1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-19829
ARGO BANCORP, INC.
------------------
(Exact name of small business issuer 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 312,791 shares outstanding as of October 31, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
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ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1996 (unaudited) and
December 31, 1995...................................... 3
Consolidated Statements of Income for the Three
and Nine Months ended September 30, 1996 and
1995 (unaudited)....................................... 4
Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 1996, and
1995 (unaudited)....................................... 5
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1996,
and 1995 (unaudited)................................... 6
Notes to Consolidated Financial Statements............. 7
Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings .............................................. 20
Item 2 Changes in Securities ......................................... 20
Item 3 Default Upon Senior Securities ................................. 20
Item 4 Submission of Matters to a Vote
of Security Holders .................................... 20
Item 5 Other Information .............................................. 20
Item 6 Exhibits and Reports on Form 8-K................................ 20
Signature Page ........................................................ 21
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands) 9/30/96 12/31/95
======================================================================================================
ASSETS (Unaudited)
Cash................................................................... $ 10,442 $ 7,224
Interest-earning deposits.............................................. 1,993 3,837
FHLB of Chicago stock.................................................. 2,989 2,669
Securities available for sale ......................................... 6,413 7,573
Loans receivable ...................................................... 162,410 143,141
Loans available for sale............................................... 1,607 ---
Accrued interest receivable............................................ 1,956 1,709
Foreclosed real estate and real estate in judgment..................... 1,594 1,473
Premises and equipment, net............................................ 8,189 6,684
Goodwill .............................................................. 365 507
Purchased mortgage servicing rights ................................... 4,234 4,033
Prepaid expenses and other assets...................................... 7,631 7,618
-------- --------
$209,823 $186,468
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits............................................................. $134,258 $122,758
Borrowed money....................................................... 53,575 38,181
Interest-bearing custodial escrow balances for loans serviced........ 4 2,623
Custodial escrow balances for loans serviced......................... 5,076 7,073
Advance payments by borrowers for taxes and insurance................ 67 167
Other liabilities.................................................... 4,722 4,336
-------- --------
Total liabilities.................................................. $197,702 $175,138
-------- --------
Stockholders' Equity:
Preferred stock, $0.01 par value;
Authorized 500,000 shares; none issued
or outstanding................................................... --- ---
Common Stock:
Class A, $0.01 par value; Authorized
3,020,000 shares; issued and outstanding
312,791 shares................................................... 3 3
Class B, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Class C, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Class D, $0.01 par value; Authorized
340,000 shares; none issued or outstanding....................... --- ---
Additional paid-in capital........................................... 2,828 2,739
Retained earnings - substantially restricted......................... 9,546 8,773
Unrealized gain on marketable securities, net of tax................. 32 42
Common stock acquired by:
Employee Stock Ownership Plan...................................... (132) (177)
Management Recognition Plan........................................ (156) (50)
-------- --------
Total stockholders' equity....................................... 12,121 11,330
-------- --------
$209,823 $186,468
======== ========
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended For the Nine Months Ended
(Dollars in thousands, except per share data) 9/30/96 9/30/95 9/30/96 9/30/95
====================================================================================================================
(Unaudited)
Interest income:
Loans receivable .................................. $ 3,967 $ 3,400 $ 10,911 $ 9,528
Mortgage-backed securities ........................ 86 101 272 307
Interest-earning deposits ......................... 165 147 487 407
------- ------- -------- -------
Total interest income ........................... 4,218 3,648 11,670 10,242
------- ------- -------- -------
Interest expense:
Deposits .......................................... 1,639 1,474 4,673 4,071
Custodial escrow balances for loans
serviced ........................................ 9 42 75 185
Borrowed money .................................... 620 663 1,761 1,917
------- ------- -------- -------
Total interest expense .......................... 2,268 2,179 6,509 6,173
------- ------- -------- -------
Net interest income before provision
for loan losses ............................... 1,950 1,469 5,161 4,069
Provision for loan losses ........................... 45 15 100 40
------- ------- -------- -------
Net interest income after provision
for loan losses ................................... 1,905 1,454 5,061 4,029
------- ------- -------- -------
Non-interest income:
Purchased mortgage servicing income, net .......... 76 83 273 255
Mortgage banking .................................. 20 17 52 56
Gain on sale of mortgage servicing rights, loans
receivable, mortgage-backed securities, and
securities available for sale ................... 332 586 1,096 1,221
Fees for other customer services .................. 102 93 290 273
Data processing income............................. 2,701 --- 8,185 ---
Other ............................................. 22 33 117 116
------- ------- -------- -------
Total non-interest income ....................... 3,253 812 10,013 1,921
------- ------- -------- -------
Non-interest expense:
Compensation and benefits ......................... 2,019 709 6,213 2,064
Occupancy and equipment ........................... 1,099 224 3,183 687
Data processing cost of services .................. 449 --- 1,132 ---
Federal deposit insurance premiums................. 863 69 1,011 196
Other general and administrative fees ............. 754 521 2,184 1,429
Amortization of goodwill .......................... 27 26 54 51
------- ------- -------- -------
Total non-interest expense ...................... 5,211 1,549 13,805 4,453
------- ------- -------- -------
Earnings before provision for
income tax expense ................................ (53) 717 1,269 1,497
Provision for income tax expense (benefit)........... (85) 255 339 513
------- ------- -------- -------
Net earnings ........................................ 32 462 930 984
------- ------- -------- -------
Primary net earnings per share ...................... .09 1.33 2.56 2.83
------- ------- -------- -------
Fully diluted earnings per share .................... .09 1.30 2.53 2.78
------- ------- -------- -------
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Unrealized
Gain (Loss)
Common Additional Marketable Common Stock Common Stock
Stock paid-in Retained Equity acquired acquired
Nine Months ended September 30, 1995 Class A Capital earnings Securities by ESOP by MRP Total
- ------------------------------------ -------------------------------------------------------------------------
Balance at December 31, 1994............................... $ 3 2,664 7,240 (224) (237) (21) 9,425
Net Income................................................. --- --- 984 --- --- --- 984
Change in unrealized loss on securities available for
sale, net................................................ --- --- --- 237 --- --- 237
Purchase of Common Stock for MRP .......................... --- --- --- --- --- 14 14
Principal payments of ESOP loan............................ --- --- --- --- 45 --- 45
Amortization of purchase price of MRP's stock.............. --- --- --- --- --- 21 21
Proceed from exercise of stock options..................... --- 49 --- --- --- --- 49
Fair value adjustment for committed ESOP shares ........... --- 18 --- --- --- --- ---
Cash dividends............................................. --- --- (103) --- --- --- (103)
------ ----- ----- ------- ----- ---- ------
Balance at September 30, 1995.............................. $ 3 2,731 8,069 13 (192) (14) 10,610
====== ===== ===== ======= ===== ==== ======
Nine months ended September 30, 1996
- ------------------------------------
Balance at December 31, 1995............................... $ 3 2,739 8,773 42 (177) (50) 11,330
Exercise of Stock Options.................................. --- 15 --- --- --- --- 15
Purchase of Common Stock for MRP........................... --- --- --- --- --- (115) (115)
Net income................................................. --- --- 930 --- --- --- 930
Adjustment of marketable equity securities to market....... --- --- --- (10) --- --- (10)
Principal payments on ESOP loan............................ --- --- --- --- 45 --- 45
Amortization of purchase price of MRP stock................ --- --- --- --- --- 9 9
Fair value adjustment for committed ESOP shares............ --- 74 --- --- --- --- 74
Dividends.................................................. --- --- (157) --- --- --- (157)
------ ----- ----- ------- ----- ---- ------
Balance at September 30, 1995.............................. $ 3 2,828 9,546 32 (132) (156) 12,121
====== ===== ===== ======= ===== ==== ======
See accompanying notes to unaudited consolidated financial statements.
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ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Dollars in Thousands) 1996 1995
==================================================================================================================================
(Unaudited)
Cash flows from operating activities:
Net income............................................................................ $ 930 $ 984
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation...................................................................... 1,352 362
Accretion of discounts and deferred loan fees..................................... (571) (231)
Provision for loan losses......................................................... 100 40
Provision for losses on foreclosed real estate.................................... 126 30
(Gain) loss on sale of:
Securities held for sale........................................................ (5) (191)
Loans receivable................................................................ (1,275) (1,032)
Foreclosed real estate.......................................................... 184 3
Loans originated and purchased for sale............................................ (22,011) (46,211)
Proceeds from sale of loans receivable............................................. 32,100 44,096
Amortization of goodwill........................................................... 82 76
Amortization of purchase price of MRP and ESOP stock............................... 54 66
Recognition of fair value of ESOP shares scheduled to be released.................. 74 18
FHLB stock dividends.............................................................. --- (40)
(Increase) decrease in accrued interest receivable, prepaid expenses, and other assets. (194) (1,359)
Increase (decrease) in accrued interest payable and other liabilities............. 387 950
------- ---------
Net cash provided by (used in) operating activities........................... 11,333 (2,439)
------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio.......................................... (66,682) (47,350)
Principal repayments on:
Loans receivable.................................................................... 36,065 26,807
Mortgage-backed securities.......................................................... 555 762
Proceeds from maturities of investment securities..................................... 600 ---
Proceeds from sale of:
Foreclosed real estate.............................................................. 982 296
Securities available for sale....................................................... 83 1,130
Premises and equipment.............................................................. --- 14
Purchase of:
FHLB stock.......................................................................... (320) (53)
Loan servicing rights............................................................... (201) (297)
Securities held for sale............................................................ (105) (799)
Premises and equipment.............................................................. (2,857) (237)
Contribution to MRP and ESOP.......................................................... (115) (14)
------- ---------
Net cash provided by (used in) investing activities........................... (31,995) (19,741)
------- ---------
Cash flows from financing activities:
Net increase in deposits.............................................................. 11,500 17,155
Proceeds from borrowed funds.......................................................... 86,718 114,009
Repayment of borrowed funds........................................................... (71,324) (107,381)
Proceeds from exercise of stock options............................................... 15 49
Dividends paid........................................................................ (157) (155)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance............................................................. (100) (10)
Net increase (decrease) in custodial escrow balances for loans serviced............... (4,616) (4,032)
------- ---------
Net cash provided by financing activities......................................... 22,036 19,635
------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 1,374 (2,545)
Cash and cash equivalents at beginning of year.......................................... 11,061 9,286
------- ---------
Cash and cash equivalents at end of year.............................................. 12,435 6,741
======= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense.................................................................... 6,459 4,019
Income taxes........................................................................ 400 ---
Non-cash investing activity - transfer of loans to foreclosed real estate............. $ 1,413 $ 1,111
======= =========
See accompanying notes to unaudited financial statements.
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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-QSB, 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 months and nine months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or "Holding Company") and its
wholly owned subsidiaries, On-Line Financial Services, Inc. ("On-Line"), Argo
Federal Savings Bank, FSB ("Argo Savings" or "Savings Bank") and Argo Savings'
wholly owned subsidiaries, Argo Mortgage Corporation, and Dolton-Riverdale
Savings Service Corporation and Argo Saving's majority owned limited liability
corporation, Margo Financial Services, LLC. The statements also include Argo
Bancorp's majority owned limited liability corporation, Argo / Empire Mortgage
LLC. Significant intercompany accounts and transactions have been eliminated in
consolidation.
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 consecutive
month period and are age 21 or older. Participants may make contributions to the
Plan from 1% to 12% of their earnings, subject to Internal Revenue Service
limitations. Matching contributions of 50% of each participants contribution up
to 12% are made at the Savings Bank's discretion each Plan year. The Savings
Bank made contributions of $46,000 and $43,000, to the Plan for the nine months
ended September 30, 1996, and 1995. The Plan also provides benefits in the event
of death, disability, or other termination of employment.
On-Line has a 401(k) Plan covering all employees who have completed one or more
years of service. 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 3.0% of
gross income are made at On-Line's discretion each year. On-Line made
contributions of $61,000 to the Plan in 1996.
In conformity with Internal Revenue Service (IRS) rules governing separate lines
of business, the 401(k) Plan for On-Line will continue to be operated separately
from the 401(k) Plan for the Savings Bank.
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In connection with the Merger Conversion, Argo Savings formed an Employee Stock
Ownership Plan ("ESOP") for eligible employees. The ESOP borrowed funds from an
unrelated third party lender in the amount of $60,180 in order to purchase 7% of
the Common Stock issued in the Merger Conversion (5,233 shares at $11.50 per
share). The ESOP has subsequently borrowed additional funds from the same third
party lender in the amount of $245,000 in order to purchase additional shares.
The ESOP has purchased an additional 13,020 shares at an average price of $18.79
per share. Argo Savings will make scheduled discretionary cash contributions to
the ESOP sufficient to service the amounts borrowed. The unpaid balance of the
ESOP has been included in borrowed funds on the unaudited consolidated statement
of condition and stockholders' equity has been reduced by a similar amount.
Contributions of $55,000 and $59,000 were made to the ESOP to fund principal and
interest payments for the nine months ended September 30, 1996, and 1995,
respectively.
On January 1, 1994, Argo Bancorp adopted the provisions of Statement of Position
93-6, (SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plans",
issued by the American Institute of Certified Public Accountants. SOP 93-6
requires Argo Bancorp to consider outstanding only those shares of the ESOP that
are committed to be released when calculating both primary and fully diluted
earnings per share. SOP 93-6 also requires the Savings Bank to record 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. The adoption of
SOP 93-6 had the effect of increasing additional paid-in capital by $74,000 for
the nine months ended September 30, 1996.
On-Line does not offer an ESOP for On-Line employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
The Board of Directors of Argo Savings formed a Management Recognition Plan and
Trust ("MRP") effective October 31, 1991, which purchased 6.8% or 15,400 shares,
of the Corporation's authorized but unissued common stock in December 1991. In
addition, Argo Savings contributed $34,385 to allow the MRP to purchase 2,990
shares in the merger conversion or on the open market. All initial MRP shares
have been awarded to employees in key management positions with the Savings Bank
and 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 24,498. As of
September 30, 1996, an additional 5,704 shares have been purchased under the MRP
and none have been awarded. The awards will be earned by employees over a
three-year period. Once awarded the aggregate purchase price of the shares will
be amortized to expense as a portion of annual compensation as the employees
become vested in their stock awards and the amortized cost is reflected as a
reduction of stockholders' equity.
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The Board of Directors of Argo Bancorp formed a Management Recognition Plan and
Trust ("MRP") effective August 27, 1996, which purchased 12,500 shares of the
Corporation's common stock. As of September 30, l996 none of the shares have
been awarded. The awards will be earned by employees over a five-year period.
Once awarded the aggregate purchase price of the shares will be amortized to
expense as a portion of annual compensation as the employees become vested in
their stock awards and the amortized cost is reflected as a reduction of
stockholders' equity.
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 107,450 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. All 107,450 options were awarded by Argo
Bancorp under the 1991 Stock Option Plan. The exercise price for the options
awarded was equal to the fair market value of the common stock at the date of
grant. To date there have been 7,941 options exercised and of which 1,072 shares
were exercised during the nine months ended September 30, 1996. At September 30,
1996, options to purchase 99,509 shares were outstanding.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 107,450
shares of Argo Bancorp's common stock were reserved for issuance by Argo Bancorp
upon exercise of non-incentive stock options to be granted to non-employee
directors of the Corporation and its subsidiaries from time to time. At
September 30, 1996, 50,100 options for shares have been awarded by Argo Bancorp
under the Non-Qualified Stock Option Plan. To date, options to acquire 4,700
shares have been exercised of which 3,200 shares were exercised during the nine
months ended September 30, 1996. The exercise price for the options awarded was
equal to the fair market value of the common stock at the date of grant. At
September 30, 1996, options to purchase 45,400 shares were outstanding under the
Non-Qualified Stock Option Plan.
On-Line does not offer a stock option plan for On-Line employees. On-Line
employees are not eligible for participation under Argo Bancorp's Stock Option
Plan.
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NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements:
(1) a risk-based capital requirement of 8.0% of risk-weighted assets, (2) a
leverage or core ratio of 3% core capital to total adjusted assets, and (3) a
tangible capital requirement of 1.5% tangible core capital to total assets.
Although the minimum capital requirement is 3.0%, the OTS Regulations provide
that an institution with less than 4.0% core capital is deemed to be
"under-capitalized." The following table summarizes, as of September 30, 1996,
Argo Savings' capital requirements under FIRREA and its actual capital ratios at
that date:
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
---------- ---------- ------- ------- -------
(Dollars in Thousands)
Risk-based 8.0% 10.76% $8,499 $11,429 $2,930
Core 3.0 5.44% 5,976 10,835 4,859
Tangible 1.5 5.44% 2,988 10,835 7,847
NOTE D - EARNINGS PER SHARE
Primary earnings per share is based on a weighted average number of shares
outstanding of 363,815 and 347,334 for the nine months ended September 30, 1996,
and 1995, respectively. Fully diluted earnings per share for the nine months
ended September 30, 1996, and 1995, is based upon 367,461 and 354,105,
respectively.
NOTE E - COMMITMENTS AND CONTINGENCIES
At September 30, 1996, Argo Savings had loan commitments totaling $1.9 million,
and $4.5 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 $1.7 million.
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ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Argo Bancorp was incorporated in August 1987, for the sole purpose of acquiring
Argo Savings. Argo Bancorp was originally capitalized through the sale of 300
shares (which split in December of 1991 at 700/1) of common stock to three
investors for total proceeds of $60,000. Argo Bancorp acquired Argo Savings on
November 17, 1987 for a capital infusion of $1.1 million. On May 26, 1992, the
Corporation completed a merger conversion whereby Dolton-Riverdale Savings
converted from a state chartered mutual association to a federally chartered
stock association and simultaneously merged with and into Argo Savings with Argo
Savings as the surviving entity. The transaction was accounted for under the
pooling of interests method. There was no goodwill or other intangible assets
recorded as a result of the transaction. As part of the merger conversion with
Dolton-Riverdale Savings, the Corporation sold an additional 74,750 shares of
common stock at an issuance price of $11.50. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Corporation retained 50% of the net proceeds from the merger conversion and
injected the remaining 50% into Argo Savings. All proceeds were used for general
business uses.
Argo Bancorp is a unitary savings and loan company and is registered as such
with the OTS. The Corporation is an active holding company with assets
consisting of Argo Savings' stock, On-Line Financial Services Stock, marketable
securities, interest-earning deposits and a majority interest in Argo/Empire
Mortgage LLC, a limited liability corporation which engages in the purchase and
disposition of loans. Argo Bancorp is a Federal Housing Authority ("FHA")
approved originator and servicer, a licensed Illinois mortgage banker and an
approved Federal National Mortgage Association ("FNMA") servicer.
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with custodial escrow
accounts associated with purchased mortgage servicing rights and funds generated
internally, primarily in one-to-four family mortgage loans. Argo Savings is a
member of the Federal Home Loan Bank ("FHLB") System, and its deposits are
insured to the maximum allowable amount by the Federal Deposit Insurance
Corporation ("FDIC").
Argo Savings operates one wholly-owned service corporation subsidiary.
Dolton-Riverdale Savings Service Corporation is a wholly owned subsidiary which
offers life insurance annuities to the customer base of Argo Savings. Argo
Savings also has two operating subsidiaries, Argo Mortgage Corporation and Margo
Financial Services LLC. Argo Mortgage Corporation is a wholly owned operating
subsidiary, which engages in mortgage brokerage activities that focus on
purchase and sale of mortgage loans into the secondary market. Margo Financial
Services LLC is a majority owned operating subsidiary, which was incorporated
and fully operational on August 20, 1996. The activities of Margo relate to the
origination, investment, sale and servicing of mortgage loans.
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Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows and borrowings. Argo Savings' operating results are also affected by the
profit recognized on the sale of mortgage loans, the fees generated by its
investment in purchased mortgage servicing rights, and customer service charges
and other income. Argo Savings' operating expenses consist of employee
compensation, occupancy expenses, federal insurance premiums, amortization of
goodwill, and other general and administrative expenses. Results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
On October 31, 1995, Argo Bancorp acquired On-Line, an Oak Brook, Illinois based
computer services bureau, serving bank and thrift clients throughout the
Midwest. The purchase transaction was consummated through the use of a
wholly-owned subsidiary, OLF Acquisition Corporation, which acquired shares of
three separate state chartered savings and loan services corporations which
owned, in the aggregate, 98.9% of the outstanding shares of On-Line. Sale of the
remaining 1.1% of On-Line shares was made by a single institutional stockholder
which held shares in On-Line directly. The intervening acquisition subsidiary
and state chartered savings and loan service corporation shells were liquidated
and merged by Argo Bancorp during 1996.
Financial terms of the transaction included a cash sweep to shareholders of
On-Line funds on hand on the closing date, less amounts necessary to establish
certain agreed-upon escrow balances, a two (2) year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a
twenty-six (26) month escrow note in the amount of $460,000, representing funds
held for future performance under a third party computer lease; and a structured
schedule of contingent payments based on future revenues of On-Line over the
next seven (7) years. The total transaction value, including asset notes and
contingent payments, will not exceed $10.0 million.
On-Line is a third party provider of on-line, real-time, electronic data
processing services to financial institutions located throughout the Midwest.
On-Line currently provides data processing services to thrifts, community banks,
savings banks, and mortgage brokers representing over 1.5 million customer
accounts in six Midwestern states. On-Line has historically marketed its
services to institutions with assets of less than $1.0 billion, where the
company's orientation toward superior customer service and specialized products
allows it to effectively compete. The acquisition by Argo Bancorp will promote
the development and sale of technological advances in the systems, programs, and
services offered by On-Line, which includes resale of software produced by
Information Technology Incorporated, integrated check and document imaging
systems, and computer output laser disc storage technology. These services are
in addition to new offerings by On-Line in the planning and deployment of wide
area and local area network systems, the sale of all related hardware and
services, expanded technical and communications support, consultation and
training, and the maintenance of in-house systems. On-Line's business plans
included marketing to small to mid-size commercial and community banks, as well
as other corporate users of advanced technology, as it moves to expand beyond
its traditional thrift institution client base.
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LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolios,
custodial escrow accounts related to loans serviced for others, and the sale of
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 $12.4 million at September 30, 1996.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the nine months ended September 30, 1996, and 1995,
Argo Savings originated and purchased mortgage loans in the principal amounts of
$66.7 million and $47.4 million, respectively. During the nine months ended
September 30, 1996, and 1995, these investing activities were primarily funded
by principal repayments on loans and mortgage-backed securities of $36.6 million
and $27.6 million, respectively, and the proceeds from the sale of loans and
securities available for sale of $33.1 million and $45.2 million, respectively.
During the nine months ended September 30, 1996 and 1995, additional funding was
provided by the increase in deposits of $11.5 million and $17.2 million,
respectively, and the increase in borrowings of $15.4 million and $6.6 million
respectively.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 1996, Argo Savings liquid assets represented
7.92% of its liquidity base as compared to the required level of 5%. 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, 1996, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 5.44%, 5.44% and
10.76%, respectively.
The Office of Thrift Supervision has adopted a final rule that requires every
savings association with more than normal interest rate risk exposure to deduct
from its total capital, for purposes of determining compliance with such
requirement, an amount equal to 50.0% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a measure of the
potential decline in the net portfolio value of a savings association, greater
than 2.0% of the present value of its assets, based upon a hypothetical 200
basis point increase or decrease in interest rates (whichever results in a
greater decline). Net portfolio value is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The OTS has
deferred implementation of this
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rule. Any savings association with less than $300 million in assets and a total
capital ratio in excess of 12.0% is exempt from this requirement unless the OTS
determines otherwise. Management does not believe that this rule will have a
material impact on the Company.
CHANGES IN FINANCIAL CONDITION
Total assets increased $23.4 million to $210 million at September 30, 1996, from
$186.5 million at December 31, 1995. The increase in total assets is due
primarily to the increase of $20.9 million in loans which was funded by an
increase in deposits of $11.5 million and an increase in borrowings of $15.4
million, partially offset by a decrease in custodial accounts of $4.6 million.
Cash and interest-earning deposits increased $1.4 million to $12.4 million at
September 30, l996, primarily due to liquidity management. Because Argo Savings
is leveraged, all excess funds not necessary to meet regulatory liquidity are
used to reduce borrowings.
Net loans receivable and loans available for sale increased $20.9 million to
$164.0 million at September 30, 1996, primarily due to the origination and
purchase of $88.7 million of loans partially offset by principal repayments of
$36.1 million and the sale of $32.1 million of loans available for sale.
Mortgage-backed securities decreased $657,000 to $5.1 million at September 30,
1996, due to principal repayments. All mortgage-backed securities are classified
as available for sale at September 30, 1996.
Deposits increased $11.5 million to $134.3 million at September 30, 1996, from
$122.8 million at December 31, 1995. The increase can primarily be attributed to
net cash inflow of $6.8 million and interest credited of $4.7 million for the
nine months ended September 30, 1996. The cash inflow was caused by an
aggressive marketing effort aimed at attracting a larger customer base and the
growth in deposits attributable to the new Gurnee branch.
Borrowings increased $15.4 million to $53.6 million at September 30, 1996, from
$38.2 million at December 31, 1995. The increase is primarily due to proceeds
from short-term advances from the Federal Home Loan Bank. The increase in
advances were used to fund loan purchases and as an additional source of
liquidity.
Custodial escrow balances for loans serviced decreased $4.6 million to $5.1
million at September 30, 1996. The custodial accounts pertain to escrowed
payments of taxes and insurance and the float on principal and interest payments
on loans serviced either for Argo Savings or on behalf of others by an
independent mortgage servicing operation. The custodial accounts related to
loans serviced by others are maintained at Argo Savings in interest-bearing
accounts. The custodial accounts associated with loans or purchased mortgage
servicing rights serviced for Argo Savings are maintained in non-interest
bearing accounts. At September 30, 1996, and 1995, $5.1 million and $3.0
million, respectively, of all custodial escrow balances pertain to loans
subserviced on behalf of Argo Savings for portfolio loans, servicing retained
loans and purchased mortgage servicing rights. Due to the nature of custodial
escrow deposits, balances fluctuate widely on a day-to-day basis.
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Currently, management does not anticipate a material increase or decrease of
custodial escrow balances over the current balance.
Stockholders' equity increased $791,000 to $12.1 million at September 30, 1996,
from $11.3 million at December 31, 1995, primarily due to net income of $930,000
partially offset by dividends paid of $157,000. Book value per common share
outstanding increased to $38.75 at September 30, 1996.
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the investment in purchased mortgage servicing rights which provide a
source of non-interest income and also act as a hedge against the decline in the
value of fixed rate mortgages in a rising interest rate environment; (v) the
increase of non-interest bearing custodial accounts related to the purchased
mortgage servicing rights; and (vi) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo Savings
does not use any artificial hedge products to reduce its exposure to interest
rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15% of total
assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities which mature or
reprice within one year over interest sensitive assets of $26.4 million or 14.8%
of total assets at September 30, 1996. As a result of the excess of interest
sensitive liabilities over interest sensitive assets, Argo Savings is "Net
Liability Sensitive" which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest published gap
analysis report. The assumptions used, although standardized, may not be
indicative of the actual withdrawals experienced by Argo Savings. Fixed maturity
deposits reprice at maturity. The combined effect of these assumptions on
passbook, NOW, money market accounts and interest-bearing escrows assumes 17.0%
of these accounts are withdrawn within three years, and 15.0% per year,
thereafter. Management believes that these decay rate assumptions are
reasonable.
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LEGISLATIVE MATTERS
On September 30, 1996, legislation was enacted which, among other things,
imposes a special one-time assessment on SAIF member institutions, including the
Savings Bank, to recapitalize the SAIF and spreads the payments of Financing
Corporation Bonds ("FICO") across all SAIF and BIF members. The FDIC special
assessment being levied is 65.7 basis points on the amount of SAIF assessable
deposits held as of March 31, l995. The special assessment was recognized in the
third quarter and is tax deductible. The Savings Bank recognized $789,000 in
connection with the FDIC special assessment. This legislation should eliminate
the substantial disparity between the amount that BIF and SAIF members had been
paying in deposit insurance premiums.
Under legislation, the FDIC estimated that BIF members will be paying a portion
of the FICO payment equal to 1.3 basis points on BIF-insured deposits on January
1, l997, compared to 6.5 basis points on SAIF-insured deposits and will pay a
pro rata share of the FICO payment on the earlier of January 1, 2000 or the date
upon which the last savings association ceases to exist. The legislation also
requires the BIF and SAIF to be merged by January 1, 1999 provided that
subsequent legislation is adopted to eliminate the savings association charter
and there are no remaining savings associations as of that date.
The FDIC has recently proposed to lower SAIF assessments to a range comparable
to that of BIF members, although SAIF members must also make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis or whether the BIF and SAIF will eventually be
merged.
Legislation regarding bad debt recapture has been enacted into law on August 20,
1996. The legislation requires recapture of reserves accumulated after 1987. The
recapture tax on post 1987 reserves must be paid over a six year period starting
in 1996. The payment of the tax can be deferred in each of 1996 and 1997 if an
institution originates at least the same average annual principal amount of
mortgage loans that it originated in the six years prior to 1996. Management
does not believe that this legislation will have a material impact on the
operations of the Company.
ACCOUNTING DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 prescribes the accounting for the impairment of long-lived
assets and goodwill related to those assets. The new rules specify when assets
should be reviewed for impairment, how to determine whether an asset is
impaired, how to measure an impairment loss, and what financial statement
disclosures are necessary. Also prescribed is the accounting for long-lived
assets and identifiable intangibles that a company plans to dispose of, other
than those that are a part of a discontinued operation. Any impairment of a
long-lived asset resulting from management's review is to be recognized as a
component of non-interest expense. The Company adopted SFAS No. 121 on January
1, 1996, and has not had a material effect on the Corporation's financial
statements.
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In May 1995, FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122, an amendment of SFAS No. 65, requires the recognition of
rights to service loans for others as separate assets, however those servicing
rights are acquired. SFAS No. 122 also requires that a mortgage banking
enterprise assess its capitalized servicing rights for impairment based on the
fair value of those rights, using a disaggregated approach for mortgage
servicing rights capitalized after adoption of the new standard. Mortgage
servicing rights are amortized on an accelerated basis over the estimated period
of net servicing revenue. Adjustments to reduce amortized cost to estimated fair
value are included in non-interest income or non-interest expense, as
appropriate. The Company adopted SFAS No. 122 on January 1, 1996, and has not
had a material effect on the Corporation's financial statement.
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, 1995, Argo Savings had twelve (12) properties, totaling $1.6
million classified as foreclosed real estate, as compared to twenty-one (21)
properties for $1,473,000 at December 31, 1995. The underlying properties on
September 30, 1996, consisted of eleven(11) single family residences, and one
(1) commercial property. The foreclosed real estate has been written down to its
estimated fair value at September 30, 1996. The total amount of loans ninety
(90) days or more past due at September 30, 1996, was $1.8 million or 1.23% of
total loans as compared to $2.0 million or 2.15% of total loans on December 31,
1995. At September 30, 1996, all loans ninety (90) days or more past due were
secured by one-to-four family residences. Total non-performing assets at
September 30, 1996, totaled $3.4 million or 1.63% of total assets..
There were no restructured loans within the meaning of Financial Accounting
Standards Board Statement 15 for any of the indicated periods.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996, AND 1995.
GENERAL
Net income for the three and nine months ended September 30, 1996, was $32,000
or $.09 per share (fully diluted) and 930,000 or $2.53 per share (fully diluted)
respectively as compared to net income of $462,000 or $1.30 per share (fully
diluted) and $984,000 or $2.78 per share (fully diluted) for the comparable
three and nine month periods ended September 30, 1995. The decrease in
comparable three month and nine month earnings resulted from the one-time SAIF
charge of $489,000 net of taxes during the third quarter of 1996, see
"Legislative Matters." Partially offsetting this one-time charge was an increase
in net interest income of $480,000 and the net revenues of On-Line which
contributed $507,000.
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INTEREST INCOME
Interest income for the three months ended September 30, 1996, was $4.2 million
as compared to $3.6 million for the three months ended September 30, 1995. The
$570,000 increase was caused by the $5.0 million increase in average interest
earning assets to $165.5 million for the quarter ended September 30, 1996, and a
77 basis point increase in the weighted average yield on interest earning assets
to 10.19% for the quarter ended September 30, 1996.
Interest income for the nine months ended September 30, 1996, totaled $11.7
million, as compared to $10.2 million for the comparable 1995 period. The $1.4
million increase was caused by the $4.6 million increase in average
interest-earning assets to $158.9 million for the nine months ended September
30, 1996, and the 94 basis point increase in the weighted average yield on
interest-earning assets to 9.77% for the nine months ended September 30, 1996
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1996, was $2.3 million
as compared to $2.2 million for the comparable 1995 period. The $89,000 increase
was caused by the $14.1 million increase in average interest-bearing liabilities
to $175.5 million for the quarter ended September 30, 1996, partially offset by
the 24 basis point decrease in the weighted average cost of interest-bearing
liabilities to 5.17% for the quarter ended September 30, 1996.
Interest expense for the nine months ended September 30, 1996, totaled $6.5
million as compared to $6.2 million for the comparable 1995 period. The $336,000
increase was driven by the $12.3 million increase in average interest-bearing
liabilities to $167.1 million for the nine months ended September 30, 1996,
partially offset by the 12 basis point decrease in the weighted average cost of
interest bearing liabilities to 5.18% for the nine months ended September 30,
1996.
NET INTEREST INCOME
Net interest income totaled $1.9 million for the three months ended September
30, 1996, reflecting an increase of $451,000 over the amount recorded in the
comparable 1995 period. The effective net interest rate for the quarter ended
September 30, 1996, increased 101 basis points to 5.02% from 4.01% for the
comparable 1994 period.
Net interest income totaled $5.1 million for the nine months ended September 30,
1996, reflecting an increase of $1.0 million over the amount recorded in the
comparable 1995 period. The effective net spread for the nine months ended
September 30, 1996, increased 107 basis points to 4.59%, from 3.52% for the
comparable 1995 period.
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The increases in the effective net interest rate for both the three and nine
month periods ended September 30, 1996 were caused primarily by the purchase of
higher yielding seasoned mortgage loans during the three month and nine month
periods ended September 30, l996.
PROVISION FOR LOAN LOSSES
A general loan loss provision of $100,000 was recorded during the nine months
ended September 30, 1996, as compared to $40,000 for the comparable 1995 period
bringing the cumulative allowance for loan losses to $594,000 or .37% of gross
loans receivable and 32.66% of total non-performing loans at September 30, 1996.
A general loan loss provision of $45,000 was recorded during the three months
ended September 30, 1996, as compared to $15,000 for the three months ended
September 30, 1995. Management believes that the 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 $2.6 million and $8.1 million for the three month
and nine month periods ended September 30, 1996, respectively. These increases
were the result of $2.7 million and $8.2 million in data processing revenue for
the three month and nine month periods ended September 30, 1996 as a result of
the acquisition of On-Line.
NON-INTEREST EXPENSE
Non-interest expense increased $3.7 million and $9.3 million for the three month
and nine month periods ended September 30, l996, respectively. These increases
were due to increases in compensation, occupancy, costs of data processing
services, and other general and administrative fees as a result of the
acquisition of On-Line. Also contributing to the increase was the one-time SAIF
assessment recapitalization charge.
INCOME TAX EXPENSE
The provision for income tax expense decreased to $339,000 or 26.7% of pre-tax
earnings for the nine months ended September 30, 1996, as compared to $513,000
or 34.2% of pre-tax earnings for the comparable 1995 period.
The decrease was the result of the utilization of $154,000 in low income housing
credits and the $300,000 tax benefit generated by the SAIF recapitalization
assessment.
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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
Not applicable.
ITEM 5. OTHER INFORMATION
During the third quarter 1996, 3,772 stock options were exercised at average
price of $14.71. These transactions increased outstanding shares to 312,791.
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. *
10.0 Argo Bancorp, Inc. 1996 Management Recognition and
Retention Plan **
27.0 Financial Data Schedule (filed herewith).
B. REPORTS ON FORM 8-K:
None
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* Incorporated herein by reference into this document from Exhibits to Form S-1,
Registration Statement, and filed on January 28, 1992, any amendments thereto,
Registration No. 33-45222.
** Incorporated herein by reference into this document from the Form S-8, filed
on September 30, l996, Registration No. 333-13047.
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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 5, 1996 /S/ John G. Yedinak
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John G. Yedinak, President of the Board
and Chief Executive Officer
Date: November 5, 1996 /S/ Carol J. Delgado
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Carol J. Delgado, Vice President and
Treasurer
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