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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-19829
ARGO BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 2,009,184 shares outstanding as of November 13, 2000.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
-----
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2000, and December 31, 1999 (unaudited).......... 3
Consolidated Statements of Income For the Three and Nine
Months ended September 30, 2000, and 1999 (unaudited)................. 4
Consolidated Statements of Comprehensive Income For
the Three and Nine Months ended September 30, 2000,
and 1999 (unaudited).................................................. 5
Consolidated Statements of Stockholders' Equity
for the Nine Months ended September 30, 2000,
and 1999 (unaudited) ................................................. 6
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2000 and 1999 (unaudited) ............ 7
Notes to Consolidated Financial Statements ........................... 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk............ 25
PART II - OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 27
Item 2 Changes in Securities ................................................ 27
Item 3 Default Upon Senior Securities ....................................... 27
Item 4 Submission of Matters to a Vote
of Security Holders ................................................ 27
Item 5 Other Information .................................................... 27
Item 6 Exhibits and Reports on Form 8-K ..................................... 28
Form 10Q Signature Page ....................................................... 28
</TABLE>
2
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Cash ....................................................... $ 14,269 $ 5,603
Interest-earning deposits .................................. 46,770 32,069
--------- ---------
Total Cash and Cash Equivalents ............................ 61,039 37,672
Stock in Federal Home Loan Bank of Chicago ................. 2,521 2,303
Trading account securities ................................. 628 668
Securities available-for-sale .............................. 13,702 14,364
Securities held-to-maturity ................................ 26,303 25,859
Loans receivable, net ...................................... 275,659 268,290
Discounted loans receivable, net ........................... 5,021 9,170
Accrued interest receivable ................................ 4,803 3,392
Foreclosed real estate, net ................................ 2,624 2,280
Premises and equipment, net ................................ 8.964 8,514
Mortgage loan servicing rights, net ........................ 544 464
Investment in limited partnership .......................... 4,614 4,494
Investment in GFS preferred stock .......................... 4,000 4,600
Debt issuance costs related to junior subordinated debt, net 1,790 1,838
Prepaid expenses and other assets .......................... 16,615 8,856
--------- ---------
Total Assets ............................................... 428,827 392,764
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................. $ 348,726 $ 301,673
Borrowed money ........................................... 27,142 40,336
Advance payments by borrowers for taxes and insurance .... 1,191 902
Accrued interest payable ................................. 650 966
Custodial escrow balances for loans serviced ............. 5,772 5,476
Other liabilities ........................................ 7,283 6,039
Junior subordinated debt ................................. 17,784 17,784
Stockholders' Equity
Preferred stock .......................................... 3 3
Common stock ............................................. 20 20
Additional paid-in capital .............................. 8,844 8,829
Retained earnings - substantially restricted ............. 12,920 12,260
Employee Stock Ownership Plan loan ....................... (426) (426)
Accumulated other comprehensive loss ...................... (838) (850)
Unearned stock awards ..................................... (244) (248)
--------- ---------
Total stockholders' equity ........................... 20,279 19,588
--------- ---------
Total Liabilities and Stockholders' Equity ................. $ 428,827 $ 392,764
========= =========
</TABLE>
See accompanying notes to consolidated unaudited financial statements
3
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
09/30/00 09/30/99 09/30/00 09/30/99
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable .................................................... $ 5,681 $ 4,703 $ 16,877 $ 13,652
Discounted loans receivable ......................................... 150 333 438 885
Securities available-for-sale ....................................... 374 388 1,148 787
Securities held-to-maturity ......................................... 466 391 1,402 634
Interest-earning deposits ........................................... 638 613 1,727 1,193
-------- -------- -------- --------
Total interest income ......................................... 7,309 6,428 21,592 17,151
-------- -------- -------- --------
Interest expense:
Deposits ............................................................ 4,719 3,414 13,048 9,087
Borrowed money ...................................................... 440 379 1,391 1,020
Junior subordinated debt ............................................ 474 485 1,434 1,425
-------- -------- -------- --------
Total interest expense ........................................... 5,633 4,278 15,873 11,532
-------- -------- -------- --------
Net interest income ............................................ 1,676 2,150 5,719 5,619
-------- -------- -------- --------
Provision for loan losses .............................................. 65 60 185 605
-------- -------- -------- --------
Net interest income after provision
for loan losses ................................................... 1,611 2,090 5,534 5,014
-------- -------- -------- --------
Non-interest income:
Loan servicing income ............................................... 111 45 213 618
Mortgage banking .................................................... 7 23 18 753
Gain (Loss) on sale of loans receivable, discounted loans receivable,
securities available for sale, trading account securities
and foreclosed real estate ........................................ 115 10 427 92
Fees and service charges ............................................ 385 183 976 548
Other ............................................................... 20 12 113 46
-------- -------- -------- --------
Total non-interest income ..................................... 638 274 1,747 2,056
-------- -------- -------- --------
Non-interest expense:
Compensation and benefits ........................................... 938 758 2,564 2,654
Occupancy and equipment ............................................. 632 386 1,503 1,167
Federal deposit insurance premium ................................... 16 36 48 103
Amortization of goodwill ............................................ -- -- -- 47
Other general and administrative fees ............................... 814 763 2,230 2,714
-------- -------- -------- --------
Total non-interest expense .................................... 2,400 1,943 6,345 6,685
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes .......... (151) 421 936 385
Income tax expense/(benefit) ........................................... (240) 85 (34) (87)
-------- -------- -------- --------
Income from continuing operations ............................. 89 336 970 472
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operation
(less applicable income taxes of $83) ..................... -- -- -- 135
Gain on sale of discontinued operation
(less applicable income taxes of $721) .................. -- -- -- 1,399
-------- -------- -------- --------
Net income ............................................................. $ 89 $ 336 $ 970 $ 2,006
-------- -------- -------- --------
Basic earnings per share:
Income from continuing operations ...................................... $ .04 $ .17 $ .48 $ .23
Income from discontinued operations .................................... -- -- -- .77
-------- -------- -------- --------
Net income ............................................................. $ .04 $ .17 $ .48 $ 1.00
======== ======== ======== ========
Diluted earnings per share:
From continuing operations ............................................. $ .04 $ .15 $ .45 $ .22
From discontinued operations ........................................... -- -- -- .72
-------- -------- -------- --------
Net income ............................................................. $ .04 $ .15 $ .45 $ .94
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated unaudited financial statements
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
09/30/00 09/30/99 09/30/00 09/30/99
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income............................................................. $ 89 $ 336 $ 970 $ 2,006
Other comprehensive income/(loss):
Net increase/(decrease) in fair value of securities
Classified as available for sale, net of tax (expense)/
benefit of $(177), $143, $(38), and $187 respectively... 289 (234) 62 305)
Less reclassification adjustment for gains included
in net income net of tax (expense)/benefits of $(30) and
$1 respectively............................................. --- --- 50 (2)
-------- ----- -------- --------
Other comprehensive income/(loss) ..................................... 289 (234) 12 (307)
-------- ----- -------- --------
Comprehensive income................................................... $ 378 $ 102 $ 982 $ 1,699
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated unaudited financial statements
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Retained
Stock Stock Capital earnings
---------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999
Balance at December 31, 1998 ............... $ 3 $ 20 $ 8,829 $ 10,084
Net income ................................. -- -- -- 2,006
Other Comprehensive Loss, net of tax ....... -- -- -- --
Amortization of purchase price of MRP stock -- -- -- --
Stock acquired by ESOP ..................... -- -- -- --
Cash dividends ............................. -- -- -- (300)
-------- -------- -------- --------
Balance at September 30, 1999 ............ $ 3 $ 20 $ 8,829 $ 11,790
======== ======== ======== ========
Nine months ended September 30, 2000
Balance at December 31, 1999 ............... $ 3 $ 20 $ 8,829 $ 12,260
Net income ................................. -- -- -- 970
Other Comprehensive Income, net of tax ..... -- -- -- --
Amortization of purchase price of MRP stock -- -- -- --
Stock options exercised .................... -- -- 15 --
Cash dividends ............................. -- -- -- (310)
-------- -------- -------- --------
Balance at September 30, 2000 ............. $ 3 $ 20 $ 8,844 $ 12,920
======== ======== ======== ========
Accumulated
Other
Comprehensive Total
Income/ Unearned Stockholders'
ESOP Loan (Loss) Stock Awards Equity
-------------------------------------------------
Nine months ended September 30, 1999
Balance at December 31, 1998 ............... -- $ (258) $ (284) $ 18,414
Net income ................................. -- -- -- 2,006
Other Comprehensive Loss, net of tax ....... -- (307) -- (307)
Amortization of purchase price of MRP stock $ 22 -- 37 59
Stock acquired by ESOP ..................... (498) -- -- (498)
Cash dividends ............................. -- -- -- (300)
-------- -------- -------- --------
Balance at September 30, 1999 ............ $ (476) $ (545) $ (247) $ 19,374
======== ======== ======== ========
Nine months ended September 30, 2000
Balance at December 31, 1999 ............... $ (426) $ (850) $ (248) $ 19,588
Net income ................................. -- -- -- 970
Other Comprehensive Income, net of tax ..... -- 12 -- 12
Amortization of purchase price of MRP stock -- -- 4 4
Stock options exercised .................... -- -- -- 15
Cash dividends ............................. -- -- -- (310)
-------- -------- -------- --------
Balance at September 30, 2000 ............. $ (426) $ (838) $ (244) $ 20,279
======== ======== ======== ========
-----------------------------------------------------------------------------------------------
See accompanying notes to consolidated unaudited financial statements
</TABLE>
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations ..................................................... $ 970 $ 472
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation ............................................................................ 473 1,120
Accretion of discounts and deferred loan fees ........................................... (198) (119)
Provision for loan losses ............................................................... 185 605
(Gain) loss on sale of:
Securities available for sale ........................................................... (80) 3
Trading account securities .............................................................. (146) (155)
Loans receivable ........................................................................ (101) (382)
Branch location ......................................................................... (117) (40)
Foreclosed real estate .................................................................. 18 431
Other ................................................................................... (23)
Net change in trading account activity .................................................... 40 --
Loans originated and purchased for sale ................................................... -- (101,484)
Proceeds from sale of loans receivable .................................................... 17,876 80,996
Amortization of goodwill .................................................................. -- 260
(Increase) decrease in purchased mortgage servicing rights ................................ (200) 155
Amortization of purchase price of MRP and ESOP stock ...................................... 4 59
(Increase) decrease in accrued interest receivable, prepaid
expenses, and other assets .............................................................. (9,170) 4,359
Increase in accrued interest payable and other liabilities ................................ 3,072 4,039
--------- ---------
Net cash provided (used) in by operating activities ..................................... 12,626 (9,702)
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio .............................................. (315,875) (158,344)
Principal repayments on:
Loans receivable and discounted loans receivable ......................................... 292,297 161,617
Securities-available-for sale ............................................................ -- 164
Securities held to maturity .............................................................. 181 --
Proceeds from sale of:
Foreclosed real estate .................................................................. 1,759 2,740
Securities available for sale ........................................................... 843 12,330
Premises and equipment .................................................................. 500 5,169
Mortgage Servicing Rights ............................................................... -- 11,100
On-Line Financial Services, Inc. ........................................................ -- 6,207
Purchase of:
Securities available for sale ........................................................... (880) (47,943)
Premises and equipment .................................................................. (1,423) (6,839)
FHLB Stock .............................................................................. (218) (392)
Net cash (paid) in purchase of subsidiary ............................................... (498)
Loan servicing rights ................................................................... -- (11,157)
--------- ---------
Net cash used in investing activities .............................................. (22,816) (25,846)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ................................................................ 47,053 59,850
Proceeds from borrowed funds ............................................................ 2,690 71,834
Repayment of borrowed funds ............................................................. (15,884) (70,063)
Proceeds from exercise of stock options ................................................. 15 --
Dividends paid .......................................................................... (310) (300)
Net increase in advance payments by borrowers for taxes and insurance ................... 289 345
Net (Increase)decrease in custodial escrow balances for loans serviced .................. (296) 80
--------- ---------
Net cash provided by financing activities ............................................. 33,557 61,746
--------- ---------
Net increase in cash and cash equivalents ............................................... 23,367 26,199
Cash and cash equivalents at beginning of period .......................................... 37,672 10,156
--------- ---------
Cash and cash equivalents at end of period ................................................ $ 61,039 $ 36,355
========= =========
Supplemental disclosure of non-cash 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
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest expense .......................................................................... $ 16,189 $ 11,243
Income taxes .............................................................................. $ 900 $ 243
Non-cash investing activity - transfer of loans to foreclosed real estate .................... $ 2,103 $ 1,584
</TABLE>
See accompanying notes to consolidated unaudited financial statements.
7
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ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals considered necessary for fair presentation have been included. The
results of operations for the three and nine months ended September 30, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The September 30, 2000 unaudited consolidated financial statements include the
accounts of Argo Bancorp, Inc. ("Argo Bancorp," the "Corporation" or the
"Company") and its wholly owned subsidiary, Argo Federal Savings Bank, FSB
("Argo Savings" or "Savings Bank") and Argo Savings' wholly owned subsidiary,
Dolton-Riverdale Savings Service Corporation ("Dolton Service"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
Subsequent to March 31, 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.
On March 31, 1999 the Company sold its wholly owned subsidiary On-Line Financial
Services, Inc. ("On-Line") to GFS Holdings, Co. of Palm Beach Gardens Florida.
The Company sold On-Line for cash proceeds of $6,700,000 and $4,600,000 of
Series B preferred stock of GFS Holdings Co. The Company recorded a gain of
$1,201,000, net of taxes of $619,000 as of March 31, 1999 based on information
available at that date. This net gain was subsequently adjusted to $1,928,000
during the final three quarters of 1999, as information became available
regarding sale expenses and an accrual for contingent payments to former On-Line
shareholders. Operating results from On-Line through March 31, 1999 are included
in the financial statements in results of discontinued operations. The following
table reflects the components of income from discontinued operations for the
three months ended March 31, 1999 (in thousands):
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Income Statement Data
Revenues............................................. $ 4,158
Costs & Expenses..................................... 3,940
-------
Operating Income 218
Income Tax Expense................................... 83
-------
Income from discontinued operations $ 135
=======
On June 1, 1999 Argo Federal Savings Bank, FSB entered into a management
services agreement ("Agreement") with E-Conduit Network, Inc. ("E-Conduit").
Under the agreement E-Conduit acquired certain assets and liabilities of Margo
and assumed the day to day operations related to the origination of mortgage
loans for the Savings Bank portfolio and for sale into the secondary market. The
Agreement also requires E-Conduit to pay a six basis point per transaction
license fee, in return E-Conduit is allowed to use the Margo name and all the
intellectual properties of Margo. As a result of this transaction Margo has
discontinued its wholesale mortgage operation and is focusing on fee generation
through its licensing activities.
On June 29, 1999, the Savings Bank sold its five operating properties located at
7600 West 63rd Street and 5818 South Archer Road, Summit, Illinois, 8267 South
Roberts Road, Bridgeview, Illinois, 2154 West Madison Street, Chicago, Illinois,
and 14076 Lincoln Avenue, Dolton, Illinois, to a non-affiliated third party for
an aggregate contractual purchase price of $5,850,000 and simultaneously entered
into a 14 year, 2-month operating lease for each of the properties with the new
purchaser. Under the terms of the lease the Savings Bank will pay an initial
monthly rental of $48,000 per month or $576,000 per year which will increase at
the rate of 1% each year commencing January 1, 2000. The net proceeds of the
sale to the Savings Bank after deducting customary closing cost including title
charges, environmental studies, surveys and legal fees was $5,230,662 resulting
in a profit of $2,246,862 to the Savings Bank. The profit, under generally
accepted accounting principles, will be taken into income by the Savings Bank
over the lease term. The Savings Bank recorded into income $40,000 and $120,000
from the deferred gain on the sale of the operating properties in the three and
nine months ended September 30, 2000. As a result of this sale and leaseback
transaction the Bank is not the record title holder of any of the properties
from which it transacts business.
On June 9, 2000, Argo Federal established an Internet banking division of the
Bank, which is marketed as "Umbrellabank.com, a division of Argo Federal Savings
Bank, FSB" ("umbrellabank.com"). Umbrellabank.com is accessible via the Internet
at http://www.umbrellabank.com and allows consumers to conduct online financial
transactions with the Bank, including but not limited to opening account
relationships, transferring funds, accessing account information, processing
bill payments, and applying for or obtaining loan products, including but not
limited to credit cards and residential mortgage secured loans. During the
period of June 9, 2000 to June 30, 2000, umbrellabank.com was accessible via the
Internet for the purposes of testing outside the beta environment. Active
advertisement and solicitation of deposits began during the three months ended
September 30, 2000.
Although umbrellabank.com is operated as a division (as opposed to a subsidiary)
of the Bank with no separate legal existence apart from the Bank, the operations
of umbrellabank.com are maintained on separate books and accounting records. In
addition, umbrellabank.com has entered into data processing and other vendor
contracts to facilitate its line of business, maintains separate and distinct
operational controls in addition to those currently in place at Argo Federal,
and has implemented policies and
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procedures complementary to those currently in place at the Bank to meet the
operational and security needs associated with expanding business operations to
the Internet.
As of September 30, 2000, deposits attributable to umbrellabank.com totaled
$27.1 million. Costs incurred by umbrellabank.com during the nine months ended
September 30, 2000 were $1,519,000 for hardware and software, $132,000 for
pre-paid expenses, $177,000 for furniture, fixtures and equipment, and $376,000
for leasehold improvements in its new office location all of which have been
capitalized. In addition, $388,000 of operating expenses and organization costs
were recorded in the nine months ended September 30, 2000 related to the
umbrellabank.com division.
NOTE B - STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants may
make contributions to the Plan from 1.0% to 12.0% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $ 50,000 and $54,000, to
the Plan for the nine months ended September 30, 2000, and 1999. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
In 1991, Argo Savings formed an Employee Stock Ownership Plan ("ESOP") for
eligible employees. Subsequent to March 31, 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, subsequent to March 31, 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 September 30, 2000. Contributions of $28,000 were made to the ESOP to
fund principal and interest payments for the nine months ended September 30,
2000.
MANAGEMENT RECOGNITION PLAN
The Board of Directors of the Savings Bank formed a management recognition plan
and trust (MRP) effective October 31, 1991, which purchased 6.8%, or 61,600
shares, of Argo Bancorp's authorized but un-issued 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. None of the remaining shares have been awarded.
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<PAGE> 11
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. No MRP shares were awarded during the nine-month
periods ended September 30, 2000 and 1999.
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 the three-month period ended September 30, 2000 no options to
purchase shares were exercised nor were any forfeited. For the nine months ended
September 30, 2000 options to purchase 4,288 shares were exercised and options
to purchase 17,196 shares were forfeited. At September 30, 2000, options to
purchase 149,984 shares were outstanding, at an average price of $5.90.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan) in 1991, under
which up to 429,800 shares of Argo Bancorp's common stock were reserved for
issuance by Argo Bancorp upon exercise of non-incentive stock options to be
granted to non-employee 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 September 30, 2000, 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). No options were exercised during the nine
month periods ended September 30, 2000 and 1999. At September 30, 2000, 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. There were 25,000 options to
purchase shares granted in the nine-month period ended September 30, 2000 at a
price of $10.00 per share, there were no options granted in the nine month
period ended September 30, 1999. At September 30, 2000, 60,000 options for
shares have been awarded by Argo Bancorp under the Plan of which 26,000 options
for shares have been forfeited. The exercise price for the options awarded was
equal to the fair market value of the common stock on the date of grant. At
September 30 2000, options to purchase 34,000 shares were outstanding at an
average price of $9.74 per share.
At September 30, 2000, the total options outstanding under all plans were
383,584 at an average price of $6.30.
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<PAGE> 12
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements.
The following table summarizes, as of September 30, 2000 and December 31, 1999,
Argo Savings' capital requirements under OTS regulations and its actual capital
ratios at those dates:
<TABLE>
<CAPTION>
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
SEPTEMBER 30, 2000 PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
------------------ ---------- ---------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Risk-based................. 8.0% 12.68% $16,733 $26,515 $ 9,782
Core....................... 4.0 6.15 16,281 25,015 8,734
Tangible................... 1.5 6.15 6,105 25,015 18,910
DECEMBER 31, 1999
Risk-based................. 8.0% 10.24% $18,278 $23,404 $ 5,126
Core....................... 4.0 5.90 14,813 21,853 7,040
Tangible................... 1.5 5.90 5,555 21,853 16,298
</TABLE>
NOTE D - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share from continuing operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
09/30/00 09/30/99 09/30/00 09/30/99
---------------------- --------------------
(Dollars and shares in thousands,
except per share data)
<S> <C> <C> <C> <C>
Net Income from continuing operations (Numerator) ... $ 89 $ 336 $ 970 $ 472
Basic earnings per share
weighted average common shares outstanding ...... 2,009 2,005 2,007 2,005
Effect of stock dilutive stock options outstanding .. 138 168 138 130
------ ------ ------ ------
Total weighted average common shares and
equivalents outstanding for diluted computation ..... 2,147 2,173 2,145 2,135
====== ====== ====== ======
Basic earnings per shares from continuing operations $ .04 $ .17 $ .48 $ .23
Diluted earnings per share from continuing operations $ .04 $ .15 $ .45 $ .22
</TABLE>
NOTE E - COMMITMENTS AND CONTINGENCIES
At September 30, 2000, Argo Savings had loan commitments totaling $2.6 million
and $8.7 million in unused lines of credit. Commitments to fund loans have
credit risk essentially the same as that involved in extending loans to
customers and are subject to Argo Savings' normal credit policies. Argo Savings
also had Community Reinvestment Act ("CRA") investment commitments outstanding
of $2.5 million.
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<PAGE> 13
NOTE F- SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, and
mortgage banking. Loans, investments, and deposits provide the revenues in the
banking operation, fee income provides the primary revenue for mortgage banking
and discount accretion provides the primary revenue for discount loan workout.
Information reported internally for performance assessment follows for the nine
months ended September 30, 2000 and 1999 respectively. The column for other
information primarily includes activity between segments which is being
eliminated.
<TABLE>
<CAPTION>
Total Discount Mortgage
Total
Banking Lending Banking Other Segments
------- ------- ------- ----- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2000
Net interest income ........ $ 5,928 $ 655 $ -- $ (864) $ 5,719
Provision for loan losses .. 95 90 -- -- 185
Other revenue .............. 1,637 (60) 18 152 1,747
Other expenses ............. 5,528 191 -- 626 6,345
Income tax expense (benefit) 504 -- -- (538) (34)
Segment profit (loss) ...... 1,438 314 18 (800) 970
Segment assets ........ 415,263 11,615 45 1,904 428,827
1999
Net interest income ........ $ 5,183 $ 436 $ -- $ -- $ 5,619
Provision for loan losses .. 515 90 -- -- 605
Other revenue .............. 2,606 (273) 753 (1,030) 2,056
Other expenses ............. 5,524 284 877 -- 6,685
Income tax benefit ......... (87) -- -- -- (87)
Segment profit (loss) ...... 1,837 (211) (124) (1,030) 472
Segment assets ........ 360,615 12,111 84 (1,171) 371,639
</TABLE>
13
<PAGE> 14
ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 10-Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1999 Form 10-K.
GENERAL
The Company was incorporated in Delaware in August 1987, for the purpose of
acquiring the Savings Bank. The Company acquired Argo Savings on November 17,
1987, for a capital infusion of $1.1 million. On August 29, 1991, the Board of
Directors of Dolton Riverdale Savings and Argo Savings adopted a Plan of Merger
Conversion ("Plan"), whereby Dolton agreed to convert from a state-chartered
mutual association to a federally-chartered stock association and merge with and
into Argo Savings with Argo Savings as the surviving entity. Final regulatory
approval was received on May 26, 1992, at which time the merger conversion 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 OTS,
Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC").
On December 31, l996, Argo Bancorp entered into a stock purchase agreement with
The Deltec Banking Corporation Limited ("Deltec"), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms of
the agreement, Argo Bancorp agreed to issue and sell 446,256 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$9.50 per share. Total proceeds from this transaction were approximately $4.2
million. A five (5.0%) percent investment advisory fee was paid to Charles E.
Webb and Company reducing the net proceeds of the transaction to $4.0 million.
The stock purchase agreement also provides that Deltec may acquire additional
shares of common stock from the Company when the Company issues or sells
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<PAGE> 15
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, 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 sale offering were
$17,250,000. Argo Capital Trust used the gross proceeds for 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 $1.7 million, and were capitalized by the
company. The expenses are being amortized over 30 years. However, the
debentures, under certain circumstances may be prepaid prior to the maturity
date. The proceeds from the sale of the Junior Subordinated Debentures are being
used by Argo Savings for general lending purposes and enhancements of
operational capabilities, and by the Company for general corporate purposes, the
enhancement of operational capabilities and the potential purchase of loans.
On June 24, 2000, the Company incorporated a wholly owned subsidiary, Argo
Redemption Corporation, an Illinois corporation ("ARC"). ARC was chartered to
effectuate, from time to time, purchase of the Company's outstanding Capital
Securities by tender, in the open market or by private agreement. Acquisitions
through the over-the-counter dealer market are anticipated to comprise the
majority of purchase activity. As of September 30, 2000, ARC had acquired 37,648
shares of Argo Capital Trust Preferred securities at an average price of $8.57
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; on March 27, 2000 the Company exercised its option
and acquired an additional 33,333 shares of Synergy Class A Common Stock. 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. During the nine
months ended September 30, 2000 the Company with OTS and FDIC approval, infused
49,999 shares of Synergy Class A Common Stock and 16,667 shares of Synergy's
Convertible Preferred Stock into Dolton Service, thereby increasing the capital
of the Savings Bank by $1,000,000.
In December 1999 the Company purchased 100,000 shares of Series B Preferred
Stock of Creditland Inc. ("Creditland") at a purchase price of $2.50 a share for
an aggregate purchase price of $250,000. Creditland is a mortgage banking
company and aggregator and marketer of various loan and credit products
including but not limited to credit cards, first residential mortgages and
second mortgages. The Bank has entered into agreements with Creditland to market
credit card products through the Bank and the Bank will also utilize Creditland
services through its Margo subsidiary as a source of residential first mortgage
loans and home equity mortgage loans. The Company with OTS and FDIC approval,
infused the 100,000 shares of the Series B Preferred Stock in Creditland into
Dolton Service on March 31, 2000, thereby increasing the capital of the Savings
Bank by an additional $250,000.
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<PAGE> 16
Unlike many savings and loan holding companies, the Company is an active holding
company with only a portion of its future anticipated operating income dependent
upon the earnings of Argo Savings. As an operating company, Argo Bancorp has
assets, liabilities and income that are unrelated to the operations of Argo
Savings. Argo Bancorp's assets at September 30, 2000, on an unconsolidated basis
consisted of its investment in Argo Savings of $25.0 million, its investment in
the majority owned Empire/Argo Mortgage LLC of $656,000, securities available
for sale of $10.0 million, GFS Holdings Preferred Stock of $4.0 million, cash
and other interest-earning deposits of $40,000, and other assets of $3.8 million
which include $1.4 million of deferred tax benefits, $1.8 million of debt
issuance costs associated with the Junior Subordinated Debentures, and $324,000
of cash surrender value on executive life insurance policies. Argo Bancorp also
had outstanding borrowings on an unconsolidated basis in the amount of $5.9
million at September 30, 2000, incurred in connection with capital infusions to
its subsidiaries. Argo Bancorp is a Federal Housing Authority ("FHA") approved
originator and servicer, a licensed Illinois mortgage banker and an approved
Federal National Mortgage Association ("FNMA") servicer.
During the nine months ended September 30, 2000 the Savings Bank through its
wholly owned subsidiary, Dolton Service, purchased 2,500 shares or 23.7% of the
issued and outstanding stock of Commercial Loan Corporation ("CLC") at a
purchase price of $125,000. CLC, which is owned by Chicagoland financial
institutions, through its management processes, underwrites, documents and
services commercial loans for financial institution investors and such loans.
The services performed by CLC include monitoring post closing performance of the
loan, preparation of the loan summaries, ongoing analysis of the performance of
the loan and the borrower including review of financial and operating statements
of the borrower and collection and remittance of all loan payments. CLC entered
into a master loans participation agreement with each of it's shareholders or
their affiliates, whereunder the same would purchase participations in pools
offered by CLC. At September 30, 2000, CLC originated 88 loans aggregating $26.0
million, which were funded through 29 pools. The rates paid on the pools to the
investors including the Bank ranged from 7.50% to 9.50% and consisted of both
fixed and variable rates. As of September 30, 2000 the Bank had purchased
interest in sixteen pools aggregating $8.5 million.
SALE OF SUBSIDIARY
On March 31, 1999, the Company sold its wholly-owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois ("On-Line"), to GFS Holdings,
Co. of Palm Beach Gardens, Florida ("Purchaser").
Under the terms of the transaction, in exchange for all of the outstanding stock
of On-Line, the Company received $11.3 million consisting of $6.7 million in
cash together with 4,600 shares of GFS Holdings Co. Series B Preferred Stock,
valued at $4.6 million. The Preferred Stock, par value $.01, originally paid the
Company a semi-annual dividend at the rate of 7.625%. The Preferred Stock was
restructured on January 31, 2000 to provide that the semi-annual dividend would
be paid at the rate of 8.625% per annum.
On January 31, 2000, six hundred (600) shares of the Preferred Stock were
redeemed by the Purchaser at $1,000 per share for a total redemption price of
$600,000. Under the restructure of the Preferred Stock, the Purchaser may
redeem, but is not required to redeem, up to 800 shares of
16
<PAGE> 17
Preferred Stock on August 31, 2000 and up to 950 shares of Preferred Stock on
March 31, 2001. If the shares of Preferred Stock are not redeemed by the
Purchaser on the respective redemption dates, then the Company will receive
warrants in the amount equal to ten (10%) percent of the shares of the Preferred
Stock which were not redeemed by the Purchaser on the respective redemption
dates. All shares will be redeemed, to the extent not redeemed earlier, on March
31, 2006. In the event the shares or any portion thereof are not redeemed on
March 31, 2006 the dividend rate on such shares not redeemed shall increase by
two hundred (200) basis points annually for each year the shares of Preferred
Stock of Purchaser have not been redeemed by the Purchaser. The Purchaser did
not redeem the 800 shares of Preferred Stock on August 31, 2000 and in lieu
thereof issued warrants to the Company to acquire at an exercise price of $10.00
per share, 281 shares of the Non-Voting Common Capital Stock of the Purchaser.
The Purchaser also failed to pay on July 31, 2000 the semi-annual dividend of
$172,500.
SALE OF BRANCHES
On August 17, 2000, Argo entered into agreements ("Purchase Agreements"), which
became effective August 30, 2000 to sell three of its branch facilities to
Archer Bank and Chicago Community Bank, both subsidiaries of the Metropolitan
Bank Group ("MBG"), a bank holding company located in Chicago, Illinois.
Archer Bank will purchase the deposits and assume the leases on the Summit,
Illinois and Bridgeview, Illinois banking facilities of Argo and Chicago
Community Bank will purchase the deposits and assume the lease on the branch
office of Argo located at 47 W. Polk Street, Chicago, Illinois. The transaction
is scheduled to close November 17, 2000. The offices will operate as branches of
Archer Bank and Chicago Community Bank.
Total deposits from the Argo branches being sold at September 30, 2000
approximates $112.0 million. Under the terms of the Purchase Agreements, the
Purchasers will assume the designated deposits and will purchase at book value,
furniture, fixture and equipment in each of the branch offices. The total
consideration to be paid is anticipated to be approximately $9.7 million before
tax effects, with the final amount to be determined at closing based upon the
total deposits assumed and assets sold less Seller's expenses. Argo will also
record income before tax effects, of $ 1.3 million in the fourth quarter of
2000, attributable to acceleration of gain on the sale of the Summit and
Bridgeview branch office buildings that were sold in June, 1999. Argo intends to
fund the transaction through the sale of loan and short term liquid investments.
The Purchasers will assume the lease obligations of the Seller at each of the
three branch sites.
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and securities available-for-sale portfolios,
custodial deposit accounts related to loans serviced for others, and the sale of
discounted loans receivable and newly originated fixed rate long-term mortgage
loans. The most liquid assets are cash and short-term investments. The levels of
these assets are dependent on the operating, financing and investing activities
during any given period. Cash and interest-earning deposits totaled $61.0
million at September 30, 2000.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans.
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<PAGE> 18
During the nine months ended September 30, 2000, and 1999, Argo Savings
originated and purchased loans receivable and discounted loans receivable in the
principal amounts of $315.9 million and $260.0 million, respectively. During the
nine months ended September 30, 2000, and 1999, these investing activities were
primarily funded by principal repayments on loans receivable and discounted
loans receivable and securities available-for-sale of $292.3 million and $161.8
million, respectively, and the proceeds from the sale of loans receivable and
discounted loans receivable, securities available for sale and foreclosed real
estate of $17.9 million and $96.1 million, respectively. During the nine months
ended September 30, 2000, additional funding was provided by the increase in
deposits of $47.1 million, which was partially offset by a $15.3 million
decrease in borrowings. During the nine months ended September 30, 1999,
additional funding was provided by the increases in deposits of $59.9 million
and borrowings of $1.8 million
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 2000, Argo Savings liquid assets represented
14.88% of its liquidity base as compared to the required level of 5.0%. The
level of liquidity maintained is believed by management to be adequate to meet
the requirements of normal operations, potential deposit outflows, and the
current loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At September 30, 2000, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 6.15%, 6.15%, and
12.68%, respectively.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At September 30, 2000, the
Savings Bank met each of its capital requirements, and it is anticipated that
Argo Savings will not be subject to the interest rate risk component.
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<PAGE> 19
CHANGES IN FINANCIAL CONDITION
Total assets increased by $36.0 million to $428.8 million at September 30, 2000,
from $392.8 million at December 31, 1999.
Cash increased $8.7 million to $14.3 million at September 30, 2000, primarily
due to increased items-in- transit balances related to the Savings bank's
deposit to the Federal Reserve as compared to December 31, 1999.
Interest-earning deposits increased by $14.7 million to $46.8 million at
September 30, 2000 from $32.1 million at December 31, 1999. The increase in
short-term deposits was the result of the accumulation of cash necessary to fund
the sale of the branches. Included as an interest earning deposit was $25.7
million of cash in the Savings Bank's 600 plus unit ATM network which earn a
return based on 200 basis points over the FHLB overnight rate.
Loans receivable and discounted loans receivable increased by $3.2 million to
$280.7 million at September 30, 2000 from $277.5 million at December 31, 1999,
as a result of loan originations and purchases totaling $315.9 million offset by
sales of loans of $317.1 million, principal repayments totaling $292.3 million,
and transfers of loans to foreclosed real estate of $2.1 million.
Premises and equipment increased by $450,000 to $9.0 million from $8.5 million
at December 31, 1999. Included in the increase are $1.4 million of equipment and
leasehold improvements related to the Savings Bank's Internet division Umbrella
Bank.com.
Deposits increased $47.1 million to $348.7 million at September 30, 2000, from
$301.7 million at December 31, 1999. The increase in deposits includes $27.1
million from the internet Bank division umbrellabank.com. The deposit gains
include increases of $39.5 million in certificate of deposits, $5.1 million in
business checking accounts and $2.5 million in passbook savings accounts.
Borrowings decreased $15.3 million to $27.1 million at September 30, 2000 from
$40.3 million at December 31, 1999. The decrease was due in part to Management's
decision to repay a $5.0 million Federal Home Loan Bank advance which came due
in February. Short term borrowings declined by $10.3 million due to the
additional liquidity provided by increased deposit flows .
Stockholders' equity increased $691,000 to $20.3 million at September 30, 2000,
from $19.6 million at December 31, 1999. The increase was primarily the result
of net income of $970,000 partially offset by cash dividends of $310,000.
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<PAGE> 20
ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standard (Statement) No. 133 on derivatives
will, in 2001, require all derivatives to be recorded at fair value on the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will be able to reclassify
held-to-maturity securities to either trading or available-for-sale, provided
certain criteria are met. This Statement may be adopted early at the start of a
calendar quarter. Since the Company has no significant derivative instruments or
hedging activities, adoption of Statement No. 133 will not have a material
impact on Argo Bancorp's financial statements. Management has decided against
early adoption of Statement No. 133.
PURCHASED MORTGAGE SERVICING RIGHTS
Argo Savings' principal investment in mortgage servicing rights 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 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.
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 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 record any additional write-down for the three months ended
September 30, 2000.
In addition to its investment in the limited partnerships, at September 30,
2000, the Savings Bank
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<PAGE> 21
had a $544,000 investment in a PMSR portfolio that it owns directly which
consisted of 2,365 mortgage loans having an outstanding principal balance of
$35.7 million.
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest and the collectibility of the loan's
principal and interest becomes doubtful.
At September 30, 2000, Argo Savings had forty-three (43) properties, totaling
$2.4 million classified as foreclosed real estate, as compared to fifty-eight
(58) properties totaling $2.3 million at December 31, 1999. The underlying
properties on September 30, 2000, consisted primarily of single family
residences. The foreclosed real estate has been written down to estimated fair
value at September 30, 2000. The total amount of loans receivable ninety (90)
days or more past due at September 30, 2000, was $4.2 million or 1.52% of total
loans receivable compared to $6.0 million or 2.25% of total loans on December
31, 1999. Loans ninety (90) days or more past due are primarily secured by
one-to-four family residences. Total non-performing assets at September 30,
2000, totaled $6.6 million or 1.55% of total assets compared to $8.3 million or
2.11% of total assets at December 31, 1999. Excluded from these totals are $1.6
million of discounted loans ninety (90) days or more past due at September 30,
2000, and $1.7 million at December 31, 1999. Discounted loans that are often
purchased with the intent to foreclose and sell the underlying property are
excluded from non-performing loans.
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<PAGE> 22
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000, AND 1999.
GENERAL
Net income for the three months ended September 30, 2000 was $89,000 or $.04 per
diluted share compared to net income from continuing operations of $336,000 or
$.15 per diluted share for the same period last year. Net income for the nine
month period ended September 30, 2000 was $970,000 or $.45 per diluted share
compared to net income from continuing operations of $472,000 or $.22 per
diluted share for the same period last year. Total net income for the nine month
period ended September 30, 1999 was $2.0 million or $.93 per diluted share.
Included in net income for the year ago period was the $1.4 million after tax
gain on the On-Line subsidiary as well as $135,000 of net income from the
discontinued operation.
INTEREST INCOME
Interest income for the three months ended September 30, 2000, totaled $7.3
million, as compared to $6.4 million for the comparable 1999 period. The
increase of $881,000 was the result of a $60.0 million increase in average
interest-earning assets and a 10 basis point increase in the yield on earning
assets to 8.03%. For the nine months ended September 30, 2000 interest income
totaled $21.6 million, an increase of $4.4 million from the $17.2 million
recorded for the same period last year. The increase was the result of a $75.5
million increase in average interest earning assets and a 20 basis point
increase in the yield on earning assets to 8.06%.
INTEREST EXPENSES
Interest expense for the three months ended September 30, 2000, totaled $5.6
million as compared to $4.3 million for the comparable 1999 period. The $1.3
million increase was primarily the result of a 77 basis point increase in the
cost of interest bearing liabilities to 5.95% and a $60.0 million increase in
average interest bearing liabilities when compared to the same period last year.
For the nine months ended September 30, 2000 interest expense totaled $15.9
million an increase of $4.3 million from the $11.5 million recorded for the same
period last year. The increase was primarily the result of a 79 basis point
increase in the cost of interest-bearing liabilities to 5.77% and a $66.0
million increase in average interest bearing liabilities when compared to the
same period last year.
NET INTEREST INCOME
Net interest income totaled $1.7 million for the three months ended September
30, 2000, a decrease of $474,000 from the amount recorded in the comparable 1999
period. The decrease in net interest income for the three months ended September
30, 2000, was the result of a 66 basis point decline in the effective net spread
to 2.08% from 2.74% for the comparable 1999 period. Net interest income for the
nine months ended September 30, 2000 increased by $100,000 to $5.7 million from
$5.6 million for the same period last year. The increase was the result of the
$75.5 million increase in average interest earning assets partially offset by
the increase of $66.0 million in average interest bearing liabilities and a 14
basis point decline in the effective net spread to 2.29% from 2.43% for the
comparable 1999 period.
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PROVISION FOR LOAN LOSSES
Provision for loan losses increased to $65,000 for the three months ended
September 30, 2000 from $60,000 for the same period last year. The allowance for
loan losses totaled $1.6 million at September 30, 2000 or .57% of total loans
and discounted loans outstanding. For the nine months ended September 30, 2000
provision for losses totaled $185,000 as compared to $605,000 for the same
period last year. Management believes that loan loss provisions are adequate and
will continue to monitor the mortgage portfolio and substandard assets for loss
exposure.
NON-INTEREST INCOME
Non-interest income increased to $638,000 for the three months ended September
30, 2000 from $273,000 for the same period last year. The increase in
non-interest income was in part the result of a $202,000 increase in fees and
service charges which was attributable to ATM fees collected from the Savings
Bank's network of 600 plus units. The sale of real estate owned resulted in net
losses of $78,000 for the three months ended September 30, 2000 compared to a
net loss of $175,000 for the same period last year.
For the nine months ended September 30, 2000 non-interest income declined to
$1.7 million as compared to $2.1 million for the same period last year. The
decrease was the result of a $735,000 decline in mortgage banking revenue and a
$405,000 decline in servicing income partially offset by a $219,000 increase in
the gains on the sale of assets and a $428,000 increase in customer service fee
income. The decline in mortgage banking income resulted from an agreement with
E-Conduit, whereby E-Conduit assumed the day-to-day operations related to the
mortgage banking operation. As a result of this agreement E-Conduit retains the
mortgage banking revenue and the expenses related to the mortgage banking
operation. The Savings Bank receives a license fee of six basis points which
totaled $18,000 for the nine months ended September 30, 2000.
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NON-INTEREST EXPENSE
Non-interest expense increased by $457,000 to $2.4 million for the three months
ended September 30, 2000 from $1.9 million for the same period last year. The
increase in operating expenses was primarily the result of the $388,000 of
expenses incurred at the Savings Bank's internet Bank division Umbrella Bank.
For the nine months ended September 30, 2000 non-interest expense declined by
$340,000 to $6.3 million as compared to $6.7 million for the same period last
year. The operating expenses related to E-Conduit totaled $865,000 for the nine
months ended September 30, 2000.
INCOME TAX EXPENSE
The Company recorded a tax benefit of $240,000 for the three months ended
September 30, 2000 compared to a tax provision of $85,000 for the same period
last year. The provision was based on a 34.0% benefit calculated on pre-tax loss
of $152,000 less the utilization of $188,000 of low income housing credits. The
tax benefit for the nine month period totaled $34,000 compared to a tax benefit
of $87,000 for the same period last year. The benefit was based on a 34.0% tax
calculated on pre-tax income of $936,000 less the utilization of $352,000 of low
income housing credits.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Investment Committee, which includes members of
senior management and directors, monitors and determines the strategy of
managing the rate and sensitivity repricing characteristics of the individual
asset and liability portfolios the Savings Bank maintains. The overall goal is
to manage this interest rate risk to most efficiently utilize the Savings Bank's
capital, as well as to maintain an acceptable level of change to its net
portfolio value ("NPV"), and net interest income. The Savings Bank Strategy is
to minimize the impact of sudden and sustained changes in interest rates on NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank change in NPV in the event of hypothetical changes
in interest rates, as well as interest rate sensitivity gap analysis, which
monitors the repricing characteristics of the Savings Bank's interest-earning
assets and interest-bearing liabilities. The Board of Directors has established
limits to changes in NPV and net interest income across a range of hypothetical
interest rate changes. If estimated changes to NPV and net interest income are
not within these limits, the Board may direct management to adjust its
asset/liability mix to bring its interest rate risk within Board limits.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans. The Savings Bank, from time to
time, also invests in long-term fixed-rate mortgages provided it is compensated
with an acceptable spread.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain
off-balance sheet items, in the event of a series of sudden and sustained
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changes in interest rates ranging from 100 to 500 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. There has been no material change in
market risk since December 31, 1999. The following table presents the Savings
Bank's projected change in NPV for the various rate shocks as of June 30, 2000
which is the most current informational available.
Estimated Increase
Change in Estimated (Decrease) in NPV
-----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2000:
300 basis point rise $ 22,390 $ (8,402) (27)%
200 basis point rise 25,593 (5,199) (17)
100 basis point rise 28,422 (2,370) (8)
Base scenario 30,792 - -
100 basis point decline 32,695 1,903 6
200 basis point decline 34,135 3,343 11
300 basis point decline 35,819 5,027 16
The Savings Bank is more sensitive to a sudden rise in interest rates at June
30, 2000 as compared to June 30, 1999. However, a decline in interest rates
would be beneficial to the Savings Bank at June 30, 2000 compared to June 30,
1999, where a decline in rates produces lower results.
The NPV is calculated by the Savings Bank using guidelines established by the
OTS related to interest rates, loan prepayment rates, deposit decay rates and
market values of certain assets under the various interest rate scenarios. These
assumptions should not be relied upon as indicative of actual results due to the
inherent shortcomings of the NPV analysis. These shortcomings include (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV, (ii) certain assets, including adjustable-rate loans,
have features which affect the potential repricing of such instruments, which
may vary from the assumptions used, and (iii) the likelihood that as interest
rates are changing, the Investment Committee would likely be changing strategies
to limit the indicated changes in NPV as part of its management process.
The Savings Bank does not use derivative instruments to control interest rate
risk. In addition, interest rate risk is the most significant market risk
affecting the Savings Bank. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of the
Company's business activities and operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share
(See Note D)
27.0 Financial Data Schedule (filed herewith)
B. Report on Form 8-K
Form 8-K was filed with the Commission on August 31, 2000 announcing that
the Registrant's wholly owned subsidiary, Argo Federal Savings Bank, FSB had
entered into agreements to sell three of it's branch banking facilities
including approximately $116 million in deposits, with a closing scheduled in
the fourth quarter.
--------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
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SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: November 13, 2000 /S/ John G. Yedinak
------------------------ -------------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
/S/ Dominic M. Fejer
-------------------------------------------
Dominic M. Fejer, Principal Financial Officer
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