<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 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 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 2,004,896 shares outstanding as of November 10, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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<PAGE> 2
ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1999, and December 31, 1998 (unaudited).. 3
Consolidated Statements of Income For the Three and Nine
Month Periods ended September 30, 1999, and 1998 (unaudited).. 4
Consolidated Statement of Comprehensive Income For
the Three and Nine Months ended September 30, 1999,
and 1998 (unaudited).......................................... 5
Consolidated Statements of Stockholders' Equity
for the Three and Nine Months ended September 30, 1999,
and 1998 (unaudited) ......................................... 6
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 (unaudited) .... 7
Notes to Consolidated Financial Statements ................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ............................................ 26
Item 2 Changes in Securities ........................................ 26
Item 3 Default Upon Senior Securities ............................... 26
Item 4 Submission of Matters to a Vote
of Security Holders ........................................ 26
Item 5 Other Information ............................................ 26
Item 6 Exhibits and Reports on Form 8-K ............................. 26
Form 10Q Signature Page ............................................... 27
</TABLE>
2
<PAGE> 3
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
9/30/99 12/31/98
-------- ---------
<S> <C> <C>
ASSETS
Cash............................................................... $ 35,156 $ 3,276
Interest-earning deposits.......................................... 1,199 6,880
-------- --------
Cash and Cash Equivalents.......................................... 36,355 10,156
Stock in Federal Home Loan Bank of Chicago......................... 2,303 1,911
Trading account securities......................................... 1,147 693
Securities available-for-sale...................................... 41,855 7,208
Loans receivable, net.............................................. 251,040 232,788
Discounted loans receivable, net................................... 9,954 12,401
Accrued interest receivable........................................ 3,111 2,024
Foreclosed real estate, net........................................ 2,331 3,875
Premises and equipment, net........................................ 7,890 10,707
Mortgage loan servicing rights, net................................ 474 593
Investment in limited partnership.................................. 4,385 4,469
Debt issuance costs related to junior subordinated debt, net....... 1,854 1,657
Prepaid expenses and other assets.................................. 8,940 18,536
-------- --------
$371,639 $307,018
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits......................................................... $292,830 $232,980
Borrowed money................................................... 26,998 25,227
Advance payments by borrowers for taxes and insurance............ 1,198 853
Accrued interest payable......................................... 950 661
Custodial escrow balances for loans serviced..................... 5,420 5,340
Other liabilities................................................ 7,619 5,759
Junior subordinated debt......................................... 17,250 17,784
Stockholders' Equity
Preferred stock.................................................. 3 3
Common stock..................................................... 20 20
Additional paid-in capital ..................................... 8,829 8,829
Retained earnings - substantially restricted..................... 11,790 10,084
Accumulated other comprehensive loss............................. (545) (238)
Common stock acquired by:........................................
Employee Stock Ownership Plan.................................. (476) ---
Management Recognition Plan.................................... (247) (284)
-------- --------
Total stockholders' equity................................... 19,374 18,414
-------- --------
Total Liabilities and Stockholders' Equity......................... $371,639 $307,018
======== ========
</TABLE>
See notes to accompanying unaudited financial statements
3
<PAGE> 4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
09/30/99 09/30/98 09/30/99 09/30/98
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans receivable.................................................... $4,703 $3,628 $13,652 $10,458
Discounted loans receivable......................................... 333 618 885 1,833
Securities available-for-sale....................................... 779 32 1,421 113
Interest-earning deposits........................................... 613 229 1,193 664
------ ------ ------- -------
Total interest income................................................. 6,428 4,507 17,151 13,068
------ ------ ------- -------
Interest expense:
Deposits............................................................ 3,414 2,270 9,087 6,950
Borrowed money...................................................... 379 529 1,020 1,308
Junior subordinated debt............................................ 485 --- 1,425 ---
------ ------ ------- -------
Total interest expense............................................ 4,278 2,799 11,532 8,258
------ ------ ------- -------
Net interest income before provision
for loan losses................................................... 2,150 1,706 5,619 4,809
Provision for loan losses........................................... 60 60 605 295
------ ------ ------- -------
Net interest income after provision
for loan losses................................................... 2,090 1,646 5,014 4,513
------ ------ ------- -------
Non-interest income:
Purchased mortgage servicing income................................. 46 (1,258) 618 (1,536)
Mortgage banking.................................................... 23 332 753 993
Gain on sale of loans receivable, discounted loans receivable,
securities available-for-sale, trading account securities
and foreclosed real estate........................................ 10 1,287 92 2,613
Fees and service charges............................................ 183 157 548 516
Other............................................................... 12 12 46 72
------ ------ ------- -------
Total non-interest income............................................. 273 530 2,056 2,658
------ ------ ------- -------
Non-interest expense:
Compensation and benefits........................................... 758 930 2,654 2,912
Occupancy and equipment............................................. 386 401 1,167 1,176
Amortization of goodwill............................................ --- --- 47 77
Other general and administrative fees............................... 799 1,213 2,817 2,945
------ ------ ------- -------
Total non-interest expense............................................ 1,942 2,545 6,685 7,110
------ ------ ------- -------
Net income/(loss) from continuing operations before
provision for income taxes ......................................... 421 (369) 385 61
Income tax expense/(benefit).......................................... 85 (107) (87) (223)
------ ------ ------- -------
Net income/(loss) from continuing operations...................... 336 (261) 472 284
------ ------ ------- -------
Discontinued operations:
Net income from discontinued Data Processing operation
(less applicable income taxes of $135, $83, and $210,
respectively)................................................... --- 220 135 342
Gain on sale of Data Processing operation
(less applicable income taxes of $721 )......................... --- --- 1,399 ---
------ ------ ------- -------
Net income/(loss)..................................................... $ 336 $ (41) $ 2,006 $ 626
====== ====== ======= =======
Basic earnings/(Loss) per share:
Income from continuing operations..................................... $ .17 $ (.13) $ .23 $ .15
Income from discontinued operations................................... --- .11 .07 .17
Gain on sale of discontinued operations............................... --- --- .70 ---
------ ------ ------- -------
Net income/(loss)..................................................... $ .17 $ (.02) $ 1.00 $ .32
====== ====== ======= =======
Diluted earnings/(Loss) per share:
From continuing operations............................................ $ .15 $ (.12) $ .21 $ .14
From discontinued operations.......................................... --- .10 .06 .16
Gain on sale of discontinued operations............................... --- --- .66 ---
------ ------ ------- -------
Net income/(loss)..................................................... $ .15 $ (.02) $ .93 $ .30
====== ====== ======= =======
</TABLE>
See notes to accompanying unaudited financial statements
4
<PAGE> 5
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
09/30/99 09/30/98 09/30/99 09/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income............................................................. $ 336 $($41) $2,006 $ 626
Other Comprehensive Income:
Net increase/(decrease) in fair value of securities
Classified as available for sale, net of tax
benefit of $143, $92, $187, and $29 respectively............... (234) (150) (305) (47)
Less reclassification adjustment for gains included in net income
net of tax benefits of $12, $1, and $133 respectively.............. --- (20) (2) (217)
---- ----- ------ ----
Other comprehensive income/(loss) ..................................... (234) (170) (307) (264)
Comprehensive income................................................... $ 102 $(211) $1,699 $ 362
===== ===== ====== =====
</TABLE>
See notes to accompanying unaudited financial statements
5
<PAGE> 6
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Retained
Stock Stock Capital earnings
--------- ------ ---------- --------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1998
Balance at December 31, 1997....................... $ --- $ 5 $8,570 $ 9,915
Net income......................................... --- --- --- 626
Proceeds from issuance of stock.................... --- 15 17 ---
Other comprehensive income, net of tax............. --- --- --- ---
Principal payments on ESOP loan.................... --- --- --- ---
Amortization of purchase price of MRP stock........ --- --- ---
Proceeds from exercise of stock options............ --- --- 155 ---
Tax benefits of stock options...................... --- --- 39 ---
Fair value adjustment for committed ESOP shares.... --- --- 25 ---
Cash dividends..................................... --- --- --- (258)
----- ----- ------ -------
Balance at September 30, 1998...................... $ --- $ 20 $8,818 $10,283
===== ===== ====== =======
Nine months ended September 30, 1999
Balance at December 31, 1998....................... $ 3 $ 20 $8,829 $10,084
Net income......................................... --- --- --- 2,006
Other comprehensive Loss net of tax................ --- --- --- ---
Amortization of purchase price of MRP stock........ --- --- --- ---
Stock acquired by ESOP............................. --- --- --- ---
Cash dividends..................................... --- --- --- (300)
----- ----- ------ -------
Balance at September 30, 1999...................... $ 3 $ 20 $8,829 $11,790
===== ===== ====== =======
<CAPTION>
Accumulated
Other Stock Stock Total
Comprehensive acquired acquired Stockholders'
/(Loss) by ESOP by MRP Equity
-------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1998
Balance at December 31, 1997....................... $ (33) $ (57) $(296) $18,104
Net income......................................... --- --- --- 626
Proceeds from issuance of stock.................... --- --- --- 32
Other comprehensive income, net of tax............. (264) --- --- (264)
Principal payments on ESOP loan.................... --- 45 --- 45
Amortization of purchase price of MRP stock....... --- --- 9 9
Proceeds from exercise of stock options........... --- --- --- 155
Tax benefits of stock options..................... --- --- --- 39
Fair value adjustment for committed ESOP shares... --- --- --- 25
Cash dividends.................................... --- --- --- (258)
----- ----- ----- -------
Balance at September 30, 1998..................... $(297) $ (12) $(287) $18,525
===== ===== ===== =======
Nine months ended September 30, 1999
Balance at December 31, 1998...................... $(238) $ --- $(284) $18,414
Net income........................................ --- --- --- 2,006
Other comprehensive Loss net of tax............... (307) --- --- (307)
Amortization of purchase price of MRP stock....... --- 22 37 59
Stock acquired by ESOP............................ --- (498) --- (498)
Cash dividends.................................... --- --- --- (300)
----- ----- ----- -------
Balance at September 30, 1999..................... $(545) $(476) $(247) $19,374
===== ===== ===== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE> 7
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 2,006 $ 626
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation............................................................................. 1,120 1,718
Accretion of discounts and deferred loan fees............................................ (119) (513)
Provision for loan losses................................................................ 605 295
(Gain) loss on sale of:
Securities available-for-sale............................................................ 3 (350)
Trading account securities............................................................... (155) ---
Loans receivable......................................................................... (382) (1,370)
Data processing operation................................................................ (2,120) ---
Foreclosed real estate................................................................... 431 97
Other.................................................................................... (63) 616
Loans originated and purchased for sale.................................................... (101,484) ---
Proceeds from sale of loans receivable..................................................... 80,996 36,234
Gain on Sale of Branch..................................................................... --- 989
Amortization of goodwill................................................................... 260 77
Decrease in purchased mortgage servicing rights............................................ 155 301
Amortization of purchase price of MRP and ESOP stock....................................... 59 54
Recognition of fair value of ESOP shares scheduled to be released.......................... --- 37
FHLB Stock redemption...................................................................... --- 1,424
Decrease in accrued interest receivable, prepaid
expenses, and other assets............................................................... 4,359 132
Increase in accrued interest payable and other liabilities................................. 4,627 705
--------- --------
Net cash (used)/provided by operating activities......................................... (9,702) 41,112
--------- --------
Cash flows from investing activities:
Loans originated and purchased for portfolio............................................... (158,344) (109,292)
Principal repayments on:
Loans receivable and discounted loans receivable......................................... 161,617 57,451
Securities-available-for sale............................................................ 164 602
Proceeds from sale of:
Foreclosed real estate................................................................... 2,740 2,241
Securities available for sale............................................................ 12,330 5,900
Premises and equipment................................................................... 5,169 169
Mortgage Servicing Rights................................................................ 11,100 ---
Data Processing operation................................................................ 6,207 ---
Purchase of:
Securities available for sale............................................................ (47,943) (6,882)
Premises and equipment................................................................... (6,839) (1,576)
FHLB Stock............................................................................... (392) ---
Net cash (paid) in purchase of subsidiary............................................... (498) (503)
Loan servicing rights.................................................................... (11,157) (197)
--------- --------
Net cash used in investing activities............................................... (25,846) (52,087)
--------- --------
Cash flows from financing activities:
Net increase in deposits................................................................. 59,850 19,631
Proceeds from borrowed funds............................................................. 71,834 21,473
Repayment of borrowed funds.............................................................. (70,063) (26,660)
Proceeds from exercise of stock options.................................................. --- 187
Dividends paid........................................................................... (300) (258)
Net increase in advance payments by borrowers for taxes and insurance.................... 345 498
Net increase/(decrease) in custodial escrow balances for loans serviced.................. 80 (691)
--------- --------
Net cash provided by financing activities........................................... 61,746 14,180
--------- --------
Net increase in cash and cash equivalents................................................ 26,199 3,205
Cash and cash equivalents at beginning of period........................................... 10,156 8,677
--------- --------
Cash and cash equivalents at end of period................................................. $ 36,355 $ 11,882
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense........................................................................... $ 11,243 $ 8,002
Income taxes............................................................................... $ 243 $ 415
Non-cash investing activity - transfer of loans to foreclosed real estate..................... $ 1,584 $ 2,476
</TABLE>
See accompanying notes to unaudited consolidated financial statements
7
<PAGE> 8
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals considered necessary for fair presentation have been included. The
results of operations for the three and nine months ended September 30, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or the "Company") and its
wholly owned subsidiaries, Argo Federal Savings Bank, FSB ("Argo Savings" or
"Savings Bank") and Argo Savings' wholly owned subsidiaries, Argo Mortgage
Corporation, Dolton-Riverdale Savings Service Corporation, and Argo Savings'
majority owned subsidiary Margo Financial Services LLC ("Margo"). The statements
also include Argo Bancorp's majority owned limited liability corporation, Argo /
Empire Mortgage LLC. Significant intercompany accounts and transactions have
been eliminated in consolidation.
On March 31, 1999 The Company sold its wholly owned subsidiary On-Line
Financial, Inc. ("On-Line"), to GFS Holdings, Inc. of Palm Beach Gardens,
Florida. Operating results from On-Line are included in the financial statements
as results of discontinued operations. The following table reflects the
components of income from discontinued operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Income Statement Data
Revenues.................................... $ --- $ 3,923 $ 4,158 $10,055
Costs & Expenses............................ --- 3,568 3,940 10,003
Operating Income --- 355 218 552
Income Tax Expense.......................... --- 135 83 210
------- ------- ------- -------
Income from discontinued operations......... $ --- $ 220 $ 135 $ 342
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
On June 1, 1999 Argo Federal Savings Bank, FSB entered into a management
services agreement ("Agreement") with E-Conduit Network, Inc. ("E-Conduit").
Under the agreement E-Conduit acquired certain assets and liabilities of Margo
and assumed the day to day operations related to the origination of mortgage
loans. The Agreement also requires E-Conduit to pay a six basis point per
transaction license fee, in return E-Conduit is allowed to use the Margo name
and all the intellectual properties of Margo. As a result of this transaction
Margo has discontinued its wholesale mortgage operation and is focusing on fee
generation through its licensing activities.
On June 29, 1999, the Savings Bank sold its five operating properties located at
7600 West 63rd. Street and 5818 South Archer Road, Summit, Illinois, 8267 South
Roberts Road, Bridgeview, Illinois, 2154 West Madison Street, Chicago, Illinois,
and 14076 Lincoln Avenue, Dolton, Illinois, to a non-affiliated third party for
an aggregate contractual purchase price of $5,850,000 and simultaneously entered
into a 14 year, 2-month operating lease for each of the properties with the new
purchaser. Under the terms of the lease the Savings Bank will pay an initial
monthly rental of $48,000 per month or $576,000 per year which will increase at
the rate of 1% each year commencing January 1, 2000. The net proceeds of the
sale to the Savings Bank after deducting customary closing cost including
broker's commissions, title charges, environmental studies, surveys and legal
fees was $5,230,662 resulting in a profit of $2,246,862 to the Savings Bank. The
profit, under generally accepted accounting principles, will be taken into
income by the Savings Bank over the lease term. As a result of this sale and
leaseback transaction the Bank is not the record title holder of any of the
properties from which it transacts business.
NOTE B - STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants may
make contributions to the Plan from 1.0% to 12.0% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $54,000 and $51,000 to
the Plan for the nine months ended September 30, 1999, and 1998. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
In 1991, Argo Savings formed an Employee Stock Ownership Plan ("ESOP") for
eligible employees. The ESOP borrowed funds from an unrelated third party lender
in the amount of $60,180 in order to purchase 7.0% of the Common Stock issued in
the Merger Conversion (20,932 shares at $2.875 per share). The ESOP subsequently
borrowed $245,000 from the same third party lender to purchase 52,080 shares at
an average price of $4.70 per share. The remaining balance of the borrowed funds
was repaid in 1998. A contribution of $47,000 was made to the ESOP to fund
principal and interest payments for the nine months ended September 30, 1998. In
May 1999 the ESOP borrowed from the Company $497,502 to purchase 49,136 shares
at an average price of $10.125. A contribution of $38,000 was made to the ESOP
to fund principal and interest payments for the nine months ended September 30,
1999.
9
<PAGE> 10
The Board of Directors of Argo Bancorp formed a Management Recognition Plan (the
"MRP") effective September 1, 1996, which purchased 50,000 shares of Argo
Bancorp stock on September 24, 1996, for $115,000. During the year ended
December 31, 1997, the Company sold 18,608 shares held by the Argo Bancorp MRP
for $181,000 reducing the total shares held by the plan to 31,392. Under this
Plan, employees in key management positions with Argo Bancorp and all its
subsidiaries are eligible for participation. No shares were awarded during the
nine months ended September 30, 1999. Amortization expense totaled $ 3,000 for
the nine month period ended September 30, 1999, and $9,000 for the nine month
period ended September 30, 1998.
On April 26, 1995, an amendment to the Argo Federal Savings Bank 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, respectively, under the MRP. During the year ended December 31, 1997, the
Company sold 22,416 shares held by the plan for $219,000, reducing the total
shares held by the plan to 100. Employees earn the awards over a three-year
period. Once awarded the aggregate purchase price of the shares will be
amortized to expense as a portion of annual compensation as the employees become
vested in their stock awards and the amortized cost is reflected as a reduction
of stockholders' equity. No shares were awarded or vested during the nine months
ended September 30, 1999.
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the "1991 Stock Option Plan"), which was approved by its shareholders
effective December 23, 1991, under which up to 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. Argo Bancorp awarded all 429,800 options
under the 1991 Stock Option Plan. The exercise price for the options awarded
were equal to the fair market value of the common stock at the date of grant. To
date there have been 258,332 options exercised; no options were exercised during
the nine months ended September 30, 1999. At September 30, 1999, options to
purchase 171,468 shares were outstanding under this plan.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (the "Non-Qualified Stock Option Plan"), which was
approved by its shareholders effective December 23, 1991, under which up to
429,800 shares of Argo Bancorp's common stock were reserved for issuance by Argo
Bancorp upon exercise of non-incentive stock options to be granted to
non-employee directors of the Corporation and its subsidiaries from time to
time. At September 30, 1999, Argo Bancorp has awarded 288,400 options for shares
under the Non-Qualified Stock Option Plan. To date, options to acquire 52,800
shares have been exercised. No options were exercised during the nine month
period ended September 30, 1999. The exercise price for the options awarded were
equal to the fair market value of the common stock at the date of grant. At
September 30, 1999, options to purchase 235,600 shares were outstanding under
the Non-Qualified Stock Option Plan.
10
<PAGE> 11
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements.
The following table summarizes, as of September 30, 1999 and at December 31,
1998, Argo Savings' capital requirements under OTS regulations and its actual
capital ratios at those dates:
<TABLE>
<CAPTION>
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
SEPTEMBER 30, 1999 PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
- ------------------- ---------- ---------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Risk-based................. 8.0% 9.74% $17,958 $21,856 $ 3,898
Core....................... 4.0 5.87 14,030 20,485 6,455
Tangible................... 1.5 5.87 5,261 20,485 15,224
DECEMBER 31, 1998
- -----------------
Risk-based................. 8.0% 10.54% $13,898 $18,310 $ 4,412
Core....................... 4.0 6.32 10,994 17,370 6,376
Tangible................... 1.5 6.32 4,123 17,370 13,247
</TABLE>
11
<PAGE> 12
NOTE D - EARNINGS PER SHARE
Basic earnings per share for the three and nine-month periods ended September
30, 1999 and 1998, was based on weighted average number of shares outstanding of
2,004,896, 1,998,008, 2,004,896 and 1,977,172 respectively. Diluted earnings per
share for the three and nine-month periods ended September 30, 1999 and 1998,
were based on weighted average number of shares outstanding of 2,167,998,
2,124,136, 2,167,998, and 2,103,300 respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
09/30/99 09/30/98 09/30/99 09/30/98
-------------------- --------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income from continuing operations...................................... $ 336 $ (261) $ 4,726 $ 284
Net income from discontinued operation................................. --- 220 135 342
Gain on Sale of Data Processing operation.............................. --- --- 1,399 ---
------- ------- ------- -------
Net income............................................................. $ 336 $ (41) $ 2,006 $ 626
======= ======= ======= =======
Basic earnings per share
weighted average common shares outstanding......................... 2,005 1,998 2,005 1,977
Additional dilutive shares............................................. 168 126 130 126
------- ------- ------- -------
Total weighted average common shares and
Equivalents outstanding for diluted computation........................ 2,168 2,124 2,168 2,103
======= ======= ======= =======
Basic earnings per shares from continuing operations................... $ .17 $ (.13) $ .23 $ .15
Basic earnings per share from discontinued operation................... --- .11 .07 .17
Basic earnings per share from gain on sale of discontinued operation.. --- --- .70 ---
------- ------- ------- -------
Basic earnings per share............................................... $ 17 $ (.02) $ 1.00 $ .32
======= ======= ======= =======
Diluted earnings per share from continuing operations.................. $ .15 $ (.12) $ .21 $ .14
Diluted earnings per share from discontinued operations ............... --- .10 .06 .16
Diluted earnings per share from gain on sale of discontinued operation. --- --- .66 ---
------- ------- ------- -------
Diluted earnings per share ............................................ $ .15 $ (.02) $ .93 $ .30
======= ======= ======= =======
</TABLE>
NOTE E - COMMITMENTS AND CONTINGENCIES
At September 30, 1999, Argo Savings had loan commitments totaling $8.4 million
and $33.4 million in unused lines of credit. Commitments to fund loans have
credit risk essentially the same as that involved in extending loans to
customers and are subject to Argo Savings' normal credit policies. Argo Savings
also had community reinvestment act ("CRA") investment commitments outstanding
of $2.6 million.
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<PAGE> 13
NOTE F- SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, and
mortgage banking. Loans, investments, and deposits provide the revenues in the
banking operation, fee income provides the primary revenue for mortgage banking
and discount accretion provides the primary revenue for discount loan workout.
Information reported internally for performance assessment follows for the nine
months ended September 30, 1999 and 1998 respectively. The column for other
information primarily includes activity between segments which is being
eliminated.
<TABLE>
<CAPTION>
Discount Mortgage
Total
Banking Loans Banking Other Segments
-------- ------- ------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1999
- ----
Net interest income........................ $ 5,183 $ 436 $ --- $ --- $ 5,619
Provision for loan losses.................. 515 90 --- --- 605
Other revenue.............................. 2,606 (273) 753 (1,030) 2,056
Other expenses............................. 5,524 284 877 --- 6,685
Income tax benefit......................... (87) --- --- --- (87)
Segment profit (loss)...................... 1,837 (211) (124) (1,030) 472
Segment assets........................ 480,198 12,111 84 (120,754) 371,639
1998
- ----
Net interest income........................ $ 3,964 $ 845 $ --- $ --- $ 4,809
Provision for loan loss.................... 85 210 --- --- 295
Other revenue.............................. 2,465 783 1,003 (1,594) 2,658
Other expenses............................. 5,552 572 986 --- 7,110
Income tax benefit......................... (223) --- --- --- (223)
Segment profit (loss)...................... 1,015 846 17 (1,594) 284
Segment assets........................ 275,127 17,008 417 (40,877) 251,675
</TABLE>
13
<PAGE> 14
ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 10Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the 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
The Company was incorporated in Delaware in August 1987, for the purpose of
acquiring the 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 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 was received on May 26, 1992, at which time the merger conversion
("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 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 $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
14
<PAGE> 15
additional shares to third parties in order that Deltec can maintain 25.0%
ownership in the Company's common stock.
In October of 1998, the Company formed 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 11.0% Capital Securities with a
liquidation amount of $10.00 per security. The proceeds from the sale 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 11.0%,
paid quarterly in arrears and are scheduled to mature on November 6, 2028. The
costs of the debt issuance were approximately $1.7 million, 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 the 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 capabilities, and by the Company for general corporate purposes.
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 September 30, 1999, on an unconsolidated
basis, consisted of its investment in Argo Savings of $20.4 million, its
investment in the majority owned Empire/Argo Mortgage LLC of $656,000,
securities available-for-sale of $17.1 million, cash and other interest-earning
deposits of $93,000, and other assets of $4.1 million which include $1.9 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 $4,666,000 at September 30, 1999, incurred in connection with capital
infusions to its subsidiaries. Argo Bancorp is a Federal Housing Authority
("FHA") approved originator and servicer, a licensed Illinois mortgage banker
and an approved Federal National Mortgage Association ("FNMA") servicer.
On September 27, 1999 the Company purchased 16,666 shares of Synergy Plan Ltd.
("Synergy") Class A Common Stock at $15.00 per share and 16,667 of Synergy's
Convertible Preferred Stock at $15.00 per share. The Company's total investment
was $500,000. The Company also received an option to acquire on or before March
31, 2000 up to 33,333 shares of Synergy Class A Common Stock for a purchase
price of $15.00 per share. The Convertible Preferred Stock owned by the Company
is convertible into 16,667 shares of Class A Common Stock of Synergy on or
before September 30, 2004, subject to Synergy's right to redeem the shares on
September 30, 2002, at a redemption price of $25.00 per share. The Convertible
Preferred Shares have a stated dividend of $.90 per share, per annum, payable
quarterly. The Company on a fully diluted basis owns at September 30, 1999, 2.9%
of the Class A Common Stock and 100% of the Convertible Preferred Stock of
Synergy. As a condition to the Company's purchase, John G. Yedinak, the Chief
Executive Officer and Chairman of the Board of Directors of the Company and the
Bank was elected to the Board of Synergy; Donald Wittmer a director of the
Company, also serves on the Board of Synergy. Synergy is a professional employee
organization, formed in 1989, which is in the business of leasing individuals in
its employ to various companies. The Company on September 30, 1999 entered into
a Client Services Agreement with Synergy effective October 1, 1999, whereunder
employees of the Company and its subsidiaries were transferred to Synergy. The
management of the Company estimates that the cost savings to the Company and the
Bank under the Client Services Agreement is $50,000 annually.
15
<PAGE> 16
SALE OF SUBSIDIARY
On March 31, 1999 the Company sold its wholly-owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois, to GFS Holdings, Inc. of Palm
Beach Gardens, Florida ("Purchaser")
Under the terms of the transaction, the Company received $11.3 million in cash
and securities in exchange for all of the outstanding stock of On-Line. The
Company received $6.7 million in cash at closing, together with 4,600 shares of
GFS Holdings Co. Series B Preferred Stock, valued at $4.6 million. The Preferred
Stock, par value $.01, pays the Company a semi-annual dividend at the rate of
7.625%. Mandatory redemption of up to 1,400 shares will be made subject to
completion of certain conditions precedent on each of July 31, 1999, January 31,
2000 and July 31, 2000. The Company voluntarily waived its right of a redemption
of a portion of the Preferred Stock at July 31, 1999. An additional redemption
of up to 3,200 shares is available on April 30, 2000, subject to obtaining
certain financial objectives. All shares will be redeemed, to the extent not
redeemed earlier, on March 31, 2006.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and securities available-for-sale portfolio,
custodial deposit accounts related to loans serviced for others, and the sale of
discounted loans receivable and newly originated fixed rate long-term mortgage
loans. The most liquid assets are cash and short-term investments. The levels of
these assets are dependent on the operating, financing and investing activities
during any given period. Cash and interest-earning deposits totaled $36.4
million at September 30, 1999.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the nine months ended September 30, 1999, and 1998,
Argo Savings originated and purchased loans receivable and discounted loans
receivable in the principal amounts of $260.0 million and $109.3 million,
respectively. During the nine months ended September 30, 1999, and 1998, these
investing activities were primarily funded by principal repayments on loans
receivable and discounted loans receivable and securities available-for-sale of
$161.8 million and $58.1 million, respectively, and the proceeds from the sale
of loans receivable and discounted loans receivable, securities
available-for-sale and foreclosed real estate of $96.1 million and $44.5
million, respectively. During the nine months ended September 30, 1999,
additional funding was provided by an increase of $60.0 in deposit balances and
a $1.8 million increase in borrowings. During the nine months ended September
30, 1998, additional funding was provided by an increase in deposits of $19.6
million, partially offset by a $5.2 million decrease in borrowings.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 1999, Argo Savings liquid assets represented
11.52% of its liquidity base as compared to the required level of 5.0%. The
level of liquidity maintained is believed by management to be adequate to meet
the requirements of normal operations, potential deposit outflows, and the
current loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At September 30, 1999, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 5.87%, 5.87%, and
9.74%, respectively.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and
17
<PAGE> 18
2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At September 30, 1999, the
Savings Bank met each of its capital requirements, and it is anticipated that
Argo Savings will not be subject to the interest rate risk component.
CHANGES IN FINANCIAL CONDITION
Total assets increased $64.6 million to $371.6 million at September 30, 1999,
from $307.0 million at December 31, 1998.
Cash and interest-earning deposits increased $26.2 million to $36.4 million at
September 30, 1999 from $10.2 million at December 31, 1998. Included in the
increase was $22.0 million in cash utilized to fund a network of 565 ATM's
through a partnership between the Savings Bank, EFmark Inc. of Westmont,
Illinois and Dairy Mart convenience stores of Hudson, Ohio.
Securities available-for-sale increased by $34.7 million to $41.9 million at
September 30, 1999 from $7.2 million at December 31, 1998. Included in the
increase is $4.6 million of GFS Holdings Co. Preferred Stock obtained in the
sale of On-Line. In addition, the Savings Bank has utilized excess cash to
purchase securities consistent with Management's asset-liability strategy.
Loans receivable and discounted loans receivable increased by $15.8 million to
$261.0 million at September 30, 1999 from $245.2 million at December 31, 1998,
as a result of loan originations and purchases totaling $260.0 million partially
offset by sales of loans of $ 81.0 million, principal repayments totaling $161.6
million, and transfers of loans to foreclosed real estate of $1.6 million.
Premises and equipment declined by a net $2.8 million to $7.9 million at
September 30, 1999 from $10.7 million at December 31, 1998. The decrease in
premises and equipment was in part the result of the sale of the operating
properties, which had a net book value of $2.9 million, and the sale of On-Line,
which had equipment with a net book balance $5.9 million at December 31, 1998.
This decline was offset by an investment of $5.8 million in a 565 unit ATM
network.
Prepaid expenses and other assets declined by $9.6 million to $8.9 million at
September 30, 1999 from $18.5 million at December 31, 1998 primarily as a result
of the On-Line sale. The December 31, 1998 balance of prepaid expenses and other
assets at On-Line was $6.2 million.
Deposits increased $59.9 million to $292.8 million at September 30, 1999, from
$233.0 million at December 31, 1998. The increase can be attributed to increases
in negotiated certificate of deposits, which the Savings Bank utilized to fund
its asset growth that occurred during the nine months ended September 30, 1999.
Other Liabilities increased by $1.9 million to $7.6 million at September 30,
1999 from $5.8 million at December 31, 1998, due in part to the deferred gain of
$2.2 million on the sale of the operating properties and to the accrued expenses
and reserves for estimated contingent payments totaling $1.6 million in
connection with the On-Line sale.
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<PAGE> 19
Stockholders' equity increased $960,000 to $19.4 million at September 30, 1999,
from $18.4 million at December 31, 1998. The increase was the result of net
income of $2.0 million partially offset by cash dividends of $300,000, the
purchase of ESOP shares at a cost of $497,000 and additional unrealized net
losses in the available-for-sale investment portfolio of $217,000.
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the increase of non-interest bearing custodial accounts related to the
purchased mortgage servicing rights; and (v) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo Savings
does not use any artificial hedge products to reduce its exposure to interest
rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15.0% of
total assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities that mature or
reprice within one year over interest sensitive assets of $47.0 million or 13.4
% of total assets at September 30, 1999. As a result of the excess of interest
sensitive liabilities over interest sensitive assets, Argo Savings is "Net
Liability Sensitive" which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest gap analysis
report. The assumptions used, although standardized, may not be indicative of
the actual withdrawals experienced by Argo Savings. Fixed maturity deposits
reprice at maturity. The combined effect of these assumptions on passbook, NOW,
money market accounts and interest-bearing escrows assumes 17.0% of these
accounts withdrawn within three years, and 15.0% per year, thereafter.
Management believes that these decay rate assumptions are reasonable.
THRIFT RECHARTERING LEGISLATION
At September 30, 1999 proposed legislation regarding elimination of the federal
thrift charter and related issues was pending before Congress. The Savings Bank,
whose deposits are insured by the Savings Association Insurance Fund ("SAIF"),
is unable to predict whether such legislation would be enacted, the extent to
which the legislation would restrict or disrupt its operations or whether the
BIF ("Bank Insurance Fund") and SAIF funds will eventually merge.
19
<PAGE> 20
ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS No. 133") which is effective for
fiscal years beginning after June 15, 1999. The statement requires all
derivatives to be recorded on the balance sheet at fair value. It also
establishes "special accounting" for hedges of changes in the fair value of
assets, liabilities, or firm commitments (fair value hedges), and hedges of
foreign currency exposures of net investments in foreign operations. To the
extent the hedge is considered highly effective, both the change in the fair
value of the derivative and the change in the fair value of the hedged item are
recognized (offset) in earnings in the same period. Changes in fair value of
derivatives that do not meet the criteria of one of these three hedge categories
are included in income.
In September 1999, the FASB issued Statement of Financial Accounting Standards
No. 137 (SFAS No. 137"), entitled "Accounting for Derivative Instruments in
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133".
SFAS No. 137 defers the effective date of SFAS No. 133 from years beginning
after June 15, 1999 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. 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 Argo Bancorp's financial statements.
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 Argo Bancorp.
The FASB continues to study several issues, including recording all financial
instruments at fair value and abolishing pooling-of -interests accounting. On
September 8, 1999, the FASB issued an exposure draft which proposes to eliminate
pooling-of-interest accounting for business combinations. Any business
combination entered in to after the effective date of this provision will be
required to be accounted for using the purchase method of accounting. The FASB
will accept comments on this proposed rule until December 7, 1999 and a final
statement is expected to become effective during the fourth quarter of 2000.
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
20
<PAGE> 21
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 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>
<CAPTION>
<S> <C>
1. Awareness 100.0% complete
2. Assessment 100.0% complete
3. Renovation 100.0% complete
4. Validation 100.0% complete
5. Implementation 100.0% complete
</TABLE>
While the Company will incur some expenses during the remaining months of 1999,
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.
Through September 30, 1999 the Company has spent approximately $20,000 in
connection with testing, and upgrading equipment and software for Year 2000
compliance. The Saving Bank's contingency plan calls for the backup of critical
application systems at December 31, 1999 in the event of a systems disaster
subsequent to year end. The contingency plan calls for running the banking
centers offline if systems and/or phone lines are unavailable subsequent to year
end. The plan incorporates provisions which include manually processing daily
work for each business day after the close of business at a data recovery center
northwest of the Savings Bank's main operating facility. Additionally, the
Savings
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<PAGE> 22
Bank's deposit and loan systems are contractually protected by a back-up
disaster recovery plan outsourced to a third party. The worst case scenario,
including the possible loss of electric power and phone lines, could have a
material impact on the operations of the Savings Bank.
PURCHASED MORTGAGE SERVICING RIGHTS
At September 30, 1999, the Savings Bank owned directly and indirectly, $4.9
million in PMSRs. Argo Saving's principal investments in PMSRs is through a $4.5
million equity investment in a limited partnership and a limited liability
company that were established for the sole purpose of directly or indirectly
purchasing mortgage servicing rights. The Savings Bank's ownership of PMSRs, as
well as its investment in the limited partnership carry interest rate risk
because the total amount of the 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 PMSRs and its investment in the
limited partnership, therefore, may be adversely affected during periods of
declining interest rates. Argo Savings 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"), a Delaware
Corporation engaged principally in mortgage servicing activities. DMI obtains
quarterly valuations from an independent appraiser for each limited partnership.
The Savings Bank recorded no further impairment of its investment during the
three and nine months ended September 30, 1999.
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest, and the collectibility of the loan's
principal and interest becomes doubtful.
At September 30, 1999, Argo Savings had fifty-eight (58) properties, totaling
$2.3 million classified as foreclosed real estate, as compared to ninety (90)
properties totaling $3.9 million at December 31, 1998. The underlying properties
on September30, 1999, consisted primarily of single family residences. The
foreclosed real estate has been written down to estimated fair value at
September 30, 1999. The total amount of loans receivable ninety (90) days or
more past due at September 30, 1999, was $7.2 million or 2.85% of total loans
receivable compared to $6.5 million or 2.80% of total loans on December 3 1,
1998. Loans ninety (90) days or more past due are primarily secured by
one-to-four family residences. Total non-performing assets at September 30,
1999, totaled $9.5 million or 2.55% of total assets compared to $10.4 million or
3.39% of total assets at December 31, 1998. Excluded from these totals are $1.9
million of discounted loans ninety (90) days or more past due at September 30,
1999, and $1.8 million at December 31, 1998.
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<PAGE> 23
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999, AND 1998.
GENERAL
Net income for the three months ended September 30, 1999 was $336,000 or $.15
per diluted share as compared to a net loss of $41,000 or ($.02) per diluted
share for the same period last year. Included in the results for the year ago
period was a pre-tax allowance of $1.2 million on the Savings Bank's investment
in a limited partnership which invests in mortgage loan servicing rights. This
allowance was partially offset by a pre-tax gain of $989,000 recorded on the
sale of a Branch location.
Net income for the nine months ended September 30, 1999 was $2.0 million or $.93
per diluted share including the after tax gain of $1.4 million or $.66 per
diluted share on the sale of On-Line. Net income for the nine months ended
September 30, 1998 was $626,000 or $.30 per diluted share.
INTEREST INCOME
Interest income for the three months ended September 30, 1999, totaled $6.4
million, as compared to $4.5 million for the comparable 1998 period. The
increase of $1.9 million was the result of a $110.0 million increase in average
interest-earning assets. This increase was partially offset by a 52 basis point
decline in the yield on interest earning assets for the third quarter of 1999
compared to the same period last year. The decrease in yield is primarily
attributable to the refinancing of higher yielding mortgage loans to lower
current rates and to the decreased investment in discounted loans receivable,
which typically have higher than market yields. For the nine months ended
September 30, 1999 interest income totaled $17.2 million, an increase of $4.1
million from the $13.1 million recorded for the same period last year. The
increase was the result of a $99.9 million increase in average interest earning
assets partially offset by a 100 basis point decline in yield for the nine
months ended September 30, 1999 as compared to the same period last year.
INTEREST EXPENSES
Interest expense for the three months ended September 30, 1999, totaled $4.3
million as compared to $2.8 million for the comparable 1998 period. The $1.5
million increase was primarily the result of a $111.4 million rise in average
interest bearing liabilities and to a lesser extent a 4 basis point increase in
the weighted average cost of interest-bearing liabilities to 5.19% for the
three-months ended September 30, 1999 as compared to the same period last year.
Included in interest bearing liabilities was $17.3 million of junior
subordinated debt at a rate of 11.0%, which accounted for $485,000 of the
increase in interest expense for the three months ended September 30, 1999.
Excluding the junior subordinated debt, the cost of interest bearing liabilities
would have declined to 4.86% for the three months ended September 30, 1999.
For the nine months ended September 30, 1999 interest expense totaled $11.5
million an increase of $3.2 million from the $8.3 million recorded for the same
period last year. The increase was primarily the result of a $96.1 million
increase in average interest bearing liabilities partially offset by a 24 basis
point decline in the cost of interest-bearing liabilities for the nine months
ended September 30, 1999 as compared to the same period last year. The junior
subordinated debt accounted for $1.4 million of the
23
<PAGE> 24
increase in interest expense for the nine months ended September 30, 1999.
Excluding the junior subordinated debt, the cost of interest bearing liabilities
would have declined to 4.71% for the nine months ended September 30, 1999.
NET INTEREST INCOME
Net interest income totaled $2.1 million for the three months ended September
30, 1999, an increase of $444,000 from the amount recorded in the comparable
1998 period. The increase in net interest income for the three months ended
September 30, 1999, resulted from the $110.4 million increase in average
interest-earning assets which was partially offset by a 56 basis point decrease
in the effective net spread to 2.74% from 3.30% for the comparable 1998 period.
Excluding the junior subordinated debt, the net spread would have declined by
only 22 basis points to 3.08%.
Net interest income for the nine months ended September 30, 1999 increased by
$810.000 to $5.6 million from $4.8 million for the same period last year. The
increase was the result of the $99.9 million increase in average interest
earning assets which was partially offset by a 76 basis point decline in the
effective net spread to 2.43% from 3.19% for the comparable 1998 period. The net
spread would have declined by only 40 basis points had the junior subordinated
debt been excluded from net interest income.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $60,000 for the comaprable three month periods
ended September 30, 1999 and 1998. For the longer nine month period loan loss
provisions totaled $605,000 for 1999 compared to $295,000 for 1998. Management
chose to increase the provision as a result of a review of the Company's
non-performing assets and due to the increase in net loans outstanding. The
allowance for loan losses totaled $1.4 million at September 30, 1999 compared to
$940,000 at December 31, 1998. Management believes that loan loss provisions are
adequate and will continue to monitor the mortgage portfolio and substandard
assets for loss exposure.
NON-INTEREST INCOME
Non-interest income declined to $273,000 for the three months ended September
30, 1999 from $530,000 for the same period last year. The $257,000 decrease was
primarily the result of lower mortgage banking income recorded in the three
months ended September 30, 1999. The decline in mortgage banking income resulted
from the Agreement with E-Conduit whereby E-Conduit assumed the day to day
operations related to the origination of mortgage loans. As a result of this
agreement E-Conduit retains the mortgage banking revenue and the expenses
related to the mortgage banking operation. The license fee income totaled
$23,000 in the three months ended September 30, 1999 compared to mortgage
banking revenue of $332,000 for the same period last year.
For the nine months ended September 30, 1999 non-interest income declined to
$2.1 million as compared to $2.7 million for the same period last year. The
decline was the result of a $1.0 million decrease in gains on the sale of loans,
and losses on the sale of foreclosed real estate which increased to $ 440,000
for the nine months ended September 30, 1999 from $91,000 for the same period
last year.
24
<PAGE> 25
NON-INTEREST EXPENSE
Non-interest expense declined to $1.9 million for the three months ended
September 30, 1999 from $2.5 million for the same period last year. The decline
was primarily the result of a $360,000 reduction in operating expenses related
to the restructuring at Margo . For the nine months ended September 30, 1999
non-interest expense decreased by $425,000 to $6.7 million as compared to $7.1
million for the same period last year.
INCOME TAX EXPENSE
The provision for income tax expense totaled $85,000 for the three months ended
September 30, 1999 compared to an accrued benefit of $107,000 for the same
period last year. The 1999 provision is based on a 38.0% provision on the
pre-tax income of $421,000 less the utilization of low income housing credits of
$75,000. For the nine months ended September 30, 1999 the provision for income
taxes yielded an accrued benefit of $87,000 compared to a accrued benefit of
$115,000 for the same period last year. The tax benefit for the nine months
ended September 30, 1999 includes low income housing credits of $233,000.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31, 1998, as
reported in the Company's Form 10-K.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share (See Note D)
27.0 Financial Data Schedule (filed herewith)
B. Reports of Form 8-K
None
- -------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: November 10, 1999 /S/ John G. Yedinak
------------------- -----------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
27
<PAGE> 28
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: November 9, 1999 /S/ John G. Yedinak
------------------ -------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 35,156
<INT-BEARING-DEPOSITS> 1,199
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,147
<INVESTMENTS-HELD-FOR-SALE> 41,855
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 251,040
<ALLOWANCE> 1,371
<TOTAL-ASSETS> 371,639
<DEPOSITS> 292,830
<SHORT-TERM> 14,166
<LIABILITIES-OTHER> 32,437
<LONG-TERM> 12,832
0
3
<COMMON> 20
<OTHER-SE> 19,351
<TOTAL-LIABILITIES-AND-EQUITY> 371,639
<INTEREST-LOAN> 14,537
<INTEREST-INVEST> 1,421
<INTEREST-OTHER> 1,193
<INTEREST-TOTAL> 17,151
<INTEREST-DEPOSIT> 9,087
<INTEREST-EXPENSE> 11,532
<INTEREST-INCOME-NET> 5,619
<LOAN-LOSSES> 605
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 6,685
<INCOME-PRETAX> 385
<INCOME-PRE-EXTRAORDINARY> 2,006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,006
<EPS-BASIC> 1.00
<EPS-DILUTED> .93
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 9,050
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 940
<CHARGE-OFFS> 174
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,371<F1>
<ALLOWANCE-DOMESTIC> 1,371<F1>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>This information is not disclosed in the form 10-Q
</FN>
</TABLE>
