average loans ................................ .01 .01 .08 .03 --
outstanding, excluding Discounted Loans
Average interest-earning assets to average
interest-bearing liabilities .............. .96x .95x .94x .99x 1.00x
Book value per share ......................... $ 9.18 $ 9.25 $ 9.28 $ 8.82 $ 7.73
Full-service customer service facilities ..... 5 5 5 5 4
</TABLE>
- -------------------------
(1) Average balances are derived from month end balances.
(2) The formula used to calculate the ratios excludes balances related to the
portfolio of Discounted Loans receivable from both the numerator and the
denominator.
(3) The formulas used to calculate the ratios excludes from the numerator the
balances related to the portfolio of Discounted Loans receivable.
LENDING ACTIVITIES
GENERAL. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and discounted loans receivable totaled $245.2
million, excluding accrued interest, at December 31, 1998, representing 79.9% of
Argo Savings' total assets. On that date, $233.5 million of total loans
outstanding, or 93.64% of its total gross loan portfolio, consisted of loans
secured by first mortgages on one- to four-family residential properties, $2.1
million, or 0.85%, consisted of loans secured by multi-family properties, and
$1.4 million, or 0.56%, consisted of loans that are secured by commercial
buildings primarily in suburban Cook and Lake County. In addition, at December
31, 1998, $12.0 million, or 4.95%, of its loan portfolio consisted of other
loans, primarily comprised of home equity and construction loans.
Argo Savings has focused its lending activities on the generation of
profits from the sale of loans. Argo Savings originates long-term, fixed-rate
mortgage loans with 15 and 30 year maturities generally for immediate sale in
the secondary mortgage market. Such loans are originated, in most instances,
through its mortgage brokerage subsidiary. Historically, Argo Savings' lending
activity has also included the origination and purchase of adjustable rate
mortgages ("ARMs"). 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 $173.4 million of loans both for portfolio and for sale during
1998.
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Company's loan portfolio (loans held for sale are included in one- to
four-family mortgage loans) in dollar amounts and in percentages of the
portfolio at the dates indicated.
9
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family: $233,461 93.64% $177,521 92.20% $177,345 92.50%
Multi-family...................... 2,128 .85 1,252 .65 1,468 .77
Commercial real estate............ 1,390 .56 1,951 1.01 4,523 2.36
------- ----- ------- ----- ------- -----
Total mortgage loans............ 236,979 95.05 180,724 93.86 183,336 95.63
Other loans:
Automobile........................ -- -- 4 -- 4 --
Mobile home....................... 188 .08 208 .11 248 .13
Other (1)......................... 12,134 4.87 11,597 6.03 8,142 4.24
------- ----- ------- ----- ------- -----
Total other loans............... 12,322 4.95 11,809 6.14 8,394 4.37
------- ----- ------- ----- ------- -----
Total loans receivable (2)...... 249,301 100.00% 192,533 100.00% 191,730 100.00%
----- ----- -----
----- ----- -----
Unearned discounts, premiums and 3,172
Deferred loan fees, net......... 7,361 17,636
Allowance for loan losses......... 940 814 665
------- ------- -------
Loans receivable, net........... $245,189 $184,358 $173,429
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1995 1994
-------------------------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family: $143,931 93.57% $112,393 93.57%
Multi-family...................... 1,180 .77 1,177 .98
Commercial real estate............ 2,379 1.55 1,684 1.40
------- ----- ------- -----
Total mortgage loans............ 147,490 95.89 115,254 95.95
Other loans:
Automobile........................ 5 -- 28 .02
Mobile home....................... 379 .25 472 .39
Other (1)......................... 5,941 3.86 4,364 3.64
------- ----- ------- -----
Total other loans............... 6,325 4.11 4,864 4.05
------- ----- ------- -----
Total loans receivable (2)...... 153,815 100.00% 120,118 100.00%
----- -----
----- -----
Unearned discounts, premiums and
Deferred loan fees, net......... 10,847 1,442
Allowance for loan losses......... 587 613
------- -------
Loans receivable, net........... $142,381 $118,063
------- -------
------- -------
</TABLE>
- ----------------------------
(1) Consists primarily of $3.5 million of home equity loans secured by one- to
four-family properties and $2.7 million of construction loans at
December 31, 1998.
(2) Includes loans receivable and discounted loans receivable.
10
<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. Set forth below is a table showing
Argo Savings' loan originations and loan purchases and sales for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
One- to four-family(1)............................ $ 82,287 $ 56,318 $ 12,904
Multi-family...................................... 360 333 455
Commercial real estate............................ -- -- 1,440
---------- --------- ---------
Total mortgage loans originated................. 82,647 56,651 14,799
Loans purchased:
Mortgage loans.................................... 79,623 39,521 58,722
Discounted loans.................................. -- 8,858 41,061
Other loans....................................... 12,750 -- --
---------- --------- ---------
Total loans purchased........................... 92,373 48,379 99,783
---------- --------- ---------
Total loans originated and purchased............ $ 175,020 $ 123,167 $135,496
---------- --------- ---------
---------- --------- ---------
Loans Sold:
Mortgage loans receivable (2)..................... $ 37,401 $ 48,466 $ 39,550
Discounted loans.................................. 11,893 20,711 7,515
Other loans....................................... 1,067 -- --
---------- --------- ---------
Total loans sold.................................. $ 50,361 $ 69,177 $ 47,065
---------- --------- ---------
---------- --------- ---------
</TABLE>
- -----------------
(1) Originations and sales exclude $90.1 million, $38.0 million, and $ 3.5
million for the years ended December 31, 1998, 1997 and 1996, respectively,
of loans originated and immediately sold directly to third party investors.
(2) Gains related to these sales were $695,000, $279,000 and $1,843,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
11
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the maturity or period to
repricing of Argo Savings' loan portfolio at December 31, 1998. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $75.9 million, $48.2 million, and $46.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
LOANS
---------------------------------------------------------------------
ONE- TO COMMERCIAL REAL
FOUR-FAMILY MULTI-FAMILY ESTATE OTHER LOANS (1) TOTAL
---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year ........... $ 81,262 $ 557 $ 175 $ 3,699 $ 85,693
--------- --------- --------- --------- ---------
After one year:
one to three years ........ 21,099 1,087 1,215 138 23,539
three to five years ....... 1,595 113 -- 6 1,714
five to 10 years .......... 11,981 3 -- 421 12,405
10 to 20 years ............ 10,459 286 -- 8,058 18,803
Over 20 years ............. 107,065 82 -- -- 107,147
--------- --------- --------- --------- ---------
Total due after one year .. 152,199 1,571 1,215 8,623 163,608
--------- --------- --------- --------- ---------
Total amounts due .......... 233,461 2,128 1,390 12,322 249,301
Unearned discounts, premiums
and deferred loan fees, net (3,177) -- -- 5
(3,172)
Allowance for loan losses .. (687) (14) (216) (23) (940)
--------- --------- --------- --------- ---------
Loans receivable, net ...... $ 229,597 $ 2,114 $ 1,174 $ 12,304 $ 245,189
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(1) Consists primarily of home equity loans secured by one- to four-family
properties in the amount of $3.5 million and $2.7 million of construction loans.
12
<PAGE>
The following table sets forth at December 31, 1998, the dollar amount of all
loans due after December 31, 1999, and whether such loans have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------------------------------------
FIXED RATES ADJUSTABLE RATES TOTAL
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.............. $ 130,367 $ 21,832 $ 152,199
Multi-family..................... 1,571 -- 1,571
Commercial real estate........... 1,215 -- 1,215
Other loans...................... 8,623 -- 8,623
----------- ----------- ------------
Total loans receivable ............. $ 141,776 $ 21,832 $ 163,608
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
LOAN ORIGINATIONS AND PURCHASES. The Savings Bank's principal business is
attracting deposits from the general public and originating or purchasing loans
primarily secured by one- to four-family residential real estate. To a lesser
extent, the Savings Bank also originates multi-family and commercial real estate
mortgage loans, home equity loans, construction loans, deposit account loans and
other consumer loans. Historically the Savings Bank's lending portfolio
consisted of those loans in existence in 1992 when the Company acquired Dolton
Riverdale, which primarily consisted of one- to four-family residential mortgage
loans. Since 1992, the Savings Bank has acquired portfolios of loans consisting
primarily of performing seasoned one- to four-family residential mortgage loans.
From time to time and in limited amounts, the Savings Bank has purchased,
through Argo Mortgage and the Company through Empire, Discounted Loans.
Discounted Loans are purchased by the Savings Bank with a view toward bringing
such loans current for the Savings Bank's portfolio, for resale in the secondary
market or for foreclosure and liquidation. Primarily as a result of its
Discounted Loan Activities, the Savings Bank's level of non-performing loans to
total loans has been historically higher than that of its peers.
In order to expand its level of loan originations and purchases, in 1996
the Savings Bank established Margo as a majority-owned subsidiary. Since August
1996, the Savings Bank has engaged in both wholesale and retail lending
activities primarily through Margo. Margo focuses on the origination, purchase,
and sale of mortgage loans generally on a "servicing released" basis into the
secondary market. Through Margo, the Savings Bank has originated loans through
Correspondents located in various states throughout the country. ARM loans
originated by Margo are generally retained by the Savings Bank for its
portfolio, while fixed-rate loans originated by Margo are generally not retained
in the Savings Bank's portfolio but are immediately sold in the secondary
market. The Savings Bank will also sell ARM loans.
The Savings Bank continues to purchase performing seasoned one- to
four-family mortgage loans. For the years ended December 31, 1998, $79.6 million
of such loans were purchased by the Savings Bank. In addition, Argo Mortgage
purchases Discounted Loans for which the borrowers may not be current as to
principal and interest payments. For the years ended December 31, 1998, 1997 and
1996, Argo Mortgage purchased $0, $8.9 million and $41.1 million of Discounted
Loans, respectively. From time to time, Discounted Loans are also purchased by
Empire, although the Company is reducing its emphasis on the purchase of
Discounted Loans.
USE AND QUALIFICATIONS OF CORRESPONDENTS. The core of Margo's
Correspondents consist of a nationwide network of third party loan originators.
Additional Correspondents are regularly added to Margo's list of third party
originators through referrals (primarily from one of the five mortgage insurance
13
<PAGE>
companies utilized by Margo) and from contacts made at trade shows, conferences,
and over the Internet. At December 31, 1998, Margo accepted applications from
approximately 100 Correspondents.
In order to be approved as a Correspondent for Margo, an applicant must
meet certain defined criteria. In evaluating potential Correspondents, Margo
looks at a number of criteria including, but not limited to, the financial
statements of potential Correspondent, participation in trade associations, and
continuing education. Quality control measures and historical performance with
respect to originations and volume selling are also significant in selecting and
continuing relationships with Correspondents. Margo seeks to enter into
relationships with Correspondents who are experienced, educated and financially
secure and who do not require day to day contact with Margo staff. In addition,
management will maintain a relationship with a Correspondent only if the
Correspondent brings an established level of loans to Margo on a monthly basis.
Management believes that it will be able to sustain relationships with
Correspondents meeting the foregoing criteria as it offers Correspondents what
it believes to be very competitive rates. In addition, as an additional
incentive to Correspondents to bring loans to Margo, Correspondents originating
an average of $250,000 per month on select portfolio products for Margo are paid
a servicing premium of 6.25 basis points on the outstanding principal balance on
such loans per year, up to a maximum of seven years. In the event loans are
sold, Correspondents are paid a fee equal to the present value of the remaining
service fee premiums less the amounts paid to date.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Argo Savings, through Margo,
originates, purchases and sells primarily fixed-rate and adjustable-rate
mortgage loans secured by one- to four-family residences. At December 31,1998,
Argo Savings' one- to four-family loan portfolio totaled $233.5 million, or
93.64% of Argo Savings' total loan portfolio. The loans generally fall into
three categories: (1) Conventional Loans--loans which conform to all of the
underwriting guidelines of Fannie Mae and Freddie Mac ("Agency Qualified"); (2)
Expanded Criteria Loans--loans which are (a) not Agency Qualified, generally due
to the borrower's credit profile, (b) are not as readily saleable in the
secondary market as Conventional Loans and (c) are generally fixed-rate loans
which are originated at interest rates higher than those of fixed-rate
Conventional Loans; and (3) Portfolio Loans--ARM loans which (a) are not Agency
Qualified, (b) are originated under specific criteria set forth by Argo Savings
and (c) are not Conventional or Expanded Criteria Loans.
The bulk of the loan originations by Margo have been sold. The Conventional
Loans are either fixed-rate or ARM loans ranging from $10,000 up to a maximum of
$240,000. These loans are sold into the secondary market through one of eight
third-party wholesale conduits with servicing released. In the future, as the
Company's cash flow and volume of Agency Qualified loans increases, Margo may
sell such loans directly to the Agencies.
The Portfolio Loans are adjustable-rate and, to a lesser extent, fixed-rate
mortgage loans originated by Argo Savings, through Margo, with principal
balances that range from $10,000 to $2.0 million and which are not necessarily
Agency Qualified. The yield on these loans is generally 100 basis points higher
than the yield on Agency Qualified loans. Portfolio Loans are generally retained
by Argo Savings. From time to time, the Savings Bank has made strategic sales of
such loans. Argo Savings, through Margo, also originates Portfolio Loans which
are jumbo residential mortgage loans. Jumbo loans are loans with principal
balances that generally range between $300,000 and $2.0 million. Adjustable-rate
jumbo mortgage loans under $600,000 are generally held in Argo Savings' loan
portfolio, while other jumbo mortgage loans are originated for sale. The yield
on jumbo loans is generally between 125 and 375 basis points higher than the
yield on Agency Qualified loans.
14
<PAGE>
Since September 1996, Argo Savings, through Margo, has enlarged its product
offerings to include the origination of Expanded Criteria Loans. Since December
31, 1997, 3.6% of the loans originated by Margo were Expanded Criteria Loans.
These loans are originated, in many instances, when the borrower's credit
profile, or some aspect of the loan, does not adhere to the Agency underwriting
guidelines. Expanded Criteria Loans are perceived by management as being
advantageous to Argo Savings because they generally have higher interest rates
and origination and servicing fees and generally lower loan-to-value ratios than
loans that conform to Agency guidelines. In addition, management believes that
the resources are available through its third party servicers to adequately
service Expanded Criteria Loans as well as the experience to resolve loans that
may become non-performing.
As of December 31, 1998, the amount of Portfolio Loans originated by Margo
which are non-performing is $966,000. Argo Savings intends to continue to expand
the volume of Portfolio and Expanded Criteria Loans throughout the country
through its nationwide network of Correspondents.
Argo Savings requires title insurance to insure the priority of its lien on
all of its mortgage loans. It also requires fire, flood, and casualty insurance
on all its properties securing loans provided by Argo Savings and mortgage
insurance on all loans with a loan-to-value of 80% or greater.
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 for the refinancing of such properties, such as five
to twelve unit apartment buildings located in the greater Chicago metropolitan
area. At December 31, 1998, Argo Savings had gross loans secured by multi-family
properties in the amount of $2.1 million, or 0.85% 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%.
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 $1.4 million or 0.56% of
the total gross loan portfolio at December 31, 1998.
Argo Savings will continue on a limited basis to originate loans secured by
commercial real estate. In underwriting these loans, consideration is given to
the property's operating history, future operating projections, current and
projected occupancy, position in the local and regional market, location and
physical condition. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower. An appraisal report is
prepared in accordance with OTS regulations by an outside appraiser qualified by
federal and state law to substantiate property values for every multi-family and
commercial real estate loan. These appraisal reports are reviewed by 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.
15
<PAGE>
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 LENDING. 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, 1998, Argo Savings' consumer loan
portfolio totaled $12.3 million, or 4.95%, of Argo Savings' total loan
portfolio, which included $2.7 million in construction loans.
Management considers consumer loans to involve more credit risk than
secured single family residential mortgage loans and, therefore, consumer loans
generally yield a higher return to Argo Savings and generally provide Argo
Savings with shorter maturities than single-family residential mortgage loans.
LOAN APPROVAL AND UNDERWRITING. Loan applications are accepted by both
Margo personnel and employees of the Savings Bank. Upon receipt of a loan
application, credit reports are ordered to verify specific information relating
to a loan applicant's employment, income, assets and credit standing, and for
independent verification of all credit, income and liability information
provided by the applicant. In the case of a real estate loan originated by the
Savings Bank, or by Margo for the Savings Bank, an appraisal of the real estate
intended to secure the proposed loan is undertaken by an independent appraiser
approved by the Savings Bank's Board of Directors. For loans originated for
Margo by third parties, an independent appraiser approved by Margo is used.
Margo uses five major mortgage insurance companies, any of which may act as
a contract underwriter on all loans originated through its network of
Correspondents. All loans originated for the Savings Bank's portfolio are also
underwritten by Margo in order to ensure such conform to the specific loan
program under which they are being originated. These insurance companies are
provided with the Savings Bank's underwriting manuals and guidelines and all
loans are underwritten to conform with the Savings Bank's guidelines. Written
assurances that the manuals and guidelines have been adhered to, in the form of
representations and warranties, are provided to Margo by the insurance company.
Upon completion of the loan application processing activities, all other
loan files are presented to the Savings Bank's loan underwriters if the loan is
originated on behalf of the Savings Bank, or to third party investors if the
loan is originated for immediate sale. In the case of the Savings Bank, certain
senior officers have lending authority and may approve loans of up to $350,000
in the case of commercial loans and $450,000 in the case of one- to four-family
loans, after completion of the underwriting process. Loans in excess of $350,000
but less than $500,000, in the case of commercial loans, and in excess of
$450,000 and less than $600,000, in the case of one- to four-family loans, must
be submitted to the Savings Bank's Lending Committee for approval. Loans in
excess of $500,000, in the case of commercial loans, and $600,000, in the case
of one- to four-family loans, are subject to approval by the Board of Directors
of the Savings Bank.
Loan applicants are promptly notified in writing of the final determination
of the loan request by either the Savings Bank or Margo. If approved, the terms
and conditions of the loan decision, including the amount of the loan, interest
rate, amortization term, brief description of the real estate securing the
mortgage as well as all conditions to final closing of the transaction are
provided in writing to the loan applicant. The
16
<PAGE>
loan applicant is required to pay all costs incurred by Margo, as well as their
own costs in connection with the loan closing. If denied, disclosure of the
factors resulting in the denial is made pursuant to the requirements of
applicable federal and state law.
The loan documentation and processing activities utilized by the Savings
Bank/Margo in connection with the origination of real estate loans conforms to
standards imposed by the Agencies, as well as third party investor guidelines.
Loan documentation and processing activities utilized by the Savings Bank/Margo
also conform to requirements of the Agencies, as well as to the standards
promulgated by the Federal Housing Authority ("FHA"), the Department of Housing
and Urban Development ("HUD") and the Veterans Administration ("VA").
Additionally, written policies and procedures governing the origination of
mortgage and other loans conforming to regulatory guidelines promulgated by the
OTS are in place and utilized by the Savings Bank.
Statistics regarding the loan applications, including those both denied and
approved, are retained by the Savings Bank and Margo, and reported annually
under the Home Mortgage Disclosure Act. Quality control procedures verifying
data obtained through loan processing activities are in place at the Savings
Bank and Margo.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans
and commitment fees 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 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, 1998, Argo Savings had $1.2 million in
net deferred loan costs that will be recognized in future periods.
Loan origination and commitment fee income varies 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. In accordance with Federal
regulations, loans and other assets are reviewed by Argo Savings on a regular
basis for a determination of need to classify such assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor, or of the current realizable value of the collateral pledged.
"Substandard" assets include those characterized by the "distinct possibility"
that Argo Savings will sustain "some loss" if the deficiencies noted are not
corrected. Assets classified as "Doubtful" have all the weaknesses inherent in
those classified as "Substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
"currently existing facts, conditions and values," "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncorrectable"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. An allowance for
losses is established in amounts deemed prudent by management. General
allowances represent loss allowances which have been established by Argo Savings
to recognize the inherent risk associated with lending activities but which,
unlike specific allowances, have not been allocated to a particular problem
asset. When an asset is classified as "Loss," Argo Savings is required to
establish a specific allowance for such losses equal to 100% of the amount of
17
<PAGE>
the asset so classified, or to charge-off such amount. Recently, the OTS
discontinued classifying Assets as "special mention" if such assets possessed
weakness but did not expose the institution to sufficient risk to warrant
classification in the Substandard category.
At December 31, 1998, Argo Savings had $6.5 million of loans and $3.9
million of REO classified as Substandard or Doubtful, respectively. Excluded
from this total is the $3.0 million of Discounted Loans ninety (90) days or more
past due. Management does not consider these loans non-performing and thus
excludes them from all non-performing loan analyses and from all general
valuation allowance analyses. If an asset or portion thereof is classified as
Loss, Argo Savings must either establish a specific allowance for loan losses in
the amount of 100 percent of the portion of the asset classified as Loss, or
charge off such amount. At December 31, 1998, Argo Savings had no assets
classified as Loss. Management evaluates collectibility of the Discounted Loans
receivable on an aggregate pool basis.
As a general rule, Argo Savings has entered into contractual arrangements
with third parties ("Sub-servicers") who collect principal and interest payments
from obligors on loans owned by Argo Savings, pay real estate property taxes and
ensure collateral securing loans remains insured for the benefit of Argo
Savings, in accordance with generally recognized servicing standards and
practices. Sub-servicers remit payments received from loan obligors and submit
monthly reports detailing delinquencies and other matters to Argo Savings. Argo
Savings may handle managing the process of collection and liquidation of loan
assets, however, in some instances, Sub-servicers are charged with such
responsibility. Generally, when a loan becomes 15 days or more past due, the
Sub-servicer submits a reminder notice to the loan obligor. For loans 30-89 days
delinquent, additional notices are submitted to the borrower, and the
Sub-servicer attempts telephonic contact. After principal and interest are 90
days or more past due, and the loan obligor has failed to respond to the
Sub-servicer and no forbearance or other repayment plan has been agreed to, the
Sub-servicer generally initiates foreclosure action. Argo Savings' policy is to
stop accruing interest for any loan in excess of 90 days delinquent separate
from management's analysis as to the future collectibility of interest.
Real estate acquired through foreclosure or deed in lieu of foreclosure or
in judgment is carried at the lower of the fair market value less cost to
dispose or the related loan balance at the date of foreclosure. An allowance for
loss is established by a charge to operations or a transfer from the allowance
for loan losses if the carrying value of REO exceeds its fair value less cost to
dispose. Sub-servicers generally manage the disposition process for Argo
Savings, contracting for security and maintenance of REO, listing REO with real
estate brokers for sale, submitting offers to purchase to Argo Savings for
review and approval, and arranging for final sale of REO utilizing attorneys and
title companies licensed in the jurisdiction where REO is located. The
disposition of REO related to Discounted Loans is now managed by Argo Savings
through its in-house personnel.
18
<PAGE>
The following table sets forth information with respect to the Savings
Bank's non-performing assets as of the dates indicated. As of the dates shown,
the Savings Bank had no restructured loans.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
1998 1997 1996 1995 1994
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans (1)(2) .................. $ 6,518 $ 5,525 $ 3,942 $ 1,987 $ 2,324
Foreclosed real estate, net (3) .............. 3,875 4,251 3,913 1,473 359
-------- -------- -------- -------- ---------
Total non-performing assets .................. $ 10,393 $ 9,776 $ 7,855 $ 3,460 $ 2,683
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Allowance for estimated loan losses as a
percentage of net loans receivable (1) ...... .40% .53% .53% .45% .52%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Allowance for loan losses to non-performing
loans ....................................... 14.42% 14.73% 16.87% 29.54% 26.38%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Non-performing loans as a percentage of loans
receivable (1) .............................. 2.80% 3.57% 3.12% 1.54% 1.93%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Non-performing assets as a percentage of total
assets (1) .................................. 3.39% 4.14% 3.43% 2.26% 1.72%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
- -------------------
(1) All non-performing loan totals exclude Discounted Loans receivable ninety
(90) days or more past due which at December 31, 1998, 1997, 1996 1995 and
1994 amounted to $3.0 million, $6.2 million, $15.5 million, $8.4 million
and $451,000, respectively.
(2) At December 31, 1998, $1.5 or 23.1% of the $6.5 million in non-performing
loans represent loans originated by the Savings Bank. The remaining loans
represent loans purchased by the Savings Bank.
(3) Includes $2.7 million of foreclosed real estate related to the Discounted
Loans receivable portfolio at December 31, 1998.
At December 31, 1998, the Savings Bank had $6.5 million of Portfolio Loans
receivable and loans held for sale and $3.0 million of Discounted Loans
receivable ninety (90) days or more delinquent. At both December 31, 1998 and
December 31, 1997, the Bank had approximately $3.9 million and $4.2 million,
respectively, of REO. This stabilization is the result of the Savings Bank's
reduction in its position in Discounted Loans receivable as the Company focuses
its resources on conventional lending.
19
<PAGE>
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
--------------------- -------------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family .... 114 $6,042 100 $6,128
Multi-family ........... 1 112 2 225
Commercial ............. -- -- -- --
------ ------ ------ ------
Total mortgage loans . 115 6,154 102 6,353
Other loans ............. 7 273 3 165
------ ------ ------ ------
Total ................ 122 $6,427 105 $6,518
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ... 2.76% 2.80%
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
---------------------- --------------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family .... 107 $4,862 95 $5,474
Multi-family ........... -- -- -- --
Commercial ............. -- -- -- --
------ ------ ------ ------
Total mortgage loans . 107 4,862 95 5,474
Other loans ............. -- -- 9 51
------ ------ ------ ------
Total ................ 107 $4,862 104 $5,525
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ... 3.16% 3.57%
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
--------------------- ----------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ................ 115 $4,055 65 $3,908
Multi-family ....................... -- -- -- --
Commercial ......................... -- -- -- --
------ ------ ------ ------
Total mortgage loans ............. 115 4,055 65 3,908
Other loans ......................... 1 1 13 34
------ ------ ------ ------
Total ........................ 116 $4,056 78 $3,942
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ............... 3.21% 3.12%
------ ------
------ ------
</TABLE>
- ------------------------------
(1) Excludes balances related to portfolio of Discounted Loans receivable.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb future
charge-offs of loans deemed uncollectible. At December 31, 1998, the Savings
Bank experienced a decrease in the percentage of net loans 90 days or more
delinquent from 3.57% of total loans receivable and loans held for sale
(excluding Discounted Loans at December 31, 1998) to 2.80% of total loans
receivable and loans held for sale (excluding Discounted Loans) at December 31,
1997. 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,
1998, represents specific reserves currently in place on REO. As of December 31,
1998, all of the allowance for loan losses pertains to a general allowance. Argo
Savings had no specific reserves established at December 31, 1998, other than
the reserves against REO. 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
20
<PAGE>
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.
The following table sets forth information with respect to Argo Savings'
allowance for loan losses by loan category for the years and at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period:
Mortgage loans:
One- to four-family ........................ $ 61 $ 412 $ 330 $ 315 $ 313
Multi-family ............................... 14 14 14 14 14
Commercial loans ............................. 216 216 216 216 216
Other loans .................................. 23 23 27 68 70
----- ----- ----- ----- -----
Total ........................................ 814 665 587 613 613
Provision for loan losses:
Mortgage loans:
One- to four-family ........................ 355 210 248 96 45
Multi-family ............................... -- -- -- -- --
Commercial loans ............................. -- -- -- -- --
Other loans .................................. -- -- -- (41) 3
----- ----- ----- ----- -----
Total ........................................ 355 210 248 55 48
Purchased allowance one- to four-family loans . 30 -- -- -- --
Transfer to allowance for losses on foreclosed
real estate ................................ (240) (50) (77) (45) (43)
Charge-offs:
Mortgage loans:
One- to four-family ........................ (19) (11) (89) (36) --
Multi-family ............................... -- -- -- -- --
Commercial loans ............................. -- -- -- -- --
Other loans .................................. -- -- (4) -- (5)
----- ----- ----- ----- -----
Total ........................................ (19) (11) (93) (36) (5)
----- ----- ----- ----- -----
Balance at end of period:
Mortgage loans:
One- to four-family ........................ 687 561 412 330 315
Multi-family ............................... 14 14 14 14 14
Commercial loans ............................. 216 216 216 216 216
Other loans .................................. 23 23 23 27 68
----- ----- ----- ----- -----
Total ........................................ $ 940 $ 814 $ 665 $ 587 $ 613
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of net charge-offs during the period to
loans outstanding, excluding Discounted Loans .01% .01% .08% .03% --%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans ...... .40% .53% .53% .45% .52%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
21
<PAGE>
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 cost of acquiring the right to service the
mortgage loans is carried as a capitalized asset and amortized proportionately
over the estimated remaining lives of the loans serviced. The servicing of
mortgages primarily consists of the collection of monthly principal and interest
payments, collection and disbursement of escrow funds for taxes and insurance,
providing various customer services and account maintenance, reporting,
foreclosure processing, and investor notification. For performing these
administrative tasks, the servicer retains a monthly servicing fee generally
calculated as a percentage of the outstanding loan balance, and holds the
escrowed payments for taxes and insurance in non-interest-bearing custodial
accounts. The servicing fee is intended to cover anticipated operating expenses
incurred in servicing the loans and to provide for an adequate profit margin.
The Company uses independent Sub-servicers to perform the administrative
activities discussed above under a sub-servicing agreement. The Company's
primary administrative task associated with PMSRs is to review monthly analyses
of all servicing and accounting reports prepared by the Sub-servicer and to
perform regular on-site inspections and reviews of the Sub-servicers'
operations.
Prior to completing any acquisition of servicing rights, the Company
analyzes a wide range of parameters with respect to each portfolio under
consideration. This review includes the projected revenues and expenses,
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 approximately
reflect the risk associated with the investment, and using a loan prepayment
assumption that management considers to be conservative relative to the
characteristics of the serviced loans. Management does not purchase PMSRs with
recourse servicing, thus the Company is not subject to the risk of and costs
(including foreclosure costs) associated with borrower default on the underlying
loans.
Mortgage servicing activities carry interest rate risk since the total
amount of servicing fees earned, as well as the amortization of the investment
in the servicing rights, fluctuates 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.
The value of PMSRs generally decrease in a declining interest rate
environment and increase in a rising interest rate environment due to the actual
or anticipated fluctuation in the prepayment speeds of the underlying mortgage
loans. The value of the PMSRs reacts inversely with the other interest-earning
assets of 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.
Argo Savings' principal investment is through a $4.5 million equity
interest in a limited partnership whose business activities are to purchase
mortgage servicing rights. There are several unaffiliated equity investors in
the limited partnership. The purchase of the servicing rights is then leveraged,
allowing the limited partnership to purchase rights equaling one to three times
the equity investment by its partners. The cost of the borrowings, as well as
the service income and expense and related amortization, is recorded at the
limited partnership level. Each quarter, financial statements are issued to the
limited partnership by
22
<PAGE>
Dovenmuehle Mortgage, Inc. ("DMI"), the general partner of the limited
partnership and the pro-rata share of the income for each investor is calculated
by DMI. Argo Savings records its share of income or loss on the equity method
for the partnership investment. 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 guidelines outlined previously for direct
purchases of servicing. The task of finding and acquiring the servicing rights
controlled by the limited partnership as well as all associated administrative
duties, is assigned to DMI. DMI also sub-services the PMSRs in the partnership.
The limited partnership is audited annually by an independent auditor and an
independent third party valuation of the partnership's PMSR is performed
quarterly. In addition, unaudited financial statements of the limited
partnership are distributed quarterly by DMI to each investor. The audited
financial statements, the unaudited quarterly financial statements and the
quarterly valuations are sent directly to each equity investor. As a result of
the current decline in the interest rate market, DMI has actively moved to
retain servicing rights on refinancings. The loans may be refinanced at lower
rates, for longer terms, and, from time to time, with higher balances with the
servicing on such loans retained by the limited partnership.
Argo Savings accounts for the investment in the limited partnerships using
the equity method of accounting. Income or loss is recorded based upon
information received from DMI. DMI obtains quarterly valuations from an
independent appraiser for the limited partnership. At December 31, 1998, the
valuation had an appraisal value lower than the current book value. The general
partner recorded a valuation allowance. Argo Savings' proportionate share of the
writedown was $1.4 million which Argo Savings has recorded based upon
information received from DMI.
In addition to its investment in the limited partnerships, at December 31,
1998, the Savings Bank had a $593,000 investment in a PMSR portfolio that it
owns directly. At December 31, 1998, this directly owned PMSR portfolio
consisted of 1,184 mortgage loans having an outstanding principal balance of
$46.8 million.
A secondary benefit derived from the PMSRs is the interest free custodial
accounts comprised of the borrowers' taxes and insurance escrows and, for a
short time period, the float on their principal and interest payments. The
custodial balances are maintained in non-interest-bearing accounts and are not
affected by changes in interest rates. The custodial balances relating to the
servicing owned at December 31, 1998, were $5.3 million.
INVESTMENT ACTIVITIES
The Savings Bank must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Savings Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 1998, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 6.35%.
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
23
<PAGE>
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, liquidity needs and performance
objectives, and investment quality and marketability. It is the Savings Bank's
general policy to invest in certificates of deposit, overnight funds, and
securities, which are securities of government sponsored entities and federal
agency obligations, and other issues that are rated investment grade. At
December 31, 1998, the Company had $7.6 million of investment securities
available for sale with an aggregate market value of $7.2 million.
The Company maintains a portfolio of readily marketable equity securities,
generally comprised of the equity securities of government sponsored entities
and the holding companies for local, regional and national banks, savings banks
and savings and loan associations. Generally, the Company has acquired
non-control positions in financial institution equities which management
believes, after analysis of market pricing, business practices, and earnings
potential, are under-valued and represent an opportunity for profit from sales
of such securities. At December 31, 1998, the Company and the Savings Bank had
$2.8 million in these securities.
In addition, the Company has been actively trading various marketable
equity securities, primarily Fannie Mae and FHLMC stock. These securities
were classified as trading at December 31, 1998. The balance of the trading
portfolio was $693,000 at December 31, 1998 and market value approximated
cost.
24
<PAGE>
The following table sets forth the composition of the Company's debt and
equity and mortgage-backed securities portfolios in dollar amounts and
percentages at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
FAIR % OF FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and agency
obligations .......................... $ 2,088 28.97% $ -- ---% $ -- ---%
Municipal bonds ....................... 380 5.27 380 7.64 602 10.40
------- ------- ------- ------ ------- ------
Total debt securities ............... $ 2,468 34.29% $ 380 7.64% $ 602 10.40%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Equity securities ...................... $ 2,809 38.97% $ 1,667 33.51% $ 282 4.87%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Mortgage-backed securities:
Freddie Mac ........................... $ 109 1.51% $ 124 2.51% $ 826 14.27%
Fannie Mae ............................ 1,797 24.93 2,799 56.26 3,949 68.23
Ginnie Mae ............................ -- -- -- -- 152 2.62
------- ------- ------- ------ ------- ------
Total mortgage-backed securities .... 1,906 26.44% 2,923 58.77% 4,927 85.12%
Net premium (discount) ................ 32 .44 39 .78 60 1.04
Unrealized loss on securities
available-for-sale .................. (7) (.09) (35) (.70) (83) (1.43)
------- ------- ------- ------ ------- ------
Net mortgage-backed securities ........ $ 1,931 26.79% $ 2,927 58.85% $ 4,904 84.73%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Total securities available-for-sale $ 7,208 100% $ 4,974 100% $ 5,788 100%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
FHLB of Chicago stock .................. $ 1,911 100% $ 3,271 100% $ 3,428 100%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
</TABLE>
The following table sets forth the amortized cost and fair values of the
Company securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government and agency
obligations ...................... $2,091 $2,088 $--- $--- $--- $---
Municipal bonds ................... 370 380 370 380 557 602
Equity securities ................. 3,195 2,809 1,695 1,667 226 282
Mortgage-backed securities:
Freddie Mac ...................... 110 109 $ 125 124 826 834
Fannie Mae ....................... 1,827 1,822 2,837 2,803 4,009 3,910
Ginnie Mae ....................... -- -- -- -- 152 160
------ ------ ------ ------ ------ ------
Total mortgage-backed securities . 1,937 1,931 2,962 2,927 4,987 4,904
------ ------ ------ ------ ------ ------
Total securities available-for-sale $7,593 $7,208 $5,027 $4,974 $5,770 $5,788
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
FHLB-Chicago stock ................. $1,911 $1,911 $3,271 $3,271 $3,428 $3,428
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
25
<PAGE>
The table below sets forth certain information regarding the amortized costs,
weighted average yields and contractual maturities of investment securities as
of December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
-----------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
------------------------------------------------------------------
<S> <C>
Investment securities
Available-for-sale:
Municipal Bonds........ $ -- --% $ -- --% $ -- --%
Equity Securities (1).. 4,786 -- -- -- 250 --
Mortgage-backed
securities:
Freddie Mac ......... -- -- -- -- -- --
Fannie Mae .......... -- -- -- -- -- --
------- ---- -------- ----- ------ -----
Total
mortgage-backed
securities ..... -- -- -- -- -- --
------- ---- -------- ----- ------ -----
Total investment
securities
available-for-
sale ............. $ 4,786 --% $ -- --% $ 250 --
------- ---- -------- ----- ------ -----
------- ---- -------- ----- ------ -----
FHLB-Chicago stock (1) ... $ -- --% $ -- --% $ -- --%
------- ---- -------- ----- ------ -----
------- ---- -------- ----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
MORE THAN TEN
YEARS TOTAL
--------------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
--------------------------------------------
<S> <C> <C> <C> <C>
Investment securities
Available-for-sale:
Municipal Bonds........ $ 370 9.50% $ 370 9.50%
Equity Securities (1).. 250 6.29 5,286
Mortgage-backed
securities:
Freddie Mac ......... 110 6.11 110 6.11
Fannie Mae .......... 1,827 6.48 1,827 6.48
------- ------ -------- ------
Total
mortgage-backed
securities ..... 1,937 6.46 1,937 6.46
------- ------ -------- ------
Total investment
securities
available-for-
sale ............. $ 2,557 6.88% $ 7,593 --%
------- ------ -------- ------
------- ------ -------- ------
FHLB-Chicago stock (1) ... $ -- --% $ 1,911 --%
------- ------ -------- ------
------- ------ -------- ------
</TABLE>
- --------------
(1) Weighted average yield does not include equity securities.
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. In addition, the Company's sources of funds include borrowed
money, which includes advances from the Federal Home Loan Bank, a note payable,
a margin account and federal funds purchased. In addition, the Company has
issued junior subordinated debentures.
DEPOSITS. Argo Savings offers a number of deposit accounts, including
tiered passbook accounts, 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 $7.4
million in brokered deposits at December 31, 1998. Argo Savings has
traditionally priced its deposit products at or near market rates in its primary
market.
26
<PAGE>
DEPOSIT FLOW. The following table sets forth the change in dollar amount of
savings accounts offered by Argo Savings between the dates indicated.
<TABLE>
<CAPTION>
AMOUNT AT PERCENT AMOUNT AT PERCENT
DECEMBER 31, OF TOTAL INCREASE DECEMBER 31, OF TOTAL INCREASE
1998 DEPOSITS (DECREASE) 1997 DEPOSITS (DECREASE)
-------------- ------------------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts $ 18,244 7.8% $ 13,748 $ 4,496 2.6% $ 885
Passbook accounts ........... 21,307 9.1 3,700 17,607 10.2 (742)
NOW accounts ................ 9,045 3.9 316 13,225 5.1 (86)
Money market accounts ....... 4,706 2.0 (1,517) 6,223 3.6 1,266
-------- ------ -------- -------- ----- --------
Total ..................... 53,302 22.8 16,247 37,055 21.5 1,323
-------- ------ -------- -------- ----- --------
Certificate accounts:
3.99% or less .............. -- -- (10) 10 -- (42)
4.00% to 4.99% ............. 28,491 12.2 27,617 874 .5 105
5.00% to 5.99% ............. 139,039 59.7 76,104 62,935 36.5 (8,234)
6.00% to 6.99% ............. 11,665 5.0 (58,297) 69,962 40.5 30,768
7.00% to 7.99% ............. 475 0.3 (1,038) 1,513 0.9 (2,099)
8.00% to 8.99% ............. 8 -- (112) 120 0.1 21
-------- ------ -------- -------- ----- --------
Total ..................... 179,678 77.2 44,264 135,414 78.5 20,519
-------- ------ -------- -------- ----- --------
Total deposits .............. $232,980 100.00% $ 60,511 $172,469 100.0% $ 21,842
-------- ------ -------- -------- ----- --------
-------- ------ -------- -------- ----- --------
Weighted Average Rate ....... 4.76% 5.18%
---- ----
---- ----
</TABLE>
<TABLE>
<CAPTION>
AMOUNT AT PERCENT
DECEMBER 31, OF TOTAL INCREASE
1996 DEPOSITS (DECREASE)
-------------- ------------------------
<S> <C> <C> <C>
Non-interest bearing accounts $ 3,611 2.4% $ 323
Passbook accounts ........... 18,349 12.2 (167)
NOW accounts ................ 8,815 5.9 (727)
Money market accounts ....... 4,957 3.3 474
-------- ----- --------
Total ..................... 35,732 23.8 (97)
-------- ----- --------
Certificate accounts:
3.99% or less .............. 52 -- 34
4.00% to 4.99% ............. 769 0.5 (4,688)
5.00% to 5.99% ............. 71,169 47.2 34,232
6.00% to 6.99% ............. 39,194 26.0 8,634
7.00% to 7.99% ............. 3,612 2.4 (10,938)
8.00% to 8.99% ............. 99 0.1 (34)
-------- ----- --------
Total ..................... 114,895 76.2 27,240
-------- ----- --------
Total deposits .............. $150,627 100.0% $ 27,143
-------- ----- --------
-------- ----- --------
Weighted Average Rate ....... 5.13%
-----
-----
</TABLE>
27
<PAGE>
CERTIFICATE ACCOUNTS. The following table presents the amount of
certificate accounts outstanding at December 31, 1998, and the periods to
maturity or repricing.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Within one year (1)..... $154,178 5.43%
One to three years...... 22,142 5.40
Thereafter ............. 3,358 5.95
-------- ----
Total .................. $179,678 5.45%
-------- ----
-------- ----
</TABLE>
- ----------------
(1) Includes a $13 million certificate that matured on February 22, 1999 and
was renewed at that time for an additional 90 days.
At December 31, 1998, Argo Savings had outstanding $54.9 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 ........... $19,719
Over three through six months... 11,720
Over six through 12 months ..... 18,865
Over 12 months ................. 4,597
-------
Total .......................... $54,901
-------
-------
</TABLE>
Argo Savings had pledged investment securities with principal balances
totaling approximately $6.4 million at December 31, 1998, as collateral to
secure certain public deposits. In addition to securities at December 31, 1998
and 1997, the Savings Bank also had letters of credit totaling $13,260,000 and
$15,402,000 as collateral to secure several State of Illinois certificates. The
total State of Illinois certificates secured by letters of credit and securities
totaled approximately $15,102,000 and $14,100,000 in 1998 and 1997,
respectively.
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits in excess of withdrawals........... $51,770 $ 13,262 $ 20,710
Interest credited........................... 8,741 8,580 6,433
------- --------- ---------
Net increase in savings
deposits................................ $60,511 $ 21,842 $ 27,143
------- --------- ---------
------- --------- ---------
</TABLE>
28
<PAGE>
Substantially all of Argo Savings' depositors are residents of the States
of Illinois and Indiana.
BORROWINGS. The Company's borrowings at December 31, 1998 include a note
payable, a margin account, capital lease obligations, FHLB advances, federal
funds purchased and junior subordinated debentures.
During 1998, the Company issued 11% junior subordinated debentures
aggregating $17,784,000 to Argo Capital Trust Company (Trust). The Trust issued
11% capital securities with an aggregate liquidation amount of $17,250,000 ($10
per capital security) to third-party investors. The capital securities and cash
are the sole assets of the Trust. The junior subordinated debentures are
includable as Tier I capital for regulatory capital purposes. The offering price
was $10 per capital security. The junior subordinated debentures and the capital
securities pay dividends and distributions, respectively, on a quarterly basis,
which are included in interest expense. The Trust is a statutory business trust
formed under the laws of the State of Delaware wholly owned by the Company. The
junior subordinated debentures will mature on November 6, 2028, at which time
the capital securities must be redeemed. The junior subordinated debentures and
the capital securities can be redeemed contemporaneously, in whole or in part,
beginning November 6, 2003 at a redemption price of $10 per capital security.
The Company has provided a full and unconditional guarantee of the obligations
of the Trust under the capital securities in the event of the occurrence of an
event of default, as defined. Debt issuance costs totaling $1,669,000 were
capitalized related to the debenture offering, and are being amortized over the
30-year life of the junior subordinated debentures.
Although 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, 1998, Argo
Savings had $17.8 million of fixed rate advances and $2.3 million of
adjustable-rate advances from the FHLB with interest rates ranging from 5.48% to
8.43%. The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, 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 institution's
creditworthiness.
The note is payable by ON-LINE for $865,000 drawn on a $1.0 million open
line of credit with a third party financial institution. This note is also
collateralized by accounts receivable of ON-LINE and the line of credit is
guaranteed by the Company. The line of credit is due to mature on August 17,
1999. The rate of interest is the lender's prime rate.
The margin account loan is from a third-party securities broker. The rate
of interest on the loan is 2% over a rate negotiated with the broker (7.28% at
December 31, 1998). The margin account loan was secured at December 31, 1998 by
securities held by the broker having a market value of $1.5 million.
29
<PAGE>
Included in other borrowings at December 31, 1998, is $3.3 million in
capital lease obligations for premises and equipment related to ON-LINE.
30
<PAGE>
The following table sets forth information regarding borrowings by the
Company on a consolidated basis at the end of and during the years indicated.
The borrowings at and during the years consisted of FHLB advances, promissory
notes, federal funds purchased, and capital lease obligations. The weighted
average was computed on a monthly average basis.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year on:
FHLB advances ............................................ 6.10% 6.22% 5.80%
Other borrowings ......................................... 7.71 8.63 8.48
Maximum amount of borrowings outstanding at any month end:
FHLB advances ............................................ $ 20,132 $ 49,587 $ 45,257
Other borrowings ......................................... 14,658 11,542 8,760
Average borrowings outstanding with respect to:
FHLB advances ............................................ $ 18,987 $ 30,191 $ 34,608
Other borrowings ......................................... 12,624 10,621 7,669
---------- ---------- ----------
Total ................................................. $ 31,611 $ 40,812 $ 42,277
---------- ---------- ----------
---------- ---------- ----------
Weighted average interest rate during the period paid on:
FHLB advances ............................................ 5.69% 5.98% 6.17%
Other borrowings ......................................... 8.60 8.43 8.32
---------- ---------- ----------
Total Weighted Average ................................ 6.20% 6.60% 6.91%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
31
<PAGE>
SUBSIDIARIES
Argo Savings has two wholly-owned subsidiaries, Argo Mortgage Corp. ("Argo
Mortgage") and Dolton-Riverdale Savings Service Corp. ("Dolton-Riverdale"). Argo
Mortgage engages in mortgage brokerage activities that focus on the purchase and
sale of deeply discounted mortgage loans into the secondary market.
Dolton-Riverdale 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, 1998, Argo Savings had an equity investment in Argo Mortgage,
Dolton-Riverdale, and Margo of $12.5 million, $161,000 and $30,000,
respectively.
COMPETITION
Argo Savings faces strong competition in attracting deposits and in
originating 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 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, 1998, the Savings Bank including its subsidiaries, had
ninety (90) employees (seventy-six (76) full-time employees and fourteen (14)
part-time employees). ON-LINE had ninety-five (95) full-time employees and no
part-time employees. A collective bargaining unit does not represent the
employees. The Company believes its relationship with its employees is good.
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REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Savings Bank, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
Argo Savings is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Savings Bank
is a member of the Federal Home Loan Bank ("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 safety and soundness and 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-K does not purport to be a complete description of such statutes and
regulations and their effects on Argo Savings 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 certain activities
authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire
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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. Argo Savings must notify the OTS 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% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' 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 mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities that are
not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS
capital regulation based on the risks the OTS believes are inherent in the type
of asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS 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, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half
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of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the institution's assets. That
dollar amount is deducted from an institution's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings institution with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The Director of the OTS may waive or defer
a savings institution's interest rate risk component on a case-by-case basis.
For the present time, the OTS has deferred implementation of the interest rate
risk component. At December 31, 1998, Argo Savings met each of its capital
requirements.
The following table presents Argo Savings' capital position, amounts and
ratios at December 31, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Actual Amount Required Amount Excess Amount Actual Percent Required Percent
<S> <C> <C> <C> <C> <C>
Tangible ................. $17,370 $ 4,127 $13,247 6.32% 1.5%
Core (Leverage) .......... 17,370 8,248 9,124 6.32 3.0
Risk-based:
Tier I (core) .......... 17,370 10,994 6,276 6.32 4.0
Total .................. 18,310 13,898 5,385 10.54 8.0
</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
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date 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. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Savings Bank are presently
insured by SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During
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1998, FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF" -- the deposit insurance fund that covers most commercial
bank deposits) members paid 1.22 basis points. By law, there will be equal
sharing of FICO payments between the members of both insurance funds on the
earlier of January 1, 2000 or the date the two insurance funds are merged.
The Argo Savings' assessment rate for the year ended December 31, 1998 was
6.1 basis points and the premium paid for this period was $112,000, which was
applied toward the payment of FICO bonds. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Argo Savings Bank.
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 Argo Savings does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. Legislation enacted in 1996 provided that
BIF and SAIF would merge by January 1, 1999, if there were no savings
associations in existence on 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. 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% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1998, Argo Savings' limit on loans to one borrower was $2.6 million. At December
31, 1998, the Argo Savings' largest aggregate outstanding balance of loans to
one borrower was $2.0 million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings institution that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, Argo Savings maintained 93.0% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "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 1 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
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during
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the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior 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. At December 31, 1998, the Bank was
classified as a Tier 1 Bank.
The OTS' has adopted new capital distribution regulations which will become
effective on April 1, 1999. Under the new regulations, an application to and the
prior approval of the Office of Thrift Supervision will be required before an
institution makes a capital distribution if (1) the institution does not meet
certain criteria for "expedited treatment" for applications under the
regulations, (2) the total capital distributions by the institution for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, (3) the institution would be
undercapitalized following the distribution or (4) the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution may still need to give advance
notice to the OTS of the capital distribution.
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 (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Savings Bank's average liquidity ratio
for the year ended December 31, 1998 was 6.35%, which exceeded the 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 assessments, paid on a
semi-annual basis, are based 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, 1998 totaled $63,000.
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" (I.E., 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 restricts the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, be on terms and under circumstances, including credit
standards, that are substantially the same or at least
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as favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
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 institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS 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.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. 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.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement was $1.395 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. Argo Savings Bank maintained
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to Argo
Savings or Argo Bancorp. The Companies have not been audited by the IRS during
the last ten (10) years. For federal income tax purposes Argo
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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
is 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, 1998, 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.
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. 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,
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other than foreign tax credits. Accordingly, the Savings 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 1998, 1997 and 1996.
ELIMINATION OF DIVIDENDS: DIVIDENDS RECEIVED DEDUCTION. The Company 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 the Company and Argo Savings own more
than 20.0% of the stock of the corporation paying a dividend.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company and Argo Savings file Illinois income tax
returns. For Illinois income tax purposes, the Company and Argo Savings are
taxed at an effective rate equal to 7.25% 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, the Company 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.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards (Statement) No. 133 on
derivatives will, in 2000, require all derivatives to be recorded at fair value
in the balance sheet, with changes in fair value charged or credited to income.
If derivatives are documented and effective as hedges, the change in the
derivative fair value will be offset by an equal change in the fair value of the
hedged item. Under the new standard, securities held-to-maturity can no longer
be hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will have another one-time window of
opportunity to reclassify held-to-maturity securities to either trading or
available-for-sale, provided certain criteria are met. This Statement may be
adopted early at the start of a calendar quarter. Since the Company has no
significant derivative instruments or hedging activities, adoption of Statement
No. 133 is not expected to have a material impact on the Company's financial
statements. Management has not decided whether to adopt Statement No. 133 early.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans
that are securitized to be classified as trading; available-for-sale; or, in
certain circumstances, held-to-maturity. Currently, these must be classified as
trading. Since the Company has not securitized mortgage loans, Statement No. 134
is not expected to affect the Company.
American Institute of Certified Public Accountants Statement of Position
98-1, effective in 1999, sets the accounting requirement to capitalize costs
incurred to develop or obtain software that is to be used solely to meet
internal needs. Costs to capitalize are those direct costs incurred after the
preliminary project
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stage, up to the date when all testing has been completed and the software is
substantially ready for use. All training costs, research and development costs,
costs incurred to convert data, and all other general and administrative costs
are to be expensed as incurred. The capitalized cost of internal-use software is
amortized over its useful life and reviewed for impairment using the criteria in
Statement No. 121. Statement of Position 98-1 is not expected to have a material
impact on the Company.
American Institute of Certified Public Accountants Statement of Position
98-5, also effective in 1999, requires all start-up, pre-opening, and
organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. Statement of Position 98-5 is not expected to have a
material impact on the Company.
The Financial Accounting Standards Board continues to study several issues,
including recording all financial instruments at fair value and abolishing
pooling-of-interests accounting. Also, it is likely that APB 25's measurement
for stock option plans will be limited to employees and not to nonemployees such
as directors, thereby causing compensation expense to be required for 1999
awards of stock options to outside directors.
ITEM 2. PROPERTIES
The Company is located and conducts its business at its home office in
Summit, Illinois, located at 7600 W. 63rd Street, Summit. The Savings Bank
conducts its business through its home office and four additional branch offices
located in Bridgeview, the near West Side of Chicago, downtown Chicago, and
Dolton, Illinois. ON-LINE is located and conducts its business at its office in
Oak Brook, Illinois located at 900 Commerce Drive. The Company believes that
Argo Savings' and ON-LINE's current facilities are adequate to meet the present
and immediately foreseeable needs of the Company. See Note 7 to the Notes to
Consolidated Financial Statements for the net book value of the property of the
Company.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
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
1998 Annual Report to Stockholders on pages A-58 through A-61 is incorporated
herein by reference.
41
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data appears under the Selected Consolidated
Financial Condition and other Data of the Corporation the Registrant's 1998
Annual Report to stockholders on page A-2 and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation" of
the 1998 Annual Report to Stockholders on pages A-3 through A-14 and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The above-captioned information appears under the caption "Quantitative
and Qualitative Disclosure about Market Risk" of the 1998 Annual Report to
Stockholders on pages A-13 through A-14 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1998, together with the report thereon by
Crowe Chizek and Company LLP appears in the Registrant's 1998 Annual Report
to Stockholders, on pages A-16 through A-57 incorporated herein by reference.
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1997 and 1996 appear in the Registrant's
1998 Annual Report to Stockholders, on pages A-18 through A-57 incorporated
herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated herein by reference to the Company's Form 8-K, and any
amendments thereto, originally filed on December 4, 1998.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999
under "Information with respect to the Nominee, Continuing Directors and Certain
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 27, 1999 under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
42
<PAGE>
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999
under "Security of Certain Beneficial Owners" and "Information with respect to
the Nominee, Continuing Directors and Certain Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 27, 1999 under "Indebtedness
of Management and Transactions with Certain Related Persons."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and its
subsidiaries, together with the Independent Auditors Report, appearing in
the 1998 Annual Report of Stockholders are incorporated herein by
reference.
Consolidated Statements of Financial Condition as of December 31, 1998, and
1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.
Notes to the Consolidated Financial Statements.
The remaining information appearing in the Annual Report is not deemed to
be filed as a part of this report, except as expressly provided herein.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) EXHIBITS
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and By-Laws.
3.1 Amended and Restated Certificate of Incorporation of Argo Bancorp,
Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
Exhibit No. 4.
4.1 Stock Certificate of Argo Bancorp, Inc.*
43
<PAGE>
4.2 Indenture of Argo Bancorp, Inc. relating to the Junior Subordinated
Debentures *
4.3 Certificate of Junior Subordinated Debenture *
4.4 Certificate of Trust of ARGO Capital Trust Company *
4.5 Capital Security Certificate of ARGO Capital Trust Company *
4.6 Guarantee of Argo Bancorp, Inc. relating to Capital Securities *
4.7 Amended and Restated Declaration of Trust of ARGO Capital Trust
Company *
4.8 Form of Goodwill Convertible Preferred Stock Certificate of Argo
Bancorp, Inc.*
Exhibit No. 10. Material Contracts.
10.1 Stockholder Agreement dated as of December 31, 1996, between Argo
Bancorp, Inc., The Deltec Corporation Limited, and John G. Yedinak.
*
10.2 Argo Bancorp, Inc. 1998 Incentive Stock Option Plan.*
10.3 1996 Argo Bancorp, Inc. Management Recognition and Retention Plan. *
10.4 Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and John G. Yedinak. *
10.5 Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and Frances M. Pitts. *
Exhibit No. 11.
11 Computation of earnings per share (included in Note 8 to the Company's
audited financial statements).
Exhibit No. 13.
13 Portions of the 1998 Annual Report to Stockholders.
Exhibit No. 16.
16 Letter regarding change in independent accountant (filed herewith).
Exhibit No. 21.
21 Subsidiary information is incorporated herein by reference to "Part I
- Subsidiaries."
Exhibit No. 23.
23.1 Consent of Crowe, Chizek and Company LLP (filed herewith).
23.2 Consent of KPMG LLP (filed herewith).
Exhibit No. 27.
27 Financial Data Schedule (filed herewith)
Exhibit No. 99.
99 Proxy Statement**
-----------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, filed on July 20, 1998 and any
amendments thereto, Registration No. 333-59435.
** To be filed within 120 days of the company's fiscal year end.
44
<PAGE>
(a)(4) REPORTS ON FORM 8-K
A Form 8-K (and the amendments thereto) was filed with the Commission on
December 4, 1998, disclosing a change in the Registrant's independent
accountants.
On December 14, 1998, the Registrant filed with the Commission a Form 8-K
announcing the initial payment and record dates with respect to the Argo
Capital Trust 11% Capital Securities.
45
<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 30, 1999 By: /S/ JOHN G. YEDINAK
---------------------------
John G. Yedinak,
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 30, 1999 By: /S/ JOHN G. YEDINAK
---------------------------
John G. Yedinak,
Chief Executive Officer
and Director (Principle
executive officer)
Date: March 30, 1999 By: /S/ SERGIO MARTINUCCI
---------------------------
Sergio Martinucci,
Vice President
and Director
Date: March 30, 1999 By: /S/ ARTHUR BYRNES
---------------------------
Arthur Byrnes, Director
Date: March 30, 1999 By: /S/ DONALD G. WITTMER
---------------------------
Donald G. Wittmer, Director
Date: March 30, 1999 By: /S/ FRANCES M. PITTS
---------------------------
Frances M. Pitts, Secretary
and Director
Date: March 30, 1999 By: /S/ DOMINIC M. FEJER
---------------------------
Dominic M. Fejer
(principal accounting and
financial officer)
46
<PAGE>
ARGO BANCORP, INC.
Corporate Profile
- --------------------------------------------------------------------------------
Argo Bancorp, Inc. (Argo Bancorp or the Company) is a Delaware corporation
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 299,000 shares of common stock at an issuance price of
$2.875, which increased the outstanding common stock to 1,299,600 shares.
There were 2,004,896 shares of common stock outstanding at December 31,
1998. 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.
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
and other companies 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 $8.9 million to be paid to the former
shareholders of On-Line. The acquisition was accounted for under the
purchase method of accounting.
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 446,256
shares of the Company's authorized and unissued common stock to Deltec at a
purchase price $9.50 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.
In October of 1998, the Company formed Argo Capital Trust, a statutory
business trust formed under the laws of the State of Delaware. The Company
and Argo Capital Trust offered 11% Capital Securities with a liquidation
amount of $10.00 per security. The proceeds from the offering were
$17,250,000 and were used to issue 11% Junior Subordinated debentures to
the Company. The Junior Subordinated debentures bear an interest rate of
11%, due quarterly to the Argo Capital Trust. The Junior Subordinated
debentures will mature on November 6, 2028 at which time the Capital
securities must be redeemed.
A-1
<PAGE>
ARGO BANCORP, INC.
Selected Financial Data
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31
----------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Loans receivable and discounted loans receivable, net $245,189 $184,358 $173,429 $142,380 $118,063
FHLB of Chicago stock 1,911 3,271 3,428 2,669 2,576
Securities available for sale 7,901 4,974 5,788 7,573 12,491
Cash and interest-earning deposits 10,156 8,677 13,276 11,061 9,286
Purchased loan servicing rights 5,062 6,706 5,264 4,033 3,641
Foreclosed real estate, net 3,875 4,251 3,913 2,234 359
Other assets 32,924 24,061 24,186 16,518 9,601
-------- -------- -------- -------- --------
Total assets $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Deposits $232,980 $172,469 $150,627 $123,484 $100,697
Borrowed money 25,227 34,156 50,879 38,181 30,820
Custodial escrow balances for loans serviced for others 5,340 6,400 5,782 9,696 14,691
Other Liabilities 7,273 5,169 5,436 4,228 835
Guaranteed preferred beneficial interest in the Company's junior debt 17,784 -- -- -- --
Stockholders' equity 18,414 18,104 16,560 10,879 8,974
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING DATA:
Year ended December 31
-----------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $17,627 $18,266 $16,074 $13,987 $10,282
Interest expense 11,777 11,286 9,083 8,341 5,012
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 5,850 6,980 6,991 5,646 5,270
Provision for loan losses 355 210 248 55 48
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,495 6,770 6,743 5,591 5,222
Noninterest income 17,675 15,585 14,194 4,479 1,838
Noninterest expense 22,847 21,409 19,260 7,662 5,383
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 323 946 1,677 2,408 1,677
Income tax expense (208) 123 343 667 281
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 531 $ 823 $ 1,334 $ 1,741 $ 1,396
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.27 $ 0.43 $ 1.07 $ 1.47 $ 1.16
Diluted earnings per share 0.26 0.39 0.90 1.24 1.02
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Year ended December 31
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.21% 0.35% 0.68% 1.00% 1.00%
Return on average equity 2.86 4.62 10.89 17.09 16.17
Average equity to average assets 7.40 7.53 6.26 5.85 6.14
Equity to total assets 6.00 7.66 7.22 5.83 5.75
Interest rate spread during period 2.97 3.80 4.62 3.69 4.25
Net interest margin 2.76 3.54 4.29 3.65 4.24
Noninterest expense to average assets 9.09 9.05 9.83 4.40 3.83
Nonperforming loans to total loans (1) 2.80 3.57 3.12 1.54 1.93
Nonperforming assets to total assets (1) 3.39 4.14 3.43 2.26 1.72
Allowance for loan losses to nonperforming loans (1) 14.42 14.73 16.87 29.54 26.38
Allowance for loan losses to net loans receivable (1) 0.40 0.53 0.53 0.45 0.52
Ratio of net charge-offs during the period to average loans
outstanding, excluding Discounted Loans 0.01 0.01 0.08 0.03 --
Average interest-earning assets to average interest-bearing liabilities 0.96x 0.95x 0.94x 0.99x 1.00x
Book value per share $ 9.18 $ 9.25 $ 9.28 $ 9.18 $ 7.73
- ----------------------------------------------------------------------------------------------------------------------------
Full-service customer service facilities 5 5 5 5 4
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Excludes balances related to portfolio of discounted loans receivable.
A-2
<PAGE>
MANAGEMENT'S 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. Forward
looking statements which are based on certain assumptions and describe future
plans , strategies, and expectations of the Company, are generally identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. 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 1998 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 299,000 shares of common
stock at an issuance price of $2.875 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 446,256 shares of the
Company's authorized but unissued common stock to Deltec at a purchase price of
$9.50 per share. Total proceeds from this transaction 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.
In October of 1998, the Company formed Argo Capital Trust, a statutory business
trust formed under the laws of the State of Delaware. The Company and Argo
Capital Trust offered 11% Capital Securities with a liquidation amount of $10.00
per security. The proceeds from the offering were $17,250,000 and were used to
issue 11% Junior Subordinated debentures to the Company. The Junior Subordinated
debentures bear an interest rate of 11%, due quarterly to the Argo Capital
Trust. The Junior Subordinated debentures will mature on November 6, 2028 at
which time the Capital securities must be redeemed. The Company has provided a
full and unconditional guarantee of the Trust under the Capital Securities in
the event of an occurrence of default. The proceeds will be used for
enhancements of operational capabilities, and general corporate purposes. Debt
issue costs of $1,669,000 were capitalized related to the debenture offering.
A-3
<PAGE>
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Company is an active holding company with assets
consisting of Argo Savings' common stock, On-Line Financial Services Inc. common
stock, marketable securities, interest-earning deposits, and an investment in a
majority-owned limited liability corporation whose primary purpose is to
purchase residential loans. Argo Bancorp is a Federal Housing Authority (FHA)
approved originator and servicer, a licensed Illinois mortgage banker, and an
approved Federal National Mortgage Association (FNMA) servicer.
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with deposits associated
with purchased mortgage servicing rights (PMSRs) and funds generated internally,
primarily in one-to-four family mortgage loans. Argo Savings is a member of the
Federal Home Loan Bank (FHLB) System, and its deposits are insured to the
maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC).
Argo Savings operates a wholly-owned service corporation. Argo Mortgage
Corporation which engages in mortgage brokerage activities that focus on the
purchase and sale of deeply discounted mortgage loans into the secondary market.
Argo Savings also has a majority interest in a limited liability corporation,
Margo Financial Services, L.L.C. (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 and
a limited partnership. Argo Savings' operating results are also affected by the
profit recognized on sales of mortgage loans, 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.
Beginning in 1997 and continuing in 1998, the Company began to focus its
resources on traditional loans receivable originated through Margo and began to
reduce its portfolio of discounted loans receivable. 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 at December 31, 1997 to
$12.4 million or 4.0% of total assets at December 31, 1998.
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 services bureau, serving banks,
thrifts, and other companies, 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 On-Line
directly. The intervening acquisition subsidiary and state chartered savings and
loan service corporation shells were liquidated and merged by Argo Bancorp in
June 1996.
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
A-4
<PAGE>
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. 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 1997 and 1998, the Company purchased from certain of the former On-Line
shareholders their rights to 33% of the future contingent payments. The Company
paid $196,000 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. During 1998, the Company paid $454,000 in contingent payments to
the former shareholders for 1997 and 1996, and accrued the 1998 contingent
payment payable in 1999 of $592,000. The total transaction value, including
asset notes and contingent payments, will not exceed $8.9 million.
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 $10.2 million at December 31, 1998. 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, 1998 and 1997, Argo
Savings originated and purchased $186.2 million and $114.3 million of loans
receivable, respectively. Management has chosen to de-emphasize the Savings
Bank's investment in discounted loans. As a result there were no new purchases
of discount loans in 1998. In 1997, $8.9 million of discounted loan receivables
were purchased . Purchase of securities available for sale totaled $6.2 million
and $8.1 million for 1998 and 1997, respectively. These investing activities
were primarily funded by principal repayments on loans and mortgage-backed
securities of $75.6 million, and $49.1 million, respectively, and an increase in
deposits, net of the sale of the Gurnee branch location, of $60.5 million and
$21.8 million for 1998 and 1997, respectively. Also providing funding was the
$63.1 million in total proceeds that resulted from the sale of loans receivable,
discounted loans receivable, securities available for sale, and foreclosed real
estate in 1998. In addition to these sources of funding, the Company also uses
Federal Home Loan Bank Advances. During 1998 and 1997 the Company borrowed $20.1
million and $23.8 million from the Federal Home Loan Bank. These borrowings have
maturities ranging from daily through November of 2006. During 1998, to increase
liquidity, as well as provide more capital for the subsidiary bank, the Company
issued $17.8 million of junior subordinated debt. This debt bears interest at
11% and is due in November of 2028.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At December 31, 1998 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.
A-5
<PAGE>
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, 1998, Argo Savings' capital exceeded all capital requirements of
the OTS. Argo Savings' tangible, core, and risk-based capital ratios were 6.32%,
6.32%, and 10.54%, respectively. Argo Savings is considered "well capitalized"
under OTS prompt corrective action regulations.
At December 31, 1998, Argo Savings had outstanding loan commitments and unused
lines of credit of $27.3 million and $4.2 million, respectively. Argo Savings
also had Community Reinvestment Act investment commitments outstanding of $3.2
million. These commitments include $968,000 to be funded over 8 years for the
investment in the Chicago Equity Fund, $321,000 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, $112,500 to be funded over five years
for investment in the Kedzie Limited Partnership, and $182,000 to be funded for
investment in the Westward III Limited Partnership.
FINANCIAL CONDITION
Total assets increased $70.7 million to $307.0 million at December 31, 1998 from
$236.3 million at December 31, 1997. The increase in total assets was funded due
primarily by an increase of $60.5 million in deposits and the issuance of $17.8
million of junior subordinated debt, which were partially offset by a $9.0
million decrease in other sources of borrowed money.
Loans receivable, which include loans held for sale and discounted loans
receivable, increased $60.8 million or 33.0% in 1998 to $245.2 million at
December 31, 1998 after increasing by $11.0 million or 6.3% in 1997. The
increase in loans receivable for 1998 and 1997 is due to the origination and
purchase of seasoned fixed rate and adjustable rate loans secured by single
family residences. New originations and purchases of loans contributed $129.1,
net of proceeds of $57.1 million from the sale of similar assets. These
purchases and originations were primarily funded by principal repayments of
$75.6 million on loans receivable, discounted loans receivable and
mortgage-backed securities; an increase in deposits of $60.5 million; and the
issuance of $17.9 million of Junior Subordinated Debt, partially offset by a
$9.0 million decrease in borrowings.
Securities available for sale, which totaled $7.2 million at December 31, 1998,
are carried at fair value and include $1.9 million of mortgage-backed
securities, $2.8 million of marketable equity securities, $2.1 million of U.S
Agency securities, and $380,000 of municipal securities. The balance of
mortgage-backed securities decreased during 1998 by $1.0 million due to the sale
of $372,000 and principal repayments of $645,000. Other security categories
increased due to the purchase of $6.2 million of securities, which was offset by
sales of $2.6 million. In addition during 1998 the Company started trading
various FHLMC and FNMA stocks. At December 31, 1998, $693,000 of securities were
classified as trading.
Deposits increased $60.5 million to $233.0 at December 31, 1998 after increasing
by $21.8 million in 1997. The increase for the years is attributable to
increased focus on attracting deposits to fund loan demand.
Borrowings decreased $8.9 million to $25.2 million at December 31, 1998. The
decrease is primarily due to the increase in deposits and the issuance of $17.8
million of junior subordinated debt in November of 1998, primarily offset by
the repayment of $2.7 million of advances and a $5.3 million note payable.
Custodial escrow balances for loans serviced declined $1.1 million to $5.3
million at December 31, 1998 . 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 non-interest-bearing
accounts. The custodial accounts associated with loans or purchased mortgage
servicing rights serviced for Argo Savings are also maintained in
noninterest-bearing accounts. At December 31, 1998 and 1997, $5.3 million and
$6.4 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.
During 1998 the Company increased its authorized common shares to 9 million. In
conjunction with this the Company decalared a four for one stock split. After
restating the common shares for all periods presented for this stock split,
common shares outstanding increased 46,560 shares to 2,004,896 at December 31,
1998. The increase is due to the exercise of stock options on 42,980 shares and
the issuance of 3,580 shares under the stock purchase agreement with The Deltec
Banking Corporation Limited. The shares were issued from
A-6
<PAGE>
authorized but unissued common stock.
During 1998, the Company also increased its authorized preferred shares to
1,000,000. In addition during 1998 the Company issued goodwill preferred stock
to common stockholders of the Company. These shares entitle the holders to 75%
of any settlement damages awarded, net of any related expenses, as a result of
the Savings Bank's lawsuit against the United States seeking damages for breach
of contract related to the elimination of supervisory goodwill in the
computation of regulatory capital. See note 14 of the consolidated financial
statements for a complete discussion.
PURCHASED MORTGAGE SERVICING RIGHTS
At December 31, 1998, the Savings Bank owned directly and indirectly, $5.1
million in PMSRs. The Banks principal investments in PMSRs is through a $4.6
million equity investment in a limited partnership. The limited partnership was
established for the sole purpose of purchasing mortgage servicing rights. The
Bank's ownership of PMSRs, as well as their investment in the limited
partnership carry interest rate risk because the total amount of servicing fees
earned, as well as the amortization of the investment in the servicing rights,
fluctuates based on loan prepayments (affecting the expected average life of a
portfolio of PMSRs). The rate of prepayment of mortgage loans may be influenced
by changing national and regional trends, prevailing mortgage rates and the
housing market in general. During periods of declining interest rates, as
existed for most of 1998, many borrowers refinanced their mortgage loans.
Accordingly, prepayments of mortgage loans increased and the loan administration
income related to the mortgage loan servicing rights corresponding to a mortgage
loan ceased as underlying loans were prepaid. Consequently, the market value of
PMSRs tend to decrease during periods of declining interest rates, since greater
prepayments can be expected. The income derived from and market value of the
Bank's PMSRs and their investment in the limited partnership, therefore, may be
adversely affected during periods of declining interest rates. The Bank accounts
for its investment in the limited partnership using the equity method. Income or
loss is recorded based upon information received from Dovenmuehle Mortgage, Inc.
("DMI"), which is a Delaware Corporation engaged principally in mortgage
servicing activities. DMI obtains quarterly valuations from an independent
appraiser for each limited partnership. The general partner recorded a valuation
allowance for the twelve months ended December 31, 1998. The Bank's
proportionate share of the valuation allowance was $1.4 million for the twelve
months ended December 31, 1998. There can be no assurance that such reserves are
adequate or additional reserves will not be required in the future.
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 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 $940,000 and
$814,000 at December 31, 1998 and 1997, respectively.
The total amount of loans (excluding discounted loans) 90 days or more past due
at December 31, 1998 was $6.5 million or 2.80% of total loans receivable as
compared to $5.5 million or 3.57% on December 31, 1997. The total amount of
discounted loans 90 days or more past due at December 31, 1998 was $3.0 million
or 24.3% of total discounted loans receivable. 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.
At December 31, 1998, Argo Bancorp had 90 properties totaling $3.9 million
classified as foreclosed as compared to 113 properties totaling $4.3 million on
December 31, 1997. The underlying properties at December 31, 1998 consist
primarily of single family residences. The foreclosed real estate has been
written down to its estimated net realizable value at December 31, 1998. The
Savings Bank maintains an allowance for losses on foreclosed real estate. The
balance totaled $332,000 and $92,000 at December 31, 1998 and 1997,
respectively. The were no provisions or charge-offs recorded in 1998, compared
to $238,000 and $538,000 of provisions and charge-offs, respectively during
1997.
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<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
--------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- --------------------------
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) $194,378 16,624 8.55% $180,964 17,321 9.57% $151,384 15,057 9.95%
Mortgage-backed securities 2,284 143 6.26 4,423 292 6.60 5,294 354 6.68
Interest-earning deposits 10,066 608 6.04 6,573 364 5.54 2,103 421 4.84
Investment securities 5,428 252 4.64 5,247 289 5.51 4,176 242 5.80
----------------------------- ------------------------------ -------------------------
Total interest-earning assets 212,156 17,627 8.31 197,207 18,266 9.26 162,957 16,074 9.86
Noninterest-earning assets (2) 39,029 39,260 32,927
-------- -------- --------
Total assets $251,185 $236,467 $195,884
-------- -------- --------
-------- -------- --------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits $188,680 9,414 4.99 $165,669 8,580 5.18 $130,163 6,433 4.94
Custodial escrows -- -- -- 21 1 5.10 1,209 78 6.45
FHLB advances and other borrowings 29,260 2,091 7.15 41,140 2,705 6.58 41,909 2,572 6.14
Guaranteed preferred beneficial
interest in the Corporation's junior
subordinated debt 2,519 272 10.80
----------------------------- ------------------------------ -------------------------
Total interest-bearing liabilities 220,459 11,777 5.34 206,830 11,286 5.46 173,281 9,083 5.24
Other liabilities 12,139 11,827 10,340
-------- -------- --------
Total liabilities 232,598 218,657 183,621
Equity 18,587 17,810 12,263
-------- -------- --------
Total liabilities and equity $251,185 $236,467 $195,884
-------- -------- --------
-------- -------- --------
Net interest income/interest
rate spread (3) 5,850 2.97% 6,980 3.80% 6,991 4.62%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
Net interest-earning assets/
(liabilities)/net interest
margin (4) $ (8,303) 2.76% $(9,623) 3.54% $(10,324) 4.29%
--------- ----- -------- ----- --------- -----
--------- ----- -------- ----- --------- -----
Ratio of average interest-earning
assets to average interest-bearing
liabilities 0.96x 0.95x 0.94x
----- ----- -----
----- ----- -----
</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 $5.1 million, $6.7
million and $5.3 million in 1998, 1997, and 1996 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.
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<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31, 1997
GENERAL. Net income for the year ended December 31, 1998 was $531,000 or $.26
per share (on a diluted basis), compared to net income of $823,000 or $.39 per
share (on a diluted basis) in 1997. The decrease in net income was due to
various factors, including a decrease in the net interest margin, a loss on the
investment in limited partnership, offset by a gain on the sale of a branch
location.
INTEREST INCOME Interest income decreased by $639,000 or 3.5% to $17.6 million
for the year ended December 31, 1998 from $18.3 million for the same period last
year. The decrease was primarily the result of a 95 basis point decline in the
average yield on average interest earning assets to 8.31% in 1998 from 9.26% in
1997. This was primarily due to the decline in yield on loans receivable of 102
basis points. .Partially offsetting this decrease was an overall increase of
$14.9 million in the average balance of interest-earning assets to $212.2
million in 1998 from $197.2 million in 1997.
INTEREST EXPENSE. Interest expense increased $491,000 or 4.35% to $11.8 million
in 1998 from $11.3 million in 1997, primarily as a result of a higher average
balance of interest-bearing liabilities. The average balance of interest-bearing
liabilities increased $13.6 million to $220.5 million from $206.8 million in
1997. Partially offsetting this increase in average balances was a 12 basis
point decline in the average cost of interest-bearing liabilities to 5.34% in
1998 from 5.46% in 1997.
NET INTEREST INCOME. Net interest income decreased by $1.1 million to $5.9
million for the twelve months ended December 31, 1998 from $7.0 million for the
same period last year. The net interest margin decreased from 3.54% in 1997 to
2.76% in 1998. The interest rate spread decreased to 2.97% in 1998 from 3.80% in
1997.
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 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.
A-9
<PAGE>
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
----------------------------------- -----------------------------------
Increase (decrease) Due to Increase (decrease) Due to
----------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $1,284 $(1,981) $(697) $2,943 $(679) $2,264
Mortgage-backed securities (141) (9) (150) (58) (3) (61)
Interest-earning deposits
and investment securities 204 4 208 304 (315) (11)
- -------------------------------------------------------------------------------------------------------------------------
Total 1,346 (1,985) (639) 3,189 (997) 2,192
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 1,192 (358) 834 1,755 392 2,147
Custodial escrows (1) -- (1) (77) -- (77)
FHLB advances and other
Borrowings (782) 168 (614) (47) 180 133
- -------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated debt 272 0 272 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total 681 (190) 491 1,631 572) 2,203
- -------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 665 $(1,795) $(1,130) $1,558 $(1,569) $(11)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES. A provision of $355,000 was recorded during 1998,
resulting in an allowance for loan losses of $940,000 or .40% of total loans
receivable, excluding discounted loans receivable and 14.47% of total
non-performing loans, excluding discounted loans receivable, at December 31,
1998. The loan loss provision in 1997 was $210,000 and the allowance for loan
losses balance at December 31, 1997 was $814,000 or .53% of loans receivable,
excluding discounted loans receivable. The increase in the provision for loan
losses was primarily due to the increase in non accrual loans. Non accrual loans
increased by $993,000 during the year or 18%. 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.
NON-INTEREST INCOME. Non-interest income increased $2.1 million to $17.7 million
in 1998 from $15.6 million in 1997. This increase was primarily the result of a
$976,000 gain recorded on the sale of the Gurnee branch, a $567,000 increase in
loan servicing fees, an aggregate increase of $574,000 in gains on sale of loans
receivable, discounted loans receivable, securities available-for-sale, net
gains on trading account securities and foreclosed real estate. In addition,
data processing income increased by $1.3 million as a result of increased
revenues at the On-Line subsidiary. Other miscellaneous income also increased by
$212,000 primarily as a result of increased sales of add-on features by On-Line.
Partially offsetting the increases to non-interest income was a decline of $1.7
million in limited partnership income which was the result of losses totaling
$1.4 million recorded on the Company's investment in the limited partnership.
The general partner recorded a valuation allowance for the twelve months ended
December 31, 1998.and the Bank's proportionate share of the valuation allowance
was $1.4 million There can be no assurance that such valuation allowance is
adequate or additional valuation allowance adjustments will not be required in
the future.
NON-INTEREST EXPENSE. Non-interest expense increased by $1.4 million or 6.7% to
$22.8 million in 1998 from $21.4 million in 1997. This increase was primarily
due to a $660,000 increase in occupancy & equipment expenses and a $723,000
increase in data processing costs of services. The occupancy and equipment
increase was primarily the result of significant leasehold improvements at the
Savings Bank's Margo subsidiary, increased property tax accruals as a result of
increased assessments, hardware purchases, and software upgrades at On-Line, as
well as the opening of two permanent branch locations within the City limits of
Chicago; Illinois. The increase in data processing costs of services was due to
the growth of hardware and software sales at On-Line.
INCOME TAX EXPENSE. The Company recorded a tax benefit of $208,000 for the
twelve months ended December 31, 1998 compared to a tax provision of $123,000
for the same period in 1997. The 1998 tax benefit resulted from recognizing
low-income housing tax credits totaling $250,000. The Company has low-income
housing tax credit
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<PAGE>
carryforwards in the amount of $595,000 expiring in 2012 and 2018. In addition,
the Company has federal net operating loss carryforwards of approximately
$212,000 expiring in 2004 and state net operating loss carryforwards of
$2,628,000 expiring in 2012 through 2018.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996
GENERAL. Net income for the year ended December 31, 1997 was $823,000 or $.39
per share (on a diluted basis), compared to net income of $1.3 million, or $.90
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 1997.
NET INTEREST INCOME. Net interest income for the year remained relatively
unchanged from 1996 at $7.0 million. The net interest margin decreased from
4.29% in 1996 to 3.54% in 1997. The interest rate spread decreased to 3.80% in
1997 from 4.62% in 1996.
PROVISION FOR LOAN LOSSES. A provision of $210,000 was recorded during 1997,
resulting in an allowance for loan losses of $814,000 or .53% of total loans
receivable, excluding discounted loans receivable, and 14.73% of total
nonperforming loans, excluding discounted loans receivable, at December 31,
1997. The loan loss provision in 1996 was $248,000 and the allowance for loan
losses balance at December 31, 1996 was $665,000 or .53% of loans receivable,
excluding discounted loans receivable
NON-INTEREST INCOME. Non-interest 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 sales 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 sales of foreclosed real
estate. Offsetting these increases was a $1.6 million decrease in gains on sales
of discounted loans receivable.
NON-INTEREST EXPENSE. Non-interest 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 a non-recurring one-time charge for
legal and accounting fees. Data processing costs of services increased $1.3
million due to significant increases in hardware and software costs of sales by
On-Line as a result of growth in the hardware and software sales division. Also
contributing to the increase in data processing costs 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.
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
LEGISLATIVE MATTERS
Legislation enacted in 1996 provided that BIF and SAIF would merge by January 1,
1999, if there were no savings associations in existence on that date. Various
proposals to eliminate the federal thrift charter, create a uniform
A-11
<PAGE>
financial institutions charter and abolish the OTS have been introduced in
Congress. 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.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
Statement of Financial Accounting Standards (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value in the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will be able to reclassify
held-to-maturity securities to either trading or available-for-sale, provided
certain criteria are met. This Statement may be adopted early at the start of a
calendar quarter. Since the Company has no significant derivative instruments or
hedging activities, adoption of Statement No. 133 is not expected to have a
material impact on the Company's financial statements.
Management has not decided whether to adopt Statement No. 133 early.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available-for-sale, or, in certain
circumstances, held-to-maturity. Currently, these must be classified as trading.
Since the Company has not securitized mortgage loans, Statement No. 134 is not
expected to affect the Company.
American Institute of Certified Public Accountants Statement of Position ("SOP")
98-1, effective in 1999, sets the accounting requirements to capitalize costs
incurred to develop or obtain software that is to be used solely to meet
internal needs. Costs to capitalize are those direct costs incurred after the
preliminary project stage, up to the date when all testing has been completed
and the software is substantially ready to use. All training costs, research and
development costs, costs incurred to convert data, and all other general and
administrative costs are to be expensed as incurred. The capitalized cost of
internal-use software is amortized over its useful life and reviewed for
impairment using the criteria in Statement No. 121. Statement of Position 98-1
is not expected to have a material impact on the Company.
SOP 98-5, also effective in 1999, requires all start-up, pre-opening, and
organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. Statement of Position 98-5 is not expected to have a
material impact on the Company.
YEAR 2000 DISCUSSIONS
The year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the year 2000 from the year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems.
The federal banking regulators have recently issued guidelines establishing
minimum safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for contingencies.
The guidelines previously issued by the agencies under the auspices of the
Federal Financial Institutions Examination Council (the "FFIEC") are not
intended to replace or supplant the FFIEC guidelines which will continue to
apply to all federally insured depository institutions.
The guidelines were issued under the section 39 of the Federal Deposit Insurance
Act (the "FDIA"), as amended, which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has
been accepted by its primary federal regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth or require the institution to take any
action the regulator deems appropriate under the circumstances. In addition to
the enforcement procedures established by the regulatory guidelines there may
also be grounds for other enforcement action by the federal banking regulators,
including
A-12
<PAGE>
cease and desist orders and civil money penalty assessments.
In 1996, the Company established an internal technology committee to identify
and/or resolve issues related to the year 2000 change. This committee has
inventoried all of the systems used by the Company, and has identified those
which are deemed "critical" to its business. The committee is charged with
administering the strategic plan for Year 2000 compliance as developed by the
Company. The plan follows guidelines set forth by the FFIEC.
The status of each of the five phases of the FFIEC Year 2000 plan are:
<TABLE>
<S> <C>
1. Awareness 100% complete
2. Assessment 100% complete
3. Renovation 100% complete
4. Validation 80% complete
5. Implementation 80% complete
</TABLE>
The 20% of validation which remains consists of two issues. The Bank's General
Ledger system with updated software to accommodate Year 2000 needs to be tested
and the Bank's Fed-Line system is also scheduled to be tested in April 1999.
On-Line has initiated a Company-wide program to prepare On-Line's computer
systems and applications for the year 2000, which includes due diligence
efforts, certain program remediation, and testing of all date-sensitive hardware
and operating systems, financial application systems product offering, and other
ancillary interface applications and systems. On-Line expects to incur primarily
internal staffing and consulting services expenses related to internal Year 2000
efforts, as well as costs for software tools and a dedicated testing platform.
In addition to the direct and indirect costs necessary for On-Line to meet its
contractual and regulatory requirements for its existing and future clients to
ensure "Year 2000 Readiness", On-Line will also incur certain costs related to
optional subscription services for its clients to perform their own Year 2000
testing both at On-Line's facility and from their institution locations. Costs
associated with these optional services are expected to be offset by revenues
earned from providing these testing services.
While the Company will incur some expenses during the next year, the Company has
not identified any situations at this time that will require material cost
expenditures to become fully compliant. It is impossible at this time to
quantify the estimated future costs due to possible business disruption caused
by vendors, suppliers, customers, or even the possible loss of electric power or
phone service; however, such cost could be substantial.
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 sustained changes in interest rates on NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the 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
A-13
<PAGE>
for the value of off-balance sheet items. The following table presents the
Savings Bank's projected change in NPV for the various rate shocks as of
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Estimated increase
(decrease) IN NPV
Change in Estimated -----------------------
Interest rate NPV Amount Percent
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
1998:
400 basis point rise $9,335 $(19,421) (68)%
300 basis point rise 15,770 (12,986) (45)
200 basis point rise 21,493 (7,263) (25)
100 basis point rise 25,932 (2,824) (10)
Base scenario 28,756 -- --
100 basis point decline 29,939 1,183 4
200 basis point decline 30,471 1,715 6
300 basis point decline 31,375 2,619 9
400 basis point decline 31,863 3,107 11
- -------------------------------------------------------------------------------------------------------
1997:
400 basis point rise $19,624 $(8,816) (31)%
300 basis point rise 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>
The Savings Bank is more sensitive to a sudden rise in interest rates at
December 31, 1998 as compared to December 31, 1997. However, a decline in
interest rates would be beneficial to the Savings Bank at December 31, 1998
compared to December 31, 1997, where a decline in rates produces lower results.
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 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.
A-14
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
A-15
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS............................... A-17
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................. A-18
CONSOLIDATED STATEMENTS OF OPERATIONS.......................... A-19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY................ A-20
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... A-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... A-23
</TABLE>
A-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Argo Bancorp, Inc.
Summit, Illinois
We have audited the accompanying consolidated statement of financial condition
of Argo Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 1998 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. 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 audit. The
accompanying consolidated financial statements of the Company as of December 31,
1997, and for the two years then ended, were audited by other auditors whose
report dated March 24, 1998 expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 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, 1998 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 5, 1999
A-17
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(Dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash $ 3,276 $ 6,211
Interest-earning deposits 6,880 2,466
-------- --------
Total cash and cash equivalents 10,156 8,677
Trading account securities 693 --
Securities available-for-sale 7,208 4,974
Loans receivable, net of allowance for loan losses of $940 and $814 232,788 153,808
Discounted loans receivable, net 12,401 30,550
Stock in Federal Home Loan Bank of Chicago 1,911 3,271
Foreclosed real estate, net of allowance for losses of $332 and $92 3,875 4,251
Premises and equipment, net 10,707 11,235
Mortgage loan servicing rights 593 794
Investment in limited partnership 4,469 5,912
Software licensing rights 1,731 1,338
Debt issuance costs related to junior subordinated debt, net 1,657 --
Accrued interest receivable 2,024 1,725
Prepaid expenses and other assets 16,805 9,763
--------- ---------
Total assets $307,018 $236,298
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $232,980 $172,469
Borrowed money 25,227 34,156
Advance payments by borrowers for taxes and insurance 853 741
Accrued interest payable 661 264
Custodial escrow balances for loans serviced for others 5,340 6,400
Other liabilities 5,759 4,164
Junior subordinated debt 17,784 --
Stockholders' equity
Preferred stock 3 --
Common stock 20 5
Additional paid-in capital 8,829 8,570
Retained earnings - substantially restricted 10,084 9,915
Common stock acquired by
Employee Stock Ownership Plan -- (57)
Management Recognition Plan (284) (296)
Accumulated other comprehensive loss (238) (33)
--------- ---------
Total stockholders' equity 18,414 18,104
--------- ---------
Total liabilities and stockholders' equity $307,018 $236,298
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
A-18
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $14,445 $12,072 $11,370
Discounted loans receivable 2,179 5,249 3,687
Mortgage-backed securities available-for-sale 143 293 354
Interest-earning deposits 608 364 421
Securities available-for-sale 252 288 242
-------- -------- --------
Total interest income 17,627 18,266 16,074
-------- -------- --------
INTEREST EXPENSE
Deposits 9,414 8,580 6,433
Custodial escrows -- 1 78
Borrowed money 2,091 2,705 2,572
Junior subordinated debt 272 -- --
-------- -------- --------
Total interest expense 11,777 11,286 9,083
-------- -------- --------
NET INTEREST INCOME 5,850 6,980 6,991
Provision for loan losses 355 210 248
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,495 6,770 6,743
-------- -------- --------
NONINTEREST INCOME
Loan servicing income 1,626 962 85
Net gain (loss) on sale of
Loans held for sale 853 217 246
Discounted loans receivable 695 279 1,843
Foreclosed real estate (228) 19 (366)
Securities available-for-sale 234 710 235
Profits on trading account activity 245 -- --
Branch location 976 -- --
Fees and service charges 702 477 520
Data processing income 12,800 11,528 11,111
Net income (loss) on investment in limited partnership (1,399) 341 352
Other 1,171 1,052 168
-------- -------- --------
Total noninterest income 17,675 15,585 14,194
-------- -------- --------
NONINTEREST EXPENSE
Compensation and benefits 8,828 8,799 8,731
Occupancy and equipment 5,596 4,930 4,260
Federal deposit insurance premiums 112 102 1,072
Loan expense 816 620 218
Professional fees 992 1,261 788
Advertising and promotion 344 382 305
Goodwill amortization 102 104 108
Data processing cost of services 3,529 2,806 1,542
Software expense 1,379 865 705
Other 1,149 1,540 1,531
-------- -------- --------
Total noninterest expense 22,847 21,409 19,260
-------- -------- --------
Income before income taxes 323 946 1,677
Income tax expense (benefit) (208) 123 343
-------- -------- --------
Net income $ 531 $ 823 $ 1,334
-------- -------- --------
-------- -------- --------
Per share amounts
Basic $ .27 $ .43 $ 1.07
Diluted .26 .39 .90
</TABLE>
See accompanying notes to consolidated financial statements.
A-19
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Years ended December 31, 1998, 1997,
and 1996 (Dollars in thousands, except per
share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Common Accumulated
Stock Stock Other Com- Total
Additional Acquired Acquired Prehensive Stock-
Preferred Common Paid-in Retained by by Income Holders'
Stock Stock Capital Earnings Esop Mrp (Loss) Equity
--------- ------ ---------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ 3 $2,739 $8,322 $(177) $ (50) $ 42 $10,879
Comprehensive income:
Net income -- -- -- 1,334 -- -- -- 1,334
Other comprehensive loss -- -- -- -- -- -- (30) (30)
--------
Total comprehensive income 1,304
Proceeds from issuance of stock -- 1 4,026 -- -- -- -- 4,027
Release of ESOP shares -- -- 38 -- 60 -- -- 98
Proceeds from exercise of stock
options -- -- 430 -- -- -- -- 430
Tax benefits of stock options exercised -- -- 149 -- -- -- -- 149
Cash dividends ($.175 per share) -- -- -- (212) -- -- -- (212)
Purchase of additional MRP shares -- -- -- -- -- (115) -- (115)
------- ------ -------- ------- -------- ------ ------ --------
Balance at December 31, 1996 -- 4 7,382 9,444 (117) (165) 12 16,560
Comprehensive income:
Net income -- -- -- 823 -- -- -- 823
Other comprehensive loss -- -- -- -- -- -- (45) (45)
-------
Total comprehensive income 778
Proceeds from issuance of stock -- 1 411 -- -- -- -- 412
Release of ESOP shares -- -- 50 -- 60 -- -- 110
MRP stock awards earned -- -- -- -- -- 12 -- 12
Proceeds from exercise of stock
options -- -- 525 -- -- -- -- 525
Tax benefits of stock options
exercised -- -- 145 -- -- -- -- 145
Cash dividends ($.18 per share) -- -- -- (352) -- -- -- (352)
Purchase of additional MRP shares -- -- -- -- -- (486) -- (486)
Proceeds from sale of MRP shares -- -- 57 -- -- 343 -- 400
------- ------ -------- ------- -------- ------ ------ -------
Balance at December 31, 1997 -- 5 8,570 9,915 (57) (296) (33) 18,104
Comprehensive income:
Net income -- -- -- 531 -- -- -- 531
Other comprehensive loss -- -- -- -- -- -- (205) (205)
-------
Total comprehensive income 326
Release of ESOP shares -- -- 48 -- 57 -- -- 105
MRP stock awards earned -- -- -- -- -- 12 -- 12
Proceeds from exercise of stock
options -- -- 186 -- -- -- -- 186
Tax benefits of stock options
exercised -- -- 40 -- -- -- -- 40
Four-for-one stock split -- 15 (15) -- -- -- -- --
Preferred stock dividend 3 -- -- (3) -- -- -- --
Cash dividends ($.185 per share) -- -- -- (359) -- -- -- (359)
------- ------ -------- ------- -------- ------ ------ --------
Balance at December 31, 1998 $ 3 $20 $8,829 $10,084 $ -- $(284) $(238) $18,414
------- ------ -------- ------- -------- ------ ------ --------
------- ------ -------- ------- -------- ------ ------ --------
</TABLE>
See accompanying notes to consolidated financial statements.
A-20
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 531 $ 823 $ 1,334
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization 2,154 2,176 1,435
Accretion of discounts and deferred loan fees (1,867) (1,032) (774)
Deferred income tax expense (benefit) (534) (249) 261
Provision for losses on loans receivable
and foreclosed real estate 355 248 487
Loss (gain) on sale of
Loans held for sale (853) (217) (246)
Discounted loans receivable (695) (279) (1,843)
Securities available-for-sale (234) (710) (235)
Trading account securities (245) -- --
Foreclosed real estate 228 (19) 366
Branch location (976) -- --
Net change in trading account activity (448) -- --
Net change in investment in limited partnership 1,443 (1,731) (1,231)
Loans originated and purchased for sale, net (33,751) 25,884 12,359
Proceeds from sale of discounted loans receivable 10,827 20,990 9,358
Goodwill amortization 102 104 108
Amortization of purchased loan servicing rights 201 169 --
MRP stock and ESOP shares earned 117 122 98
Decrease (increase) in accrued interest receivable and
prepaid expenses and other assets (5,489) 1,571 (3,689)
Increase (decrease) in accrued interest payable
and other liabilities 1,433 (736) 1,500
-------- -------- --------
Net cash from operating activities (27,701) 47,114 19,288
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated and purchased for portfolio, net (37,708) (61,368) (54,382)
Proceeds from maturities of and principal
repayments on securities available-for-sale 645 855 1,360
Proceeds from sale of
Securities available-for-sale 2,993 8,668 742
Stock in Federal Home Loan Bank of Chicago 1,360 157 --
Foreclosed real estate 3,010 4,543 1,968
Purchased loan servicing rights -- 120 --
Premises and equipment 89 -- 19
Gurnee branch, net of cash and cash equivalents (11,965) -- --
Purchase of
Securities available-for-sale (6,157) (8,088) (152)
Premises and equipment (2,065) (3,553) (5,849)
Stock in Federal Home Loan Bank of Chicago -- -- (759)
Net cash received in purchase of subsidiary -- -- 67
Software licensing rights (393) -- --
Cash paid to former stockholders of On-Line (454) -- --
-------- -------- --------
Net cash from investing activities (50,645) (58,666) (56,986)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
A-21
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 73,760 $ 21,842 $ 27,143
Proceeds from borrowed money 74,003 88,433 118,671
Repayment of borrowed money (82,932) (105,156) (105,974)
Proceeds from issuance of junior subordinated debentures,
net of debt issuance expenses 16,115 -- --
Purchase of MRP shares -- (486) (115)
Proceeds from stock issuance -- 412 4,027
Proceeds from sale of MRP stock -- 400 --
Proceeds from exercise of stock options 186 525 430
Dividends paid (359) (352) (212)
Net change in advance payment by borrowers for taxes
and insurance 112 717 (143)
Net change in custodial balances for loans serviced (1,060) 618 (3,914)
--------- --------- ---------
Net cash from financing activities 79,825 6,953 39,913
--------- --------- ---------
Net change in cash and cash equivalents 1,479 (4,599) 2,215
Cash and cash equivalents at beginning of year 8,677 13,276 11,061
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,156 $ 8,677 $ 13,276
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 11,380 $ 11,196 $ 8,980
Income taxes 15 76 400
Supplemental disclosure of noncash investing and
financing activities
Sale of Gurnee branch
Assets sold $ 351 $ -- $ --
Cash paid 12,316 -- --
--------- --------- ---------
Net liabilities sold $ 11,965 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Transfer of loans to foreclosed real estate 3,102 4,955 4,285
</TABLE>
See accompanying notes to consolidated financial statements.
A-22
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include Argo Bancorp, Inc. (Argo Bancorp or the Company) and its
wholly-owned subsidiaries, Argo Federal Savings Bank, FSB (Argo Savings or the
Savings Bank) and On-Line Financial Services, Inc. (On-Line); 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. Intercompany transactions and balances are eliminated in
consolidation.
The Company, through its subsidiaries, provides a full range of financial
services and data processing services through its locations in Cook County,
Illinois. The Savings Bank's primary business is the solicitation of savings
deposits from the general public and the purchase or origination of loans
secured by one-to-four-family residential real estate. In addition, the Savings
Bank sells mortgage loans on a service released basis into the secondary market,
has an ATM network, and has investments in a partnership which owns purchased
mortgage servicing rights. Through its nonbank subsidiaries, the Savings Bank
also provides mortgage banking activities that focus on the purchase and sale of
mortgage loans into the secondary market. On-Line provides a full range of
computer services to bank, thrift, and other clients. In addition, through the
Company's joint venture, the Company is involved in the purchase and disposition
of discounted loans.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments, amortization period of debt issuance costs, amortization of
software licensing rights, and valuation of the limited partnership investment
are particularly subject to change.
SECURITIES: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are carried at fair value,
with unrealized holding gains and losses, net of taxes, reported in other
comprehensive income. Trading securities are carried at fair value, with changes
in unrealized holding gains and losses included in income. Other securities such
as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
(Continued)
A-23
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities.
LOANS: Loans are reported at the principal balance outstanding, net of unearned
discounts, deferred loan fees and costs, and an allowance for loan losses. Loans
held for sale are reported at the lower of cost or market, on an aggregate
basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
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.
There was no impairment expense recorded in 1998, 1997, or 1996.
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.
(Continued)
A-24
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FORECLOSED REAL ESTATE: Foreclosed real estate acquired through or instead of
loan foreclosure is initially recorded at fair value when acquired, establishing
a new cost basis. If fair value declines, a valuation allowance is recorded
through expense. Costs after acquisition are expensed.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the asset useful lives
on a straight-line basis.
INVESTMENT IN LIMITED PARTNERSHIP: The investment in limited partnership is
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
at least annually by the partnership.
SERVICING RIGHTS: The Company does not service loans sold. Purchased servicing
rights are recognized as assets and expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated based on
the fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
SOFTWARE LICENSING RIGHTS: The cost of software licensing rights acquired and
other product conversion costs at On-Line are capitalized and amortized to
expense on a straight-line basis over periods of 5 to 7 years.
INTANGIBLES: 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.
INCOME TAXES: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
CASH AND CASH EQUIVALENTS: Cash and interest-earning deposits with banks with
original maturities less than 90 days are considered to be cash and cash
equivalents. The Company reports net cash flows for customer loan and deposit
activity.
(Continued)
A-25
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 dilutive effects of outstanding stock options
and the management retention plan.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale, net of tax, which are also recognized
as separate components of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior information
restated to be comparable.
INDUSTRY SEGMENTS: Internal financial information is primarily reported and
aggregated into four lines of business; banking, acquisition of discount loans,
mortgage banking, and data processing.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties, and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Mortgage loans originated in mortgage banking can be converted into securities,
although the Company has historically had no such securitizations. A new
accounting standard for 1999 will allow classifying these securities as
available-for-sale, trading, or held-to-maturity, instead of the current
requirement to classify as trading. This is not expected to have a material
effect but the effect will vary depending on the level and designation of
securitizations as well as on market price movements.
RECLASSIFICATION: Certain reclassifications have been made to the 1996 and 1997
information to make it comparable with the 1998 presentation.
(Continued)
A-26
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - ACQUISITION OF ON-LINE FINANCIAL SERVICES, INC.
On-Line was purchased by Argo Bancorp, effective October 30, 1995. The
acquisition was accounted for using the purchase method of accounting.
The purchase transaction was consummated through the use of a wholly-owned
subsidiary of Argo Bancorp, 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 1997. In addition, Argo Bancorp received $133,927
prior to 1998 from the stock it held in the Illinois Service Corporation, which
owned shares of On-Line.
Financial terms of the transaction included a cash sweep to stockholders 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 structured payment schedule requires payments as
a percent of net revenues. The payment schedule requires 10.5% of net revenues
in year 1, 15.5% in years 2 and 3, and 11.0% in years 4 through 7. The total
transaction value, including asset notes and contingent payments, will not
exceed $8.9 million.
During 1997, Argo Bancorp asserted claims that the selling stockholders of
On-Line had breached certain representations and warranties in the purchase
contract. Following a series of negotiations, the selling stockholders agreed to
reduce the purchase price by $1,098,000. During 1998, Argo Bancorp paid $454,000
in contingent payments to the former stockholders for the periods ended October
31, 1997 and 1996 and accrued the October 31, 1998 contingent payment payable,
to be paid in 1999, of $592,000.
In 1997 and 1998, Argo Bancorp purchased from certain former On-Line
stockholders their rights to 33% of the future contingent payments and increased
goodwill. Argo Bancorp paid $196,000 for these future contingent payments. At
December 31, 1998, the maximum amount of future contingent payments approximates
$2,500,000. The actual amount to be paid will be impacted by future revenue
streams and potential purchases of former stockholders' rights to contingent
payments.
(Continued)
A-27
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
----------------------December 31, 1998 -----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Municipal securities $ 370 $ 10 $ -- $ 380
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 110 -- (1) 109
Federal National Mortgage
Association 1,827 3 (8) 1,822
U.S. agency securities 2,091 -- (3) 2,088
Marketable equity securities 3,195 5 (391) 2,809
----------- ----------- ----------- -----------
$ 7,593 $ 18 $ (403) $ 7,208
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------December 31, 1997-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
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>
The amortized cost and fair value of securities available-for-sale, by
contractual maturity, at December 31, 1998 are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
(Continued)
A-28
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE-FOR-SALE (Continued)
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
(In Thousands)
<S> <C> <C>
Due in one year or less $ 1,591 $ 1,590
Due after five years through ten years 695 698
Due after ten years 175 180
----------- -----------
2,461 2,468
Mortgage-backed securities 1,937 1,931
Marketable equity securities 3,195 2,809
----------- -----------
$ 7,593 $ 7,208
----------- -----------
----------- -----------
</TABLE>
Proceeds from sales of securities available-for-sale for the years ended
December 31, 1998, 1997, and 1996 were $2,993,000, $8,668,000, and $742,000.
Gross gains of $234,000, $710,000, and $235,000 were recorded during 1998, 1997,
and 1996. There were no realized losses on security sales during these years.
NOTE 4 - LOANS RECEIVABLE
Loans receivable and loans held for sale, net, are summarized as follows:
<TABLE>
<CAPTION>
----------December 31,--------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
First mortgage loans $ 198,178 $ 111,404
Participating investment in first mortgage loans 22,701 31,059
Commercial real estate loans 1,390 1,951
Equity line of credit loans 3,521 7,700
Other loans 8,493 3,649
------------ ------------
Total gross loans receivable 234,283 155,763
Add (deduct)
Allowance for loan losses (940) (814)
Deferred loan costs 1,208 681
Unearned discounts (1,763) (1,822)
------------ ------------
$ 232,788 $ 153,808
------------ ------------
Weighted-average interest rate 7.84% 9.57%
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-29
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Included in first mortgage loans are loans held for sale totaling approximately
$31.0 million and $6.5 million at December 31, 1998 and 1997.
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 814 $ 665 $ 587
Provision for loan losses 355 210 248
Allowance on acquired loans 30 -- -
Transfer to allowance for losses on
foreclosed real estate (240) (50) (77)
Charge-offs (19) (11) (93)
----------- ----------- -----------
Balance at end of year $ 940 $ 814 $ 665
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Loans receivable on nonaccrual are as follows:
<TABLE>
<CAPTION>
Percentage
of Loans
Number Receivable,
of Net of
Loans Amount Discount
----- ------ --------
(In Thousands)
<S> <C> <C> <C>
December 31, 1998 105 $ 6,518 2.80%
December 31, 1997 104 5,525 3.57
</TABLE>
First mortgage loans at December 31, 1998 include approximately $129.3 million
in out-of-area purchased participation and whole loans, which are secured by
single-family homes, with approximately 13% in California, 7% in New York, and
80% spread throughout the remainder of the country. There is no geographic
concentration of nonperforming loans.
- --------------------------------------------------------------------------------
(Continued)
A-30
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 5 - DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net, are as follows:
<TABLE>
<CAPTION>
----------December 31,--------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
First mortgage loans $ 15,018 $ 36,310
Other loans -- 460
------------ ------------
Total discounted loans receivable 15,018 36,770
Less unearned discount (2,617) (6,220)
------------ ------------
$ 12,401 $ 30,550
------------ ------------
------------ ------------
</TABLE>
Discounted loans receivable on nonaccrual are as follows:
<TABLE>
<CAPTION>
Percentage
of Discount
Number Loans
of Loans Amount Receivable
-------- ------ ----------
(In Thousands)
<S> <C> <C> <C>
December 31, 1998 83 $ 3,019 24.34%
December 31, 1997 152 6,220 20.36
</TABLE>
NOTE 6 - ALLOWANCE FOR LOSSES ON FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate is summarized as
follows:
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 92 $ 189 $ 412
Provision for losses -- 38 238
Transfer from allowance for loan losses 240 50 77
Charge-offs -- (185) (538)
----------- ----------- -----------
Balance at end of year $ 332 $ 92 $ 189
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-31
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment, net, are summarized as follows:
<TABLE>
<CAPTION>
----------DECEMBER 31,-------
1998 1997
(In Thousands)
<S> <C> <C>
Land $ 537 $ 537
Office buildings and improvements 4,159 4,075
Leasehold improvements 2,060 1,994
Furniture, fixtures, and equipment 17,804 17,082
Capital leases 5,698 6,593
----------- -----------
30,258 30,281
Less accumulated depreciation and amortization (19,551) (19,046)
----------- -----------
$ 10,707 $ 11,235
----------- -----------
----------- -----------
</TABLE>
Included in occupancy and equipment expense is depreciation and amortization
expense of office properties and equipment of approximately $2,154,000,
$2,176,000, and $1,435,000 for the years ended December 31, 1998, 1997, and
1996. 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, 1998, the Company had capital lease obligations of $5.7 million
relating to lease agreements for equipment and other space in connection with
On-Line. Interest expense with respect to these capital leases totaled $346,000,
$402,000 and $207,000 in 1998, 1997, and 1996 and is included with borrowed
money interest expense.
The Company leases office space and computer equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1998, 1997, and
1996 totaled $508,000, $503,000, and $574,000.
At December 31, 1998, 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:
- --------------------------------------------------------------------------------
(Continued)
A-32
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 7 - PREMISES AND EQUIPMENT (Continued)
<TABLE>
<CAPTION>
Year Ended December 31 Operating Capital
---------------------- --------- -------
(In Thousands)
<S> <C> <C>
1999 $ 403 $ 1,155
2000 421 958
2001 440 933
2002 456 574
2003 408 310
Thereafter 1,070 -
---------- -----------
Total minimum lease payments $ 3,199 3,930
----------
----------
Amount representing interest - capital leases 619
-----------
Present value of minimum capital lease payments $ 3,311
-----------
-----------
</TABLE>
NOTE 8 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND
INVESTMENT IN LIMITED PARTNERSHIP
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 $3.8 million, $9.1 million, and $8.9 million
at December 31, 1998, 1997, and 1996.
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, 1998 and 1997,
Argo Savings held $593,000 and $794,000 in purchased mortgage servicing rights
(PMSRs) with underlying principal balances of approximately $46.8 million and
$62.2 million. During the year ended December 31, 1997, PMSRs totaling $120,000
with an underlying principal balance of $9.2 million were sold at cost by the
Savings Bank. There were no sales of purchased mortgage servicing rights for the
years ended December 31, 1998 and 1996.
The balance of investment in limited partnership of $4.5 million and $5.9
million at December 31, 1998 and 1997 represents Argo Savings' investment in
three divisions of a single limited partnership. 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 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 PMSRs, the
collateral underlying the equity investment is the
- --------------------------------------------------------------------------------
(Continued)
A-33
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 8 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND
INVESTMENT IN LIMITED PARTNERSHIP (Continued)
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. During 1998,
the net loss for the partnership resulted from the impairment of the PMSRs at
the partnership level, due to a decrease in the appraised value of the PMSRs,
which exceeded income from the partnership.
NOTE 9 - DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
------------------1998------------------ ------------------1997-----------------
Amount Percent Weighted Amount Percent Weighted
in of Average in of Average
Thousands Total Rate Thousands Total Rate
--------- ----- ---- --------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing $ 18,244 7.8% --% $ 4,496 2.6% --%
Passbook accounts 21,307 9.1 2.78 17,607 10.2 2.63
NOW accounts 9,045 3.9 1.97 8,729 5.1 2.48
Money market accounts 4,706 2.0 3.57 6,223 3.6 3.50
----------- ---------- ----------- ----------
53,302 22.8 2.43 37,055 21.5 2.72
----------- ---------- ----------- ----------
Certificate accounts:
3.99% or less -- -- -- 10 -- 2.50
4.00 - 4.99% 28,491 12.2 4.72 874 .5 4.85
5.00 - 5.99% 139,039 59.7 5.52 62,935 36.5 5.50
6.00 - 6.99% 11,665 5.0 6.29 69,962 40.5 6.17
7.00 - 7.99% 475 .3 7.28 1,513 .9 7.05
8.00 - 8.99% 8 -- 8.53 120 .1 8.44
----------- ---------- ----------- ----------
179,678 77.2 5.45 135,414 78.5 5.85
----------- ---------- ----------- ----------
$ 232,980 100.0% 4.76% $ 172,469 100.0% 5.18%
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
Contractual maturities of certificate accounts at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Under 12 months $ 154,178 $ 116,154
12 months to 36 months 22,142 13,313
Over 36 months 3,358 5,947
------------ ------------
$ 179,678 $ 135,414
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-34
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS (Continued)
The Savings Bank has pledged investment securities of approximately $6,379,000
and $3,022,000 at December 31, 1998 and 1997 as collateral to secure certain
public deposits. In addition to securities at December 31, 1998 and 1997, the
Savings Bank also had letters of credit totaling $13,260,000 and $15,402,000 as
collateral to secure several State of Illinois certificates. The total State of
Illinois certificates secured by letters of credit and securities totaled
approximately $15,102,000 and $14,100,000. The aggregate amount of deposit
accounts with a balance greater than $100,000 was $60,348,000 and $40,607,000 at
December 31, 1998 and 1997.
Interest expense on deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
----------YEAR ENDED DECEMBER 31,---------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Passbook and certificate accounts $ 8,960 $ 8,064 $ 5,934
NOW accounts 230 270 282
Money market accounts 224 246 217
----------- ----------- -----------
$ 9,414 $ 8,580 $ 6,433
----------- ----------- -----------
----------- ----------- -----------
NOTE 10 - BORROWINGS
During 1998, the Company issued 11% junior subordinated debentures aggregating
$17,784,000 to Argo Capital Trust Company (Trust). The Trust issued 11% capital
securities with an aggregate liquidation amount of $17,250,000 ($10 per capital
security) to third-party investors. The capital securities and cash are the sole
assets of the Trust. The junior subordinated debentures are includable as Tier I
capital for regulatory capital purposes. The offering price was $10 per capital
security. The junior subordinated debentures and the capital securities pay
dividends and distributions, respectively, on a quarterly basis, which are
included in interest expense. The Trust is a statutory business trust formed
under the laws of the State of Delaware wholly owned by the Company. The junior
subordinated debentures will mature on November 6, 2028, at which time the
capital securities must be redeemed. The junior subordinated debentures and
capital securities can be redeemed contemporaneously, in whole or in part,
beginning November 6, 2003 at a redemption price of $10 per capital security.
The Company has provided a full and unconditional guarantee of the obligations
of the Trust under the capital securities in the event of the occurrence of an
event of default, as defined. Debt issuance costs totaling $1,669,000 were
capitalized related to the debenture offering and are being amortized over the
30-year life of the junior subordinated debentures.
- --------------------------------------------------------------------------------
(Continued)
A-35
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 10 - BORROWINGS (Continued)
Borrowed money at December 31 is summarized as follows:
Weighted Interest Rate Balance
December 31, December 31,
Maturity 1998 1997 1998 1997
-------- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank of Chicago
Open line 5.23% 6.24% $ 2,300 $ 6,000
2/21/00 5.48 5.48 5,000 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
-------- ---------- ---------- ----------
6.10 6.22 20,132 23,832
-------- ---------- ---------- ----------
Other borrowings
ESOP note payable -- 8.08 -- 57
Note payable Open line -- 8.44 -- 5,279
Note payable Open line 7.75 8.44 865 830
Margin account Open line 7.28 8.49 319 329
Capital lease obligations
(see Note 7) Various 8.75 8.96 3,311 3,829
Federal funds purchased Daily 5.50 -- 600 -
-------- ---------- ---------- ----------
7.71 8.63 5,095 10,324
-------- ---------- ---------- ----------
8.31% 6.95% $ 25,227 $ 34,156
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
The required aggregate principal balance of first mortgage loans securing
advances is determined by the Federal Home Loan Bank (FHLB). At December 31,
1998 and 1997, approximately $48 million and $56 million, respectively, of loans
were pledged and delivered to the FHLB. In addition, 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 also
pledged as collateral for these advances.
The open line with the Federal Home Loan Bank of Chicago (FHLB) bears interest
at a rate that adjusts daily. All other FHLB advances are at fixed interest
rates.
- --------------------------------------------------------------------------------
(Continued)
A-36
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 10 - BORROWINGS (Continued)
The note payable of $865,000 at December 31, 1998 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 is the
lender's prime rate.
The margin account loan is from a third-party securities broker. The rate of
interest on the loan is 2% over a rate negotiated with the broker (7.28% at
December 31, 1998). The margin account loan was secured at December 31, 1998 by
securities held by the broker having a market value of $1.5 million.
During 1998, the Company used a portion of the proceeds from the issuance of the
junior subordinated debentures to repay and retire its open line of credit of
$6,000,000 which the Company had with a third-party financial institution.
NOTE 11 - INCOME TAXES
The provision for federal and state income tax expense consists of the
following:
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Federal
Current $ 171 $ 496 $ 82
Deferred (413) (242) 261
----------- ----------- -----------
(242) 254 343
State
Current 155 (124) -
Deferred (121) (7) -
----------- ----------- -----------
Total income tax expense (benefit) $ (208) $ 123 $ 343
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are summarized as follows:
- --------------------------------------------------------------------------------
(Continued)
A-37
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
----------December 31,--------
1998 1997
(In Thousands)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 207 $ 91
Unused tax credit 595 212
Allowance for loan losses 515 374
Depreciation -- 215
Unrealized loss on securities
available-for-sale 146 20
Other -- 20
----------- -----------
Gross deferred tax assets 1,463 932
----------- -----------
Deferred tax liabilities
Excess tax bad debt deduction (26) (31)
Limited partnership interest (593) (1,116)
Depreciation (250) --
Other (224) (75)
----------- -----------
Gross deferred tax liabilities (1,093) (1,222)
----------- -----------
Net deferred tax asset (liability) $ 370 $ (290)
----------- -----------
----------- -----------
</TABLE>
The effective income tax rate differs from the statutory federal tax rate of
34%. The major reasons for this difference for the years ended December 31
follow:
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate $ 110 $ 321 $ 570
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net 35 35 37
Net decrease in valuation allowance -- -- (62)
Municipal interest, net (11) (14) (14)
Tax credits (204) (208) (179)
Other (138) (11) (9)
----------- ----------- -----------
Income tax expense (benefit) $ (208) $ 123 $ 343
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-38
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
At December 31, 1998, Argo Bancorp has federal net operating loss carryforwards
available of approximately $212,000 expiring in 2004. Utilization of these net
operating losses is limited to approximately $55,000 per year. At December 31,
1998, state net operating loss carryforwards of $2,628,000 were available for
future use.
These net operating losses expire from 2012 through 2018.
At December 31, 1998, Argo Bancorp has low income housing and alternative
minimum tax credit carryforwards in the amount of $595,000 expiring in 2012 and
2018.
Retained earnings at December 31, 1998 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.
NOTE 12 - EMPLOYEE BENEFIT PLANS
All share and per-share information within this footnote reflects the 1998
four-for-one stock split.
401(K) PLAN AND TRUST
The Argo Federal Savings 401(k) 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 (IRS) limitations. Discretionary matching contributions
of 50% of each participant's contribution up to 12% may be made by the Savings
Bank each plan year. The Savings Bank made contributions of $71,000, $82,000,
and $73,000 to the plan for the years ended December 31, 1998, 1997, and 1996.
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. Discretionary matching contributions of 50% of each participant's
contribution up to 6% of participant contributions are made by On-Line each plan
year. On-Line made contributions of $60,000, $49,000 and $81,000, to the plan
for the years ended December 31, 1998, 1997, and 1996.
- --------------------------------------------------------------------------------
(Continued)
A-39
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
In conformity with 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.
- --------------------------------------------------------------------------------
(Continued)
A-40
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN
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 (20,932 shares at $2.88 per share). The ESOP subsequently
borrowed additional funds from the same third-party lender in the amount of
$245,000 in order to purchase an additional 52,080 shares at an average price of
$4.70 per share. All ESOP debt was paid off during 1998. At December 31, 1997,
the unpaid balance of the ESOP loan was included in borrowed money on the
consolidated statements of financial condition, and stockholders' equity was
reduced by a similar amount. Contributions of $60,000, $67,000, and $72,000 were
made to the ESOP to fund principal and interest payments for the years ended
December 31, 1998, 1997, and 1996. Selected ESOP information at December 31,
1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Shares allocated 73,909 63,424
Unearned shares 1,443 9,588
----------- -----------
Total ESOP shares 75,352 73,012
----------- -----------
----------- -----------
Total value of unearned shares $ 13,709 $ 93,483
----------- -----------
----------- -----------
</TABLE>
In addition, during 1998, in connection with the preferred stock issue of
goodwill (see Note 14), 18,838 shares of preferred stock were contributed to the
ESOP. At December 31, 1998, the total allocated preferred shares were 18,618 and
the unallocated shares were 220.
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 allocated and 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.
On-Line does not offer an ESOP for its employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
- --------------------------------------------------------------------------------
(Continued)
A-41
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
MANAGEMENT RECOGNITION PLAN
The Board of Directors of the Savings Bank formed a Management Recognition Plan
and Trust (MRP) effective October 31, 1991, which purchased 6.8%, or 61,600
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
11,960 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 are fully vested.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 97,992. An additional
15,188 and 7,628 shares were purchased in 1996 and 1995 under the MRP. During
the year ended December 31, 1997, the Company sold 22,416 shares held by the
Savings Bank MRP for $219,000, reducing the total shares held by the plan to
400. The proceeds from this transaction were recorded as an increase in capital
at December 31, 1997. None of the remaining shares have been awarded.
The Board of Directors of Argo Bancorp formed a new MRP effective September 1,
1996, which purchased 50,000 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, 6,300 shares were awarded to certain key On-Line
employees. The awards vest over a five-year period, the aggregate purchase price
of shares awarded in being expensed as a portion of annual compensation, and the
remaining cost is reflected as a reduction of stockholders' equity. The expense
totaled $12,000 for the years 1998 and 1997. No MRP shares were awarded during
the years ended December 31, 1998 and 1996. Also during the year ended December
31, 1997, the Company sold 18,608 shares held by the Argo Bancorp MRP plan for
$181,000, reducing the total shares held by the plan to 31,392, including the
6,300 awarded shares. 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 429,800 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 429,800 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 ($3.84 per
share). During 1998, 1997, and 1996, 42,980, 95,988, and 91,888 of the options
were exercised. The weighted
- --------------------------------------------------------------------------------
(Continued)
A-42
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
average exercise price for the options exercised in 1998, 1997, and 1996 was
$3.60, $3.85, and $4.19. At December 31, 1998, options to purchase 171,468
shares were outstanding, at an average price of $5.90.
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 429,800 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. Options for 4,000 shares were granted in 1997. At December 31, 1997, the
Board of Directors approved a resolution to discontinue any further grants under
this plan. At December 31, 1998, 252,400 options for shares had 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 ($6.02 per share). During 1998, 1997, and 1996, 3,580, 34,000,
and 12,800, of the options were exercised. The weighted average exercise price
for options exercised in 1998, 1997, and 1996 was $8.87, $4.56, and $3.58. At
December 31, 1998, options to purchase 199,600 shares were outstanding at an
average price of $6.02.
Argo Bancorp's Board of Directors adopted the 1998 Incentive Stock Option Plan
for Employees in 1998, under which up to 400,000 shares of Argo Bancorp's common
stock were reserved for issuance by Argo Bancorp upon exercise of stock options
to be granted to employees from time to time. At December 31, 1998, 12,000
options for shares have been awarded by Argo Bancorp under the plan. The
exercise price for the options awarded was equal to the fair market value of the
common stock on the date of grant ($8.625). The weighted average exercise price
for options exercised in 1998 was $8.625.
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 1991 Stock
Option Plans, but are eligible under the 1998 Incentive Stock Option Plan for
Employees.
The Company applies ABP Opinion No. 25 in accounting for the Stock Option Plans
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. 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:
- --------------------------------------------------------------------------------
(Continued)
A-43
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net income
As reported $ 531 $ 823 $ 1,334
Pro forma 515 583 1,115
Earnings per share
Basic
As reported .27 .43 1.07
Pro forma .26 .30 .89
Diluted
As reported .26 .39 .90
Pro forma .25 .28 .75
</TABLE>
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 1998, 1997, and 1996:
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2.07% 2.13% 2.37%
Risk-free interest rate 5.50% 6.11% 6.10%
Weighted average expected life 8 years 8 years 8 years
Expected volatility 13.93% 6.70% 6.95%
</TABLE>
The weighted average per share fair values of options granted during 1998, 1997,
and 1996 were $2.11, $2.68, and $2.50.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of its business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations of interest rates. These
financial 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.
- --------------------------------------------------------------------------------
(Continued)
A-44
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
Commitments to originate fixed and adjustable rate mortgage loans amounted to
approximately $22.2 million and $5.1 million, respectively, at December 31,
1998. The fixed rate commitments have rates ranging from 5.88% to 9.50%. These
commitments represent amounts which the Savings Bank plans to fund in its normal
commitment period. the Company evaluates each customer's creditworthiness on a
case-by-case basis.
Unused lines of credit amounted to approximately $4.2 million as of December 31,
1998. 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.
NOTE 14 - CAPITAL MATTERS
During 1998, the Board of Directors authorized, and the stockholders approved,
an increase to 10,000,000 in the aggregate number of shares of all classes of
capital stock which the Company has authority to issue. Of these shares,
9,000,000 are to be shares of common stock, $.01 par value per share, and
1,000,000 are to be shares of serial preferred stock, $.01 par value per share.
Concurrently, the Board authorized cancellation of the Class B, Class C, and
Class D common stock, resulting in only Class A common stock being authorized.
The Board of Directors also approved a four-for-one stock split of common stock
during 1998, and all earnings per share and dividends per share information has
been restated to reflect this stock split.
During 1998, the Company declared a dividend of goodwill convertible preferred
stock to all holders of common stock of the Company as of August 24, 1998 on a
share-for-share basis. As a result, 592,681 shares of goodwill preferred stock
were issued to holders of common stock as of August 31, 1998. The goodwill
preferred stock entitles the holders thereof to 75% of any settlement damages
awarded upon a final judgment to the Savings Bank, net of expenses and certain
other items, as a result of the Savings Bank's lawsuit against the United States
seeking damages for breach of contract related to the elimination and exclusion
of supervisory goodwill in the computation of the Savings Bank's regulatory
capital in connection with the Company's acquisition of the Savings Bank in
November 1998 ("Goodwill Litigation"). At the time of the final judgment and
award of damages, if any, the goodwill preferred stock will either be (1)
redeemed by the Company for cash or (2) become convertible into common stock.
The Company will be entitled to retain the remaining 25% of any damages awarded
to the Savings Bank, net of expenses and certain other items, in the Goodwill
Litigation.
- --------------------------------------------------------------------------------
(Continued)
A-45
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 14 - CAPITAL MATTERS (Continued)
Information regarding Class A common stock at December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Par value per share $ .01 $ .01
Authorized shares 9,000,000 3,020,000
Shares issued 2,004,896 489,584
</TABLE>
Information regarding preferred stock at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Par value per share $ .01 $ .01
Authorized shares 1,000,000 500,000
Shares issued 592,681 -
</TABLE>
At December 31, 1997, Class B, Class C, and Class D common stock each had a par
value of $.01 per share, with no shares outstanding. The authorized shares of
each issue were 340,000, 340,000, and 800,000, respectively.
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 Savings Bank assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Savings Bank
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined) to risk-weighted
assets (as defined), Tier I capital (as defined) to assets (as defined), and
tangible capital (as defined). Management believes, as of December 31, 1998 and
1997, that the Savings Bank meets all capital adequacy requirements to which it
is subject.
- --------------------------------------------------------------------------------
(Continued)
A-46
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 14 - CAPITAL MATTERS (Continued)
As of December 31, 1998, 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, 1998 and 1997:
<TABLE>
<CAPTION>
To be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------ -------- ------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total capital
(to risk-weighted
assets) $ 18,310 10.54% $ 13,898 8.00% $ 17,372 10.00%
Tier I capital
(to risk-weighted
assets) 17,370 9.91 7,011 4.00 10,517 6.00
Tier I capital
(to adjusted assets) 17,370 6.32 10,994 4.00 13,742 5.00
Tangible capital
(to tangible assets) 17,370 6.32 4,123 1.50 N/A N/A
December 31, 1997
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 4,990 4.00 7,486 6.00
Tier I capital
(to adjusted assets) 13,035 5.93 8,789 4.00 10,986 5.00
Tangible capital
(to tangible assets) 13,035 5.93 3,296 1.50 N/A N/A
</TABLE>
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
- --------------------------------------------------------------------------------
(Continued)
A-47
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 14 - CAPITAL MATTERS (Continued)
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, 1998 and 1997, the Savings Bank was a Tier I
Savings Bank.
NOTE 15 - SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, mortgage
banking, and data processing. Loans, investments, and deposits provide the
revenues in the banking operation, fee income provides the primary revenue for
mortgage banking and data processing, and discount accretion provides the
primary revenue for discount loan workout. All operations are domestic.
The accounting policies used for the operating segments are the same as those
described in the summary of significant accounting policies. On-Line comprises
the data processing segment and performance is evaluated for On-Line on a
stand-alone basis. Empire/Argo Mortgage LLC comprises the discount loans segment
and performance is also evaluated on a stand-alone basis. Mortgage banking is
comprised of a portion of the banking segment and Margo Financial Services LLC.
Performance is evaluated on a stand-alone basis for Margo Financial Services
LLC. Income taxes are allocated to banking and data processing segments. No
indirect expenses are allocated. On-Line provides data processing service for
banking segment.
Information reported internally for performance assessment follows. The column
for other information primarily includes activity between segments which is
being eliminated.
<TABLE>
<CAPTION>
(In Thousands)
Discount Mortgage Data Total
Banking Loans Banking Processing Other Segments
------- ----- ------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
1998
Net interest income $ 5,226 $ 1,032 $ -- $ (408) $ -- $ 5,850
Provision for loan losses 115 240 -- -- -- 355
Other revenue 3,622 740 1,637 14,177 (2,501) 17,675
Other expenses 7,592 695 1,571 13,308 (319) 22,847
Income tax expense (383) -- -- 175 -- (208)
Segment profit (loss) 1,524 837 66 286 (2,182) 531
Segment assets 326,966 13,550 412 12,487 (46,397) 307,018
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-48
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 15 - SEGMENT FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
Discount Mortgage Data Total
Banking Loans Banking Processing Other Segments
------- ----- ------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
1997
Net interest income $ 4,884 $ 2,572 $ -- $ (476) $ -- $ 6,980
Provision for loan losses 160 50 -- -- -- 210
Other revenue 4,598 281 977 12,750 (3,021) 15,585
Other expenses 7,408 1,288 955 12,077 (319) 21,409
Income tax expense 51 -- -- 72 -- 123
Segment profit (loss) 1,863 1,515 22 125 (2,702) 823
Segment assets 249,674 35,876 191 11,168 (60,611) 236,298
1996
Net interest income $ 3,622 $ 3,687 $ -- $ (318) $ -- $ 6,991
Provision for loan losses 248 -- -- -- -- 248
Other revenue 2,975 1,856 85 11,521 (2,243) 14,194
Other expenses 7,665 1,529 163 10,075 (172) 19,260
Income tax expense (49) -- -- 392 -- 343
Segment profit (loss) (1,267) 4,014 (78) 736 (2,071) 1,334
Segment assets 225,464 57,194 103 10,312 (77,603) 215,470
</TABLE>
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows of Argo
Bancorp, Inc. are presented on the following pages.
- --------------------------------------------------------------------------------
(Continued)
A-49
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
----------December 31,--------
1998 1997
(In Thousands)
<S> <C> <C>
Assets
Cash $ 5,673 $ 146
Interest-bearing deposits 250 520
----------- -----------
Total cash and cash equivalents 5,923 666
Securities available-for-sale 2,505 1,333
Loans receivable 387 62
Investment in banking subsidiary 17,592 13,731
Investment in data processing subsidiary 6,545 5,024
Investment in limited liability corporation 837 1,430
----------- -----------
Total investments in subsidiaries 24,974 20,185
Other assets 4,243 1,760
----------- -----------
Total assets $ 38,032 $ 24,006
----------- -----------
----------- -----------
Liabilities and stockholders' equity
Borrowed money $ 319 $ 5,608
Other liabilities 1,515 294
Junior subordinated debentures 17,784 -
Stockholders' equity 18,414 18,104
----------- -----------
Total liabilities and stockholders' equity $ 38,032 $ 24,006
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-50
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Interest income $ 52 $ 23 $ 9
Interest expense (827) (335) (341)
----------- ----------- -----------
Net interest expense (775) (312) (332)
Dividends from subsidiaries 500 2,242 1,818
Equity in undistributed (overdistributed)
earnings of subsidiaries 804 (1,144) 148
Gains on sales of securities available-for-sale 233 618 235
Noninterest expense (762) (789) (683)
----------- ----------- -----------
Net income before income taxes -- 615 1,186
Income tax benefit (531) (208) (148)
----------- ----------- -----------
Net income $ 531 $ 823 1,334
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-51
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------Year Ended December 31,------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 531 $ 823 $ 1,334
Adjustments to reconcile net income to net cash
provided by operating activities
Gains on the sales of securities (233) (618) (235)
Equity in (undistributed) over-
distributed earnings of subsidiaries (804) 1,144 (148)
Amortization of purchase price of
ESOP and MRP 69 72 60
Recognition of fair value of ESOP
shares scheduled to be released 48 50 38
Increase in other assets (20) (729) (586)
Increase (decrease) in other liabilities 543 (143) 370
----------- ----------- -----------
Net cash from operating activities 134 599 833
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased, net (325) (57) 3
Proceeds from the sales of securities 2,388 5,790 742
Purchases of securities (3,740) (6,306) (127)
Net cash (paid) received in purchase of subsidiary (454) 916 -
Contribution to MRP and ESOP -- (486) (115)
----------- ----------- -----------
Net cash from investing activities (2,131) (143) 503
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-52
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------Year Ended December 31,---------
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance $ -- $ 412 $ 4,027
Proceeds from issuance of subordinated
debentures, net of debt issuance expenses 16,115 -- --
Proceeds from borrowed money -- 11,108 1,943
Repayment of borrowed money (5,289) (9,040) (3,120)
Capital contributions to subsidiaries (3,399) (3,698) (3,775)
Proceeds from exercise of stock options 186 525 430
Proceeds from sale of MRP stock -- 400 --
Dividends paid (359) (351) (212)
----------- ----------- -----------
Net cash from financing activities 7,254 (644) (707)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,257 (188) 629
Cash and cash equivalents at beginning of year 666 854 225
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,923 $ 666 $ 854
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Argo Bancorp's financial instruments as of December
31, 1998 and 1997 are set forth in the following table, followed by the methods
and assumptions used.
- --------------------------------------------------------------------------------
(Continued)
A-53
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash $ 3,276 $ 3,276 $ 6,211 $ 6,211
Interest-bearing deposits 6,880 6,880 2,466 2,466
Trading account securities 693 693 -- --
Securities available-for-sale 7,208 7,208 4,974 4,974
Loans receivable 245,189 248,536 184,358 201,466
FHLB of Chicago stock 1,911 1,911 3,271 3,271
Accrued interest receivable 2,024 2,024 1,725 1,725
Financial liabilities
Deposits without stated maturities 53,302 53,202 37,055 37,055
Deposits with stated maturities 179,678 178,061 135,414 135,582
Borrowed money 25,227 26,086 34,156 34,205
Junior subordinated debt 17,784 17,784 -- --
Custodial escrow balances 5,340 5,340 6,400 6,400
Accrued interest payable 661 661 264 264
</TABLE>
Statement of Financial Accounting Standards No. 107 defined the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties other than a forced liquidation
sale. 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, TRADING SECURITIES, 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.
- --------------------------------------------------------------------------------
(Continued)
A-54
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(c) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the secondary
market. The loan portfolio is segmented into fixed and adjustable interest rate
categories. For fixed rate loans, fair value is estimated based on quoted market
prices of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. For adjustable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. The carrying amount of accrued interest receivable
approximates its fair value due to the relatively short period of time between
accrual and expected realization.
(d) DEPOSITS, CUSTODIAL ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook savings,
NOW, and money market accounts, and custodial escrows are disclosed as the
amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flows 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 AND JUNIOR SUBORDINATED DEBT
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.
The carrying value approximates fair value for the junior subordinated debt as
the debt was priced and issued late in 1998.
- --------------------------------------------------------------------------------
(Continued)
A-55
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 18 - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
(Dollars in Thousands, Except Share and Per Share Data)
<S> <C> <C> <C>
Numerator
Net income $ 531 $ 823 $ 1,334
Denominator
Basic earnings per share - weighted
average shares outstanding 1,948,843 1,931,572 1,253,024
Effect of dilutive stock options
outstanding 98,372 175,192 230,092
-------------- --------------- --------------
Diluted earnings per share -
weighted average shares outstanding 2,047,215 2,106,764 1,483,116
-------------- --------------- --------------
-------------- --------------- --------------
Basic earnings per share $ .27 .43 1.07
Diluted earnings per share .26 .39 .90
</TABLE>
NOTE 19 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains (losses) on
securities available-for-sale $ (97) $ 639 $ 185
Reclassification adjustments for gains
later recognized in income (234) (710) (235)
----------- ----------- -----------
Net unrealized losses (331) (71) (50)
Tax effect 126 26 20
----------- ----------- -----------
Other comprehensive loss $ (205) $ (45) $ (30)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
A-56
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
NOTE 20 - COMMITMENT AND CONTINGENCIES
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.
- --------------------------------------------------------------------------------
A-57
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ARGO BANCORP, INC.
<TABLE>
<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
Dominic M. Fejer Arthur E. Byrnes
Vice President, Controller Chairman, Deltec Asset Management Corporation
Director
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
Frank J. Lis President and Owner, RBD & Associates, Ltd.
Senior Vice President, Treasurer Director
Dominic M. Fejer Emil T. Sergo
Vice President, Chief Financial Officer Mayor, McCook, Illinois
Director
Rebecca L. Leon
Vice President, Retail Operations Dennis G. Carroll
Detective, City of Chicago Police Department
Patricia E. Reid Director
Assistant Vice President, Controller
Raymond E. Froula
Maria L. Horstmann Retired
Assistant Secretary Director
Mary Ann Gearhart
Member, Will County Board of Commissioners
Director
</TABLE>
A-58
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DIRECTORS AND OFFICERS
ON-LINE FINANCIAL SERVICES, INC.
John G. Yedinak Dennis Kosobucki
Chief Executive Officer and Chairman of the Board President and Chairman of the Board
West Town Savings Bank
Colleen Kitch Director
Senior Vice President
Chief Operating Officer Sergio Martinucci
President and Owner, Coldwell Banker
Frances M. Pitts Stanmeyer Realtors
Vice President and Secretary Director
David Birk Joseph J. Renn
Vice President, President, Chairman of the Board and
Information Systems Development Chief Executive Officer
Lisle Savings & Loan
Greg Wright Director
Vice President, Sales
Steve Szopa
Vice President,
Information Systems
Donald G. Wittmer
President and Owner,
Wittmer Financial Services, Ltd.
Director
</TABLE>
A-59
<PAGE>
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STOCKHOLDER REFERENCE
CORPORATE HEADQUARTERS INDEPENDENT AUDITORS
Argo Bancorp, Inc. Crowe, Chizek and Company LLP
7600 W. 63rd Street One Mid America Plaza
Summit, Illinois 60501 Oak Brook, Illinois 60522
(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
Washington, D. C. 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 1998 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
227 W. Monroe Argo Bancorp, Inc.
Chicago, Illinois 60606 7600 W. 63rd Street
(312) 578-2060 Summit, Illinois 60501
INVESTOR INFORMATION ANNUAL MEETING
Stockholders, investors, and analysts interested The annual meeting of stockholders will be held at
in additional information may contact: 3:00 p.m. on April 27, 1999, at Argo Federal Savings
John G. Yedinak, President and Bank, FSB, 7600 W. 63rd Street, Summit, Illinois 60501.
CEO at the Corporate 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 47 West Polk St.
Dolton, Illinois 60419 Chicago, Illinois 60605
(708) 849-3770 (312) 588-1327
</TABLE>
A-60
<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, 1998:
First Quarter $ 8.734 $ 8.625 $ .0450
Second Quarter 8.875 8.625 .0450
Third Quarter 8.875 8.825 .0450
Fourth Quarter 9.500 8.250 .0450
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
First Quarter $ 8.187 $ 7.812 $ .0450
Second Quarter 8.468 8.182 .0450
Third Quarter 8.531 8.468 .0450
Fourth Quarter 9.750 8.531 .0450
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
First Quarter $ 7.500 $ 6.687 $ .0425
Second Quarter 7.562 7.531 .0425
Third Quarter 7.625 7.562 .0450
Fourth Quarter 7.812 7.625 .0450
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
First Quarter $ 6.250 $ 6.250 $ .0425
Second Quarter 6.312 6.250 .0425
Third Quarter 6.562 6.312 .0425
Fourth Quarter 6.562 6.562 .0425
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-61
<PAGE>
KPMG Peat Marwick LLP
December 4, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Argo Bancorp, Inc. and, under the
date of March 24, 1998, we reported on the consolidated financial statements of
Argo Bancorp, Inc. and subsidiaries as of and for the years ended December 31,
1997 and 1996. On December 2, 1998, our appointment as principal accountants was
terminated. We have read Argo Bancorp, Inc.'s statements included under Item 4
of its Form 8-K dated December 3, 1998, and we agree with such statements,
except that we are not in a position to agree or disagree with Argo Bancorp,
Inc.'s statements that on December 3, 1998, Argo Bancorp, Inc. engaged Crowe
Chizek & Co. LLP as its independent accountants, that the change was approved by
the Board of Directors and its Audit committee, and we are not in a position to
agree or disagree with Argo Bancorp, Inc.'s statements under Item 4 (b) of its
Form 8-K.
Very truly yours,
/s/ KPMG Peat Marwick LLP
<PAGE>
Exhibit 23.1
The Board of Directors
Argo Bancorp, Inc.
We consent to the 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 5, 1999, relating to the
consolidated statements of financial condition of Argo Bancorp, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended, which
report appears on Form 10-K of Argo Bancorp, Inc.
/s/Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 29, 1999
<PAGE>
Exhibit 23.2
The Board of Directors
Argo Bancorp, Inc.:
We consent to incorporation by reference in the December 31, 1998 annual
report on Form 10-K of Argo Bancorp, Inc., of our report dated March 24,
1998, relating to the consolidated statement of financial condition of Argo
Bancorp, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the years in the two-year period ended December 31,
1997.
/s/ KPMG LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,276
<INT-BEARING-DEPOSITS> 6,880
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 693
<INVESTMENTS-HELD-FOR-SALE> 7,208
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 246,129
<ALLOWANCE> 940
<TOTAL-ASSETS> 307,018
<DEPOSITS> 232,980
<SHORT-TERM> 7,395
<LIABILITIES-OTHER> 12,613
<LONG-TERM> 17,832
17,784
3
<COMMON> 8,849
<OTHER-SE> 9,562
<TOTAL-LIABILITIES-AND-EQUITY> 307,018
<INTEREST-LOAN> 16,624
<INTEREST-INVEST> 1,003
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,627
<INTEREST-DEPOSIT> 9,414
<INTEREST-EXPENSE> 11,777
<INTEREST-INCOME-NET> 5,850
<LOAN-LOSSES> 355
<SECURITIES-GAINS> 234
<EXPENSE-OTHER> 22,847
<INCOME-PRETAX> 323
<INCOME-PRE-EXTRAORDINARY> 531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531
<EPS-PRIMARY> .27
<EPS-DILUTED> .26
<YIELD-ACTUAL> 8.31
<LOANS-NON> 6,518
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,154
<ALLOWANCE-OPEN> 814
<CHARGE-OFFS> 19
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 940
<ALLOWANCE-DOMESTIC> 940
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 940
</TABLE>
