<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
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 [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, i.e., persons other than directors and
executive officers of the Registrant is $3,254,402 and is based upon the last
sales price as quoted on Nasdaq for MARCH 29, 2000.
The Registrant had 2,004,896 shares outstanding as of March 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1999, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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INDEX
<TABLE>
<CAPTION>
PART I PAGE NO.
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<S> <C> <C>
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 39
Item 3. Legal Proceedings.............................................................. 40
Item 4. Submission of Matters to a Vote of Security Holders............................ 40
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters...................................................... 40
Item 6. Selected Consolidated Financial Data........................................... 40
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 41
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................................. 41
Item 8. Consolidated Financial Statements and Supplementary
Data......................................................................... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................................... 41
PART III
--------
Item 10. Directors and Executive Officers of the Registrant............................. 41
Item 11. Executive Compensation......................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................... 41
Item 13. Certain Relationships and Related Transactions................................. 42
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................................. 42
SIGNATURES ............................................................................. 44
</TABLE>
2
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PART 1
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 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 $1,913,000 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 capabilities, and by the Company for general corporate purposes, the
enhancement of operational capabilities and the potential purchase of loans.
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
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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 owned at December 31, 1999, 2.9% of the
Class A Common Stock and 100% of the Convertible Preferred Stock of Synergy. As
a condition of the Company's purchase of shares, John G. Yedinak, the Chief
Executive Officer and Chairman of the Board of Directors of the Company, was
elected to the board of Directors of Synergy. Donald Wittmer, a director of the
Company, also serves on the board of Synergy. Synergy is a professional employer
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
Company estimates that the cost savings to the Company and Argo Savings under
the Client Services Agreement will be $50,000 annually.
ON-LINE FINANCIAL SERVICES, INC.
Argo Bancorp acquired on October 31, 1995 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. 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 strategy was to enhance On-Line's strong foundation
as a data processing and data communications network provided by implementing
tools to continue supporting existing services, as well as evolve into a
provider of electronic commerce, Intranet and Internet services, technical
training services, and document management and imaging services.
On March 31, 1999, the Company sold On-Line to GFS Holdings Co. of
(GFS) Palm Beach Gardens, Florida. 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 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
subject to completion of certain conditions precedent were to be made by GFS on
July 31, 1999. The Company voluntarily waived its right of a redemption of 600
shares of the Preferred Stock at July 31, 1999. During January 2000, GFS
redeemed 600 shares of the Preferred Stock.
BUSINESS OF EMPIRE/ARGO, LLC
During 1999, the Company simplified its organizational structure by
merging Empire/Argo LLC ("Empire"), a consolidated joint venture of Argo
Bancorp, into Argo Bancorp. The merger qualified as a tax-free reorganization
and was accounted for as an internal reorganization.
In recent years, the Company has acquired discounted loans through
Empire. The Company estimated the amounts it would 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 have 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
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Mortgage"), a wholly owned subsidiary of Argo Savings. Argo Savings discontinued
additional investments in Discounted Loans in 1997.
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 and 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, 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.
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
During 1999, Argo Mortgage Corporation ("Argo Mortgage"), a wholly
owned subsidiary of the Savings Bank, merged into the Savings Bank. The merger
qualified as a tax-free reorganization and was accounted for as an internal
reorganization. Argo Savings had a 50.1% ownership interest in Margo Financial
Services, LLC ("Margo"). On June 1, 1999, Margo was restructured in that all of
the assets and liabilities of Margo were distributed and/or assumed by the
owners in accordance with their equity ownership.
Margo is an Illinois chartered limited liability corporation whose
other member is E-Conduit Network, Inc. ("E-Conduit"), an Illinois corporation.
Margo's primary objectives were to increase loan origination volume and to serve
as a wholesale mortgage banking operation using a network of brokers,
correspondents and conduits.
On June 1, 1999, Argo Savings entered into a management services
agreement with E-Conduit Network, Inc. ("E-Conduit"). Under the agreement,
E-Conduit assumed the day-to-day operations of Margo, relating to the
origination of mortgage loans. The agreement also provided a license to
E-Conduit allowing the company to use the Margo name and all the intellectual
properties of Margo retained after the restructure. In exchange for the license
of Margo assets, under the agreement E-Conduit is required to pay a six basis
point per transaction license fee on loans originated on behalf of Argo Savings.
As a result of this transaction, Margo has discontinued its wholesale mortgage
operation and is focusing on fee generation through its licensing activities.
Margo will be a franchiser and license the use of various proprietary assets and
products retained by the company.
Through its subsidiaries, Argo Mortgage and Margo, and on its own since
the 1999 dissolution of Argo Mortgage and reorganization of Margo, Argo Savings
has engaged in mortgage
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brokerage activities that focus on the origination, purchase and sale of
mortgage loans in the secondary market. Argo Savings also offers, to a much
lesser extent, Expanded Criteria Loans. These one-to four-family loans which 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 mortgage loans on a "servicing released" basis
into the secondary market and through investment in purchased mortgage servicing
rights ("PMSRs"). More recently, Argo Savings has also generated fee income from
an expanding network of regionally deployed ATMs, both in the Chicago midwest
area and in mid-Atlantic states.
Through Argo Mortgage and on its own, Argo Savings 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 estimated the amounts it would
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 discontinued additional investments in
Discounted Loans in 1997.
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, commercial
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.
On June 29, 1999, Argo Savings 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,
Argo Savings 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 realized Argo Savings 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 Argo Savings. The profit, under generally accepted
accounting principles, will be taken into income by Argo Savings over the lease
term. As a result of this sale and leaseback transaction, Argo Savings rents, as
opposed to owns, the properties from which it transacts business.
MARKET AREA
Argo Savings considers its primary market area to be the greater
Chicago metropolitan area (thereinafter 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.
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
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market area through its network of Margo correspondents. As of December 31,
1999, 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 1999 Annual Report
to Stockholders, portions of which are incorporated herein by reference.
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SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At and for the
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FINANCIAL CONDITION DATA:
Loans receivable, net $ 277,460 $ 245,189 $ 184,358 $ 173,429 $ 142,380
Stock in Federal Home Loan Bank of Chicago 2,303 1,911 3,271 3,428 2,669
Securities 40,891 7,901 4,974 5,788 7,573
Cash and cash equivalents 37,672 10,096 8,579 13,240 9,890
Mortgage loan servicing rights 4,958 5,062 6,706 5,264 4,033
Foreclosed real estate 2,280 3,875 4,251 3,913 2,234
Net assets of discontinued operation - 6,545 5,114 3,546 1,403
Investment in GFS preferred stock 4,600 - - - -
Other assets 22,600 20,497 12,991 13,310 11,204
---------- ---------- ---------- ---------- ----------
Total assets $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
Deposits $ 301,673 $ 232,980 $ 172,469 $ 150,627 $ 123,484
Borrowed money 40,336 21,051 29,497 45,013 36,755
Custodial escrow balances for loans serviced 5,476 5,340 6,400 5,782 9,696
Other liabilities 7,907 5,507 3,774 3,936 572
Junior subordinated debt 17,784 17,784 - - -
Stockholders' equity 19,588 18,414 $ 18,104 $ 16,560 $ 10,879
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
Interest income $ 23,896 $ 17,625 $ 18,263 $ 16,050 $ 13,973
Interest expense 16,014 11,367 10,807 8,741 8,299
---------- ---------- ---------- ---------- ----------
Net interest income 7,882 6,258 7,456 7,309 5,674
Provision for loan losses 965 355 210 248 55
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 6,917 5,903 7,246 7,061 5,619
Noninterest income 2,340 3,810 3,151 2,897 2,465
Noninterest expense 9,079 9,851 9,648 9,311 6,034
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 178 (138) 749 647 2,050
Income tax expense (benefit) (336) (383) 51 (49) 531
---------- ---------- ---------- ---------- ----------
Income from continuing operations 514 245 698 598 1,519
Discontinued operations:
Income from discontinued operation
(net of tax) 135 286 125 736 222
Gain on sale of discontinued operation
(net of tax) 1,928 - - - -
---------- ---------- ---------- ---------- ----------
NET INCOME $ 2,577 $ 531 $ 823 $ 1,334 $ 1,741
========== ========== ========== ========== ==========
Income from continuing operations
Basic $ .26 $ .12 $ .36 $ .48 $ 1.28
Diluted .25 .12 .33 .40 1.08
Net income
Basic $ 1.22 $ .27 $ .43 $ .48 $ 1.28
Diluted 1.25 .26 .39 .40 1.08
</TABLE>
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<TABLE>
<CAPTION>
At and for the
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data (1) (Dollars in thousands, except per share data)
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Return from continuing operations on average
assets (4) 0.15% 0.10% 0.31% 0.32% 0.91%
Return from continuing operations on average
equity (4) 2.68 1.34 3.92 4.88 14.91
Average equity to average assets (4) 5.54 7.58 7.94 6.55 6.08
Stockholders' equity to total assets (4) 5.09 6.12 7.86 7.45 6.25
Interest rate spread 2.54 3.15 4.03 4.62 3.69
Net interest margin 2.53 2.95 3.78 4.29 3.65
Noninterest expense to average assets (4) 3.77 3.80 4.28 4.99 3.61
Non-performing loans to net loans receivable (2) 2.25 2.80 3.57 3.12 1.54
Non-performing assets to total assets (3) (4) 2.12 3.45 4.25 3.53 1.91
Allowance for loan losses to non-performing
loans (2) 25.61 14.42 14.73 16.87 29.54
Allowance for loan losses to net loans receivable (3) .58 .40 .53 .53 .45
Ratio of net charge-offs to average loans
outstanding, .03 .01 .01 .08 .03
excluding Discounted Loans
Average interest-earning assets to average
interest-bearing liabilities 1.01x .96x .95x .94x .99x
Book value per share $ 9.75 $ 9.18 $ 9.25 $ 9.28 $ 8.82
Full-service customer service facilities 5 5 5 5 5
</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 the portfolio of
Discounted Loans receivable.
(4) Restated to remove results of discontinued operation.
LENDING ACTIVITIES
General. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and Discounted Loans receivable, totaled
$277.5 million at December 31, 1999, representing 70.64% of consolidated total
assets. On that date, $249.5 million of total loans outstanding, or 88.99% of
its total loan portfolio, consisted of loans secured by first mortgages on one-
to four-family residential properties, $1.5 million, or 0.55%, consisted of
loans secured by multi-family properties, and $1.0 million, or 0.35%, consisted
of loans that are secured by commercial real estate primarily in suburban Cook
and Lake Counties. In addition, at December 31, 1999, $28.3 million, or 10.11%,
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 were originated, in most instances,
through Margo prior to its 1999 reorganization. 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 $129.7 million of loans both for portfolio and for sale during
1999.
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Analysis of Loan Portfolio. The following table sets forth the composition of
the Company's loan portfolio, including loans held for sale, in dollar amounts
and in percentages of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- --------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family:.............. $249,542 88.99% $233,461 93.64% $177,521 92.20% $177,345 92.50%
Multi-family...................... 1,539 .55 2,128 .85 1,252 .65 1,468 .77
Commercial real estate............ 997 .35 1,390 .56 1,951 1.01 4,523 2.36
------- ------ -------- ------- -------- ------ -------- ------
Total mortgage loans............ 252,078 89.89 236,979 95.05 180,724 93.86 183,336 95.63
Other loans:
Mobile home....................... 161 .06 188 .08 208 .11 248 .13
Other (1)......................... 28,183 10.05 12,134 4.87 11,601 6.03 8,146 4.24
------- ------ -------- ------- -------- ------ -------- ------
Total other loans............... 28,344 10.11 12,322 4.95 11,809 6.14 8,394 4.37
------- ------ -------- ------- -------- ------ -------- ------
Total loans receivable (2)...... 280,422 100.00% 249,301 100.00% 192,533 100.00% 191,730 100.00%
======= ====== ======== ======= ======== ====== ======== ======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 1,411 3,172 7,361 17,636
Allowance for loan losses......... 1,551 940 814 665
------- -------- -------- --------
Loans receivable, net........... $277,460 $245,189 $184,358 $173,429
======= ======== ======== ========
<CAPTION>
AT DECEMBER 31,
------------------------
1995
------------------------
AMOUNT % OF TOTAL
<S> <C> <C>
Mortgage loans:
One- to four-family:.............. $143,931 93.57%
Multi-family...................... 1,180 .77
Commercial real estate............ 2,379 1.55
-------- -------
Total mortgage loans............ 147,490 95.89
Other loans:
Mobile home....................... 379 .25
Other (1)......................... 5,946 3.86
-------- -------
Total other loans............... 6,325 4.11
-------- -------
Total loans receivable (2)...... 153,815 100.00%
=======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 10,847
Allowance for loan losses......... 587
--------
Loans receivable, net........... $142,381
========
</TABLE>
- ----------------------------
(1) Consists primarily of $11.0 million and $3.5 million of home equity loans
secured by one- to four-family properties and $4.8 million and $2.7 million
of construction loans at December 31, 1999 and 1998.
(2) Includes loans receivable and Discounted Loans receivable.
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Loan Originations, Purchases and Sales. Set forth below is a table
showing Argo Savings' loan originations and loan purchases and sales for the
years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
One- to four-family (1) $ 88,157 $ 82,287 $ 56,318
Multi-family - 360 333
------------ ------------ ------------
Total mortgage loans originated 88,157 82,647 56,651
Loans purchased:
Mortgage loans 33,123 79,623 39,521
Discounted Loans - - 8,858
Other loans 8,414 12,750 -
------------ ------------ ------------
Total loans purchased 41,537 92,373 48,379
------------ ------------ ------------
Total loans originated and purchased $ 129,694 $ 175,020 $ 123,167
============ ============ ============
Loans sold:
Mortgage loans receivable (1) $ 12,675 $ 37,401 $ 48,466
Discounted Loans (2) 2,162 11,893 20,711
Other loans - 1,067 -
------------ ------------ ------------
Total loans sold $ 14,837 $ 50,361 $ 69,177
============ ============ ============
</TABLE>
(1) Originations and sales exclude $103.0, $90.1 million, and $38.0 million for
the years ended December 31, 1999, 1998, and 1997 of loans originated and
immediately sold directly to third party investors.
(2) Gains related to these sales were $188,000, $695,000, and $279,000 for the
years ended December 31, 1999, 1998, and 1997.
11
<PAGE> 12
Loan Maturity and Repricing. The following table shows the remaining maturities
or period to repricing of Argo Savings' loan portfolio at December 31, 1999.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. 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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
LOANS
-----
COMMERCIAL
ONE- TO REAL
FOUR-FAMILY MULTI-FAMILY ESTATE OTHER (1) TOTAL
----------- ------------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
AMOUNTS DUE:
Within one year $ 141,249 $ 750 $ 101 $ 14,785 $ 156,885
After one year:
One to three years 32,512 485 896 103 33,996
Three to five years 4,853 - - 402 5,255
Five to ten years 10,047 5 - 8,375 18,427
Ten to twenty years 18,016 237 - 4,679 22,932
Over 20 years 42,865 62 - - 42,927
---------- ------- --------- ---------- ---------
Total due after one year 108,293 789 896 13,559 123,537
---------- ------- --------- ---------- ---------
Total amounts due 249,542 1,539 997 28,344 280,422
Less:
Unearned discounts, premiums
and deferred loan fees, net 1,411 - - - 1,411
Allowance for loan losses 1,298 14 216 23 1,551
---------- ------- --------- ---------- ---------
Loans receivable, net $ 246,833 $ 1,525 $ 781 $ 28,321 $ 277,460
========== ======= ========= ========== =========
</TABLE>
(1) Consists primarily of home equity loans secured by one- to four-family
properties in the amount of $11.0 million and $4.8 million of construction
loans.
12
<PAGE> 13
The following table sets forth at December 31, 1999, the dollar amount of all
loans due after December 31, 2000, and whether such loans have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------
FIXED ADJUSTABLE
RATES RATES TOTAL
----- ----- -----
(IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C>
One- to four-family $ 84,703 $ 23,590 $ 108,293
Multi-family 789 - 789
Commercial real estate 896 - 896
Other loans 13,559 - 13,559
------------ ------------ ------------
Total $ 99,947 $ 23,590 $ 123,537
============ ============ ============
</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. 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 discounted loans. Discounted loans are
purchased 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.
The Savings Bank continues to purchase performing seasoned
one-to-four-family mortgage loans. For the year ended December 31, 1999, $33.1
million of such loans were purchased by the Savings Bank. In addition, prior to
1998, the Savings Bank purchased discounted loans for which the borrowers may
not be current as to principal and interest payments. For the year ended
December 31, 1997, the Savings Bank purchased $8.9 million of Discounted Loans.
The Company is reducing its emphasis on the purchase of Discounted Loans. Argo
Savings discontinued additional investments in Discounted Loans in 1997.
One-to-Four-Family Residential Loans. Argo Savings originates,
purchases, and sells fixed-rate and adjustable-rate mortgage loans secured by
one-to-four-family residences. At December 31, 1999, Argo Savings'
one-to-four-family loan portfolio totaled $249.5 million, or 88.99% 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 Portfolio Loans are adjustable rate and, to a lesser extent, fixed
rate mortgage loans 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
13
<PAGE> 14
Savings Bank has made strategic sales of such loans. Argo Savings 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 mortgage loans are
originated for sale. The yield on jumbo loans is generally between 125 and 375
basis points higher than the yield on Agency Qualified loans.
Since September 1996, Argo Savings has enlarged its product offerings
to include the origination of 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.
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. 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,
1999, Argo Savings had gross loans secured by multi-family properties in the
amount of $1.5 million, or 0.55% 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 $1.0 million or 0.35% of
the total gross loan portfolio at December 31, 1999.
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
14
<PAGE> 15
guarantees through an investigation of the borrower's personal finances.
Commercial real estate lending entails significant additional risks as
compared with one- to four-family residential property lending. Commercial real
estate loans typically involve larger loan balances to a single borrower or
groups of affiliated borrowers. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such may be subject to a greater
extent to adverse conditions in the economy generally.
Consumer 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 years, while mobile home loans have
terms of up to fifteen years. At December 31, 1999, Argo Savings' consumer loan
portfolio totaled $28.3 million, or 10.11%, of Argo Savings' total loan
portfolio, which included $11.0 million of home equity loans and $4.8 million in
single family 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. 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 request for a real estate secured loan, 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.
Upon completion of the loan application processing activities, all 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. If approved, the terms and conditions of the
loan decision, including the amount of the loan, interest rate, amortization
term, brief description of the real estate securing the mortgage as well as all
conditions to final closing of the transaction are provided in writing to the
loan applicant. The loan applicant is required to pay all costs incurred, 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 in connection with the origination of real estate loans conform to
standards imposed by the Agencies, as well as third party investor guidelines
and 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
15
<PAGE> 16
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 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.
Loan Origination and Other Fees. In addition to interest earned on
loans and commitments for making loans, Argo Savings earns fees in connection
with originating loans. Origination fees are a percentage of the principal
amount of the mortgage loan charged to the borrower for the granting of the
loan. Loan fees are accounted for by deferring all loan origination fees and
certain direct costs associated with originations. Net deferred fees or costs
are amortized as yield adjustments over the 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, 1999, Argo Savings had $1.4
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 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 with weaknesses and
characteristics considered "uncollectable" 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. 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
the asset so classified, or to charge-off such amount.
At December 31, 1999, Argo Savings had $6.1 million of loans classified
as Substandard or Doubtful and $2.3 million of REO. At December 31, 1999, Argo
Savings had no assets classified as Loss. Excluded from the loans information is
the $1.7 million of discounted loans ninety 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.
Management evaluates collectibility of the Discounted Loans receivable on an
aggregate pool basis.
16
<PAGE> 17
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 secured loans remain 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 managed by Argo Savings
through its in-house personnel.
17
<PAGE> 18
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)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing loans (1)(2) $ 6,039 $ 6,518 $ 5,525 $ 3,942 $ 1,987
Foreclosed real estate, net (3) 2,280 3,875 4,251 3,913 1,473
--------- --------- --------- --------- --------
Total non-performing assets $ 8,319 $ 10,393 $ 9,776 $ 7,855 $ 3,460
========= ========= ========= ========= ========
Allowance for loan losses as a
percentage of net loans receivable (1) .51% .40% .53% .53% .45%
========= ========= ========= ========= ========
Allowance for loan losses to non-performing
loans (1) 25.68% 14.42% 14.73% 16.87% 29.54%
========= ========= ========= ========= ========
Non-performing loans as a percentage of
loans receivable (1) 2.25% 2.80% 3.57% 3.12% 1.54%
========= ========= ========= ========= ========
Non-performing assets as a percentage of
total assets (4) 2.12 3.45 4.25 3.53 1.91
========= ========= ========= ========= ========
</TABLE>
(1) All non-performing loan totals exclude Discounted Loans receivable ninety
days or more past due which at December 31, 1999, 1998, 1997, 1996, and
1995 amounted to $1.7 million, $3.0 million, $6.2 million, $15.5 million,
and $8.4 million. All gross loan totals exclude Discounted Loans receivable
which at December 31, 1999, 1998, 1997, 1996, and 1995 amounted to $9.1
million, $12.4 million, $30.6 million, $47.7 million, and $13.5 million.
(2) At December 31, 1999, $1.2 million or 20.2% of the $6.0 million in
non-performing loans represent loans originated by the Savings Bank. The
remaining loans represent loans purchased by the Savings Bank.
(3) Includes $746,000 of foreclosed real estate related to the Discounted Loans
receivable portfolio at December 31, 1999. (4) Restated to reflect impact
reduction in total assets for assets of discontinued operations.
18
<PAGE> 19
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- ------------------------ ----------------------
LOANS LOANS LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE, NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET OF LOANS NET OF LOANS NET
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family....... 78 $ 3,364 86 $ 6,039 114 $6,042 100 $ 6,128
Multi-family.............. - - - - 1 112 2 225
---- ------- --- ------- ---- ------- ---- -------
Total mortgage loans...... 78 3,364 86 6,039 115 6,154 102 6,353
Other loans.................. - - - - 7 273 3 165
---- ------- --- ------- ---- ------- ---- -------
Total................. 78 $ 3,364 86 $ 6,039 122 $ 6,427 105 $ 6,518
==== ======= === ======= ==== ======= ==== =======
Delinquent loans to total
loans receivable (1)...... 1.25% 2.25% 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
----- ------- ---- -------
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>
- ----------------------
(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, 1999, the Savings
Bank experienced a decrease in the percentage of net loans 90 days or more
delinquent from 2.80% of total loans receivable and loans held for sale
(excluding Discounted Loans) at December 31, 1998 to 2.25% of total loans
receivable and loans held for sale (excluding Discounted Loans) at December 31,
1999. 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,
1999, represents specific reserves currently in place on 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 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
19
<PAGE> 20
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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
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
Provision for loan losses:
Mortgage loans:
One- to four-family....................... 965 355 210 248 96
Multi-family.............................. - - - - -
Commercial loans............................ - - - - -
Other loans................................. - - - - (41)
------- ------- -------- -------- --------
Total..................................... 965 355 210 248 55
Purchased allowance on one-to-four-family loans - 30 - - -
Transfer to allowance for losses on foreclosed
real estate............................... (270) (240) (50) (77) (45)
Charge-offs:
Mortgage loans:
One- to four-family....................... (84) (19) (11) (89) (36)
Multi-family.............................. - - - - -
Commercial loans............................ - - - - -
Other loans................................. - - - (4) -
Total..................................... (84) (19) (11) (93) (36)
------- ------- -------- -------- --------
Balance at end of year:
Mortgage loans:
One-to-four-family........................ 1,298 687 561 412 330
Multi-family.............................. 14 14 14 14 14
Commercial loans............................ 216 216 216 216 216
Other loans................................. 23 23 23 23 27
------- ------- -------- -------- --------
Total..................................... $ 1,551 $ 940 $ 814 $ 665 $ 587
======= ======= ======== ======== ========
Ratio of net charge-offs during the period to
loans outstanding, excluding Discounted Loans .03% .01% .01% .08% .03%
======= ======= ======== ======== ========
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans...... .58% .40% .53% .53% .45%
======= ======= ======== ======== ========
</TABLE>
20
<PAGE> 21
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased Mortgage Servicing Rights ("PMSRs" or "MSRs") 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 PMSRs, 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. Thus, the PMSRs act as a
natural hedge against the mortgage loans in Argo Savings' portfolio in a
changing interest rate environment.
Argo Savings' principal investment in mortgage servicing rights
("MSRs") is through a $3.3 million equity interest in a limited partnership
whose business activities are to purchase MSRs and a $1.2 investment in
subordinated debentures of the partnership. There are several unaffiliated
equity investors in the limited partnership. The purchase of the servicing
rights is then leveraged, allowing
21
<PAGE> 22
the limited partnership to purchase MSRs 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 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 MSRs 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 MSRs. The task of finding and acquiring the PMSRs 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 MSRs on refinancings. The
loans may be refinanced at lower rates, for longer terms, and, from time to
time, with higher balances with the MSRs on such loans retained by the limited
partnership.
Argo Savings accounts for the investment in the three 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 appraised value lower than the current book value. The general
partner recorded a valuation allowance. Argo Savings' proportionate share of the
writedown was $1.4 which Argo Savings recorded based upon information received
from DMI. During 1999, a portion of Argo's investment was converted to
subordinated debentures which yield interest at 30%. In addition, the value of
the servicing revenue remained stable and the Bank did not receive an additional
write-down.
In addition to its investment in the limited partnerships, at December
31, 1999, the Savings Bank had a $464,000 investment in a PMSR portfolio that it
owns directly. At December 31, 1999, this directly owned PMSR portfolio
consisted of 2,365 mortgage loans having an outstanding principal balance of
$35.7 million.
A secondary benefit derived from the PMSRs is the associated 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, 1999, were $6.0 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, 1999, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 15.0%.
22
<PAGE> 23
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Savings Bank is to invest funds
among various categories of investments and maturities based upon the Savings
Bank's asset/liability management policies, 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 of government sponsored entities and federal agency obligations, and
other issues that are rated investment grade. At December 31, 1999, the Company
had $15.7 million of securities available-for-sale with an aggregate fair value
of $14.4 million and $25.9 million of securities held-to-maturity with an
aggregate fair value of $24.1 million.
The Company maintains a portfolio of marketable equity securities and
trust preferred securities, generally comprised of the 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 believe, after analysis of market pricing, business practices, and
earnings potential, were under-valued and represent an opportunity for profit
from sales of such securities. At December 31, 1999, the Company and the Savings
Bank had $6.8 million in these securities, which are included in the
available-for-sale totals above.
In addition, the Company has been actively trading various marketable
equity securities, primarily FNMA and FHLMC stock. These securities are
classified as trading and totaled $688,000 at December 31, 1999, with market
value approximately equal to cost.
The Company owned as of December 31, 1999 $4.6 million of Series B
preferred stock issued by GFS Holdings Company in connection with the
acquisition of On-Line by GFS. The preferred stock bears interest at 7.625% per
annum payable semi-annually .
23
<PAGE> 24
The following table sets forth the composition of the Company's
available-for-sale portfolio in dollar amounts and percentages at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1999 1998 1997
---- ---- ----
FAIR % OF FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency obligations $ 5,157 35.90% $ 2,088 28.97% $ - -%
Municipal bonds 378 2.63 380 5.27 380 7.64
Corporate bonds 393 2.74 - - - -
--------- ------- ------- ------- ------- ------
Total debt securities 5,928 41.27 2,468 34.24 380 7.64
Equity securities 3,163 22.02 2,441 33.87 1,667 33.51
Trust preferred securities 3,591 25.00 368 5.10 - -
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 87 0.61 109 1.51 124 2.50
Federal National Mortgage
Association Fannie Mae 1,620 11.28 1,797 24.93 2,799 56.27
--------- ------- ------- ------- ------- ------
Total mortgage-backed securities 1,707 11.89 1,906 26.44 2,923 58.77
Net premium (discount) 28 0.19 32 .44 39 .78
Unrealized loss on securities
available-for-sale (53) (0.37) (7) (0.09) (35) (0.70)
--------- ------- ------- ------- ------- ------
Net mortgage-backed securities 1,682 11.71 1,931 26.79 2,927 58.85
--------- ------- ------- ------- ------- ------
Total securities available-for-sale $ 14,364 100.00% $ 7,208 100.00% $ 4,974 100.00%
========= ======= ======= ======= ======= ======
FHLB of Chicago stock $ 2,303 100.00% $ 1,911 100.00% $ 3,271 100.00%
========= ======= ======= ======= ======= ======
</TABLE>
The following table sets forth the composition of the Company's
held-to-maturity securities portfolio in dollar amounts and percentages at
December 31, 1999. The Company held no held-to-maturity securities at December
31, 1998 or 1997.
Amortized % of
Cost Total
---- -----
Corporate bonds $ 726 2.81%
U.S. agency securities 24,157 93.42
Collateralized mortgage obligations 976 3.77
---------- ------
Total securities held-to-maturity $ 25,859 100.00%
========== ======
24
<PAGE> 25
The following table sets forth the amortized cost and fair values of
the Company's available-for-sale and held-to-maturity securities at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -----------------------
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 agency
obligations $ 5,500 $ 5,157 $ 2,091 $ 2,088 $ - $ -
Municipal bonds 370 378 370 380 370 380
Corporate bonds 411 393 - - - -
Equity securities 3,761 3,163 2,828 2,441 1,695 1,667
Trust preferred securities 3,960 3,591 367 368 - -
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 88 85 110 109 125 124
Federal National Mortgage
Association Fannie Mae 1,647 1,597 1,827 1,822 2,837 2,803
-------- -------- -------- -------- --------- --------
Total mortgage-backed securities 1,735 1,682 1,937 1,931 2,962 2,927
-------- -------- -------- -------- --------- --------
Total securities available-for-sale $ 15,737 $ 14,364 $ 7,593 $ 7,208 $ 5,027 $ 4,974
======== ======== ======== ======== ========= ========
FHLB of Chicago stock $ 2,303 $ 2,303 $ 1,911 $ 1,911 $ 3,271 $ 3,271
======== ======== ======== ======== ========= ========
Securities held-to-maturity:
Corporate bonds $ 726 $ 561 $ - $ - $ - $ -
U.S. agency securities 24,157 22,545 - - - -
Collateralized mortgage obligations 976 976 - - - -
-------- -------- -------- -------- --------- --------
Total securities held-to-maturity $ 25,859 $ 24,082 $ - $ - $ - $ -
======== ======== ======== ======== ========= ========
</TABLE>
25
<PAGE> 26
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of securities as of December
31, 1999.
<TABLE>
<CAPTION>
MORE THAN ONE YEAR MORE THAN FIVE YEARS MORE THAN TEN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS YEARS TOTAL
----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---------- -------- ---------- --------- ---------- --------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Government and
agency obligations $ - -% $ - -% $1,500 7.05% $ 4,000 7.01% $ 5,500 7.02%
Municipal bonds - - - - 370 9.50 - - 370 9.50
Corporate bonds - - - - 411 8.00 - - 411 8.00
Equity securities (1) 3,761 - - - - - - - 3,761 -
Trust preferred
securities 3,960 7.56 - - - - - - 3,960 7.56
Mortgage-backed
securities
Federal Home Loan
Mortgage Corporation
Freddie Mac 88 5.87 - - - - - - 88 5.87
Federal National
Mortgage Association
Fannie Mae 1,647 6.02 - - - - - - 1,647 6.02
------- ------ ------ -------- --------
Total mortgage-
backed securities 1,735 6.01 - - - - - - 1,937 6.01
------- ------ ------ -------- --------
Total available-
for-sale $ 9,456 7.04% $ - -% $2,281 7.60% $ 4,000 7.01% $15,737 7.11%
======= ====== ====== ======== =======
HELD-TO-MATURITY:
Corporate bonds $ - -% $ - -% $ - -% $ 726 7.61% $ 726 7.61%
U.S. agency securities - - 3,000 7.02 4,000 7.26 17,157 7.09 24,157 7.12
Collateralized mortgage
obligations 976 7.00 - - - - - - 976 7.00
------- ------ ------ -------- -------
Total held-to-
maturity $ 976 7.00% $3,000 7.02% $4,000 7.26% $ 17,883 7.11% $25,859 7.12%
======= ====== ====== ======== =======
</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 associated with PMSRs. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and market conditions.
Additionally, the Company's sources of funds include borrowed money, which
includes advances from the Federal Home Loan Bank of Chicago ("FHLB"), a note
payable, a margin account and federal funds purchased. In addition, the Company
has issued junior subordinated debentures. 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.
26
<PAGE> 27
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 $38.2
million in brokered deposits at December 31, 1999. Argo Savings has
traditionally priced its deposit products at or near market rates in its primary
markets.
27
<PAGE> 28
Deposit Flow. The following table sets forth the composition of and the
change in dollar amount of deposit accounts offered by Argo Savings between the
dates indicated.
<TABLE>
<CAPTION>
AMOUNT AT PERCENT AMOUNT AT PERCENT AMOUNT AT
DECEMBER 31, OF TOTAL INCREASE DECEMBER 31, OF TOTAL INCREASE DECEMBER 31,
1999 DEPOSITS (DECREASE) 1998 DEPOSITS (DECREASE) 1997
-------------- --------- ---------- ------------ --------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts $ 6,072 2.0% $ (12,172) $ 18,244 7.8% $ 13,748 $ 4,496
Passbook accounts 19,873 6.6 (1,434) 21,307 9.1 3,700 17,607
NOW accounts 10,612 3.5 1,567 9,045 3.9 316 13,225
Money market accounts 4,426 1.5 (280) 4,706 2.0 (1,517) 6,223
--------- ------ --------- ---------- ------ -------- ----------
Total 40,983 13.6 (12,319) 53,302 22.8 16,247 37,055
--------- ------ --------- ---------- ------ -------- ----------
Certificate accounts:
3.99% or less - - - - - (10) 10
4.00% to 4.99% 47,892 15.9 19,401 28,491 12.2 27,617 874
5.00% to 5.99% 118,805 39.4 (20,234) 139,039 59.7 76,104 62,935
6.00% to 6.99% 93,542 31.0 81,877 11,665 5.0 (58,297) 69,962
7.00% to 7.99% 443 .1 (32) 475 0.3 (1,038) 1,513
8.00% to 8.99% 8 - - 8 - (112) 120
--------- ------ --------- ---------- ------ -------- ----------
Total 260,690 86.4 81,012 179,678 77.2 44,264 135,414
--------- ------ --------- ---------- ------ -------- ----------
Total deposits $ 301,673 100.0% $ 68,693 $ 232,980 100.0% $ 60,511 $ 172,469
========= ====== ========= ========== ====== ======== ==========
Weighted average rate 5.16% 4.60% 5.12%
========= ========== ==========
<CAPTION>
PERCENT
OF TOTAL INCREASE
DEPOSITS (DECREASE)
--------- ----------
<S> <C> <C>
Non-interest bearing accounts 2.6% $ 885
Passbook accounts 10.2 (742)
NOW accounts 5.1 (86)
Money market accounts 3.6 1,266
------ --------
Total 21.5 1,323
------ --------
Certificate accounts:
3.99% or less - (42)
4.00% to 4.99% .5 105
5.00% to 5.99% 36.5 (8,234)
6.00% to 6.99% 40.5 30,768
7.00% to 7.99% 0.9 (2,099)
8.00% to 8.99% 0.1 21
------ --------
Total 78.5 114,895
------ --------
Total deposits 100.0% $150,627
====== ========
Weighted average rate
</TABLE>
28
<PAGE> 29
Certificate Accounts. The following table presents the amount of
certificate accounts outstanding at December 31, 1999, and the periods to
maturity or repricing.
WEIGHTED
AMOUNT AVERAGE
(IN THOUSANDS) RATE
------------ ----
Within one year (1) $ 183,289 5.34%
One to three years 71,779 5.78
Thereafter 5,622 6.08
---------- ----
Total $ 260,690 5.62%
========== ====
(1) Includes a $13 million certificate that matured on February 22, 2000 and was
renewed at that time for an additional 90 days.
At December 31, 1999, Argo Savings had outstanding $54.9 million of
certificate of deposit accounts in amounts of $100,000 or more maturing or
repricing as follows:
AMOUNT WEIGHTED
(IN THOUSANDS) AVERAGE RATE
-------------- ------------
Three months or less $ 22,023 4.63%
Over three through six months 11,892 5.44
Over six through 12 months 25,820 5.90
Over 12 months 15,399 5.88
---------- ----
Total $ 75,134 5.45%
========== ====
Argo Savings had pledged securities with principal balances totaling
approximately $3.3 million and $6.4 million at December 31, 1999 and 1998, as
collateral to secure certain public deposits. In addition to securities pledged
at December 31, 1999 and 1998, the Savings Bank also had letters of credit
totaling $14.3 million and $13.3 million as collateral to secure several State
of Illinois certificates. The total State of Illinois certificates secured by
letters of credit and securities totaled approximately $15.5 million and $15.1
million in at December 31, 1999 and 1998.
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the years indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Deposits in excess of withdrawals $56,151 $64,346 $ 13,262
Interest credited 12,542 9,414 8,580
------- ------- --------
Net increase in
deposits $68,693 $73,760 $ 21,842
======= ======= ========
Substantially all of Argo Savings' depositors are residents of the
States of Illinois and Indiana.
29
<PAGE> 30
Borrowings. The Company's borrowings at December 31, 1999 include
margin accounts, FHLB advances, and junior subordinated debentures.
During 1998, the Company issued 11% junior subordinated debentures
aggregating $17,784,000 to Argo Capital Trust. Argo Capital 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 at Argo Savings 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 Argo Capital Trust and the capital securities in the event of
the occurrence of an event of default, as defined. Debt issuance costs totaling
$1,913,000, including $244,000 paid in 1999, 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 for Argo
Savings' lending and investment activities and for its general business
purposes, Argo Savings can also borrow funds from the FHLB to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
functions as a central reserve bank providing credit for 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 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, 1999, Argo Savings had $17.8 million of fixed rate advances and
$17.1 million of adjustable-rate advances from the FHLB with interest rates
ranging from 4.74% to 8.43%.
The margin account loans are from third-party securities brokers. The
rate of interest on the loans is negotiated with the brokers. The margin account
loans were secured at December 31, 1999 by securities held by the brokers having
market values of $24.4 million.
30
<PAGE> 31
The following table sets forth information regarding borrowings by the
Company on a consolidated basis at the end of and during the year indicated. The
borrowings at and during the year consisted of FHLB advances, junior
subordinated debt, promissory notes, federal funds purchased, capital lease
obligations. The weighted average was computed on a monthly average basis.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of year on:
FHLB advances 5.66% 6.10% 6.22%
Junior subordinated debt 11.00 11.00 -
Other borrowings 7.79 7.71 8.63
Maximum amount of borrowings outstanding at any month end:
FHLB advances $ 34,932 $ 20,132 $ 49,587
Junior subordinated debt 17,784 17,784 -
Other borrowings 5,404 14,658 11,542
Average borrowings outstanding with respect to:
FHLB advances $ 34,432 $ 18,987 $ 30,191
Junior subordinated debt. 17,784 2,680 -
Other borrowings 3,388 12,624 10,621
-------- -------- --------
Total $ 55,604 $ 34,291 $ 40,812
======== ======== ========
Weighted average interest rate during the year paid on:
FHLB advances 5.35% 5.69% 5.98%
Junior subordinated debt 11.00 11.00 -
Other borrowings 8.67 8.60 8.43
Total Weighted Average 7.35 7.18 6.60
</TABLE>
31
<PAGE> 32
SUBSIDIARIES
Argo Savings has a wholly-owned subsidiary, Dolton-Riverdale Savings
Service Corp. ("Dolton-Riverdale"). At December 31, 1998, Argo Savings had an
equity investment in Dolton-Riverdale of $159,000.
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, reflected by a relatively high core deposit
base.
PERSONNEL
Effective October 1, 1999 the Company entered into a Client Services
Agreement with Synergy, a professional employer organization. Under the Client
Services Agreement all employees of the Company were transferred to Synergy with
Synergy assigning employees to the Company as the work place employer. At
December 31, 1999, 79 employees of Synergy were assigned to the Company.
32
<PAGE> 33
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
33
<PAGE> 34
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. 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
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<PAGE> 35
risk exposure exceeds 2% must deduct an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the 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, 1999, Argo Savings met each of its capital
requirements.
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<PAGE> 36
The following table presents Argo Savings' capital position, amounts
and ratios at December 31, 1999:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Actual Required Excess Actual Required
Amount Amount Amount Percent Percent
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Tangible . . . . . . . . . $21,853 $5,553 $16,300 5.9% 1.5%
Risk-based:
Tier I (core) . . . . . 21,853 14,809 7,044 5.9 4.0
Total . . . . . . . . . 23,404 15,191 8,213 12.3 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.
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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 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 January 1, 2000.
The Argo Savings' assessment rate for the year ended December 31, 1999
was 6.1 basis points and the premium paid for this period was $146,000, 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.
New Legislation.
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, 1999, Argo Savings' limit on loans to one borrower was $3.3
million. At December 31, 1999, the Argo Savings' largest aggregate outstanding
balance of loans to one borrower was $4.2 million. The Savings Bank's authority
to approve loans in excess of the regulatory Loan to One Borrower limitation was
approved by the OTS under Section 563.93(d)(3) of OTS Regulations for Insured
Institutions, relating to loans provided for the construction of housing units.
All other borrowers have aggregate balances below the savings bank's limit to
one borrower.
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,
1999, Argo Savings maintained 88% 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
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<PAGE> 38
greater of (i) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year or (ii) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior 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, 1999, the Bank was classified as a Tier 1 Bank.
Effective April 1, 1999, the Office of Thrift Supervision's capital
distribution regulation changed. Under the new regulation, an application to and
the prior approval of the Office of Thrift Supervision is required before any
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under Office of Thrift Supervision regulations
(generally, compliance with all capital requirements and examination ratings in
one of two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with office of Thrift Supervision. If an application is
not required, the institution must still give advance notice to office of Thrift
Supervision 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, 1999 was 12.42%, 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, 1999 totaled $66,000.
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
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<PAGE> 39
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
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
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Companies have not been audited by the IRS during the last ten (10) years. For
federal income tax purposes Argo Bancorp and its subsidiaries (except Margo)
file consolidated income tax returns and report their income on a calendar year
basis using the accrual method of accounting and subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the tax reserve for bad debts, discussed below. Margo
Financial Services, LLC files a separate partnership income tax return.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as Argo Savings, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specific limitations, be
deducted in arriving at their taxable income. Argo Savings' deduction with
respect to "qualifying loans", which are generally loans secured by certain
interests in real property, could be computed using an amount based on a six (6)
year moving average of Argo Savings' actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of Argo Savings' taxable income (the
"PTI Method"), computed without regard to this deduction and with additional
modifications and reduced by the amounts of any permitted addition to the
non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and Argo
Savings 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
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amount equal to 75.0% of the amount by which the Savings Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). AMT cannot be reduced by tax
credits, other than foreign tax credits. Accordingly, the 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, beginning in January 1, 2001, 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 other than any transfer of
securities that management elects from held-to-maturity to available-for-sale.
Management has not decided whether to adopt Statement No. 133 early.
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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.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The facilities are being leased back from the purchaser
over a period of 170 months. The leases are accounted for as operating leases.
The gain of $2,400,000 was deferred and is being recognized into income over the
life of the leases, with $86,000 recognized during the year ended December 31,
1999. The leases contain renewal options for three additional periods of ten,
five and five years each.
The Company believes that the Argo Savings' 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, 1999,
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 the caption "Shareholder Information"
in the Registrant's 1999 Annual Report to Stockholders on pages 62 through 64
and is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data appears under the caption
"Selected Consolidated Financial Condition and other Data of the Corporation" in
the Registrant's 1999 Annual Report to Stockholders on pages 4 and 5 and is
incorporated herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1999 Annual Report to Stockholders on pages 6 through 22 and is
incorporated herein by reference.
ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The above-captioned information appears under the caption "Quantitative
and Qualitative Disclosures about Market Risk" of the 1999 Annual Report to
Stockholders on pages 20 through 22 and is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1999 and 1998, together with the report thereon
by Crowe, Chizek and Company LLP, appears in the Registrant's 1999 Annual Report
to Stockholders, on pages 23 through 61 and is incorporated herein by reference.
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1997 appears in the Registrant's 1999 Annual
Report to Stockholders on pages 23 through 61 and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 May 2, 2000 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 May 2, 2000 under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 May 2, 2000
under "Security Ownership of Certain Beneficial Owners" and "Information with
respect to the Nominee, Continuing Directors and Certain Executive Officers."
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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 May 2, 2000 under
"Indebtedness of Management and Transactions with Certain Related Persons."
PART IV.
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 Report of Independent Auditors,
appearing in the 1999 Annual Report to Stockholders are incorporated
herein by reference.
Report of Independent Auditors.
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
Notes to the Consolidated Financial Statements.
The remaining information appearing in the 1999 Annual Report to
Stockholders 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 Bylaws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.**
3.2 By-Laws of Argo Bancorp, Inc.**
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Exhibit No. 4.
4.1 Stock Certificate of Argo Bancorp, Inc.**
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. *
10.6 Employment Agreement between Argo Bancorp, Inc. and Colleen A.
Kitch
Exhibit No. 11.
11.1 Computation of earnings per share (included in Note 18 to
the Company's audited financial statements).
Exhibit No. 13.
13.1 Portions of the 1999 Annual Report to Stockholders.
Exhibit No. 21.
21.1 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.
27.1 Financial Data Schedule (filed herewith)
-----------------
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on July 20,
1998 and any amendments, Registration No. 333-59435.
(a)(4) REPORTS ON FORM 8-K
None.
45
<PAGE> 46
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 31, 2000 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 31, 2000 By: /s/ John G. Yedinak
----------------------------
John G. Yedinak, Chief
Executive Officer and Director
(Principle executive officer)
Date: March 31, 2000 By: /s/ Sergio Martinucci
----------------------------
Sergio Martinucci, Vice
President and Director
Date: March 31, 2000 By: /s/ Arthur Byrnes
---------------------------
Arthur Byrnes, Director
Date: March 31, 2000 By: /s/ Donald G. Wittmer
---------------------------
Donald G. Wittmer, Director
Date: March 31, 2000 By: /s/ Frances M. Pitts
---------------------------
Frances M. Pitts, Secretary
and Director
Date: March 31, 2000 By: /s/ Dominic M. Fejer
---------------------------
Dominic M. Fejer
(principal accounting and
financial officer)
46
<PAGE> 1
EXHIBIT 13
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
<PAGE> 2
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
CONTENTS
REPORT OF INDEPENDENT AUDITORS 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Argo Bancorp, Inc.
Summit, Illinois
We have audited the accompanying consolidated statements of financial condition
of Argo Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years 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 audits. The accompanying consolidated financial
statements of the Company for the year ended December 31, 1997 were audited by
other auditors whose report dated March 24, 1998 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 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, 1999 and 1998 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 17, 2000
<PAGE> 4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 5,603 $ 3,216
Interest-earning deposits 32,069 6,880
--------- ---------
Total cash and cash equivalents 37,672 10,096
Trading account securities 668 693
Securities available-for-sale 14,364 7,208
Securities held-to-maturity (fair value of $24,082) 25,859 --
Loans receivable, net 268,290 232,788
Discounted loans receivable, net 9,170 12,401
Mortgage loan servicing rights 464 593
Investment in limited partnership 4,494 4,469
Investment in GFS preferred stock 4,600 --
Stock in Federal Home Loan Bank of Chicago 2,303 1,911
Foreclosed real estate, net 2,280 3,875
Premises and equipment, net 8,514 4,787
Debt issuance costs related to junior subordinated debt, net 1,838 1,657
Accrued interest receivable 3,392 2,024
Prepaid expenses and other assets 8,856 12,029
Net assets of discontinued operation -- 6,545
--------- ---------
Total assets $ 392,764 $ 301,076
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 301,673 $ 232,980
Borrowed money 40,336 21,051
Advance payments by borrowers for taxes and insurance 902 853
Custodial escrow balances for loans serviced for others 5,476 5,340
Accrued interest payable 966 661
Other liabilities 6,039 3,993
Junior subordinated debt 17,784 17,784
Stockholders' equity
Preferred stock 3 3
Common stock 20 20
Additional paid-in capital 8,829 8,829
Retained earnings - substantially restricted 12,260 10,084
Employee Stock Ownership Plan loan (426) --
Unearned stock awards (248) (284)
Accumulated other comprehensive loss (850) (238)
--------- ---------
Total stockholders' equity 19,588 18,414
--------- ---------
Total liabilities and stockholders' equity $ 392,764 $ 301,076
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
<PAGE> 5
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable $ 18,564 $ 14,445 $ 12,072
Discounted loans receivable 1,235 2,179 5,249
Mortgage-backed securities available-for-sale 114 143 293
Securities available-for-sale 1,011 252 288
Securities held-to-maturity 1,167 -- --
Interest-earning deposits 1,805 606 361
-------- -------- --------
Total interest income 23,896 17,625 18,263
-------- -------- --------
Interest expense
Deposits 12,542 9,414 8,581
Borrowed money 1,567 1,681 2,226
Junior subordinated debt 1,905 272 --
-------- -------- --------
Total interest expense 16,014 11,367 10,807
-------- -------- --------
Net interest income 7,882 6,258 7,456
Provision for loan losses 965 355 210
-------- -------- --------
Net interest income after provision for loan losses 6,917 5,903 7,246
Noninterest income
Loan servicing income 1,372 1,626 962
Net gain (loss) on sale of
Loans held for sale 200 853 217
Discounted loans receivable 188 695 279
Foreclosed real estate (533) (228) 19
Securities available-for-sale (2) 234 710
Profits on trading account activity 119 245 --
Branch locations 86 976 --
Fees and service charges 638 702 477
Net income (loss) on investment in limited partnership 166 (1,399) 341
Other 106 106 146
-------- -------- --------
Total noninterest income 2,340 3,810 3,151
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
3.
<PAGE> 6
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Noninterest expense
Compensation and benefits $ 3,741 $ 4,038 $ 4,301
Occupancy and equipment 1,637 1,663 1,347
Federal deposit insurance premiums 146 112 102
Loan expense 797 816 620
Professional fees 572 992 1,261
Advertising and promotion 253 315 382
Goodwill amortization 47 102 102
Data processing 396 334 289
Other 1,490 1,479 1,244
---------- ---------- ----------
Total noninterest expense 9,079 9,851 9,648
---------- ---------- ----------
Income (loss) from continuing operations before income taxes 178 (138) 749
Income tax expense (benefit) (336) (383) 51
---------- ---------- ----------
Income from continuing operations 514 245 698
Income from discontinued operation (net of tax) 135 286 125
Gain on sale of discontinued operation (net of tax) 1,928 - -
---------- ---------- ----------
Income from discontinued operations 2,063 286 125
---------- ---------- ----------
Net income $ 2,577 $ 531 $ 823
========== ========== ==========
Per share amounts
Income from continuing operations
Basic $ .26 $ .12 $ .36
Diluted .25 .12 .33
Income from discontinued operations
Basic $ 1.06 $ .15 $ .07
Diluted 1.00 .14 .06
Net income
Basic $ 1.32 $ .27 $ .43
Diluted 1.25 .26 .39
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE> 7
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Com- Total
Additional Unearned prehensive Stock-
Preferred Common Paid-in Retained ESOP Stock Income holders'
Stock Stock Capital Earnings Loan Awards (Loss) Equity
-------- -------- -------- -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- $ 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
Comprehensive income:
Net income -- -- -- 2,577 -- -- -- 2,577
Other comprehensive loss -- -- -- -- -- -- (612) (612)
Total comprehensive income 1,965
Purchase of ESOP shares -- -- -- -- (498) -- -- (498)
Release of ESOP shares -- -- -- -- 72 -- -- 72
MRP stock awards earned -- -- -- -- -- 36 -- 36
Cash dividends ($.20 per share) -- -- -- (401) -- -- -- (401)
-------- -------- -------- -------- --------- --------- --------- ---------
Balance at December 31, 1999 $ 3 $ 20 $ 8,829 $ 12,260 $ (426) $ (248) $ (850) $ 19,588
======== ======== ======== ======== ========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE> 8
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Income from continuing operations $ 514 $ 245 $ 698
Adjustments to reconcile income from continuing operations
to net cash from operating activities
Depreciation and amortization 1,100 757 676
Accretion of discounts and deferred loan fees 1,761 (1,867) (1,032)
Deferred income tax expense (benefit) (780) (580) 196
Provision for losses on loans receivable
and foreclosed real estate 965 355 248
Loss (gain) on sale of
Loans held for sale (200) (853) (217)
Discounted loans receivable (188) (695) (279)
Securities available-for-sale 2 (234) (710)
Trading account securities (119) (245) --
Foreclosed real estate 533 228 (19)
Branch location (86) (976) --
Net change in trading account activity 279 (448) --
Net change in investment in limited partnership (25) 1,443 (1,731)
Loans originated and purchased for sale, net 10,305 (33,751) 25,884
Proceeds from sale of discounted loans receivable 2,162 10,827 20,990
Goodwill amortization 47 102 104
Amortization of purchased loan servicing rights 129 201 169
MRP stock and ESOP shares earned 108 117 122
Decrease (increase) in accrued interest receivable and
prepaid expenses and other assets 2,855 (5,489) 1,571
Increase (decrease) in accrued interest payable and other liabilities 62 1,725 (1,152)
-------- -------- --------
Net cash from operating activities 19,424 (29,138) 45,518
Cash flows from investing activities
Loans originated and purchased for portfolio, net (49,025) (37,708) (61,368)
Proceeds from maturities of and principal repayments on
securities available-for-sale 3,402 645 855
Proceeds from sale of
Securities available-for-sale 420 2,993 8,668
Stock in Federal Home Loan Bank of Chicago -- 1,360 157
Foreclosed real estate 3,011 3,010 4,543
Purchased loan servicing rights 11,100 -- 120
Premises and equipment -- 89 --
On-Line Financial Services, Inc., net 4,583 -- --
Gurnee branch, net of cash and cash equivalents -- (11,965) --
Banking facilities 5,850 -- --
Purchase of
Loan servicing rights (11,100) -- --
Securities available-for-sale (12,099) (6,157) (8,088)
Securities held-to-maturity (25,859) -- --
Premises and equipment (8,267) (2,065) (3,553)
Stock in Federal Home Loan Bank of Chicago (392) -- --
Cash paid to former stockholders of On-Line (575) (454) --
-------- -------- --------
Net cash from investing activities (78,951) (50,252) (58,666)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
6.
<PAGE> 9
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits $ 68,693 $ 73,760 $ 21,842
Proceeds from borrowed money 24,885 73,968 88,433
Repayment of borrowed money (5,600) (81,875) (103,720)
Proceeds from issuance of junior subordinated debentures,
net of debt issuance expenses (181) 16,115 --
Purchase of MRP shares -- -- (486)
Purchase of additional ESOP shares (498) -- --
Proceeds from stock issuance -- -- 412
Proceeds from sale of MRP stock -- -- 400
Proceeds from exercise of stock options -- 186 525
Dividends paid (401) (359) (352)
Net change in advance payment by borrowers for taxes
and insurance 49 112 717
Net change in custodial balances for loans serviced 136 (1,060) 618
--------- --------- ---------
Net cash from financing activities 87,083 80,847 8,389
Net cash provided by discontinued operations 20 60 98
--------- --------- ---------
20 60 98
Net change in cash and cash equivalents 27,576 1,517 (4,661)
Cash and cash equivalents at beginning of year 10,096 8,579 13,240
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,672 $ 10,096 $ 8,579
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 15,709 $ 10,970 $ 10,717
Income taxes 240 15 76
Supplemental disclosure of noncash investing and
financing activities
Assumption of liability related to sale of On-Line
Financial Services, Inc. $ 546
Preferred stock received related to sale of On-Line
Financial Services, Inc. 4,600
Sale of Gurnee branch
Assets sold $ 351
Cash paid 12,316
---------
Net liabilities sold $ 11,965
=========
Transfer of loans to foreclosed real estate 2,219 $ 3,102 4,955
Deferred gain on sale lease back 2,410
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
<PAGE> 10
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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 subsidiary, Argo Federal Savings Bank, FSB (Argo Savings or the
Savings Bank); and the Savings Bank's wholly owned subsidiary, Dolton-Riverdale
Savings Service Corporation (Dolton-Riverdale). Intercompany transactions and
balances are eliminated in consolidation.
During 1999 the Company simplified its organizational structure by merging Argo
Mortgage Corporation, a wholly owned subsidiary of the Savings Bank, and Margo
Financial Services, LLC, a majority-owned subsidiary of the Savings Bank, into
the Savings Bank and merging Empire/Argo Mortgage LLC, a consolidated joint
venture of Argo Bancorp, into Argo Bancorp. The mergers qualified as tax-free
reorganizations and were accounted for as internal reorganizations. Accordingly,
the notes to the consolidated financial statements have been restated to reflect
the internal reorganization as if they had occurred on January 1, 1997. Finally,
as discussed in a separate note, during 1999, the Company sold its wholly owned
subsidiary, On-Line Financial Services, Inc. (On-Line).
The Company, through its subsidiaries, provides a full range of financial
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. In
addition, the Company is involved in the purchase and disposition of discounted
loans. 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.
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, 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 and investment in GFS preferred stock are
carried at cost.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 11
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 has from time to time purchased 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 1999, 1998, or 1997.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 12
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 assets' 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. 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.
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.
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.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 13
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available-for-sale, net of tax, which
are also recognized as separate components of equity.
Industry Segments: Internal financial information is primarily reported and
aggregated into three lines of business; banking, discount loan operations, and
mortgage banking.
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.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
New Accounting Pronouncements: Beginning January 1, 2001, 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.
On-Line Significant Accounting Policies: Significant accounting policies of
On-Line prior to its sale were:
- - The cost of software licensing rights acquired and other product
conversion costs were capitalized and amortized to expense on a
straight-line basis over periods of 5 to 7 years.
- - Certain equipment was leased under capital lease agreements. The cost of
these assets was amortized on the straight-line basis.
Reclassification: Certain reclassifications have been made to the 1997 and 1998
information to make it comparable with the 1999 presentation.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 14
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SALE OF ON-LINE FINANCIAL SERVICES, INC.
On March 31, 1999, the Company sold On-Line for cash proceeds of $6,700,000 and
$4,600,000 in Series B preferred stock of GFS Holdings Co. After adjusting for
sale expenses of $298,000 and recording an accrual for contingent payments to
former On-Line shareholders of $546,000, the sale resulted in a pretax gain of
$2,922,000 which, net of $994,000 of income taxes, produced a gain on sale of
discontinued operations of $1,928,000.
Results from the data processing segment are shown as discontinued operations
with prior years restated. Components of amounts reflected in the December 31,
1998 consolidated balance sheet and the December 31, 1999 (through the date of
sale), 1998, and 1997 consolidated income statements are presented in the
following table:
(In thousands) 1998
----
Balance Sheet Data:
Current assets $ 3,186
Property, plant and equipment, net 5,920
Noncurrent assets 3,387
Current liabilities (3,229)
Noncurrent liabilities (2,719)
--------
Net assets of discontinued operations $ 6,545
========
Income Statement Data: 1999 1998 1997
---- ---- ----
Revenues $ 4,247 $14,177 $12,750
Costs and expenses 4,029 13,716 12,553
------- ------- -------
Operating income 218 461 197
Income tax expense 83 175 72
------- ------- -------
Income from discontinued operations $ 135 $ 286 $ 125
======= ======= =======
As part of the acquisition of On-Line by Argo Bancorp in 1995, a structured
schedule of contingent payments was established based on a percentage of future
net revenues of On-Line over the next seven years ending October 31, 2002. As a
condition of the acquisition, Argo Bancorp, Inc. retained this liability to the
former stockholders of On-Line.
At December 31, 1999, the Company estimated the liability for future contingent
payments to be $546,000 This liability has been recorded and reduced the gain on
sale to $2,922,000. The actual amount to be paid will be impacted by future
revenue streams.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 15
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
Securities available-for-sale are summarized as follows:
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Municipal securities $ 370 $ 8 $ -- $ 378
U.S. agency securities 5,500 -- (343) 5,157
Corporate bonds 411 -- (18) 393
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 88 -- (3) 85
Federal National Mortgage
Association 1,647 -- (50) 1,597
Trust preferred securities 3,960 -- (369) 3,591
Marketable equity securities 3,761 12 (610) 3,163
-------- -------- -------- --------
$ 15,737 $ 20 $ (1,393) $ 14,364
======== ======== ======== ========
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Municipal securities $ 370 $ 10 $ -- $ 380
U.S. agency securities 2,091 -- (3) 2,088
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 110 -- (1) 109
Federal National Mortgage
Association 1,827 3 (8) 1,822
Trust preferred securities 367 3 (2) 368
Marketable equity securities 2,828 2 (389) 2,441
-------- -------- -------- --------
$ 7,593 $ 18 $ (403) $ 7,208
======== ======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 16
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
U.S. agency securities $ 24,157 $ -- $ (1,612) $ 22,545
Collateralized mortgage obligations 976 -- -- 976
Corporate bonds 726 -- (165) 561
-------- ------- -------- --------
$ 25,859 $ -- $ (1,777) $ 24,082
======== ======= ======== ========
</TABLE>
The amortized cost and fair value of securities, by contractual maturity, at
December 31, 1999 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.
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands) (In Thousands)
Due after one through five years $ -- $ -- $ 3,000 $ 2,975
Due after five years through ten years 2,281 2,235 4,000 3,816
Due after ten years 4,000 3,693 17,883 16,315
------- ------- ------- -------
6,281 5,928 24,883 23,106
Mortgage-backed securities and
collateralized mortgage obligations 1,735 1,682 976 976
Trust preferred securities 3,960 3,591 -- --
Marketable equity securities 3,761 3,163 -- --
------- ------- ------- -------
$15,737 $14,364 $25,859 $24,082
======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 17
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Proceeds from sales of securities available-for-sale and the realized gross
gains and losses are as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Proceeds for sales $ 420 $2,993 $8,668
Gross realized gains 27 234 710
Gross realized losses (29) -- --
At December 31, 1999, trading account securities primarily consist of marketable
equity securities which are carried at fair value. The unrealized loss of
$52,000 at December 31, 1999 is reflected as a component of current earnings.
There were no unrealized gains or losses at December 31, 1998 or 1997.
At December 31, 1999 and 1998, $5,600,000 and $2,255,000 of securities were
pledged to secure short-term borrowings and Federal Home Loan Bank advances.
NOTE 4 - LOANS RECEIVABLE
Loans receivable and loans held for sale, net, are summarized as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
First mortgage loans $ 219,521 $ 198,178
Participating investment in first mortgage loans 30,021 22,701
Commercial real estate loans 997 1,390
Equity line of credit loans 7,512 3,521
Other loans 11,331 8,493
--------- ---------
Total gross loans receivable 269,382 234,283
Add (deduct)
Allowance for loan losses (1,551) (940)
Deferred loan costs 1,384 1,208
Unearned discounts (925) (1,763)
--------- ---------
$ 268,290 $ 232,788
========= =========
Weighted-average interest rate 7.98% 7.84%
========= =========
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 18
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Included in first mortgage loans are loans held for sale totaling approximately
$18.9 million and $31.0 million at December 31, 1999 and 1998. The loans held
for sale at December 31, 1999 included $16.7 million of loans originated by Argo
Savings for an affiliate. The loans are originated with commitments to sell and
are usually sold within 30 days of funding
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 940 $ 814 $ 665
Provision for loan losses 965 355 210
Allowance on acquired loans - 30 -
Transfer to allowance for losses on
foreclosed real estate - - (50)
Charge-offs (354) (259) (11)
------------ ----------- -----------
Balance at end of year $ 1,551 $ 940 $ 814
============ =========== ===========
</TABLE>
Loans receivable on nonaccrual are as follows:
Percentage
of Loans
Number Receivable,
of Net of
Loans Amount Discount
----- ------ --------
(Dollars in Thousands)
December 31, 1999 86 $ 6,039 2.25%
December 31, 1998 105 6,518 2.80
First mortgage loans at December 31, 1999 include approximately $141.3 million
in out-of-area purchased participation and whole loans, which are secured by
single-family homes, with approximately 9.9% in California, 5.4% in New York,
and 84.7% spread throughout the remainder of the country. There is no geographic
concentration of nonperforming loans.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 19
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 5 - DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net, are as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
Discounted first mortgage loans $ 11,040 $ 15,018
Unearned discount (1,870) (2,617)
--------- --------
$ 9,170 $ 12,401
========= ========
Discounted loans receivable on nonaccrual are as follows:
Percentage
of Discount
Number Loans
of Loans Amount Receivable
-------- ------ ----------
(In Thousands)
December 31, 1999 64 $ 1,718 18.74%
December 31, 1998 83 3,019 24.34
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment, net, are summarized as follows:
December 31,
----------------
1999 1998
---- ----
(In Thousands)
Land $ -- $ 537
Office buildings and improvements 341 4,159
Leasehold improvements 472 361
Furniture, fixtures, and equipment 11,640 4,330
-------- --------
12,453 9,387
Less accumulated depreciation and amortization (3,939) (4,600)
-------- --------
$ 8,514 $ 4,787
======== ========
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 20
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
Included in occupancy and equipment expense is depreciation and amortization
expense of office properties and equipment of approximately $1,100,000,
$757,000, and $676,000 for the years ended December 31, 1999, 1998, and 1997.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The facilities are being leased back from the purchaser
over a period of 170 months. The leases are accounted for as operating leases.
The gain of $2,400,000 was deferred and is being recognized into income over the
life of the leases, with $86,000 recognized during the year ended December 31,
1999. The leases contain renewal options for three additional periods, the first
for ten years and the final two for five years each.
During the year ended December 31, 1998, Argo Savings sold its Gurnee, Illinois
branch to an unrelated party. The purchaser assumed selected deposit accounts as
part of this transaction. Argo Savings recorded a gain of $976,000 on the branch
sale.
The Company leases office space under noncancelable operating leases. Rent
expense for the years ended December 31, 1999, 1998, and 1997 totaled $457,000,
$118,000, and $58,000.
The estimated minimum rental payments under the terms of the leases at December
31, 1999 are as follows:
Year Ended December 31 Amount
---------------------- ------
(In Thousands)
2000 $ 683
2001 692
2002 701
2003 654
2004 605
Thereafter 5,453
----------
Total minimum lease payments $ 8,788
==========
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 21
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 7 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND INVESTMENT IN
LIMITED PARTNERSHIP
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, 1999 and 1998,
Argo Savings held $464,000 and $593,000 in purchased mortgage servicing rights
(PMSRs) with underlying principal balances of approximately $35.7 million and
$46.8 million. During 1999, the Company bought an additional $11.1 million of
servicing rights with underlying principal balances of approximately $823
million. At June 30, 1999, these servicing rights were called at the Company's
original purchase price. There was no gain or loss recorded. Servicing income
related to these loans approximated $619,000. 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 year ended December 31, 1998.
The balance of investment in limited partnership of $4.5 million at December 31,
1999 and 1998 represents Argo Savings' investment in various divisions of a
single limited partnership. The investment includes a $3.3 million equity
interest in a limited partnership whose business activities are to purchase
mortgage servicing rights, and a $1.2 million investment in subordinated
debentures of the partnership. The debentures have an interest rate of 30%.
During 1999, the Company reinvested the equity in one division into another
previously owned division. 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 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
temporary 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.
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE> 22
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
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 $ 6,072 2.0% --% $ 18,244 7.8% --%
Passbook accounts 19,873 6.6 2.20 21,307 9.1 2.78
NOW accounts 10,612 3.5 1.36 9,045 3.9 1.97
Money market accounts 4,426 1.5 2.90 4,706 2.0 3.57
--------- ----- ---- ----------- ----- ----
40,983 13.6 1.77 53,302 22.8 1.76
Certificate accounts:
4.00% - 4.99% 47,892 15.9 4.58 28,491 12.2 4.72
5.00% - 5.99% 118,805 39.4 5.61 139,039 59.7 5.52
6.00% - 6.99% 93,542 31.0 6.37 11,665 5.0 6.29
7.00% - 7.99% 443 .1 7.17 475 .3 7.28
8.00% - 8.99% 8 -- 8.53 8 -- 8.53
--------- ----- ---- ----------- ----- ----
260,690 86.4 5.70 179,678 77.2 5.45
--------- ----- ---- ----------- ----- ----
$ 301,673 100.0% 5.16 $ 232,980 100.0% 4.60
========= ===== ==== =========== ===== ====
</TABLE>
Contractual maturities of certificate accounts at December 31, 1999 are as
follows (in thousands):
Under 12 months $ 183,289
12 months to 36 months 71,779
Over 36 months 5,622
------------
$ 260,690
============
The Savings Bank has pledged investment securities of approximately $3,323,000
and $6,379,000 at December 31, 1999 and 1998 as collateral to secure certain
public deposits. In addition to securities at December 31, 1999 and 1998, the
Savings Bank also had letters of credit totaling $14,280,000 and $13,260,000 as
collateral to secure several State of Illinois certificates. The total State of
Illinois certificates secured by letters of credit and securities totaled
approximately $15,523,000 and $15,102,000 at December 31, 1999 and 1998. The
aggregate amount of certificate of deposit accounts with a balance greater than
$100,000 was $75,134,000 and $60,348,000 at December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE> 23
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS (Continued)
Interest expense on deposit accounts is summarized as follows:
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- -------- --------
(In Thousands)
Passbook and certificate accounts $ 12,247 $ 8,960 $ 8,064
NOW accounts 143 230 270
Money market accounts 152 224 246
--------- -------- --------
$ 12,542 $ 9,414 $ 8,580
========= ======== ========
NOTE 9 - BORROWINGS
In 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 and is 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 $1,913,000, including
$244,000 paid in 1999, were capitalized related to the debenture offering and
are being amortized over the 30-year life of the junior subordinated debentures.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 24
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 9 - BORROWINGS (Continued)
Borrowed money at December 31 is summarized as follows:
<TABLE>
<CAPTION>
Weighted Interest Rate Balance
December 31, December 31,
------------ ------------
Maturity 1999 1998 1999 1998
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands)
Advances from the Federal
Home Loan Bank of Chicago
Open line 4.74% 5.23% $ 17,100 $ 2,300
2/21/00 - 5.48 - 5,000
2/22/00 5.95 - 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
---------- ----------
5.56 6.10 34,932 20,132
Other borrowings
Margin accounts Open line 7.79 7.28 5,404 319
Federal funds purchased Daily - 5.50 - 600
---------- ----------
7.79 7.71 5,404 919
---------- ----------
5.86 6.10 $ 40,336 $ 21,051
========== ==========
</TABLE>
The required aggregate principal balance of first mortgage loans securing
advances is determined by the Federal Home Loan Bank (FHLB). At December 31,
1999 and 1998, approximately $63 million and $48 million 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 FHLB bears interest at a rate that adjusts daily. All
other FHLB advances are at fixed interest rates.
The margin account loans are from third-party securities brokers and were
secured at December 31, 1999 by securities which are held by the broker and have
a market value of $24.4 million.
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE> 25
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS
Income tax expense (benefit) from continuing operations consists of the
following:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Federal
Current $ 572 $ 90 $(145)
Deferred (908) (473) 196
----- ----- -----
(336) (383) 51
State
Current 318 107 --
Deferred (318) (107) --
----- ----- -----
Total income tax expense (benefit) $(336) $(383) $ 51
===== ===== =====
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are summarized as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
Deferred tax assets
Net operating loss carryforwards $ 281 $ 537
Unused tax credits 914 490
Allowance for loan losses 713 472
Depreciation -- 57
Deferred gain on sale of fixed assets 900 --
Unrealized losses on securities available-for-sale 523 147
Gross deferred tax assets 3,331 1,703
------- ------
Deferred tax liabilities
Excess tax bad debt deduction $ (20) $ (26)
Limited partnership interest (851) (850)
Depreciation (2) --
Other (37) (8)
Gross deferred tax liabilities (910) (884)
------ ------
Net deferred tax asset $2,421 $ 819
====== ======
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE> 26
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS (Continued)
The effective income tax rate differs from the statutory federal tax rate of
34%. The major reasons for this difference related to income (loss) from
continuing operations for the years ended December 31 follow:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $ 61 $ (47) $ 212
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net 16 35 35
Municipal interest, net (11) (11) (13)
Tax credits (300) (275) (216)
Other (102) (85) 33
----- ----- -----
Income tax expense (benefit) $(336) $(383) $ 51
===== ===== =====
At December 31, 1999, state net operating loss carryforwards of $5,921,000 were
available for future use. These net operating losses expire from 2012 through
2019.
At December 31, 1999, Argo Bancorp has low income housing and alternative
minimum tax credit carryforwards in the amount of $914,000 expiring from 2012
through 2019.
Retained earnings at December 31, 1999 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 11 - EMPLOYEE BENEFIT PLANS
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 $76,000, $71,000,
and $82,000 to the plan for the years ended December 31, 1999, 1998, and 1997.
The plan also provides benefits in the event of death, disability, or other
termination of employment.
- --------------------------------------------------------------------------------
(Continued)
24
<PAGE> 27
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Savings Bank maintains 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 of this debt was repaid during 1998. During 1999, the ESOP
borrowed funds from Argo Bancorp in the amount of $498,000 in order to purchase
49,136 shares at an average price of $10.13 per share. In addition, during 1999,
the ESOP used available cash in the plan to purchase an additional 2,500 shares.
Consolidated stockholders' equity was reduced by the unpaid balance of the ESOP
loan at December 31, 1999. Contributions of $72,000, $60,000, and $67,000 were
accrued or made to the ESOP to fund principal and interest payments for the
years ended December 31, 1999, 1998, and 1997. Selected ESOP information at
December 31, 1999, 1998, and 1997 follows:
1999 1998 1997
---- ---- ----
Shares allocated 82,503 73,909 63,424
Unearned shares 44,485 1,443 9,588
Total ESOP shares 126,988 75,352 73,012
======== ======= =======
Total value of unearned shares $511,578 $13,709 $93,483
======== ======= =======
During 1998, in connection with the goodwill convertible preferred stock
issuance (see Note 13), 18,838 shares of preferred stock were contributed to the
ESOP. At December 31, 1999, all 18,838 preferred shares were allocated. At
December 31, 1998, the total allocated preferred shares were 18,618 and the
unallocated shares were 220.
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.
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
- --------------------------------------------------------------------------------
(Continued)
25
<PAGE> 28
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
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 was being expensed as a portion of annual compensation, and
the remaining cost is reflected as a reduction of stockholders' equity. Due to
the sale of On-Line, the shares became fully vested and compensation expense of
$36,000 was recognized in 1999. The expense totaled $12,000 for each of the
years 1998 and 1997. No MRP shares were awarded during the years ended December
31, 1999 and 1998. 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 1999, no options were exercised. In 1998 and 1997, 42,980, and
95,988 of the options were exercised. The weighted average exercise price for
the options exercised in 1998 and 1997 was $3.60 and $3.85. At December 31,
1999, options to purchase 171,468 shares were outstanding, at an average price
of $5.90.
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE> 29
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan) 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, 1999, 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 1999, no options were exercised. In
1998 and 1997, 3,580, and 34,000 of the options were exercised. The weighted
average exercise price for options exercised in 1998 and 1997 was $8.87 and
$4.56. At December 31, 1999, 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. Options to purchase 23,000 and
12,000 shares were granted during 1999 and 1998, and options to acquire 12,000
were forfeited in 1999. At December 31, 1999 and 1998, 35,000 and 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 ($9.00 per share 1999 and $8.625 in 1998). At December 31,
1999, options to purchase 23,000 shares were outstanding at an average price of
$9.00 per share.
At December 31, 1999 and 1998, the total options outstanding under all plans
were 394,068 and 383,068, at an average price of $6.14 and $6.05.
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 from continuing operations
would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands, Except Per Share Data)
Income from continuing operations
As reported $ 514 $ 245 $ 698
Pro forma 490 220 458
Earnings per share
Basic
As reported .26 .12 .36
Pro forma .25 .11 .24
Diluted
As reported .25 .12 .33
Pro forma .23 .11 .22
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE> 30
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
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
estimating the fair value for options granted in 1999, 1998, and 1997:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Dividend yield 2.08% 2.07% 2.13%
Risk-free interest rate 5.50% 5.50% 6.11%
Weighted average expected life 10 years 8 years 8 years
Expected volatility 18.06% 13.93% 6.70
The weighted average per share fair values of options granted during 1999, 1998,
and 1997 were $2.70, $2.11, and $2.68.
NOTE 12 - 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.
Commitments to originate fixed and adjustable rate mortgage loans amounted to
approximately $3.9 million and $22.2 million at December 31, 1999 and 1998. The
fixed rate commitments at December 31, 1999 have rates ranging from 7.63% to
9.00%. 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 $9.0 million and $4.2 million
as of December 31, 1999 and 1998.
The Company also had outstanding firm commitments to originate mortgage loans
and sell the loans to the secondary market approximating $30.2 million at
December 31, 1999.
The Savings Bank had Community Reinvestment Act (CRA) investment commitments
outstanding of $2.6 million. These commitments include $1,000,000 to be funded
for investment in the Greater West Side Loan Fund, $703,000 to be funded over
ten years for
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE> 31
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
investment in the Chicago Equity Fund, and $336,000 to be funded over thirteen
years for investment in the Community Investment Corporation.
NOTE 13 - CAPITAL MATTERS
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.
Information regarding Class A common stock at December 31, 1999 and 1998
follows:
Par value per share $ .01
Authorized shares 9,000,000
Shares issued 2,004,896
Information regarding preferred stock at December 31, 1999 and 1998 follows:
Par value per share $ .01
Authorized shares 1,000,000
Shares issued 592,681
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.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE> 32
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
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) and Tier I capital (as defined) to assets (as defined).
Management believes, as of December 31, 1999 and 1998, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, 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, 1999 and 1998:
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------ -------- ------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999
Total capital
(to risk-weighted
assets) $23,404 12.3% $15,191 8.00% $18,989 10.00%
Tier I capital
(to risk-weighted
assets) 21,853 11.5 7,596 4.00 11,394 6.00
Tier I capital
(to adjusted assets) 21,853 5.9 14,809 4.00 18,512 5.00
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
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE> 33
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
Effective April 1, 1999, the Office of Thrift Supervision's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under Office of Thrift Supervision regulations
(generally, compliance with all capital requirements and examination ratings in
one of two top categories); the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years; the institution would be undercapitalized following the
distribution; or the distribution would otherwise be contrary to a statute,
regulation, or agreement with the Office of Thrift Supervision. If an
application is not required, the institution must still give advance notice to
the Office of Thrift Supervision of the capital distribution.
NOTE 14 - SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, discount loan operations, and mortgage
banking. Loans, investments, and deposits provide the revenues in the banking
operation; fee income provides the primary revenue for mortgage banking interest
income; 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. Income taxes are
allocated to the banking segment. No indirect expenses are allocated.
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 Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
<S> <C> <C> <C> <C> <C>
1999
- ----
Net interest income $ 7,346 $ 536 $ -- $ -- $ 7,882
Provision for loan losses 695 270 -- -- 965
Other revenue 3,095 (313) 754 (1,196) 2,340
Other expenses 7,848 352 879 -- 9,079
Income tax expense (benefit 433 -- -- (769) (336)
Segment profit (loss) 1,465 (399) (125) (427) 514
Segment assets 419,763 11,879 34 (38,912) 392,764
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE> 34
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
(In Thousands)
Discount Mortgage Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
<S> <C> <C> <C> <C> <C>
1998
- ----
Net interest income $ 5,226 $ 1,032 $ -- $ -- $ 6,258
Provision for loan losses 115 240 -- -- 355
Other revenue 3,622 740 1,637 (2,189) 3,810
Other expenses 7,592 695 1,571 (7) 9,851
Income tax expense (benefit 148 -- -- (531) (383)
Segment profit (loss) 993 837 66 (1,651) 245
Segment assets for
continuing operations 320,421 13,550 412 (39,852) 294,531
1997
- ----
Net interest income $ 4,884 $ 2,572 $ -- $ -- $ 7,456
Provision for loan losses 160 50 -- -- 210
Other revenue 4,598 281 977 (2,705) 3,151
Other expenses 7,408 1,288 955 (3) 9,648
Income tax expense 259 -- -- (208) 51
Segment profit (loss) 1,655 1,515 22 (2,494) 698
Segment assets for
continuing operations 244,560 35,876 191 (55,497) 225,130
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE> 35
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows of Argo
Bancorp, Inc. follow:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
------------
1999 1998
---- ----
(In Thousands)
Assets
Cash $ 145 $ 5,673
Interest-bearing deposits 39 250
------- -------
Total cash and cash equivalents 184 5,923
Trading securities 197 --
Securities available-for-sale 11,415 2,505
Investment in GFS preferred stock 4,600 --
Loans receivable 778 387
Discounted loans receivable 301 --
Investment in banking subsidiary 21,831 17,592
Investment in limited liability corporation -- 837
Total investments in subsidiaries 22,831 18,429
Investment in discontinued operation -- 6,545
Other assets 4,817 4,243
------- -------
Total assets $44,123 $38,032
======= =======
Liabilities and stockholders' equity
Borrowed money $ 5,404 $ 319
Other liabilities 1,347 1,515
Junior subordinated debentures 17,784 17,784
Stockholders' equity 19,588 18,414
------- -------
Total liabilities and stockholders' equity $44,123 $38,032
======= =======
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE> 36
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest income $ 971 $ 52 $ 23
Interest expense (2,093) (827) (335)
------- ------- -------
Net interest expense (1,122) (775) (312)
Dividends from subsidiaries -- 500 2,242
Equity in undistributed (overdistributed)
earnings of subsidiaries 1,721 518 (1,269)
Gain (loss) on sales of securities available-for-sale (2) 233 618
Profits on trading account activity 29 -- --
Loss on sales of foreclosed real estate (3) -- --
Noninterest expense (878) (762) (789)
------- ------- -------
Income (loss) from continuing operations
before income taxes (255) (286) 490
Income tax benefit (769) (531) (208)
------- ------- -------
Income from continuing operations 514 245 698
Income from discontinued operation (net of tax) 135 286 125
Gain on sale of discontinued operation (net of tax) 1,928 -- --
------- ------- -------
Net income $ 2,577 $ 531 $ 823
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE> 37
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 514 $ 245 $ 698
Adjustments to reconcile net income to net cash
provided by operating activities
Net change in trading account activity (33) -- --
Loss (gain) on the sales of securities available-
for-sale 2 (233) (618)
Gain on trading account securities (29) -- --
Gains on the sales of foreclosed real estate 3 -- --
Equity in (undistributed) over-
distributed earnings of subsidiaries (1,721) (518) 1,144
Amortization of purchase price of
ESOP and MRP 108 69 72
Recognition of fair value of ESOP
shares scheduled to be released -- 48 50
Increase in other assets 652 (580) (702)
Increase (decrease) in other liabilities (206) 543 (143)
-------- -------- --------
Net cash from operating activities (710) (426) 501
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased, net (692) (325) (57)
Proceeds from the sales of securities 420 2,388 5,790
Purchases of securities (13,361) (3,740) (6,306)
Proceeds from sale of On-Line Financial
Services, Inc., net 4,583 -- --
Net cash (paid) received in purchase of subsidiary (575) (454) 916
Contribution to MRP and ESOP 73 -- (486)
-------- -------- --------
Net cash from investing activities (9,552) (2,131) (143)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE> 38
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance $ -- $ -- $ 412
Proceeds from issuance of subordinated
debentures, net of debt issuance expenses (181) 16,115 --
Proceeds from borrowed money 5,085 -- 11,108
Repayment of borrowed money -- (5,289) (9,040)
Capital contributions to subsidiaries -- (2,899) (3,698)
Proceeds from exercise of stock options -- 186 525
Proceeds from sale of MRP stock -- -- 400
Dividends paid (401) (359) (351)
-------- -------- --------
Net cash from financing activities 4,503 7,754 (644)
Net cash provided by discontinued operations 20 60 98
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,739) 5,257 (188)
Cash and cash equivalents at beginning of year 5,923 666 854
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 184 $ 5,923 $ 666
======== ======== ========
Supplemental disclosure of noncash
investing activities
Preferred stock received related to sale
of On-Line Financial Services, Inc. $ 4,600
Transfer of securities available-for-sale
to tracing account 135
Capital contribution to banking subsidiary
in the form of securities available-for-sale 3,000
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE> 39
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Argo Bancorp's financial instruments as of December
31, 1999 and 1998 are set forth in the following table, followed by the methods
and assumptions used.
<TABLE>
<CAPTION>
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash $ 5,603 $ 5,603 $ 3,216 $ 3,216
Interest-bearing deposits 32,069 32,069 6,880 6,880
Trading account securities 668 668 693 693
Securities available-for-sale 14,364 14,364 7,208 7,208
Securities held-to-maturity 25,859 24,082 -- --
Loans receivable 277,460 277,859 245,189 248,536
Investment in GFS preferred stock 4,600 4,600 -- --
FHLB of Chicago stock 2,303 2,303 1,911 1,911
Accrued interest receivable 3,392 3,392 2,024 2,024
Financial liabilities
Deposits without stated maturities 40,983 40,983 53,302 53,302
Deposits with stated maturities 260,690 262,390 179,678 178,061
Borrowed money 40,336 40,042 21,051 21,910
Junior subordinated debt 17,784 23,707 17,784 17,784
Advance payments by borrowers
for taxes and insurance 902 902 853 853
Custodial escrow balances 5,476 5,476 5,340 5,340
Accrued interest payable 966 966 661 661
</TABLE>
Statement on 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.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE> 40
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(b) SECURITIES AVAILABLE-FOR-SALE, HELD-TO-MATURITY, TRADING SECURITIES, FHLB
OF CHICAGO STOCK, AND INVESTMENT IN GFS PREFERRED STOCK.
The fair value of securities available-for-sale and held-to-maturity and trading
securities was estimated using quoted market prices. The fair value of FHLB
stock is based on its redemption value. The fair value of the GFS preferred
stock is its carrying value based upon the market interest rate.
(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, ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook savings,
NOW, and money market accounts, and escrows is 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 and junior subordinated debt is the present
value of the contractual cash flows, discounted by the current rate offered for
similar remaining maturities.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE> 41
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 17 - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share from continuing operations:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands, Except Per Share Data)
Numerator $ 514 $ 245 $ 698
========== ========== ==========
Denominator
Basic earnings per share - weighted
average shares outstanding 1,946,744 1,948,843 1,931,572
Effect of dilutive stock options
outstanding 114,581 98,372 175,192
---------- ---------- ----------
Diluted earnings per share -
weighted average shares outstanding $2,061,325 $2,047,215 $2,106,764
========== ========== ==========
Basic earnings per share $ .26 $ .12 $ .36
Diluted earnings per share .25 .12 .33
NOTE 18 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1999 1998 1997
---- ---- ----
Unrealized holding gains (losses) on
securities available-for-sale $(990) $ (97) $ 639
Less reclassification adjustments for gains
(losses) recognized in income (2) 234 710
----- ----- -----
Net unrealized losses (988) (331) (71)
Tax effect 376 126 26
----- ----- -----
Other comprehensive loss $(612) $(205) $ (45)
===== ===== =====
- --------------------------------------------------------------------------------
39
<PAGE> 42
ARGO BANCORP, INC.
Shareholder Information
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ARGO BANCORP, INC.
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer Senior Vice President,
Chairman of the Board Coldwell Banker Residential Realtors
Vice President and Director
Frances M. Pitts Donald G. Wittmer
Executive Vice President, President and Owner,
Secretary and Director Wittmer Financial Services, Ltd.
Director
Dominic M. Fejer Arthur E. Byrnes
Vice President, Controller Chairman, Deltec Asset
Management Corporation
Director
Colleen A. Kitch
Executive Vice President
ARGO FEDERAL SAVINGS BANK, FSB
John G. Yedinak Sergio Martinucci
President, Chief Executive Officer Senior Vice President,
and Director Coldwell Banker Residential Realtors
Chairman of the Board
Frances M. Pitts Richard B. Duffner
Senior Vice President, President and Owner,
General Counsel and Secretary RBD & Associates, Ltd.
Director
Dominic M. Fejer Emil T. Sergo
Vice President, Chief Financial Officer Mayor, McCook, Illinois
Director
Rebecca L. Leon Dennis G. Carroll
Vice President, Retail Operations Detective, City of Chicago Police Dept.
Director
Marie C. Goudie Raymond E. Froula
Controller Retired
Director
Teena D. Juergens Mary Ann Gearhart
Assistant Secretary Member, Will County
Board of Commissioners
Director
<PAGE> 43
ARGO BANCORP, INC.
Shareholder Information
- -------------------------------------------------------------------------------
STOCKHOLDER REFERENCE
<TABLE>
<S> <C>
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
Chicago Counsel Transfer Agent and Registrar
Kemp & Grzelakowski, Ltd. LaSalle Bank, N.A.
1900 Spring Road Trust and Asset Management Division
Suite 500 135 South LaSalle Street
Oak Brook, Illinois 60523-14495 Chicago, Illinois 60603
(312) 904-2584
Market Makers Annual Report on Form 10-K
Tucker Anthony, Incorporated Copies of Argo Bancorp, Inc.'s 1999
1 South Wacker Drive Annual Report on Form 10-K
Suite 1900 filed without exhibits with the Securities
Chicago, Illinois 60606 and Exchange Commission are available
(888)655-4135 without charge to stockholders, upon
written request to:
Investor Information Frances M. Pitts, Corporate Secretary
Stockholders, investors, and analysts Argo Bancorp, Inc.
interested in additional information 7600 W. 63rd Street
may contact: Summit, Illinois 60501
John G. Yedinak, President and CEO,
at the Corporate Headquarters Annual Meeting
The annual meeting of stockholders will
be held at 12:00 p.m. on May 2, 2000 at
Argo Federal Savings Bank, FSB,
7600 W. 63rd Street, Summit, Illinois
60501.
Stockholders are encouraged to attend.
OFFICE LOCATIONS
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>
<PAGE> 44
ARGO BANCORP, INC.
Shareholder Information
- -------------------------------------------------------------------------------
STOCK PRICE INFORMATION
Argo Bancorp 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.
High Low Dividends
---- --- ---------
Year ended December 31, 1999:
First Quarter $ 9.375 $ 8.250 $ .0500
Second Quarter 9.500 8.500 .0500
Third Quarter 10.250 8.500 .0500
Fourth Quarter 11.500 9.750 .0500
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
<PAGE> 45
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
CORPORATE PROFILE
Argo Bancorp, Inc. ("Argo Bancorp" or "the Company") is a Delaware corporation
organized in August 1987 for the purpose of acquiring Argo Federal Savings Bank,
FSB ("Argo Savings"). Argo Bancorp acquired Argo Savings on November 17, 1987
for a capital infusion of $1.1 million. On May 26, 1992, Argo Bancorp completed
a merger conversion with Dolton-Riverdale Savings and Loan Association
("Dolton") and, as part of the conversion, Argo Bancorp sold an additional
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, 1999. 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 under the symbol ARGO. The current
market makers of the stock are Keck, Bruyette & Woods, Inc., 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 five locations in Cook County, Illinois.
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
1.
<PAGE> 46
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
CORPORATE PROFILE (Continued)
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 $1,913,000 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
capabilities and by the Company for general corporate purposes, the enhancement
of operational capabilities, and the potential purchase of loans.
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 owns at December 31, 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, 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 Company estimates that the cost
savings to the Company and Argo Savings under the Client Services Agreement will
be $50,000 annually.
2.
<PAGE> 47
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
CORPORATE PROFILE (Continued)
Argo Bancorp acquired on October 31, 1995, 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. 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 strategy was to enhance On-Line's strong foundation
as a data processing and data communications network by implementing tools to
continue supporting existing services, as well as to evolve into a provider of
electronic commerce, Intranet and Internet services, technical training
services, and document management and imaging services.
On March 31, 1999, the Company sold On-Line to GFS Holdings Co. of Palm Beach
Gardens, Florida. 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 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%. The mandatory redemption of up to 1,400 shares subject to
completion of certain conditions precedent was to be made by GFS on July 31,
1999. The Company voluntarily waived its right to redeem 600 shares of the
Preferred Stock at July 31, 1999. During January 2000, the Company redeemed 600
shares of the preferred stock.
3.
<PAGE> 48
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
CONSOLIDATED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Loans receivable, net $ 277,460 $ 245,189 $ 184,358 $ 173,429 $ 142,380
Stock in Federal Home Loan Bank of Chicago 2,303 1,911 3,271 3,428 2,669
Securities 40,891 7,901 4,974 5,788 7,573
Cash and cash equivalents 37,672 10,096 8,579 13,240 9,890
Mortgage loan servicing rights 4,958 5,062 6,706 5,264 4,033
Foreclosed real estate 2,280 3,875 4,251 3,913 2,234
Net assets of discontinued operation - 6,545 5,114 3,546 1,403
Investment in GFS preferred stock 4,600 - - - -
Other assets 22,600 20,497 12,991 13,310 11,204
---------- ---------- ---------- ---------- ----------
Total assets $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
Deposits $ 301,673 $ 232,980 $ 172,469 $ 150,627 $ 123,484
Borrowed money 40,336 21,051 29,497 45,013 36,755
Custodial escrow balances for loans serviced 5,476 5,340 6,400 5,782 9,696
Other liabilities 7,907 5,507 3,774 3,936 572
Junior subordinated debt 17,784 17,784 - - -
Stockholders' equity 19,588 18,414 $ 18,104 $ 16,560 $ 10,879
---------- -------------------------------------------------
Total liabilities and stockholders' equity $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
Interest income $ 23,896 $ 17,625 $ 18,263 $ 16,050 $ 13,973
Interest expense 16,014 11,367 10,807 8,741 8,299
--------------------------------------------------------------
Net interest income 7,882 6,258 7,456 7,309 5,674
Provision for loan losses 965 355 210 248 55
--------------------------------------------------------------
Net interest income after provision
for loan losses 6,917 5,903 7,246 7,061 5,619
Noninterest income 2,340 3,810 3,151 2,897 2,465
Noninterest expense 9,079 9,851 9,648 9,311 6,034
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 178 (138) 749 647 2,050
Income tax expense (benefit) (336) (383) 51 (49) 531
---------- ---------- ------------------------- ------------
Income from continuing operations 514 245 698 598 1,519
Discontinued operations:
Income from discontinued operation
(net of tax) 135 286 125 736 222
Gain on sale of discontinued operation
(net of tax) 1,928 - - - -
---------- ---------- ---------- ---------- ----------
$ 2,577 $ 531 $ 823 $ 1,334 $ 1,741
========== ========== ========== ========== ==========
Income from continuing operations $ .26 $ .12 $ .36 $ .48 $ 1.28
Diluted basic .25 .12 .33 .40 1.08
Net income
Basic 1.32 .27 .43 .43 1.28
Diluted 1.25 .26 .39 .40 1.08
</TABLE>
4.
<PAGE> 49
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA (1) (Dollars in thousands, except per share data)
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Return from continuing operations on average
assets (4) 0.15% 0.10% 0.31% 0.32% 0.91%
Return from continuing operations on average
equity (4) 2.68 1.34 3.92 4.88 14.91
Average equity to average assets (4) 5.54 7.58 7.94 6.55 6.08
Stockholders' equity to total assets (4) 5.09 6.12 7.86 7.45 6.25
Interest rate spread 2.54 3.05 4.03 4.62 3.69
Net interest margin 2.53 2.95 3.78 4.29 3.65
Noninterest expense to average assets (4) 3.77 3.80 4.28 4.99 3.61
Non-performing loans to net loans receivable (2) 2.25 2.80 3.57 3.12 1.54
Non-performing assets to total assets (3) (4) 2.12 3.45 4.25 3.53 1.91
Allowance for loan losses to non-performing
loans (2) 25.61 14.42 14.73 16.87 29.54
Allowance for loan losses to net loans receivable (3) 0.58 0.40 0.53 0.53 0.45
Ratio of net charge-offs to average loans
outstanding, 0.03 0.01 0.01 0.08 0.03
excluding discounted loans
Average interest-earning assets to average
interest-bearing liabilities 1.01x .96x .95x .94x .99x
Book value per share $ 9.75 $ 9.18 $ 9.25 $ 9.28 $ 8.82
Full-service customer service facilities 5 5 5 5 5
</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 the portfolio of
discounted loans receivable.
(4) Restated to remove results of discontinued operation.
5.
<PAGE> 50
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
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 Consolidated 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 "may," "could," "should," "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 Company'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 1999 Form 10-K.
GENERAL
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 investments in Argo Savings, marketable securities, and
interest-earning deposits. 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) seller/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).
6.
<PAGE> 51
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
During 1999, Argo Mortgage Corporation ("Argo Mortgage"), a wholly owned
subsidiary of Argo Savings, was merged into Argo Savings. In addition,
Empire/Argo Mortgage LLC, a consolidated joint venture of the Company, was
merged into the Company. The mergers qualified as tax-free reorganizations and
were accounted for as internal reorganizations.
In addition, Argo Savings had a 50.1% ownership interest in Margo Financial
Services, LLC ("Margo"). The other owner was E-Conduit, Inc. ("E-Conduit"). On
June 1, 1999, Margo was restructured so that all of the unlicensed assets and
liabilities of Margo were distributed and/or assumed by the owners in accordance
with the equity ownership. On June 1, 1999, Argo Savings entered into a
management services agreement with 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
provided a license to E-Conduit allowing the Company to use the Margo name and
all of the intellectual properties of Margo retained after the restructure. In
exchange for the license of assets under the agreement, E-Conduit is required to
pay a six basis point per transaction license fee on loans originated on behalf
of Argo Services. As a result of this transaction, Margo has discontinued its
wholesale mortgage operation and is focusing on fee generation through its
licensing activities. Margo will be a franchiser and license the use of various
proprietary assets and products retained by the Company.
Through its subsidiaries, Argo Mortgage and Margo, and on its own since the 1999
transactions discussed above, 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 also offers, to a much lesser extent,
one-to four-family loans that 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 ("Expanded Criteria 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 and as well as
through investments in Purchased Mortgage Servicing Rights ("PMSRs"). More
recently, Argo Savings has also generated fee income from an expanding network
of regionally deployed ATMs, both in the Chicago area and in mid-Atlantic
states.
Through Argo Mortgage and on its own, Argo Savings has acquired loans for which
the borrowers may not be current as to principal and interest payments
("Discounted Loans"). In determining the amount it will bid to acquire such
loans at public sales and auctions, Argo Savings estimated the amounts it would
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,
7.
<PAGE> 52
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
which have become real estate owned. Argo Savings discontinued additional
investments in discounted loans in 1998.
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, commercial 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.
On June 29, 1999, Argo 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, Argo Savings
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 realized by Argo Savings after deducting customary
closing costs 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 Argo Savings. The profit, under generally accepted accounting
principles, will be taken into income by Argo Savings over the lease term. As a
result of this sale and leaseback transaction, Argo Savings rents as opposed to
owns the properties from which it transacts business.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolios,
custodial deposit accounts related to loans serviced for others, maturing
investments and borrowed money, FHLB advances, and loan sales. In addition,
during 1999, the Company also had a source of funds related to the sale of its
operating facilities and the sale of On-Line. 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 $37.7 million at December 31, 1999. Argo
Savings has adequate alternative funding sources if short-term liquidity needs
arise.
8.
<PAGE> 53
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
The primary investing activity of Argo Savings is the origination and purchase
of mortgage loans. During the years ended December 31, 1999 and 1998, Argo
Savings originated and purchased $129.7 million and $175.0 million of loans
receivable, respectively. Purchases of securities available-for-sale and
held-to-maturity totaled $38.0 million and $6.2 million for 1999 and 1998,
respectively. These investing activities were primarily funded by principal
repayments on loans and mortgage-backed securities of $84.1 million and $138.0
million, for 1999 and 1998, respectively, and an increase in deposits of $68.7
million and $73.8 million for 1999 and 1998, respectively. Also providing
funding was the $37.3 million in total proceeds that resulted from the sale of
loans receivable, discounted loans receivable, securities available-for-sale,
foreclosed real estate, banking facilities, and On-Line in 1999. In addition to
these sources of funding, the Company also uses FHLB advances. During 1999 and
1998, the Company borrowed $14.8 million and $20.1 million, respectively, from
the FHLB. These borrowings have maturities ranging from daily through November
of 2006. In addition, during 1999 the Company used margin accounts to purchase
securities. At December 31, 1999, there was approximately $5.4 million in margin
balances outstanding. During 1998, to increase liquidity, as well as provide
more capital for Argo Savings, 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, 1999, Argo Savings' liquid assets represented
12.42% 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 ensure necessary
liquidity.
Liquidity management for Argo Savings is both a daily and long-term function of
Argo Savings' management. Argo Savings' management meets on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments.
At December 31, 1999, Argo Savings' capital exceeded all capital requirements of
the OTS. Argo Savings' Tier I capital to adjusted assets, Tier I capital to
risk-weighted assets, and risk-based capital ratios were 5.90%, 11.5%, and
12.3%, respectively. Argo Savings is considered "well capitalized" under OTS
prompt corrective action regulations.
9.
<PAGE> 54
ARGO BANCORP, INC.
- --------------------------------------------------------------------------------
At December 31, 1999, Argo Savings had outstanding loan commitments and unused
lines of credit of $3.9 million and $9.0 million, respectively. In addition to
this, Argo Savings had a firm commitment to originate loans and sell the loans
to the secondary market approximating $30.2 million at December 31, 1999. Argo
Savings also had Community Reinvestment Act investment commitments outstanding
of $2.6 million. These commitments include $703,000 to be funded over 10 years
for the investment in the Chicago Equity Fund, $336,000 to be funded over 13
years for investment in the Community Investment Corporation, $1.0 million to be
funded for the Greater 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 $91.7 million to $392.8 million at December 31, 1999 from
$301.1 million at December 31, 1998.
Cash and interest-earning deposits increased by $27.6 million to $37.7 million
at December 31, 1999 from $10.1 million at December 31, 1998. Included in the
increase was $28.6 million in cash used to fund a network of ATM's in the
midwest and midatlantic states. The network of ATMs is through a servicing
agreement between the Savings Bank, EFmark Inc. of Westmont, Illinois and Dairy
Mart convenience stores of Hudson, Ohio. This also caused an increase in
premises and equipment, after taking into account the sale leaseback discussed
previously, as the Bank funded the acquisition of the ATM machines.
Loans receivable, which includes loans held for sale and discounted loans
receivable, increased $32.3 million, or 13.2%, in 1999 to $277.5 million at
December 31, 1999 after increasing by $60.8 million, or 33.0%, in 1998. The
increase in loans receivable for 1999 and 1998 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
$129.7, net of proceeds of $12.4 million from the sale of similar assets. These
purchases and originations were primarily funded by principal repayments of
$84.1 million on loans receivable, Discounted Loans, and mortgage-backed
securities; an increase in deposits of $68.7 million; and a $19.3 million net
increase in borrowings.
10.
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ARGO BANCORP, INC.
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Securities available-for-sale, which totaled $14.4 million at December 31, 1999,
are carried at fair value and include $1.7 million of mortgage-backed
securities, $3.2 million of marketable equity securities, $3.6 million of trust
preferred securities, $5.2 million of U.S Agency securities, $378,000 of
municipal securities, and $393,000 of corporate bonds.
The Company has been actively trading the marketable equity securities of FNMA
and FHLMC common stock. These securities are classified as trading and totaled
$668,000 and $693,000 at December 31, 1999 and 1998, respectively, with fair
value approximately equal to cost.
During 1999, the Company used excess cash to purchase securities totaling $25.9
at December 31, 1999, which are classified as held-to-maturity. These securities
were classified as held-to-maturity since management has the intent and the
Company the ability to hold these securities to maturity. These securities are
made up of $24.2 million of U.S. Agency securities, $976,000 of collateralized
mortgage obligations and $726,000 of corporate bonds.
Deposits increased $68.7 million, or 29.5%, to $301.7 million at December 31,
1999, after increasing by $60.5 million in 1998. The increase is attributable to
increased focus on attracting deposits to fund loan demand, the use of brokered
deposits, and other initiatives.
Borrowings increased $19.3 million to $40.3 million at December 31, 1999. The
increase is primarily due to short-term borrowings at year end to fund loan
demand and the use of margin accounts to purchase securities.
Custodial escrow balances for loans serviced increased by $136,000 to $5.5
million at December 31, 1999. 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
("PMSRS") serviced for Argo Savings are also maintained in non-interest-bearing
accounts. At December 31, 1999 and 1998, $6.0 million and $5.3 million,
respectively, of all custodial escrow balances pertain to loans subserviced on
behalf of Argo Saving for portfolio loans, servicing retained loans, and PMSRS.
Due to the nature of custodial escrow deposits, balances may fluctuate widely on
a day-to-day basis.
11.
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ARGO BANCORP, INC.
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During 1999, the ESOP borrowed $498,000 from the Company and bought an
additional 49,136 shares at an average price of $10.13 per share.
PURCHASED MORTGAGE SERVICING RIGHTS
Argo Savings' principal investment in mortgage servicing rights ("MSRS") is
through a $3.3 million equity interest in a limited partnership whose business
activities are to purchase MSRS and a $1.2 investment in subordinated debentures
of the partnership. 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 MSRS equaling one to three times
the equity investment by its partners. The cost of the borrowings, as well as
the servicing income and expense and related amortization, is recorded at the
limited partnership level. Each quarter, financial statements are issued to the
limited partnership by 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 MSRS 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 for direct purchases of MSRS. The task
of finding and acquiring the MSRS controlled by the limited partnership, as well
as all associated administrative duties, is assigned to DMI. DMI also
sub-services the MSRS in the partnership. The limited partnership is audited
annually by an independent auditor and an independent third party valuation of
the partnership's MSRS 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.
At December 31, 1998, the independent valuation showed an appraised 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 recorded based upon information received from DMI. During 1999, $1.2
million of Argo's investment was converted to subordinated debentures, which
yield interest at 30%. In addition, the value of the servicing revenue remained
stable and the Bank did not record any additional write-down in 1999.
12.
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ARGO BANCORP, INC.
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In addition to its investment in the limited partnerships, at December 31, 1999,
the Savings Bank had a $464,000 investment in a MSRS portfolio that it owns
directly which consisted of 2,365 mortgage loans having an outstanding principal
balance of $35.7 million.
The Company owned as of December 31, 1999, $4.6 million of Series B preferred
stock issued by GFS Holdings Company in connection with the acquisition of
On-Line by GFS. The preferred stock bears interest at 7.625% per annum payable
semi-annually.
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 $1.6 million
and $940,000 at December 31, 1999 and 1998, respectively.
The total amount of loans (excluding Discounted Loans) 90 days or more past due
at December 31, 1999 was $6.0 million, or 2.25% of total loans receivable, as
compared to $6.5 million, or 2.80%, on December 31, 1998. The total amount of
Discounted Loans 90 days or more past due at December 31, 1999, was $1.7
million, or 18.7% of total Discounted Loans receivable. 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.
At December 31, 1999, Argo Bancorp had 58 properties totaling $2.3 million
classified as foreclosed as compared to 90 properties totaling $3.9 million on
December 31, 1998. The underlying properties at December 31, 1999, consist
primarily of single-family residences. The foreclosed real estate has been
written down to its estimated net realizable value at December 31, 1999. During
1999, foreclosed real estate properties were sold resulting in net losses of
$533,000 compared to sales of foreclosed properties in 1998 resulting in net
losses of $228,000.
13.
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ARGO BANCORP, INC.
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RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998
General. Net income for the year ended December 31, 1999, was $2.6 million, or
$1.25 per diluted share, including the after tax gain of $1.9 million, or $.94
per diluted share, on the sale of On-Line. Net income for the twelve months
ended December 31, 1998, was $531,000, or $.26 per diluted share.
Income from continuing operations totaled $514,000, or $.25 per diluted share,
compared to $245,000, or $.12 per diluted share, for 1998. The increase in
income from continuing operations was primarily due to a $1.6 million
improvement in net interest income and a $772,000 reduction in operating
expenses, which offset a $610,000 increase in the provision for loan losses and
a $1.5 million decline in noninterest income.
Interest Income. Interest income increased by $6.3 million, or 35.6%, to $23.9
million for the year ended December 31, 1999, from $17.6 million for the same
period last year. The improvement in interest income was the result of a $99.3
million increase in average interest-earning assets to $311.5 million, which
offset a decline of 64 basis points in the yield on interest-earning assets to
7.67% for the year ended December 31, 1999, from 8.31% for 1998.
Interest Expense. Interest expense increased by $4.6 million, or 40.9%, to $16.0
million in 1999 from $11.4 million in 1998, as a result of a $91.5 million
increase in average interest-bearing liabilities. The average cost of
interest-bearing liabilities declined by 21 basis points to 5.13% for the year
ended 1999 from 5.10% for 1998.
Net Interest Income. Net interest income increased by $1.6 million to $7.9
million for the twelve months ended December 31, 1999, from $6.3 million for the
same period last year. The increase to net interest income was despite a 42
basis point decline in the net interest margin to 2.53% for the year ended
December 31, 1999, from 2.95% in 1998. The interest rate spread decreased to
2.54% in 1999 from 3.15% in 1998.
The table below sets forth certain information regarding changes in interest
income and interest expense of Argo Bancorp, Inc. 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 has been allocated
proportionately to the change due to volume and the change due to rate.
14.
<PAGE> 59
ARGO BANCORP, INC.
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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 continuing operations for the years
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,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable (1) $245,739 $19,799 8.06% $194,378 $16,624 9.55% $180,964 $17,321 9.57%
Mortgage-backed securities 1,816 114 6.28 2,284 143 6.26 4,423 293 6.60
Interest-earning deposits 31,120 1,805 5.80 10,066 606 6.02 6,573 361 5.54
Securities 32,707 2,178 6.66 5,428 252 4.64 5,247 288 5.51
------------------------- -------------------------- ------------------------
Total interest-earning assets 311,382 23,896 7.67 212,156 17,625 8.31 197,207 18,263 9.26
Non-interest-earning assets (2) 33,777 39,029 39,260
-------- -------- --------
Total assets $345,159 $251,185 $236,467
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: $268,727 12,542 4.67 $188,680 9,414 4.99 $165,669 8,581 5.18
Deposits 26,016 1,567 6.02 29,260 1,681 5.75 41,140 2,226 5.41
FHLB advances and other borrowings
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated debt 17,250 1,905 11.04 2,519 272 10.80 - - -
------------------------- -------------------------- ------------------------
Total interest-bearing liabilities 311,993 16,014 5.13 220,459 11,367 5.16 206,810 10,807 5.23
Other liabilities 14,175 12,139 11,827
-------- -------- --------
Total liabilities 326,168 232,598 218,637
Equity 19,091 18,587 17,810
-------- -------- --------
Total liabilities and equity $345,259 $251,185 $236,447
======== ======== ========
Net interest income/interest rate spread (3) $ 7,882 2.54% $ 6,258 3.15% $ 7,456 4.03%
=============== =============== ==============
Net interest-earning assets/(liabilities)
/net interest margin (4) $ (611) 2.53% $ (8,303) 2.95% $ (9,623) 3.78%
======== ====== ======== ====== ======== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 0.96x 0.96x 0.95x
======== ======== ========
</TABLE>
(1) Loans receivable include loans held for sale, portfolio loans receivable,
and discount loans receivable.
(2) Included in the balances are PM SRs of approximately in $5.0, $5.1 million
and $6.7 million in 1999, 1998, and 1997 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.
15.
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ARGO BANCORP, INC.
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<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
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 $ 272 $ 2,903 $ 3,175 $ 1,284 $ (1,980) $ (696)
Interest-earning deposits 72 1,127 1,199 194 50 244
Mortgage-backed securities (2) (27) (29) (141) (8) (149)
Investment securities 89 1,837 1,926 9 47 37
--------- --------- --------- --------- --------- --------
Total 431 5,840 6,271 1,346 (1,984) (638)
Interest-bearing liabilities:
Deposits 156 2,972 3,128 1,191 (358) 833
FHLB advances and other
Borrowings (7) (107) (114) (574) 29 (545)
Guaranteed preferred beneficial
interest in the Corporation's
junior subordinated debt 177 1,456 1,633 272 - 272
--------- --------- --------- --------- --------- --------
Total 326 4,321 4,647 889 (329) 560
--------- --------- --------- --------- --------- --------
Net change in interest income $ 105 $ 1,519 $ 1,624 $ 457 $ (1,655) $ (1,198)
========= ========= ========= ========= ========= ========
</TABLE>
Provision for Loan Losses. The provision for loan losses totaled $965,000 for
the year ended December 31, 1999, compared to $355,000 for 1998, resulting in an
allowance for loan losses of $1.6 million, or .58% of total loans receivables
and 25.61% of total non-performing loans at December 31, 1999. The allowance for
loan losses balance at December 31, 1998 was $940,000, or .40% of loans
receivable excluding Discounted Loans receivable. The increase in the provision
for loan losses was primarily due to the increase in the Savings Bank's loan
portfolio. In determining the provision for loan losses and adequacy of the
corresponding allowance for loan losses, management considers changes in the
asset quality, charge-off experience, and economic conditions.
Noninterest Income. Noninterest income declined by $1.5 million to $2.3 million
for the year ended December 31, 1999, compared to $3.8 million in 1998. This
decrease was in part the result of a $1.2 million decline in gains on the sale
of loans held for sale and discounted loans receivable. The sale of foreclosed
real estate resulted in net losses of $533,000 for the year ended December 31,
1999, or $205,000 higher than the net losses of $228,000 recorded in 1998.
Profits on the sale of trading account securities declined by $126,000 to
$119,000 in 1999 from $245,000 in 1998. The Company also recorded a net loss of
$2,000 on the sale of securities available-for-sale in 1999 compared to net
gains of $245,000 in 1998. In addition, loan servicing income declined by
$254,000 to $1.4 million for the year ended December 31, 1999, from $1.6 million
for 1998. The decline in loans servicing income was as a result of the
management services agreement dated June 1, 1999, between the Savings Bank and
E-Conduit which limited the Savings Bank's revenue to a six basis point per
transaction license fee. In addition, in 1998, the
16.
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ARGO BANCORP, INC.
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Company had a $976,000 gain on the sale of a branch which was offset by
$1,399,000 of losses from the investment in the MSR limited partnership. In
1999, the gain recognized on the sale of five operating properties of the Bank
in the sale and leaseback transaction was $86,000 with limited partnership net
income of $166,000.
Noninterest Expense. Noninterest expense declined by $772,000 to $9.1 million in
1999 from $9.9 million in 1998. This decline was in part the result of the Margo
restructuring and the management services agreement with E-Conduit, which
reduced the operating expenses related to Margo by $693,000 to $879,000 in 1999
from $1.6 million in 1998. In addition, professional services fees declined by
$420,000 to $572,000 in 1999 from $992,000 in 1998 as management focused on
controlling these costs during 1999. Finally, compensation and benefits
decreased as a result of the client services agreement with Synergy and as a
result of a reduction in full-time employees.
Income Tax Expense. The Company recorded a tax benefit from continuing
operations of $336,000 for 1999 compared to a tax benefit of $383,000 1998. The
1999 tax benefit resulted primarily from recognizing low-income housing tax
credits totaling $300,000. The Company has low-income housing tax credit
carryforwards in the amount of $914,000 expiring in 2012 and 2019. In addition,
the Company has state tax net operating loss carryforwards of $5,921,000
expiring in 2012 through 2019.
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. Income from continuing operations totaled
$245,000, or $.12 per share (diluted), compared to $698,000, or $.33 per share
(diluted), for 1997. The decrease in net income was due to various factors,
including a decrease in the net interest margin and a loss on the investment in
the MSR limited partnership, offset by a gain on the sale of a branch location.
Interest Income. Interest income decreased by $638,000, or 3.5%, to $17.6
million for the year ended December 31, 1998, from $18.3 million for 1997. 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 $212,156,000 in
1998 from $197,207,000 in 1997.
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ARGO BANCORP, INC.
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Interest Expense. Interest expense increased $560,000, or 5.18%, to $11.4
million in 1998 from $10.8 million in 1997, primarily as a result of higher
averages. 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 7 basis point decline in the average cost of
interest-bearing liabilities to 5.16% in 1998 from 5.23% in 1997.
Net Interest Income. Net interest income decreased by $1.2 million to $6.3
million for 1998 from $7.5 million for 1997. The net interest margin decreased
from 3.78% in 1997 to 2.95% in 1998. The interest rate spread decreased to 3.15%
in 1998 from 4.03% in 1997.
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, or 18%, during 1998.
Noninterest Income. Noninterest income increased $659,000 to $3.8 million in
1998 from $3.2 million in 1997. This increase was primarily the result of a
$976,000 gain recorded on the sale of the Gurnee branch, a $664,000 increase in
loan servicing fees and an aggregate increase of $574,000 in gains on sales of
loans receivable, Discounted Loans receivable, securities available-for-sale,
trading account securities, and foreclosed real estate. Partially offsetting the
increases to noninterest 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 MSRS limited partnership. The general partner
recorded a valuation allowance for the twelve months ended December 31, 1998 and
Argo Saving's proportionate share of the valuation allowance was $1.4 million.
Noninterest Expense. Noninterest expense increased by $200,000, or 2.1%, to $9.9
million in 1998 from $9.6 million in 1997. This increase was primarily due to a
$316,000 increase in occupancy and equipment expenses, a $45,000 increase in
data processing costs of services, and a $235,000 increase in other expenses.
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
18.
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ARGO BANCORP, INC.
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as the opening of two permanent branch locations within the city limits of
Chicago, Illinois.
Income Tax Expense. The Company recorded a tax benefit from continuing
operations of $383,000 for 1998 compared to tax expense of $51,000 for 1997. The
1998 tax benefit resulted primarily from recognizing low-income housing tax
credits totaling $250,000.
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 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
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"), titled "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
January 1, 2001. Since the Company has no significant derivative instruments or
hedging activities, adoption of Statement No. 133 and No. 137 is not expected to
have a material impact on Argo Bancorp's consolidated financial statements.
19.
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ARGO BANCORP, INC.
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YEAR 2000
The Year 2000 issue arose from the inability of some computer systems to
recognize the year 2000. Many computer programs and systems originally were
programmed with six digit dates that provided only two digits to identify the
calendar year in the date field.
The Company experienced no problems or issues related to the millennium issue.
The Company is not aware of any borrowers incurring significant Year 2000 issues
or any vendors used by the Company which have incurred significant Year 2000
issues. The Company spent approximately $30,000 on Year 2000 related hardware,
software and contingency planning over the past two years.
A contingency plan, which involves processing transactions at the third party
data processors back-up recovery site, disaster recovery programs in the event
of electrical failures, manual bookkeeping systems and additional cash
requirements was approved by the board of directors and will be maintained by
management during the year 2000 in the event that unanticipated Year 2000 issues
arise.
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's 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.
20.
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ARGO BANCORP, INC.
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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 300 basis points. Management
assumes that a 200 basis point movement up or down is considered reasonable and
plausible for purposes of managing its interest-rate risk on a day-to-day basis.
NPV is the market value of portfolio equity and is computed as the difference
between the market value of assets and the market value of liabilities, adjusted
for the value of off-balance-sheet items. The following table presents the
Savings Bank's projected change in NPV for the various rate shocks as of
December 31, 1999 and 1998.
Estimated Increase
(Decrease) in NPV
Change in Estimated ----------------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
1999:
300 basis point rise $ 10,005 $ (14,099) (58)%
200 basis point rise 15,915 (8,189) (34)
100 basis point rise 20,893 (3,211) (13)
Base scenario 24,104 - -
100 basis point decline 25,715 1,611 7
200 basis point decline 26,805 2,701 11
300 basis point decline 27,806 3,701 15
1998:
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
The Savings Bank is more sensitive to a sudden rise in interest rates at
December 31, 1999, as compared to December 31, 1998. However, a decline in
interest rates would be beneficial to the Savings Bank at December 31, 1999,
compared to December 31, 1998, where a decline in rates produces lower results.
21.
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ARGO BANCORP, INC.
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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.
22.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Argo Bancorp, Inc.
We consent to incorporation by reference in the Registration Statements on Forms
S-8 (File Numbers 33-59856, 33-5587202, and 33-13047) of Argo Bancorp, Inc. of
our report date March 17, 2000, relating to the consolidated statements of
financial condition of Argo Bancorp, Inc and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, which report is
included in this Annual Report on Form 10-K of Argo Bancorp, Inc.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 30, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Argo Bancorp, Inc.:
We consent to incorporation by reference in the December 31, 1999 annual report
on Form 10-K of Argo Bancorp, Inc., of our report dated March 24, 1998, related
to the consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997.
KPMG LLP
Chicago, Illinois
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-k and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 5,603
<INT-BEARING-DEPOSITS> 32,069
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 668
<INVESTMENTS-HELD-FOR-SALE> 14,364
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 279,011
<ALLOWANCE> 1,551
<TOTAL-ASSETS> 392,764
<DEPOSITS> 301,673
<SHORT-TERM> 27,504
<LIABILITIES-OTHER> 13,383
<LONG-TERM> 12,832
0
3
<COMMON> 20
<OTHER-SE> 19,565
<TOTAL-LIABILITIES-AND-EQUITY> 392,764
<INTEREST-LOAN> 19,799
<INTEREST-INVEST> 2,292
<INTEREST-OTHER> 1,805
<INTEREST-TOTAL> 23,896
<INTEREST-DEPOSIT> 12,542
<INTEREST-EXPENSE> 16,014
<INTEREST-INCOME-NET> 7,882
<LOAN-LOSSES> 965
<SECURITIES-GAINS> 119
<EXPENSE-OTHER> 9,079
<INCOME-PRETAX> 178
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,577
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 7.67
<LOANS-NON> 7,757
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 940
<CHARGE-OFFS> 354
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,551
<ALLOWANCE-DOMESTIC> 1,551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
