ARGO BANCORP, INC.
Corporate Profile
- --------------------------------------------------------------------------------
Argo Bancorp, Inc. (Argo Bancorp or the Company) is a Delaware corporation
organized in August 1987 for the purpose of acquiring Argo Federal Savings
Bank, FSB (Argo Savings). Argo Bancorp acquired Argo Savings on November 17,
1987 for a capital infusion of $1.1 million. On May 26, 1992 Argo Bancorp
completed a merger conversion with Dolton-Riverdale Savings and Loan
Association (Dolton) and, as part of the conversion, Argo Bancorp sold an
additional 74,750 shares of common stock at an issuance price of $11.50, which
increased the outstanding common stock to 300,150 shares. There were 489,584
shares of common stock outstanding at December 31, 1997. Argo Bancorp is a
unitary savings and loan holding company and is registered as such with the
Office of Thrift Supervision (OTS). Argo Bancorp's common stock is publicly
traded on the Nasdaq Stock Market Over the Counter Market. The current market
makers of the stock are R. W. Baird, Incorporated, ABN AMRO Incorporated and
Kemper Securities.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois and converted to a federal stock charter
in 1982. Argo Savings is headquartered in Summit, Illinois and conducts
business as a traditional savings and loan from four locations in Cook County,
Illinois and one location in Lake County, Illinois.
On October 31, 1995, Argo Bancorp acquired On-Line Financial Services, Inc.
(On-Line), an Oak Brook, Illinois based third-party provider of on-line, real-
time, electronic data processing services to financial institutions. The
purchase of On-Line was structured as a revenue sharing agreement covering
seven years from the acquisition date, with annual payouts and a maximum cap
of $10 million to be paid to the former shareholders of On-Line. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the consolidated financial statements include the results of
operations since the date of acquisition.
On December 31, 1996 Argo Bancorp entered into a stock purchase agreement with
The Deltec Banking Corporation Limited, (Deltec), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms
of the agreement Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price
$38 per share. Total proceeds from this transaction were approximately
$4,239,000. A 5% investment advisory fee totaling approximately $212,000 was
paid to Charles E. Webb & Company resulting in net proceeds of $4,027,000.
1
ARGO BANCORP, INC.
Selected Financial Data
(Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
At December 31
--------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Financial Condition Data:
Loans receivable and discounted loans receivable, net $ 184,358 173,429 142,380 118,063 90,139
FHLB of Chicago stock 3,271 3,428 2,669 2,576 2,576
Securities available for sale 4,974 5,788 7,573 12,491 15,009
Cash and interest-earning deposits 8,677 13,276 11,061 9,286 6,905
Purchased loan servicing rights 6,706 5,264 4,033 3,641 2,508
Foreclosed real estate, net 4,251 3,913 2,234 359 554
Other assets 24,061 24,186 16,518 9,601 8,038
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Total assets 236,298 229,284 186,468 156,017 125,729
Deposits 172,469 150,627 123,484 100,697 88,220
Borrowed money 34,156 50,879 38,181 30,820 9,064
Custodial escrow balances for loans serviced for others 6,400 5,782 9,696 14,691 20,031
Other liabilities 5,169 5,436 4,228 835 619
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Stockholders equity $ 18,104 16,560 10,879 8,974 7,795
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Year ended
Selected Operating Data: December 31
---------- --------- -------- --------- --------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Interest income $ 18,266 16,074 13,987 10,282 9,477
Interest expense 11,286 9,083 8,341 5,012 3,822
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net interest income before provision for loan losses 6,980 6,991 5,646 5,270 5,655
Provision for loan losses 210 248 55 48 270
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net interest income after provision for loan losses 6,770 6,743 5,591 5,222 5,385
Noninterest income 15,585 14,194 4,479 1,838 1,738
Noninterest expense 21,409 19,260 7,662 5,383 4,587
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Income before income taxes 946 1,677 2,408 1,677 2,536
Income tax expense 123 343 667 281 952
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Income before extraordinary item and cumulative effect of change
in accounting principle 823 1,334 1,741 1,396 1,584
Cumulative effect of change in accounting for income taxes - - - - 460
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Net income $ 823 1,334 1,741 1,396 2,044
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Basic earnings per share $ 1.70 4.26 5.88 4.62 6.80
Diluted earnings per share $ 1.56 3.60 4.96 4.08 6.21
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Selected Financial Ratios and Other Data: Year ended December 31
---------- --------- -------- --------- --------
1997 1996 1995 1994 1993
---------- --------- -------- --------- --------
Return on average assets 0.35% 0.68 1.00 1.00 1.59
Return on average equity 4.62 10.89 17.09 16.17 27.88
Average equity to average assets 7.53 6.26 5.85 6.10 5.71
Equity to total assets 7.66 7.22 5.83 5.75 6.20
Interest rate spread during period 3.81 4.61 3.69 4.25 4.82
Net interest margin 3.54 4.44 3.65 4.24 4.93
Noninterest expense to average assets 9.05 9.83 4.40 3.86 3.58
Nonperforming loans to total loans (1) 3.57 3.12 1.54 1.98 1.19
Nonperforming assets to total assets (1) 4.14 3.43 2.26 1.72 1.31
Allowance for loan losses to nonperforming loans (1) 14.73 16.87 29.54 26.38 55.88
Average interest-earning assets to average
interest-bearing liabilities 0.95x 0.94x .99x 1.00x 1.03x
Book value per share $ 36.98 37.11 36.72 30.91 27.38
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
Full-service customer service facilities 5 5 5 4 3
- ---------------------------------------------------------------- ---------- --------- -------- --------- --------
(1) Excludes balances related to portfolio of discounted loans receivable.
2
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 Annual Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, an increase in loan delinquencies or foreclosures, legislative and
regulatory changes, monetary and fiscal policies of the federal government,
changes in tax policies, rates and regulations of federal, state and local tax
authorities, changes in interest rates, a decline in real estate values, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1997 Form 10-K.
GENERAL
Argo Bancorp was incorporated in August 1987 for the purpose of acquiring Argo
Savings. The Company was originally capitalized through the sale of 300 shares
(which split in December 1991 at 700/1) of common stock to three investors for
total proceeds of $60,000. Argo Bancorp acquired argo Savings on November 17,
1987 with a capital infusion of $1.1 million. On August 29, 1991 the Board of
Directors of Dolton and Argo Savings adopted a Plan of Merger Conversion (Plan)
whereby Dolton agreed to convert from a state-chartered mutual association to a
federally-chartered stock association and merge with and into Argo Savings, with
Argo Savings as the surviving entity. Pursuant to the Plan, shares of common
stock of Argo Bancorp were first sold to the members of Dolton in a subscription
offering and the shares not subscribed were then offered to the public in a
community offering. The subscription and community offering were held
concurrently and were completed on April 27, 1992. Final regulatory approval
was received on may 26, 1992, at which time the merger conversion was completed.
The transaction was accounted for as a pooling-of-interests. As a result, no
goodwill or other intangible assets were recorded. As part of the merger
conversion with Dolton, the Company sold an additional 74,750 shares of common
stock at an issuance price of $11.50 per share. Net proceeds from the merger
conversion were $326,000 after the deduction of the conversion expenses. The
Company retained 50% of the net proceeds from the merger conversion and injected
the remaining 50% into Argo Savings.
On December 31, 1996 Argo Bancorp entered into a Stock Purchase Agreement with
The Deltec Banking Corporation Limited (Deltec), a banking corporation organized
under the laws of the Commonwealth of the Bahamas. Under the terms of the
purchase agreement, Argo Bancorp agreed to issue and sell 111,564 shares of the
Company's authorized but unissued common stock to Deltec at a purchase price of
$38 per share. Total proceeds from this transaction were approximately
$4,239,000. A 5% investment advisory fee totaling $212,000 was paid to Charles
E. Webb & Company resulting in net proceeds of $4,027,000. The Company also
entered into a Stockholder Agreement with Deltec which stipulates, in material
part that on any occasion the Company shall determine to issue additional
shares, Argo Bancorp shall offer to sell to Deltec such number of shares
required to allow Deltec to continue to own 25% of the outstanding common stock
in the Company.
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Company is an active holding company with assets
consisting of Argo Savings' common stock, On-Line Financial Services Inc. common
stock, marketable securities, interest-earning deposits, and an investment in a
majority-owned limited liability corporation whose primary purpose is to
purchase residential loans. Argo Bancorp is a Federal Housing Authority (FHA)
approved originator and servicer, a licensed Illinois mortgage banker, and an
approved Federal National Mortgage Association (FNMA) servicer.
3
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with deposits associated
with purchased mortgage servicing rights (PMSRs) and funds generated internally,
primarily in one-to-four family mortgage loans. Argo Savings is a member of the
Federal Home Loan Bank (FHLB) System, and its deposits are insured to the
maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC).
Argo Savings operates two wholly-owned service corporation subsidiaries. Argo
Mortgage Corporation engages in mortgage brokerage activities that focus on the
purchase and sale of deeply discounted mortgage loans into the secondary market.
Dolton-Riverdale Savings Service Corp. offers life insurance annuities to the
customer base of Argo Savings. Argo Savings also has a majority interest in a
limited liability corporation, Margo Financial Services, LL. (Margo). The
primary activity of Margo is the origination of mortgage loans for portfolio and
for sale into the secondary market.
Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities, and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows, and borrowings, and the income generated by its investment in PMSRs.
Argo Savings' operating results are also affected by the profit recognized on
the sale of mortgage loans, investment securities customer service charges, and
other income. Argo Savings' operating expenses consist of employee compensation,
occupancy expenses, federal deposit insurance premiums, amortization of
goodwill, and other general and administrative expenses.
Results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates, real
estate values, government policies, and actions of regulatory authorities.
DISCOUNTED LOANS RECEIVABLE
In recent years the Company has acquired through private sales and auctions,
mortgage loans at a discount for which the borrowers are either not current as
to principal and interest payments or there is doubt to the borrowers' ability
to pay in full the contractual principal and interest. The Company estimates
the amounts it will realize through foreclosure, collection efforts or other
resolution of each loan and the length of time required to complete the
collection process in determining the amounts it will bid to acquire such loans.
Investment in these assets has generally resulted in higher than market interest
yields and significant gains as a result of the ultimate sale of properties
acquired through these purchases. Losses have also been incurred from certain
properties through other real estate owned activity.
During 1997, the Company began to focus its resources on traditional loans
receivable originated through its majority-owned subsidiary, Margo, and began to
reduce its portfolio of discounted loans receivable. Sales of discounted loans
receivable totaled $21.0 million in 1997, compared to $9.4 million in 1996. As a
result of the Company's business strategy, the balance of the discounted loans
receivable portfolio decreased from $47.7 or 20.8% of total assets to $30.6
million or 12.9% of total assets at December 31, 1997.
ON-LINE FINANCIAL SERVICES
On October 31, 1995 Argo Bancorp acquired On-Line Financial Services, Inc. (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 service
corporations which owned, in the aggregate, 98.9% of the outstanding shares of
On-Line. Sale of the remaining 1.1% of On-Line shares was made by a single
institutional stockholder which held shares in OnLine directly. The intervening
acquisition subsidiary and state chartered savings and loan service corporation
shells were liquidated and merged by Argo Bancorp in June 1996.
Financial terms of the transaction included a cash sweep to shareholders of On-
Line funds on hand on the closing date, less amounts necessary to establish
certain agreed-upon escrow balances; a two-year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a 26-month
escrow note in the amount of $460,000, which was paid in 1997, representing
funds held for future performance under a third-party computer lease; and a
structured schedule of contingent payments based on future revenues of On-Line
over the next seven years. The total transaction value, including asset notes
and contingent payments, will not exceed $8.9 million. During 1997, the Company
asserted claims that the selling shareholders of On-Line had breached certain
representations and warranties in the purchase contract. Following a series of
negotiations, the selling shareholders agreed to reduce the purchase price by
$1,098,000. In December, 1997, the Company purchased
4
from certain of the former shareholders their rights to 25.45% of the future
contingent payment. The Company paid $172,000 for these future contingent
payments. Management anticipates funding any required future payments with
borrowed funds and excess funds generated from operations and, to the extent
necessary, earnings and assets of the Company.
On-Line is a third party provider of electronic data processing services,
primarily to financial institutions located throughout the midwest. On-Line
currently provides data processing services to thrifts, community banks and
savings banks, representing over 1.2 million customer accounts in six midwestern
states. On-Line has historically marketed its services to institutions with
assets of less than $1 billion, where the company's orientation toward superior
customer service and specialized products allows it to effectively compete. The
acquisition by Argo Bancorp has promoted the development and sale of
technological advances in the systems, programs, and services offered by On-
Line, which includes resale of software produced by Information Technology
Incorporated, integrated check and document imaging systems, and computer output
laser disc storage technology. These services are in addition to new offerings
by On-Line in the planning and deployment of wide area and local area network
systems, the sale of all related hardware and services, expanded technical and
communications support, consultation, and training, and the maintenance of in-
house systems. On-Line's business plans include aggressive marketing to small
to mid-size commercial and community banks, as well as other corporate users of
advanced technology, as it moves to expand its traditional thrift institution
client base.
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolio,
custodial deposit accounts related to loans serviced for others, maturing
investments and borrowed money. The most liquid assets are cash and short-term
investments. The levels of these assets are dependent on operating, financing,
and investing activities during any given period. Cash and interest-earning
deposits totaled $8.7 million at December 31, 1997. Additional sources of funds
have included FHLB advances, and loan sales. Argo Savings has adequate
alternative funding sources if short-term liquidity needs arise.
The primary investing activity at Argo Savings is the origination and purchase
of mortgage loans. During the years ended December 31, 1997 and 1996, Argo
Savings originated and purchased $115.2 million and $83.2 million of loans
receivable, respectively, and $8.9 million and $41.1 million of discounted loans
receivable, respectively. Purchase of securities available for sale totaled
$8.1 million and $152,000 for 1997 and 1996, respectively. Income earned from
limited partnership investments in purchase mortgage servicing rights totaled
$341,000 for the year ended December 31, 1997. These investing activities were
primarily funded by principal repayments on loans and mortgage-backed securities
of $49.1 million, and $47.0 million, respectively, and an increase in deposits
of $21.8 million and $27.1 million for 1997 and 1996, respectively. Also
providing funding was the $74.5 million in total proceeds that resulted from the
sale of loans receivable, discounted loans receivable, securities available for
sale, and foreclosed real estate in 1997.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At December 31, 1997 Argo Savings' liquid assets represented
6.51% of its liquidity base as compared to the required level of 4%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and current loan
demand. Cash flow projections are updated regularly to assure necessary
liquidity.
Liquidity management for Argo Savings is both a daily and long-term function of
Argo Savings' management. Argo Savings' management meets on a daily basis and
monitors interest rates, current and projected commitments to purchase loans and
the likelihood of funding such commitments, and projected cash flows. Excess
funds are generally invested in short-term investments.
At December 31, 1997 Argo Savings' capital exceeded all capital requirements of
the OTS. Argo Savings' tangible, core, and risk-based capital ratios were
5.93%, 5.93%, and 11.10%, respectively. Argo Savings is considered "well
capitalized" under OTS prompt corrective action regulations.
5
At December 31, 1997 , Argo Savings had outstanding loan commitments and unused
lines of credit of $5.4 million and $7.8 million, respectively. Argo Savings
also had Community Reinvestment Act investment commitments outstanding of $3.2
million. These commitments include $977,000 to be funded over 8 years for the
investment in the Chicago Equity Fund, $317,000 to be funded over twelve years
for investment in the Community Investment Corporation, $1.0 million to be
funded for the Great West Side Loan Fund, $498,000 to be funded over five years
for investment in the Keidze Ltd Partnership, and $182,000 to be funded
for investment in the Westward III Limited Partnership.
FINANCIAL CONDITION
Total assets increased $7.0 million to $236.3 million at December 31, 1997 from
$229.3 million at December 31, 1996. The increase in total assets is due
primarily to an increase of $21.8 million in deposits, partially offset by a
$15.7 million decrease in borrowed money. The increase in total assets of $42.8
million to $229.3 million at December 31, 1996 from $186.5 million at December
31, 1995 was due primarily to an increase of $27.1 million in deposits and $12.7
million in borrowed money.
Loans receivable, which include loans receivable, loans held for sale and
discounted loans receivable, increased $10.9 million or 6.28% in 1997 to $184.4
million at December 31, 1997. The increase in loans receivable for 1997 and
1996 is due to the origination and purchase of seasoned fixed rate and
adjustable rate loans secured by single family residences. New originations and
purchases contributed $115.2 million in loans receivable and purchases
contributed $8.9 million in discounted loans receivable. These purchases and
originations were primarily funded by principal repayments of $49.1 million on
loans receivable, discounted loans receivable and mortgage-backed securities,
proceeds from the sale of loans receivable, discounted loans receivable and
foreclosed real estate of $65.8 million and an increase in deposits of $21.8
million, partially offset by a $16.7 million decrease in borrowings. The 1996
originations and purchases of $99.1 million were primarily funded by the $27.1
million increase in deposits, and $8.2 million increase in borrowings, principal
repayments of $48.2 million and proceeds from the sale of loans receivable and
discounted loans receivable of $45.4 million.
Securities available for sale, which totaled $5.0 million at December 31, 1997,
are carried at fair value and include $2.9 million of mortgage-backed
securities, $1.7 million of marketable equity securities, and $380,000 of
municipal securities. The balance of mortgage-backed securities decreased
during 1997 by $2.0 million due to the sale of $1.1 million and principal
repayments of $855,000. Partially offsetting these decreases was a $1.4 million
dollar increase in marketable equity securities.
Deposits increased $21.8 million to $172.5 at December 31, 1997, while deposits
increased $27.1 million to $150.6 million at December 31, 1996 from $123.5
million at December 31, 1995. The increase for both years is attributable to
increased focus on attracting deposits.
Borrowings decreased $16.7 million to $34.2 million at December 31, 1997. The
decrease is primarily due to the increase in deposits and decreased funding
needs for the purchase of seasoned loan packages. Borrowing increased $12.7
million to $50.9 million at December 31, 1996 from $38.2 million at December 31,
1995. The increase was primarily attributable to the increased funding needs
related to the purchase of seasoned loan packages and loan originations.
Custodial escrow balances for loans serviced increased $618,000 to $6.4 million
at December 31, 1997. The custodial accounts relate to escrowed payments of
taxes and insurance and the float on principal and interest payments on loans
serviced either for Argo Savings or on behalf of others by an independent
mortgage servicing operation. The custodial accounts related to loans serviced
by others are maintained at Argo Savings in interest-bearing accounts. The
custodial accounts associated with loans or purchased mortgage servicing rights
serviced for Argo Savings are maintained in noninterest-bearing accounts. At
December 31, 1997 and 1996, $6.4 million and $5.8 million, respectively, of all
custodial escrow balances pertain to loans subserviced on behalf of Argo Saving
for portfolio loans, servicing retained loans, and purchased mortgage servicing
rights. Due to the nature of custodial escrow deposits, balances may fluctuate
widely on a day-to-day basis.
Common shares outstanding increased 43,330 shares to 489,584 at December 31,
1997. The increase is due to the exercise of 32,497 stock options and the
issuance of 10,833 shares under the stock purchase agreement with The Deltec
Banking Corporation Limited. The shares were issued from authorized but
unissued common stock.
6
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by seeking 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 PMSRs, which provide a source of noninterest 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 maintenance of noninterest-bearing custodial accounts
related to the PMSRs; 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 quarterly basis by management. Argo Savings does not use
any derivatives to reduce its exposure to interest rate risk.
Argo Savings had an excess of interest-sensitive liabilities which mature or
reprice within one year over interest-sensitive assets of $73.1 million or 30.9%
of total assets at December 31, 1997. 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 its gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, and money market accounts are withdrawn based on
industry averages provided by the OTS. 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, and money market accounts has 27% of
these accounts withdrawn within one year. Management believes that these decay
rate assumptions are reasonable.
7
The following table presents Argo BancorpAEs interest sensitivity gap between
interest-earning assets, excluding premiums and discounts, and interest-bearing
liabilities at December 31, 1997. The information provided in the table below is
based on asset maturity for fixed rate assets and repricing dates for adjustable
rate assets. No prepayment assumptions have been included.
At December 31, 1997
------------------------------------------------------------------------------------------------------
More Than More Than More Than More Than
1 Year 1 Year 3 Years 5 Years 10 Years More Than
or Less to 3 Years to 5 Years to 10 Years to 20 Years 20 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1) (2) $ 56,085 15,258 2,469 12,381 17,738 71,316 175,247
Other loans (1) 8,417 208 86 500 2,217 333 11,761
Interest-earning deposits 2,466 - - - - - 2,466
Mortgage-backed securities 2,923 - - - - - 2,923
Investment securities 1,571 - - - 370 3,271 5,212
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 71,462 15,466 2,555 12,881 20,325 74,920 197,609
Less unearned discount, premium, and deferred fees (2,142) (616) (100) (500) (716) (3,249) (7,323)
- ----------------------------------------------------------------------------------------------------------------------------------
Total net interest-earning assets 69,320 14,850 2,455 12,381 19,609 71,671 190,286
Interest-bearing liabilities:
Passbook accounts 2,993 4,402 2,465 4,578 2,289 880 17,607
NOW accounts (3) 4,896 2,643 3,835 874 976 - 13,224
Money market accounts 4,917 683 311 247 43 22 6,223
Certificate accounts 116,154 13,314 5,747 200 - - 135,415
Custodial escrows 1 - - - - - 1
FHLB advances and other borrowings 13,435 6,464 1,197 13,060 - - 34,156
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 142,396 27,506 13,555 18,959 3,308 902 206,626
- ----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(73,076) (12,656) (11,100) (6,578) 16,301 70,769 (16,340)
==================================================================================================================================
Cumulative interest sensitivity gap $(73,076) (85,732) (96,832) (103,410) (87,109) (16,340)
==================================================================================================================================
Cumulative interest sensitivity gap as a percentage of
total assets (30.93)% (36.28) (40.98) (43.76) (36.86) (6.91)
==================================================================================================================================
Cumulative net interest-sensitive assets as a
percentage of interest-sensitive liabilities 48.68 % 49.54 47.22 48.91 57.66 92.09
==================================================================================================================================
(1) For purpose of the GAP analysis, mortgage and other loans are not reduced
for allowance for loan losses, but are reduced for nonperforming loans.
(2) Mortgage loans include loans held for sale, portfolio loans receivable and
discount loans receivable.
(3) Does not include noninterest-bearing NOW accounts of $2.9 million and
noninterest-bearing accounts associated with loans serviced for others of
$6.1 million.
8
s
The following table sets forth certain information relating to Argo Bancorp's
consolidated average balance sheets and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management believes that the use of month-end balances
instead of daily average balances has not caused a material difference in the
information presented.
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable (1) $ 180,964 17,321 9.57% $ 151,384 15,057 9.95% $ 139,194 13,010 9.35%
Mortgage-backed securities 4,423 292 6.60 5,294 354 6.68 6,108 405 6.63
Interest-earning deposits 6,573 364 5.54 2,103 421 4.84 1,459 67 4.58
Investment securities 5,247 289 5.51 4,176 242 5.80 7,837 505 6.45
-------------------------- -------------------------- --------------------------
Total interest-earning assets 197,207 18,266 9.26 162,957 16,074 9.86 154,598 13,987 9.05
Noninterest-earning assets (2) 39,260 32,927 19,444
--------- --------- ---------
Total assets $ 236,467 $ 195,884 $ 174,042
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits 165,669 8,580 5.18 130,163 6,433 4.94 113,857 5,610 4.93
Custodial escrows 21 1 5.10 1,209 78 6.45 3,126 224 7.17
FHLB advances and other borrowings 41,140 2,705 6.58 41,909 2,572 6.14 38,768 2,507 6.47
-------------------------- -------------------------- --------------------------
Total interest-bearing liabilities 206,830 11,286 5.46 173,281 9,083 5.24 155,751 8,341 5.36
Other liabilities 11,827 10,340 8,103
--------- --------- ---------
Total liabilities 218,657 183,621 163,854
Equity 17,810 12,263 10,188
--------- --------- ---------
Total liabilities and equity $ 236,467 195,884 174,042
========= ========= =========
Net interest income/interest
rate spread (3) 6,980 3.80% 6,991 4.62% 5,646 3.69%
============= ============= =============
Net interest-earning assets/(liabilities)/
net interest margin (4) $ (9,623) 3.54% $ (10,324) 4.44% $ (1,153) 3.65%
========= ====== ========= ====== ========= ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 0.95x 0.94x .99x
========= ========= =========
(1) Loans receivable include loans held for sale, portfolio loans receivable
and discount loans receivable.
(2) Included in the balances are PMSRs of approximately in $6.7, $5.3 million
and $4.0 million in 1997, 1996, and 1995, respectively.
(3) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-
bearing liabilities .
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
9
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. The allowance for loan losses totaled
$814,000 and $685,000 at December 31, 1997 and 1996, respectively.
The total amount of loans (excluding discounted loans) 90 days or more past due
at December 31, 1997 was $5.5 million or 3.57% of total loans receivable as
compared to $3.9 million or 3.12% on December 31, 1996. The total amount of
discounted loans 90 days or more past due at December 31, 1997 was $6.2 million
or 20.4% of total discounted loans receivable. The total amount of discounted
loans 90 days or more past due at December 31, 1996 was $15.5 million or 32.4%
of total discounted loans receivable.
At December 31, 1997, Argo Bancorp had 113 properties totaling $4.3 million
classified as foreclosed as compared to 95 properties totaling $3.9 million on
December 31, 1996. The underlying properties at December 31, 1997 consist
primarily of single family residences. The foreclosed real estate has been
written down to its net realizable value at December 31, 1997. The Savings Bank
maintains an allowance for losses on foreclosed real estate. The balance totaled
$92,000 and $189,000 at December 31, 1997 and 1996, respectively. The provision
for losses and chargeoffs totaled $38,000 and $185,000, respectively, during
1997, compared to $238,000 and $538,000 during 1996.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996
General. Net income for the year ended December 31, 1997 was $823,000 million
- --------
or $1.56 per share (on a diluted basis), compared to net income of $1.3 million,
or $3.60 per share (on a diluted basis), in 1996.
Interest Income. Interest income increased $2.2 million or 13.6% to $18.3
- ---------------
million in 1997 from $16.1 million in 1996. The increase is primarily due to
the increase of $34.2 million in the average balance of interest-earning assets
to $197.2 million in 1997 from $163.0 million in 1996. Partially offsetting
this increase was a 60 basis point decrease in the average yield on interest-
earning assets to 9.26% in 1997 from 9.86% in 1996.
Interest Expense. Interest expense increased $2.2 million or 24.25% to $11.3
- -----------------
million in 1997 from $9.1 million in 1996, primarily as a result of a higher
average balance of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased $33.5 million to $206.8 million from
$173.3 million in 1996. Also contributing to the increase in interest expense
was a 22 basis point increase in the average cost of funds from 5.24% in 1996 to
5.46% in 1996.
Net Interest Income. Net interest income for the year remained relatively
- --------------------
unchanged from 1996 at $7.0 million. The net interest margin decreased from
4.44% in 1996 to 3.54% in 1997. The interest rate spread decreased to 3.80% in
1997 from 4.62% in 1996.
The table below sets forth certain information regarding changes in interest
income and interest expense of Argo Bancorp for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change
in volume
10
multiplied by prior rate); (2) changes in rates (change in rate multiplied by
prior volume); and (3) net changes in rate-volume. The change attributable to
the combined impact of volume and rate have been allocated proportionately to
the change due to volume and the change due to rate.
1997 compared to 1996 1996 compared to 1995
---------------------------------- ----------------------------------
Increase (decrease) due to Increase (decrease) due to
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
---------- ----------- --------- ---------- ----------- ---------
(In thousands)
Interest-earning assets:
Loans receivable, net $2,943 (679) 2,264 1,220 828 2,048
Mortgage-backed securities (58) (3) (61) (54) 3 (51)
Interest-earning deposits
and investment securities 304 (315) (11) (84) 174 90
---------- ----------- --------- ---------- ----------- ---------
Total 3,189 (997) 2,192 1,082 1,005 2,087
---------- ----------- --------- ---------- ----------- ---------
Interest-bearing liabilities:
Deposits 1,755 392 2,147 805 18 823
Custodial escrows (77) - (77) (124) (22) (146)
FHLB advances and other
borrowings (47) 180 133 193 (128) 65
---------- ----------- --------- ---------- ----------- ---------
Total 1,631 572 2,203 874 (132) 742
---------- ----------- --------- ---------- ----------- ---------
Net change in interest income $1,558 (1,569) (11) 208 1,137 1,345
========== =========== ========= ========== =========== =========
Provision for Loan Losses. A provision of $210,000 was recorded during
- --------------------------
1997, resulting in an allowance for loan losses of $814,000 or .53% of total
loans receivable, excluding discounted loans receivable and 14.73% of total
nonperforming loans, excluding discounted loans receivable, at December 31,
1997. The loan loss provision in 1996 was $148,000 and the allowance for loan
losses balance at December 31, 1996 was $665,000 or .53% of loans receivable,
excluding discounted loans receivable. In the determination of the provision for
loan losses and adequacy of the corresponding allowance for loan losses,
management considers changes in the asset quality, charge off experience and
economic conditions.
Noninterest Income. Noninterest income increased $1.4 million to $15.6 million
- -------------------
in 1997 from $14.2 million in 1996. The increase is primarily due to a $931,000
increase in fees attributable to Margo's operation; a $475,000 increase in gains
on sale of securities, a $417,000 increase in data processing income, a $702,000
increase in other income primarily attributable to other ancillary income at On-
Line, and a $385,000 increase in gains on sale of foreclosed real estate.
Offsetting these increases was a $1.6 million decrease in gains on sale of
discounted loans receivable.
Noninterest Expense. Noninterest expense increased $2.1 million to $21.4
- --------------------
million in 1997 from $19.3 million in 1996. This increase was primarily due to
increases in occupancy, professional fees, data processing cost of services, and
other expenses. Occupancy increased $670,000 primarily due to significant
leasehold improvement at On-Line, as well as the opening of Argo Savings'
permanent branch location on the West side of Chicago, Illinois. The $473,000
increase in professional fees was caused by significant increases in legal and
accounting fees. Data processing cost of services increased $1.3 million due to
significant increases in hardware and software cost of sale by On-Line as a
result of growth in the hardware and software sales division. Also contributing
to the increase in data processing cost of services were increases in various
third party data communication charges. The $129,000 increase in other expenses
was partially due to Margo being fully operational in 1997 as well as increases
at other subsidiaries. Offsetting these increases in noninterest expenses is the
significant decrease in federal deposit insurance premiums as a result of the
one time SAIF assessment of $789,000 during the year ended December 31, 1996.
11
Income Tax Expense. The provision for income tax expense decreased $220,000 to
- -------------------
$123,000 for the year ended December 31, 1997. The decrease was primarily due
to a decrease of pretax income of $731,000 and the utilization of approximately
$202,000 in available tax credits primarily attributable to the Company's
investment in low-income housing partnerships.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995
General. Net income for the year ended December 31, 1996 was $1.3 million or
- --------
$3.64 per share (on a diluted basis), compared to net income of $1.7 million, or
$4.96 per share (on a diluted basis), in 1995.
Interest Income. Interest income increased $2.1 million or 14.9% to $16.1
- ----------------
million in 1996 from $14.0 million in 1995. The increase is primarily due to
the increase of $8.4 million in the average balance of interest-earning assets
to $163.0 million in 1996 from $154.6 million in 1995, and an increase in the
average yield on interest-earning assets to 9.86% in 1996 from 9.05% in 1995.
This increase in average yield was primarily due to the significant growth in
the higher yielding discounted loans receivable portfolio during 1996.
Interest Expense. Interest expense increased $742,000 or 8.90% to $9.1 million
- -----------------
in 1996 from $8.3 million in 1995, primarily as a result of a higher average
balance of interest-bearing liabilities. The average balance of interest-
bearing liabilities increased $17.5 million to $173.3 million in 1996 from
$155.8 million in 1995. Partially offsetting this increase as a 12 basis point
decrease in the average cost of funds from 5.36% in 1995 to 5.24% in 1996.
Net Interest Income. Net interest income totaled $7.0 million for the year
- --------------------
ended December 31, 1996, reflecting an increase of $1.4 million from the $5.6
million recorded in 1995. The net interest margin increased from 3.65% in 1995
to 4.44% in 1996. The interest rate spread increased to 4.62% in 1996 compared
to 3.69% in 1995, primarily as a result of the purchase of higher yielding
discounted loans.
Provision for Loan Losses. A general loan loss provision of $248,000 was
- --------------------------
recorded during 1996, bringing the allowance for loan losses to $665,000 or .53%
of total loans receivable, excluding discounted loans receivable and 16.87% of
total nonperforming loans, excluding discounted loans receivable, at December
31, 1996. The loan loss provision in 1995 was $55,000 and the allowance for
loan losses balance at December 31, 1995 was $587,000, or .45% of loans
receivable, excluding discounted loans receivable. In the determination of the
provision for loan losses and adequacy of the corresponding allowance for loan
losses, management considers changes in the asset quality, charge off experience
and economic conditions.
Noninterest Income. Noninterest income increased $9.7 million during 1996 to
- -------------------
$14.2 million in 1996 from $4.5 million in 1995. The increase is primarily due
to the November 1995 acquisition of On-Line Financial Services, Inc., which
generated $11.1 million in data processing revenue for the year ended December
31, 1996 as compared to the $1.8 million generated for the two months ending
December 31, 1995. Also contributing to the increase in noninterest income was
a $781,000 increase in gains on sale of discounted loans receivable. This
increase was due to increased loan sale activity at Argo Mortgage. Offsetting
these increases was a $364,000 increase in losses realized on the sale of
foreclosed assets.
Noninterest Expense. Noninterest expense increased $11.5 million to $19.2
- --------------------
million in 1996 from $7.7 million in 1995. This increase was primarily due to
the acquisition of On-Line Financial Services in the fourth quarter of 1995.
The full year of operations of On-Line Financial Services resulted in increases
of $3.8 million in compensation, $2.7 million in occupancy, $1.3 million in data
servicing costs, and $1.3 million in other general and administrative, $586,000
in software expenses, $140,000 in advertising and $194,000 in legal and
professional fees. Also contributing to the increase in noninterest expense in
1996 was the $804,000 increase in Federal deposit insurance premiums. This was
primarily the result of the special recapitalization assessment of $789,000
accrued on September 30, 1996.
12
Income Tax Expense. The provision for income tax expense decreased $324,000 to
- -------------------
$343,000 for the year ended December 31, 1996. The decrease was primarily due
to a decrease of pretax income of $731,000 and the utilization of approximately
$179,000 in available tax credits primarily attributable to the Company's
investment in low-income housing partnerships.
Fourth Quarter 1996 Results. Income for the fourth quarter of 1996 totaled
- ---------------------------
$404,000, representing a decrease of $353,000 from 1995 net income of $757,000.
Results for the fourth quarter of 1996 include adjustments made to the
previously reported results for the year ended December 31, 1996. The
adjustments impacted various accounts, including the following: loan interest
income, the gain on sale of assets and data processing revenue were decreased by
$280,000, $44,000, and $38,000, respectively; compensation expense and other
noninterest expense increased by $118,000 and $451,000, respectively; interest
expense on borrowings decreased by $40,000; other data processing income
increased by $98,000. The related tax impact of these adjustments totaled
$367,000, resulting in a net decrease to net income of $426,000.
LEGISLATIVE MATTERS
On September 30, 1996 legislation was enacted which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Savings
Bank, to recapitalize the SAIF and spread the payments of Financing Corporation
Bonds ("FICO") across all SAIF and BIF members. The recapitalization assessment
levied was 65.7 basis points on the amount of SAIF assessable deposits held as
of March 31, 1995. The special assessment was recognized in the third quarter
of 1996 and was tax deductible. The Savings Bank paid $789,000 in connection
with the FDIC special assessment.
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, 1997, compared to 6.5 basis points on SAIF-insured deposits. Pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. 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 also lowered the 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.
The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. That
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applied to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
Legislation regarding bad debt recapture was 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.
13
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
The Financial Accounting Standards Board ("FASB") recently adopted or issued
proposals and guidelines which may have a significant impact on the accounting
practices of commercial enterprises in general and financial institutions in
particular.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
net worth and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management of the Company does
not expect that the adoption of SFAS 130 will have a material effect on the
consolidated financial statements of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosure for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131
is effective for fiscal year beginning after December 15, 1997, with earlier
application permitted. The Company will be adopting SFAS No. 131 in 1998.
YEAR 2000 DISCUSSIONS
Many existing computer programs use only two digits to identify a year in a date
field. These programs were designed and developed without considering the
impact of a change in century. If not corrected, many computer programs could
fail, or create erroneous results which could affect a company's ability to do
business prior to, at, or after December 31, 1999.
Financial service organizations such as Argo Savings are heavily reliant upon
computer systems in processing and accounting for services provided to
customers. Substantially all of the Company's major computer processing is
contracted with third party providers. Although the contracted vendors bear the
responsibility of making their systems "year 2000 complaint", assuming the costs
associated with necessary changes, keeping the Company appraised of their
progress in meeting established benchmarks, and certifying to the Company that
the systems are in fact "year 2000 ready", the Company bears ultimate
responsibility for testing, due diligence and assurance that its major vendors
will continue to provide service without interruption due to the change in
century at year-end 1999.
14
In 1996, the Company established an internal technology committee to identify
and/or resolve issues related to the year 2000 change. The technology
committee has inventoried all of the systems used by the Company, and has
identified those which are deemed "critical" to its business. As a part of its
responsibilities, the committee maintains regular communications with vendors
providing critical systems to the Company to verify that 1) testing is
performed regularly, and 2) necessary changes are being identified and
addressed. The Savings Bank management estimates that the year 2000 compliance
expense will total approximately $100,000.
On-Line has initiated a Company-wide program to prepare On-Line's computer
systems and applications for the year 2000. On-Line expects to incur
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. Testing and conversion of system applications is expected to
cost approximately $600,000 to $800,000 over the next three years.
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 substained changes in interest rates on NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank change in NPV in the event of hypothetical changes
in interest rates, as well as interest rate sensitivity gap analysis, which
monitors the repricing characteristics of the Savings Bank's interest-earning
assets and interest-bearing liabilities. The Board of Directors has established
limits to changes in NPV and net interest income across a range of hypothetical
interest rate changes. If estimated changes to NPV and net interest income are
not within these limits, the Board may direct management to adjust its
asset/liability mix to bring its interest rate risk within Board limits.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans. The Savings Bank, from time to
time, also invests in long-term fixed-rate mortgages provided it is compensated
with an acceptable spread.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain off-
balance sheet items, in the event of a series of sudden and sustained changes in
interest rates ranging from 100 to 400 basis points. Management assumes that a
200 basis point movement up or down is considered reasonable and plausible for
purposes of managing its interest-rate risk on a day-to-day basis. NPV is the
market value of portfolio equity and is computed as the difference between the
market value of assets and the market value of liabilities, adjusted for the
value of off-balance sheet items. The following table presents the Bank's
projected change in NPV for the various rate shocks as of December 31, 1997.
The Bank does not maintain any securities for trading purposes.
Estimated increase
(decrease) in NPV
Change in Estimated -----------------
Interest rate NPV Amount Percent
------------- --------- ------- --------
(Dollars in thousands)
400 basis point risk $19,624 (8,816) (31)%
300 basis point risk 23,536 (4,903) (17)
200 basis point rise 26,708 (1,731) (6)
100 basis point rise 28,501 62 -
Base scenario 28,440 - -
100 basis point decline 27,246 (1,194) (4)
200 basis point decline 25,956 (2,483) (9)
300 basis point decline 24,978 (3,462) (12)
400 basis point decline 24,296 (4,144) (15)
15
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 currently engage in trading activities or 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.
16
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Argo Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Argo Bancorp, Inc. and subsidiaries (the Company) as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Argo
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG
Chicago, Illinois
March 24, 1998
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
- ----------------------------------------------------------------------------------------------------
Assets 1997 1996
- ----------------------------------------------------------------------------------------- ---------
(in thousands)
Cash $ 6,211 12,518
Interest-earning deposits 2,466 758
Stock in Federal Home Loan Bank of Chicago, at cost 3,271 3,428
Securities available-for-sale, at fair value 4,974 5,788
Loans receivable, net of allowance for loan losses of
$814 and $665 in 1997 and 1996, respectively 153,808 125,704
Discounted loans receivable 30,550 47,725
Accrued interest receivable 1,725 2,089
Foreclosed real estate, net of allowance for losses of $92 and $189
in 1997 and 1996, respectively 4,251 3,913
Premises and equipment, net 11,235 9,856
Mortgage loan servicing rights 794 1,089
Investment in limited partnerships 5,912 4,175
Software licensing rights 1,338 1,663
Prepaid expenses and other assets 9,763 10,578
- ----------------------------------------------------------------------------------------- ---------
$ 236,298 229,284
- ----------------------------------------------------------------------------------------- ---------
Liabilities and Stockholders Equity
- ----------------------------------------------------------------------------------------- ---------
Deposits 172,469 150,627
Borrowed money 34,156 50,879
Advance payments by borrowers for taxes and insurance 741 24
Accrued interest payable 264 267
Interest-bearing custodial escrow balances for loans serviced for others 1 76
Custodial escrow balances for loans serviced for others 6,399 5,706
Other liabilities 4,164 5,145
- ----------------------------------------------------------------------------------------- ---------
Total liabilities 218,194 212,724
- ----------------------------------------------------------------------------------------- ---------
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 489,584 shares in 1997 and 446,254 shares in 1996 5 4
Class B and C, $0.01 par value. Authorized 340,000 shares each;
none issued or outstanding - -
Class D, $0.01 par value. Authorized 800,000 shares; none issued or outstanding - -
Additional paid-in capital 8,570 7,382
Retained earnings - substantially restricted 9,915 9,444
Common stock acquired by:
Employee Stock Ownership Plan (57) (117)
Management Recognition Plan (296) (165)
Net unrealized gain (loss) on securities available-for-sale, net of income taxe (33) 12
- ----------------------------------------------------------------------------------------- ---------
Total stockholders' equity 18,104 16,560
Commitments and contingencies
- ----------------------------------------------------------------------------------------- ---------
$ 236,298 229,284
- ----------------------------------------------------------------------------------------- ---------
See accompanying notes to consolidated financial statements.
18
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
(in thousands, except per share data)
Interest income:
Loans receivable $ 12,072 11,370 11,836
Discounted loans receivable 5,249 3,687 1,174
Mortgage-backed securities available-for-sale 293 354 405
Interest-earning deposits 364 421 67
Securities available-for-sale 288 242 505
- -----------------------------------------------------------------------------------
Total interest income 18,266 16,074 13,987
- -----------------------------------------------------------------------------------
Interest expense:
Deposits 8,580 6,433 5,610
Custodial escrows 1 78 224
Borrowed money 2,705 2,572 2,507
- -----------------------------------------------------------------------------------
Total interest expense 11,286 9,083 8,341
- -----------------------------------------------------------------------------------
Net interest income before provision for
loan losses 6,980 6,991 5,646
Provision for loan losses 210 248 55
- -----------------------------------------------------------------------------------
Net interest income after provision for
loan losses 6,770 6,743 5,591
- -----------------------------------------------------------------------------------
Noninterest income:
Loan servicing income, net 426 352 361
Net gain (loss) on sale of:
Loans held for sale 217 246 226
Discounted loans receivable 279 1,843 1,062
Foreclosed real estate 19 (366) (2)
Securities available-for-sale 710 235 219
Fees and service charges 1,451 520 450
Data processing income 11,528 11,111 1,836
Other 955 253 327
- -----------------------------------------------------------------------------------
Total noninterest income 15,585 14,194 4,479
- -----------------------------------------------------------------------------------
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
(in thousands, except
per share data)
Noninterest expense:
Compensation and benefits $ 8,799 8,731 3,648
Occupancy and equipment 4,930 4,260 1,471
Federal deposit insurance premiums 102 1,072 268
Loan servicing expense 550 268 251
Professional fees 1,261 788 431
Advertising and promotion 382 305 104
Goodwill amortization 104 108 102
Data processing cost of services 2,806 1,542 231
Computer services - - 181
Software expense 865 705 119
Other 1,610 1,481 856
- -----------------------------------------------------------------------------------
Total noninterest expense 21,409 19,260 7,662
- -----------------------------------------------------------------------------------
Income before income taxes 946 1,677 2,408
Income tax expense 123 343 667
- -----------------------------------------------------------------------------------
Net income $ 823 1,334 1,741
===================================================================================
Per share amounts:
Basic $ 1.70 4.24 5.88
Diluted 1.56 3.60 4.96
===================================================================================
See accompanying notes to consolidated financial statements.
20
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended December 31, 1997, 1996, and 1995
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized
Common Common gain (loss)
Common Additional stock stock on securities Total
stock paid-in Retained acquired acquired available- stockholders
Class A capital earnings by ESOP by MRP for-sale equity
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
(in thousands)
Balance at December 31, 1994 $ 3 2,664 6,789 (237) (21) (224) 8,974
Net income - - 1,741 - - - 1,741
Principal payments on ESOP loan - - - 60 - - 60
Amortization of purchase price of
MRP stock - - - - 21 - 21
Proceeds from exercise of stock options - 49 - - - - 49
Fair value adjustment for committed
ESOP shares - 26 - - - - 26
Cash dividends ($.68 per share) - - (208) - - - (208)
Purchase of additional MRP shares - - - - (50) - (50)
Change in unrealized gain (loss) on
securities available-for-sale, net of
income taxes - - - - - 266 266
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1995 3 2,739 8,322 (177) (50) 42 10,879
Net income - - 1,334 - - - 1,334
Proceeds from issuance of stock 1 4,026 - - - - 4,027
Principal payments on ESOP loan - - - 60 - - 60
Proceeds from exercise of stock options - 430 - - - - 430
Tax benefits of stock options exercised - 149 - - - - 149
Fair value adjustment for committed
ESOP shares - 38 - - - - 38
Cash dividends ($.68 per share) - - (212) - - - (212)
Purchase of additional MRP shares - - - - (115) - (115)
Change in unrealized gain (loss) on securities
available-for-sale, net of income taxes - - - - - (30) (30)
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1996 4 7,382 9,444 (117) (165) 12 16,560
Net income - - 823 - - - 823
Proceeds from issuance of stock 1 411 - - - - 412
Principal payments on ESOP loan - - - 60 - - 60
Amortization of purchase price of
MRP stock - - - - 12 - 12
Proceeds from exercise of stock options - 525 - - - - 525
Tax benefits of stock options exercised - 145 - - - - 145
Fair value adjustment for committed
ESOP shares - 50 - - - - 50
Cash dividends ($.68 per share) - - (352) - - - (352)
Purchase of additional MRP shares - - - - (486) - (486)
Proceeds from sale of MRP stock - 57 - - 343 - 400
Change in unrealized gain (loss) on securities
available-for-sale, net of income taxes - - - - - (45) (45)
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
Balance at December 31, 1997 $ 5 8,570 9,915 (57) (296) (33) 18,104
- -------------------------------------------- --------- ---------- -------- -------- -------- ------------- ------------
See accompanying notes to consolidated financial statements.
21
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 823 1,334 1,741
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,176 1,435 708
Accretion of discounts and deferred loan fees (1,032) (774) (1,440)
Deferred income tax expense (benefit) (37) 261 545
Provision for losses on loans receivable and foreclosed real estate 248 487 114
Loss (gain) on sale of:
Loans held for sale (217) (246) (226)
Discounted loans receivable (279) (1,843) (1,062)
Securities available-for-sale (710) (235) (219)
Foreclosed real estate (19) 366 2
Loans originated and purchased for sale (14,428) (23,681) (57,769)
Proceeds from sale of loans held for sale 40,312 36,040 45,850
Proceeds from sale of discounted loans receivable 20,990 9,358 6,494
Goodwill amortization 104 108 102
Amortization of purchased loan servicing rights 169 - -
Amortization of purchase price of MRP and ESOP stock 72 60 81
Recognition of fair value of ESOP shares committed to be released 50 38 26
FHLB stock dividends - - (40)
Decrease (increase) in accrued interest receivable and
prepaid expenses and other assets 1,571 (3,689) (3,985)
Increase in accrued interest payable and other liabilities (948) 1,500 2,865
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 48,845 20,519 (6,213)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated and purchased for portfolio (100,742) (59,552) (35,633)
Discounted loans receivable purchased (8,858) (41,061) (19,904)
Principal repayments on:
Loans receivable and discounted loans receivable 48,232 46,231 35,928
Mortgage-backed securities available-for-sale 855 735 936
Proceeds from maturities of investment securities - 625 4,100
Proceeds from sale of:
Securities available-for-sale 8,668 742 1,448
FHLB stock 157 - -
Foreclosed real estate 4,543 1,968 600
Purchased loan servicing rights 120 - -
Premises and equipment - 19 14
Purchase of:
Securities available-for-sale (8,088) (152) (830)
Premises and equipment (3,553) (5,849) (3,691)
Stock in Federal Home Loan Bank of Chicago - (759) (53)
Loan servicing rights (1,731) (1,231) -
Net cash (paid) received in purchase of subsidiary - 67 (629)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (60,397) (58,217) (17,714)
- -------------------------------------------------------------------------------------------------
(Continued)
22
ARGO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from financing activities:
Net increase in deposits $ 21,842 27,143 22,787
Proceeds from borrowed money 88,433 118,671 145,718
Repayment of borrowed money (105,156)(105,974)(137,482)
Purchase of MRP shares (486) (115) (50)
Proceeds from stock issuance 412 4,027 -
Proceeds from sale of MRP stock 400 - -
Proceeds from exercise of stock options 525 430 49
Dividends paid (352) (212) (208)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 717 (143) (17)
Net increase (decrease) in custodial escrow balances for loans servic 618 (3,914) (4,995)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,953 39,913 25,802
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (4,599) 2,215 1,875
Cash and cash equivalents at beginning of year 13,276 11,061 9,186
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,677 13,276 11,061
- -------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11,196 8,980 7,983
Income taxes 76 400 190
Noncash investing activity -
transfer of loans to foreclosed real estate 4,955 4,285 1,820
Decrease in taxes payable from exercise of stock options 145 149 -
On-Line acquisition:
Fair value of assets acquired, including
cash and cash equivalents - - 5,344
Value assigned to intangibles - - 154
Liabilities assumed - - 5,190
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
(Continued)
23
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Argo Bancorp, Inc. (Argo Bancorp or the
Company) and subsidiaries conform to generally accepted accounting
principles and to prevailing industry practices. The following is a
description of the more significant of those policies.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are comprised of the accounts of
Argo Bancorp; its wholly-owned subsidiaries, On-Line Financial Services,
Inc. and the Savings Bank; the Savings Bank's wholly-owned subsidiaries,
Argo Mortgage Corporation and Dolton-Riverdale Savings Service Corporation
and its majority owned subsidiary, Margo Financial Services LLC; and Argo
Bancorp's consolidated joint venture, Empire/Argo Mortgage LLC. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997 presentation.
(B) INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investments for which the Company has the positive intent and ability to
hold to maturity are classified as "held-to-maturity" and measured at
amortized cost, adjusted for amortization of premiums and accretion of
discounts. Investments purchased and held principally for the purpose of
selling them in the near term are classified as "trading securities" and
measured at fair value, with any changes in fair value included in earnings.
All other investments that are not classified as "held-to-maturity" or
"trading securities" are classified as "available-for-sale." Investments
available-for-sale are measured at fair value with any unrealized gains or
losses reflected as a separate component of stockholders' equity, net of
income taxes.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities.
Amortization of premiums and accretion of discounts are recognized in
interest income over the estimated life of the related securities using the
interest method. Gains or losses on the sale of investment and mortgage-
backed securities are determined using the specific identification method.
(C) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less unearned
discounts, deferred loan fees (costs), and allowance for loan losses.
Discounts on loans are amortized to interest income over the contractual
life of the related loans using the interest method. Interest income is not
recognized on loans which are 90 days or greater delinquent or on loans
which management believes are uncollectible.
All loan origination fees and certain direct costs associated with loan
originations are deferred. Net deferred fees and costs are amortized as
yield adjustments over the contractual life of the related loans using a
method which approximates the interest method, adjusted for estimated
prepayments based on the Savings Bank's historical prepayment experience.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Allowances for estimated
losses on loans receivable are established when any permanent decline in
value occurs. Additions to allowances for losses are provided based on a
periodic evaluation by management. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current and prospective economic conditions. In
addition, various regulatory agencies, as an integral part of their
(Continued)
24
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
examination process, periodically review the Savings Bank's allowance for
losses. Such agencies may require the Savings Bank to recognize additions
to the allowance for loan losses based on their judgments or information
available to them at the time of their examination. In the opinion of
management, the allowance, when taken as a whole, is adequate to absorb
losses in the current loan portfolio.
(D) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Impaired loans are measured at the present value of expected future cash
flows discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. Homogeneous loans that are
collectively evaluated for impairment, including first mortgage loans,
consumer loans, and the portfolio of discounted loans receivable are
excluded from the impairment provisions. At December 31, 1997 and 1996, the
Company identified no loans that were considered impaired as defined.
(E) DISCOUNTED LOANS RECEIVABLE
The Company purchases loans, predominately secured by single family
homes, at moderate to deep discounts. The moderate discount loans have been
historically performing loans whereas the deep discount loans have been
nonperforming. These loans receivable are stated at unpaid principal
balance less unearned discount. Discounts on the performing loans are
accreted to interest income over the contractual life of the related loans
using the interest method. Discounts on purchased loans for which the
collection of principal and interest is not probable are only recognized in
income when the loan is sold or paid in full. Management evaluates
collectibility of the portfolio of discounted loans receivable on an
aggregate pool basis. Any excess of estimated fair value over the net loan
balance, in the aggregate, is charged to income. There was no impairment
expense recorded in 1997, 1996, or 1995.
(F) MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
(G) FORECLOSED REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure
or in judgment is carried at the lower of fair value less costs to dispose
or the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is
established by a charge to operations if the carrying value of a property
exceeds its fair value less costs to dispose.
(Continued)
25
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------
Activity in the allowance for losses on foreclosed real estate is
summarized as follows:
- -------------------------------------------------------------------------
Year ended December 31,
--------------------------
1997 1996 1995
- -------------------------------------------------------------------------
Balance at beginning of year $ 189 412 399
Provision for losses 38 238 59
Transfer from allowance for loan losses 50 77 45
Charge-offs (185) (538) (91)
- -------------------------------------------------------------------------
Balance at end of year $ 92 189 412
=========================================================================
(H) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets. Useful
lives are 25 to 50 years for building and additions, 7 to 10 years for
building and parking lot improvements, and 3 to 10 years for furniture,
fixtures, equipment, and computer software.
(I) PURCHASED LOAN SERVICING RIGHTS
The investment in purchased loan servicing rights represents equity
investments in limited partnerships carried at the lower of fair value or
the equity investment. The cost of acquiring the rights to service mortgage
loans is capitalized at the partnership level as are other loan servicing
costs. Valuations are performed by management of the Company on a quarterly
basis, and an independent valuation is performed annually by the
partnerships.
(J) SOFTWARE LICENSING RIGHTS
The cost of certain software licensing rights acquired and other product
conversion costs at On-Line Financial Services, Inc. are capitalized and
amortized to expense on a straight-line basis over periods of 5 to 7 years.
(K) EXCESS COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED
The cost in excess of fair value of net assets acquired (goodwill) in
business combinations is amortized to expense over 15 years for banking
acquisitions and 20 years for the On-Line acquisition using the straight
line method.
(L) INCOME TAXES
Argo Bancorp and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and state income taxes is based upon
earnings reported in the consolidated financial statements.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the tax consequences attributable to differences between
the financial statement existing assets and liabilities and their respective
tax bases (temporary differences). Deferred tax assets and liabilities are
measured using
(Continued)
26
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
enacted tax rates expected to apply to taxable income in the years in which
the temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(M) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and
interest-earning deposits with banks with original maturities less than 90
days are considered to be cash and cash equivalents.
The Savings Bank is required by federal regulations to maintain a minimum
level of liquid assets of 4%. The Savings Bank exceeded the federal
requirement at December 31, 1997 and 1996.
(N) EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," in the fourth
quarter of 1997. All prior periods presented have been restated under the
provisions of SFAS No. 128. Under the provisions of SFAS No. 128, primary
and fully diluted earnings per share were replaced with basic and diluted
earnings per share. Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the diluted effect of outstanding
stock options.
The following table sets forth the components of basic and diluted
earnings per share:
- --------------------------------------------------------------------------------
Years ended December 31
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands,
except per share data)
Numerator:
Net income $ 823 1,334 1,741
- --------------------------------------------------------------------------------
Denominator:
Basic earnings per share weighted
average shares outstanding 482,893 313,256 295,987
Effect of dilutive stock options
outstanding 43,798 57,523 55,186
- --------------------------------------------------------------------------------
Diluted earnings per share
weighted average shares outstanding 526,691 370,779 351,164
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.70 4.26 5.88
Diluted earnings per share 1.56 3.60 4.96
- --------------------------------------------------------------------------------
(Continued)
27
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(O) MANAGEMENT ESTIMATES
In order to prepare the consolidated financial statements in conformity
with generally accepted accounting principles, management is required to
make certain estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. These estimates may differ from
actual results.
(2) ACQUISITION OF ON-LINE FINANCIAL SERVICES, INC.
On October 31, 1995 Argo Bancorp acquired On-Line Financial Services,
Inc. (On-Line), an Oak Brook, Illinois based computer service bureau,
servicing bank and thrift clients throughout the Midwest. The acquisition
was accounted for using the purchase method. The consolidated financial
statements include the results of operations since the acquisition date.
The purchase transaction was consummated through the use of a wholly
owned subsidiary of the Company, OLF Acquisition Corporation, which acquired
shares of three separate state chartered savings and loan service
corporations which owned, in the aggregate, 98.9% of the outstanding shares
of On-Line. Sale of the remaining 1.1% of On-Line shares was made by a
single institutional stockholder which held shares in On-Line directly. The
intervening acquisition subsidiary and state chartered savings and loan
service corporation shells were liquidated and merged by Argo Bancorp in
1996.
Financial terms of the transaction included a cash sweep to shareholders
of On-Line funds on hand on the closing date, less amounts necessary to
establish certain agreed-upon escrow balances; a two-year asset note of
approximately $1,026,000, representing the closing date net book value of
On-Line; a 26-month escrow note in the amount of $460,000, which was paid in
1997, representing funds held for future performance under a third-party
computer lease; and a structured schedule of contingent payments based on
future revenues of On-Line over the next seven years. The total transaction
value, including asset notes and contingent payments, will not exceed $8.9
million. During 1997, the Company asserted claims that the selling
shareholders of On-Line had breached certain representations and warranties
in the purchase contract. Following a series of negotiations, the selling
shareholders agreed to reduce the purchase price by $1,098,000. As a result,
at December 31, 1997, the amounts paid or payable, exclusive of the future
contingent payments, for On-Line were $836,000 less than the fair value of
the net assets acquired. Any future contingent payments will reduce this
shortgage. In December, 1997, the Company purchased from certain of the
former shareholders their rights to 25.45% of the future contingent payment.
The Company paid $172,000 for these future contingent payments. Management
anticipates funding any required future payments with borrowed funds and
excess funds generated from operations and, to the extent necessary,
earnings and assets of the Company. The structured payment schedule is as
follows:
- ------------------------------------------------------------------------------
Percentage of
net revenues
- ------------------------------------------------------------------------------
Year 1 10.5%
Year 2 15.5
Year 3 15.5
Year 4 11.0
Year 5 11.0
Year 6 11.0
Year 7 11.0
- ------------------------------------------------------------------------------
(Continued)
28
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
- ------------------------------------------------------------------------------------------------
December 31, 1997
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ------------------------------------------------------------------------------------------------
(in thousands)
Municipal Securities $ 370 10 380 -
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation 125 - (1) 124
Federal National Mortgage Association 2,837 (34) 2,803
Marketable equity securities 1,695 7 (35) 1,667
$5,027 17 (70) 4,974
================================================================================================
December 31, 1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ------------------------------------------------------------------------------------------------
(in thousands)
Municipal securities $ 557 45 602
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation 826 12 (4) 834
Federal National Mortgage Association 4,009 4 (103) 3,910
Government National Mortgage Association 152 8 160
Marketable equity securities 226 56 282
- ------------------------------------------------------------------------------------------------
$5,770 125 (107) 5,788
================================================================================================
(Continued)
29
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of securities available-for-
sale, by contractual maturity, at December 31, 1997, are shown below.
Mortgage-backed securities, although not due at a single maturity date, are
allocated among the maturity groupings based on contractual maturity.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations.
- --------------------------------------------------------------------------------
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
(in thousands)
Due in one year or less $ 234 234
Due after one year through five years 565 560
Due after five years through ten years 50 52
Due after ten years 2,483 2,461
- --------------------------------------------------------------------------------
3,332 3,307
Marketable equity securities 1,695 1,667
- --------------------------------------------------------------------------------
$5,027 4,974
================================================================================
Proceeds from sales of securities available-for-sale for the years ended
December 31, 1997, 1996, and 1995 were $8,668,000, $742,000, and $1,448,000,
respectively. Gross gains of $710,000, $235,000, and $219,000, respectively
during 1997, 1996, and 1995 there were no realized losses on security sales
during these years.
(Continued)
30
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) LOANS RECEIVABLE
Loans receivable and loans held for sale, net are summarized as follows:
- --------------------------------------------------------------------------------
December 31
-------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
First mortgage loans $111,404 81,050
Participating investment in first mortgage loans 31,059 37,487
Commercial real estate loans 1,951 4,019
Equity line of credit loans 7,700 6,035
Other loans 3,649 1,297
- --------------------------------------------------------------------------------
Total gross loans receivable 155,763 129,888
Add (deduct):
Allowance for loan losses (814) (665)
Deferred loan costs 681 93
Unearned discounts (1,822) (3,612)
- --------------------------------------------------------------------------------
$153,808 125,704
================================================================================
Weighted-average interest rate 9.57% 9.95%
================================================================================
Included in first mortgage loans are loans held for sale totaling
approximately $6.5 million and $8.2 million at December 31, 1997 and 1996,
respectively.
The following is a summary of the changes in the allowance for loan
losses:
- --------------------------------------------------------------------------------
Years ended December 31
--------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Balance at beginning of year $ 665 587 613
Provision for loan losses 210 248 55
Transfer to allowance for losses on
foreclosed real estate (50) (77) (45)
Charge-offs (11) (93) (36)
- --------------------------------------------------------------------------------
Balance at end of year $ 814 665 587
================================================================================
(Continued)
31
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans receivable delinquent three months or more are as follows:
- --------------------------------------------------------------------------------
Percentage of
Number loans receivable
of loans Amount net of discount
- --------------------------------------------------------------------------------
(in thousands)
December 31, 1997 104 $5,525 3.57%
December 31, 1996 78 3,942 3.12
December 31, 1995 57 1,987 1.54
================================================================================
First mortgage loans at December 31, 1997 include approximately $90.9
million in out-of-area purchased participation and whole loans, which are
secured by single-family homes, with approximately 13% in California, 13% in
New York, and 74% spread throughout the remainder of the country. There is
no geographic concentration of nonperforming loans.
(5) DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net are as follows:
- --------------------------------------------------------------------------------
December 31
------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
First mortgage loans $36,310 60,276
Commercial real estate loans 504
Other loans 460 1,062
- --------------------------------------------------------------------------------
Total discounted loans receivable 36,770 61,842
Less unearned discount (6,220) (14,117)
- --------------------------------------------------------------------------------
$30,550 47,725
================================================================================
Discounted loans receivable delinquent three months or more are as
follows:
- --------------------------------------------------------------------------------
Percentage
of discount loans
Amount receivable, net
- --------------------------------------------------------------------------------
(in thousands)
December 31, 1997 $6,220 20.36%
December 31, 1996 15,454 32.38
================================================================================
(Continued)
32
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
- --------------------------------------------------------------------------------
December 31
-------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Investment securities $ 61 58
Mortgage-backed securities 18 27
Loans receivable and discounted loans receivable 1,646 2,004
- --------------------------------------------------------------------------------
$1,725 2,089
================================================================================
(7) PREMISES AND EQUIPMENT
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
- --------------------------------------------------------------------------------
December 31
-------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Land $ 537 537
Office buildings and improvements 4,075 3,776
Leasehold improvements 1,994 1,293
Furniture, fixtures, and equipment 17,082 15,331
Capital leases 6,593 5,811
- --------------------------------------------------------------------------------
30,281 26,748
Less accumulated depreciation and amortization (19,046) (16,892)
- --------------------------------------------------------------------------------
$ 11,235 9,856
================================================================================
Included in occupancy and equipment expense is depreciation and
amortization expense of office properties and equipment of approximately
$2,176,000, $1,435,000, and $708,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
The Company leases certain equipment under capital lease agreements. The
cost of these assets is amortized on the straight-line basis with the charge
included in depreciation expense.
At December 31, 1997 the Company had capital lease obligations of $6.6
million relating to lease agreements for equipment and other space in
connection with On-Line. Interest expense with respect to these capital
leases totaled $402,000, $207,000, and $42,000 in 1997, 1996, and 1995,
respectively.
(Continued)
33
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company leases office space and computer equipment under
noncancelable operating leases. Rent expense for the years ended December
31, 1997, 1996, and 1995 totaled $503,000, $574,000, and $149,000,
respectively.
At December 31, 1997, minimum future rental payments due under capital
and noncancelable operating leases having an initial or remaining term of
one year or more consisted of the following:
- --------------------------------------------------------------------------------
Year ended December 31 Operating Capital
- --------------------------------------------------------------------------------
(in thousands)
1998 $ 343 1,296
1999 359 986
2000 344 802
2001 359 777
2002 372 496
Thereafter 1,520 310
- --------------------------------------------------------------------------------
Total minimum lease payments 3,297 4,667
Amount representing interest capital leases 838
- --------------------------------------------------------------------------------
Present value of minimum capital lease payments 3,829
================================================================================
(8) LOAN SERVICING AND PURCHASED MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans totaled approximately $9.1 million, $8.9 million,
and $10.3 million at December 31, 1997, 1996, and 1995, respectively.
For independently acquired servicing rights, the cost of acquiring the
rights to service mortgage loans is capitalized and amortized in proportion
to and over the period of the estimated net servicing income. On December
31, 1997 and 1996, Argo Savings held $794,000 and $1.1 million,
respectively, in purchased mortgage servicing rights (PMSR's) with an
underlying principal balance of approximately $62.2 million and $83.2
million, respectively. Service fee income for the year ended December 31,
1997 totaled $84,000 net of amortization of purchased mortgage servicing
rights of $2,000. No income was recorded in 1996. In 1995, Argo Bancorp had
no independently purchased servicing rights.
During the year ended December 31, 1997, PMSR's totaling $120,000 with an
underlying principal balance of $9.2 million were sold at cost from the
Savings Bank. There were no other sales of purchased mortgage servicing
rights for the years ended December 31, 1997, 1996, and 1995.
The custodial accounts which relate to loans subserviced on behalf of the
Savings Bank and Argo Bancorp for portfolio loans, servicing retained loans,
and purchased mortgage servicing rights are maintained at the Savings Bank
in noninterest-bearing accounts. The custodial accounts are used for
escrowed payments of taxes and insurance and the float on principal and
interest payments. At December 31, 1997, the entire balance of the
custodial accounts of $6,399,000 relates to loans serviced on behalf of the
Savings Bank and Argo Bancorp.
(Continued)
34
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The balance of investment in limited partnerships of $5.9 million and
$4.2 million at December 31, 1997 and 1996, respectively, represents Argo
Savings' investment in three divisions of a single limited partnerships.
The single business activity of this limited partnership is the purchase of
current mortgage servicing rights. There are several equity investors in
each division of the partnership. The purchase of the servicing rights is
then leveraged allowing the partnership to purchase additional servicing
rights. At the end of five years, or at such time as the investors agree,
the servicing rights will be sold and the proceeds divided pro rata among
the investors. As with typical investments in PMSR's, the collateral
underlying the equity investment is the servicing rights. All purchases of
servicing rights must be approved by all equity investors and undergo
stringent guidelines outlined previously for a purchase of servicing. The
administration and servicing of the purchased portfolios in each division is
performed by the general partner. Argo Savings' recorded income related to
this partnership on the equity method of $341,000, $352,000, and $360,000
during 1997, 1996, and 1995, respectively, is included in servicing fee
income, net of amortization of PMSR's, in the consolidated statements of
operations.
(9) DEPOSITS
Deposits at December 31 are summarized as follows:
1997 1996
--------------------------- ------------------------------
Amount Weighted Amount Weighted
in average in average
thousands Percent rate thousands Percent rate
- ------------------------------------------------------------------------------------------
Passbook accounts $ 17,607 10.2% 2.63% $ 18,349 12.2% 2.76%
NOW accounts 13,225 7.7 2.48 12,426 8.3 3.05
Money market accounts 6,223 3.6 3.50 4,957 3.3 4.30
- ------------------------------------------------------------------------------------------
37,055 21.5 2.72 35,732 23.8 3.07
- ------------------------------------------------------------------------------------------
Certificate accounts:
3.99% or less 10 2.50 52 2.50
4.00 4.99% 874 .5 4.85 769 .5 4.84
5.00 5.99% 62,935 36.5 5.55 71,169 47.2 5.50
6.00 6.99% 69,962 40.5 6.11 39,194 26.0 6.17
7.00 7.99% 1,513 .9 7.09 3,612 2.4 7.05
8.00 8.99% 120 .1 8.44 99 .1 8.44
- ------------------------------------------------------------------------------------------
135,414 78.5 5.85 114,895 76.2 5.77
- ------------------------------------------------------------------------------------------
$172,469 100.0% 5.18% $150,627 100.0% 5.13%
- ------------------------------------------------------------------------------------------
(Continued)
35
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Contractual maturities of certificate accounts at December 31 are as
follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Under 12 months $116,154 48,570
12 months to 36 months 13,313 57,111
Over 36 months 5,947 9,214
- --------------------------------------------------------------------------------
$135,414 114,895
- --------------------------------------------------------------------------------
The Savings Bank has pledged investment securities of approximately
$3,022,000 and $4,160,000 at December 31, 1997 and 1996, respectively, as
collateral to secure certain public deposits. At December 31, 1997 and
1996, respectively, the Savings Bank also had letters of credit totaling
$15,402,000 and $14,523,000, respectively, as collateral to secure several
State of Illinois certificates of deposit totaling approximately
$14,100,000. The aggregate amount of deposit accounts with a balance
greater than $100,000 was $40,607,000 and $36,487,000 at December 31, 1997
and 1996, respectively.
Interest expense on deposit accounts is summarized as follows:
- --------------------------------------------------------------------------------
Years ended December 31
-----------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Passbook and certificate accounts $8,064 5,934 5,162
NOW accounts 270 282 333
Money market accounts 246 217 115
- --------------------------------------------------------------------------------
$8,580 6,433 5,610
- --------------------------------------------------------------------------------
(Continued)
36
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) BORROWED MONEY
Borrowed money at December 31 is summarized as follows:
- --------------------------------------------------------------------------------
Weighted interest rate Balance
December 31 December 31
------------------- -------------------
Maturity 1997 1996 1997 1996
- -------------------------------------------------------------------------------------
(in thousands)
Advances from the Federal
Home Loan Bank of Chicago:
Open line 6.24% 5.59 $ 6,000 25,650
1/02/97 - 6.14 - 297
2/11/97 - 4.80 - 2,000
2/10/97 - 4.80 - 1,409
12/17/97 - 6.30 - 55
2/21/00 5.48 - 5,000 -
6/03/01 8.43 8.43 72 72
4/20/03 6.13 6.13 2,760 2,760
11/25/06 6.58 6.58 10,000 10,000
- ------------------------------------------------------------------------------------
6.22 5.80 23,832 42,243
- ------------------------------------------------------------------------------------
Other borrowings:
ESOP note payable 4/27/99 8.08 8.02 57 117
Note payable Open line 8.44 8.25 5,279 2,227
Note payable 10/31/97 5.90 - 1,026 -
Note payable Open line 8.44 8.25 830 975
Margin account Open line 8.49 - 329 -
Capital lease obligations
(see note 7) various 8.96 9.28 3,829 4,291
- ------------------------------------------------------------------------------------
8.63 8.48 10,324 8,636
- ------------------------------------------------------------------------------------
6.95% 6.25 $34,156 50,879
- ------------------------------------------------------------------------------------
The Savings Bank adopted a collateral pledge agreement whereby the
Savings Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, first mortgages with unpaid principal
balances aggregating no less than 167% of the outstanding secured advances
and letters of credit from the Federal Home Loan Bank of Chicago. All stock
in the Federal Home Loan Bank of Chicago is pledged as additional collateral
for these advances.
The 18,253 shares of common stock of Argo Bancorp held by the ESOP are
pledged as collateral for the ESOP note. The other borrowings at December
31, 1997 consist of two notes payable and an open line margin account. The
note payable of $5,279,000 is drawn on an open line of credit totaling
$6,000,000 with a third-party financial institution, and is collateralized
by the Company's stock in Argo Federal Savings Bank. The rate of interest
adjusts monthly at prime (8.50% at December 31, 1997). The note payable of
$830,000 is drawn on On-Line's $1,000,000 line of credit with a third-party
financial institution, and is collateralized by accounts receivable of On-
Line. The rate of interest adjusts monthly at prime (8.50% at December 31,
1997).
(Continued)
37
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The margin account loan is from a third party securities broker. The
rate of interest on the loan adjusts daily at prime less .50% (8.00% at
December 31, 1997). The margin account loan was secured at December 31,
1997 by securities held by the broker having a market value of $1.1 million.
(11) INCOME TAXES
The provision for Federal and state income tax expense consists of the
following:
- --------------------------------------------------------------------------------
Years ended December 31,
-------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Federal:
Current $ 496 82 122
Deferred (242) 261 545
- --------------------------------------------------------------------------------
254 343 667
State:
Current (124) - -
Deferred (7) - -
- --------------------------------------------------------------------------------
Total income tax expense $ 123 343 667
================================================================================
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December
31, 1997 and 1996 are summarized as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 91 111
Unused tax credit carryforwards 212 -
Allowance for loan losses 374 259
Depreciation 215 159
Unrealized loss on securities
available-for-sale 20 -
Other 20 40
- --------------------------------------------------------------------------------
Gross deferred tax assets 932 569
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess tax bad debt deduction (31) (31)
Limited partnership interest (1,116) (988)
Unrealized gain on securities available-for-sale - (7)
Other (75) (108)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (1,222) (1,134)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ (502) (565)
================================================================================
(Continued)
38
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The effective income tax rate differs from the statutory federal tax rate
of 34%. The major reasons for this difference for the years ended December
31 follow:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Federal income tax at statutory rate $ 321 570 819
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net 35 37 35
Net operating loss carryforwards utilized (124) (18) (19)
Net decrease in valuation allowance (62)
Municipal interest, net (14) (14) (13)
Tax credits (208) (179) (306)
Other 113 9 151
- --------------------------------------------------------------------------------
Income tax expense $ 123 343 667
================================================================================
At December 31, 1997 Argo Bancorp has net operating loss carryforwards
available of approximately $267,000 expiring in 2004. Utilization of these
net operating losses is limited to approximately $55,000 per year.
At December 31, 1997, Argo Bancorp has low income housing tax credit
carryforwards in the amount of $212,000 expiring in 2011 and 2012.
Retained earnings at December 31, 1997 include $1,349,000 for which no
provision for Federal income tax has been made. These amounts represent
allocations of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt
losses will create income, which will be subject to the then-current
corporate income tax rate.
(12) EMPLOYEE BENEFIT PLANS
401(K) PLAN AND TRUST
The Argo Federal Savings 401(k) Plan (Plan) is an ERISA-qualified plan
covering all employees of the Savings Bank who have completed at least 1,000
hours of service within a 12 consecutive month period and are age 21 or
older. Participants may make contributions to the Plan from 1% to 12% of
their earnings, subject to Internal Revenue Service limitations. Matching
contributions of 50% of each participant's contribution up to 12% are made
at the Savings Bank's discretion each Plan year. The Savings Bank made
contributions of $82,000, $73,000, and $64,000 to the Plan for the years
ended December 31, 1997, 1996, and 1995, respectively. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
On-Line has a qualified 401(k) Plan covering all employees who have
completed one or more years of service. Participants may make contributions
to the Plan from 1% to 12% of their earnings, subject to Internal Revenue
Service limitations. Matching contributions of 50% of each participant's
contribution up to 6% of participant contributions are made at On-Line's
discretion each year. On-Line made contributions of $49,000, $81,000, and
$10,800 to the Plan for the years ended December 31, 1997, 1996, and 1995,
respectively.
(Continued)
39
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Dolton Riverdale merger conversion, the Savings
Bank formed an Employee Stock Ownership Plan (ESOP) for eligible employees.
The ESOP borrowed funds from an unrelated third-party lender in the amount
of $60,180 in order to purchase 7% of the common stock to be issued in the
merger conversion (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 an additional 13,020 shares at
an average price of $18.79 per share. The Savings Bank will make scheduled
discretionary cash contributions to the ESOP sufficient to service the
amounts borrowed. The unpaid balance of the ESOP loan has been included in
borrowed funds on the consolidated statements of financial condition, and
stockholders' equity has been reduced by a similar amount. Contributions of
$67,000, $72,000, and $78,000 were made to the ESOP to fund principal and
interest payments for the years ended December 31, 1997, 1996, and 1995,
respectively. At December 31, 1997, 18,253 shares were allocated, 15,856
shares were committed to be released, and 2,397 shares were in suspense.
The fair value of unearned shares at December 31, 1997 was $93,483.
In accordance with Statement of Position 93-6, (SOP 93-6), "Employers'
Accounting for Employee Stock Ownership Plans," Argo Bancorp considers
outstanding only those shares of the ESOP that are committed to be released
when calculating both basic and diluted earnings per share. The Savings
Bank records the difference between the fair value of the shares committed
to be released and the cost of those shares to the ESOP as a charge to
additional paid-in capital with the corresponding increase or decrease to
compensation expense. Additional paid-in capital was increased by $50,000,
$38,000, and $26,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
On-Line does not offer an ESOP for its employees. On-Line employees are
not eligible for participation under the Savings Bank's ESOP.
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 15,400 shares, of Argo Bancorp's authorized but unissued common
stock in December 1991. In addition, Argo Bancorp contributed $34,385 to
allow the MRP to purchase 2,990 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 vested over a three-
year period. The aggregate purchase price of the shares awarded is being
amortized to expense as a portion of annual compensation, and the
unamortized cost is reflected as a reduction of stockholders' equity. No
MRP shares were awarded or expensed during the years ended December 31, 1997
and 1996. For the year ended December 31, 1995, the Savings Bank expensed
$21,000 of the funds relating to the MRP awards.
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. An
additional 3,797 and 1,907 shares were purchased in 1996 and 1995,
respectively, under the MRP. During the year ended December 31, 1997, the
Company sold 5,604 shares held by the Savings Bank MRP for $219,000,
reducing the total shares held by the plan to one hundred (100). The
proceeds from this transaction were recorded as an increase in capital at
December 31, 1997. None of the remaining shares have been awarded.
(Continued)
40
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Board of Directors of Argo Bancorp formed a new MRP effective
September 1, 1996, which purchased 12,500 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, 1,575 shares
were awarded to certain key On-Line employees. Amortization expense totaled
$12,000 for the year ended December 31, 1997. No MRP shares were awarded or
expensed during the year ended December 31, 1996. Also during the year
ended December 31, 1997, the Company sold 4,652 shares held by the Argo
Bancorp MRP plan for $181,000, reducing the total shares held by the plan to
7,848. The proceeds from this transaction were recorded as an increase in
capital at December 31, 1997.
STOCK OPTION PLANS
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and
Incentive Plan (the 1991 Stock Option Plan), under which up to 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 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. During 1997, 1996, and 1995, 23,997,
22,972, and 3,762 of the options were exercised, respectively. The
weighted average exercise price for the options exercised in 1997, 1996,
and 1995 was $15.40, $16.76, and $14.21, respectively. At December 31,
1997, options to purchase 53,612 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) in 1991,
under which up to 107,450 shares of Argo Bancorp's common stock were
reserved for issuance by Argo Bancorp upon exercise of nonincentive stock
options to be granted to nonemployee directors of the Savings Bank
subsidiary from time to time. At December 31, 1997, 62,100 options for
shares have 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. During 1997,
1996, and 1995, 8,500, 3,200, and 500 of the options were exercised,
respectively. The weighted average exercise price for options exercised
in 1997, 1996, and 1995 was $18.24, $14.31, and $11.50, respectively. At
December 31, 1997, options to purchase 48,900 shares were outstanding.
On-Line does not offer a stock option plan for its employees. On-Line
employees and directors are not eligible for participation under Argo
Bancorp's Stock Option Plans.
(Continued)
41
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company applies ABP Opinion No. 25 in accounting for the Stock Option
Plan and, accordingly, compensation cost based on the fair value at grant
date has not been recognized for its stock options in the consolidated
financial statements during the years ended December 31, 1997 and 1996. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, "Accounting for Stock-
Based Compensation," the Company's net income would have been reduced to the
pro forma amounts indicated below:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
Net income:
As reported $ 823 1,334 1,741
Pro forma 583 1,115 1,375
Earnings per share:
Basic:
As reported 1.70 4.26 5.88
Pro forma 1.21 3.56 4.63
Diluted:
As reported 1.56 3.60 4.96
Pro forma 1.10 3.01 3.92
- -------------------------------------------------------------------------------
Pro forma net income reflects only options granted in 1997, 1996, and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above, because compensation cost is reflected over the
options' graded vesting period of three years for the 1991 Stock Option Plan
and immediately for the Non Qualified Stock Option Plan. Compensation cost
for options granted prior to January 1, 1995, is not considered. However,
the annual expense allocation methodology prescribed by SFAS No. 123
attributes a higher percentage of the reported expense to earlier years than
to later years, resulting in an accelerated expense recognition.
The fair value of each option granted is estimated on the grant date
using the Black-Scholes option pricing model. The following assumptions
were used in estimated the fair value for options granted in 1997, 1996,
and 1995:
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Dividend yield 2.13% 2.37% 2.37%
Risk-free interest rate 6.11% 6.10% 6.64%
Weighted average expected life 8 yrs. 8 yrs. 8 yrs.
Expected volatility 8.70% 6.95% 6.95%
- -------------------------------------------------------------------------------
The weighted average per share fair values of options granted during 1997,
1996, and 1995 were $10.72, $9.99, and $8.49, respectively.
(Continued)
42
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Savings Bank is a party to financial instruments with off-balance
sheet risk in the normal course of its business. These instruments
represent commitments to originate and sell first mortgage loans and letters
of credit, and involve credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
Commitments to originate fixed and adjustable rate mortgage loans
amounted to approximately $5.8 million at December 31, 1997, at rates
ranging from 6.25% to 9.38%. These commitments represent amounts which the
Savings Bank plans to fund in its normal commitment period. The Savings
Bank evaluates each customer's creditworthiness on a case-by-case basis.
Unused lines of credit amounted to approximately $7.8 million as of
December 31, 1997. The Savings Bank also had Community Reinvestment Act
(CRA) investment commitments outstanding of $3.2 million. These commitments
include $977,000 to be funded over ten years for investment in the Chicago
Equity Fund, $317,000 to be funded over thirteen years for investment in the
Community Investment Corporation.
(14) CAPITAL CONTRIBUTIONS
Argo Bancorp contributed $2.4 million and $1.5 million to On-Line during
the years ended December 31, 1997 and 1996, respectively. These capital
contributions were used to fund software license purchases, leasehold
improvements, and to improve the cash flow position. Argo Bancorp
contributed $1.3 million and $2.3 million to the Savings Bank in December of
1997 and 1996, respectively. Both contributions were made with the intent
of increasing regulatory capital levels and thereby allowing future growth.
Argo Bancorp also contributed $2.5 million to Empire Mortgage LLC during the
year ended December 31, 1995 to fund loan purchases.
(15) REGULATION AND SUPERVISION
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Savings Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Savings Bank capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
(Continued)
43
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined) to
risk-weighted assets (as defined), Tier I capital (as defined) to assets (as
defined), and tangible capital (as defined). Management believes, as of
December 31, 1997 and 1996, that the Savings Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
Office of the Thrift Supervision categorized the Savings Bank as well-
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Savings Bank must maintain minimum
total risk-based, Tier I risk-based, Tier I leverage, and tangible capital
ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Savings Bank's actual capital amounts (in thousands) and ratios are
as follows as of December 31, 1997 and 1996:
- --------------------------------------------------------------------------------------------------------
To be well-
For capital capitalized under
adequacy prompt corrective
Actual purposes action
--------------- ---------------- -----------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted
assets) $13,849 11.10% $ 9,981 8.00% $12,476 10.00%
Tier I capital
(to risk-weighted
assets) 13,035 10.45 N/a N/a 7,486 6.00
Tier I capital (core leverage)
(to assets) 13,035 5.93 6,592 3.00 10,986 5.00
Tangible capital
(to assets) 13,035 5.93 3,296 1.50 N/a N/a
- --------------------------------------------------------------------------------------------------------
(Continued)
44
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------------------------------
To be well-
For capital capitalized under
adequacy prompt corrective
Actual purposes action
--------------- ---------------- -----------------
December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted
assets) $13,212 10.84% $9,749 8.00% $12,186 10.00%
Tier I capital
(to risk-weighted
assets) 12,547 10.30 N/A N/A 7,311 6.00
Tier I capital (core leverage)
(to assets) 12,547 5.82 6,464 3.00 10,774 5.00
Tangible capital
(to assets) 12,547 5.82 3,232 1.50 N/A N/A
- ---------------------------------------------------------------------------------------------------------
(16) DIVIDEND RESTRICTIONS
The OTS imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution (Tier I Savings Bank) and has not been advised by the OTS that
it is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a
calendar year up to the higher of (i) 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
income over the most recent four-quarter period. Any additional capital
distributions would require prior regulatory approval. As of December 31,
1997 and 1996, the Savings Bank was a Tier I Savings Bank.
(17) SEGMENT FINANCIAL INFORMATION
Argo Bancorp operates in two primary business segments, banking and data
processing, through its two operating subsidiaries. The Savings Bank
provides a wide array of diversified financial services including mortgage,
commercial, and consumer banking services to individuals as well as small
and midsize businesses. On-Line Financial provides data processing services
to financial institutions.
(Continued)
45
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table highlights Argo Bancorp's organizational revenues,
earnings, and assets by business segment. Organizational revenues,
earnings, and assets by business segment are impacted by Argo Bancorp
intercompany allocations. The allocations are based upon various management
estimates. The data processing 1995 amounts represent a stub period of two
months from the acquisition date of On-Line.
- --------------------------------------------------------------------------------
Data Consolidated
Banking processing total
- -------------------------------------------------------------------------------
(in thousands)
1997:
- -------------------------------------------------------------------------------
Revenues $ 21,101 12,750 33,851
Earnings 698 125 823
Assets 225,129 11,169 236,298
- -------------------------------------------------------------------------------
1996:
Revenues $ 18,722 11,546 30,268
Earnings 598 736 1,334
Assets 218,972 10,312 229,284
- --------------------------------------------------------------------------------
1995:
Revenues $ 16,630 1,836 18,466
Earnings 1,519 222 1,741
Assets 179,983 6,485 186,468
- -------------------------------------------------------------------------------
(Continued)
46
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(18) PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows
of Argo Bancorp, Inc. are presented on the following pages, and should be
read in connection with the consolidated financial statements and notes
thereto.
- --------------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31
---------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Assets:
Cash $ 146 538
Interest-bearing deposits 520 316
Securities available-for-sale 1,333 282
Loans receivable 62 5
Investment in subsidiaries 20,185 18,583
Other assets 1,760 813
- --------------------------------------------------------------------------------
Total assets $24,006 20,537
- --------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Borrowed money 5,608 3,540
Other liabilities 294 437
Total stockholders' equity 18,104 16,560
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $24,006 20,537
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years ended December 31
--------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Interest income $ 23 9 23
Interest expense (335) (341) (286)
- --------------------------------------------------- ----------------------------
Net interest expense (312) (332) (263)
Dividends from subsidiaries 2,242 1,818 973
Equity in undistributed earnings
of subsidiaries (1,144) 148 1,097
Other noninterest income 618 235 206
Noninterest expense (789) (683) (399)
- --------------------------------------------------------------------------------
Net income before income taxes 615 1,186 1,614
Income tax benefit (208) (148) (127)
- --------------------------------------------------------------------------------
Net income $ 823 1,334 1,741
- --------------------------------------------------------------------------------
(Continued)
47
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years ended December 31
--------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 823 1,334 1,741
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of loans 137
(Gain) loss on the sale of:
Loans (2)
Investment securities (618) (235) (204)
Equity in undistributed earnings of subsidiaries 1,144 (148) (1,097)
Amortization of purchase price of ESOP and MRP 72 60 81
Recognition of fair value of ESOP shares scheduled to be released 50 38 26
Increase in other assets (729) (586) (139)
Increase (decrease) in other liabilities (143) 370 (499)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 599 833 44
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans originated (63) (135)
Principal repayments on loans receivable 6 3 3
Proceeds from the sale of investment securities 5,790 742 1,314
Purchase of investment securities (6,306) (127) (760)
Net cash (paid) received in purchase of subsidiary 916 (629)
Contribution to MRP and ESOP (486) (115) (50)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (143) 503 (257)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock issuance 412 4,027
Proceeds from borrowed money 11,108 1,943 5,173
Repayment of borrowed money (9,040) (3,120) (2,573)
Capital contributions to subsidiaries (3,698) (3,775) (2,517)
Proceeds from exercise of stock options 525 430 49
Proceeds from sale of MRP stock 400
Dividends paid (351) (212) (208)
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (644) (707) (76)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (188) 629 (289)
Cash and cash equivalents at beginning of year 854 225 514
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 666 854 225
- -----------------------------------------------------------------------------------------------------------
(Continued)
48
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure of estimated fair values for all asset, liability,
and off-balance sheet financial instruments. The estimated fair value
amounts under SFAS No. 107 have been determined as of a specific point in
time utilizing various available market information, assumptions, and
appropriate valuation methodologies. Accordingly, the estimated fair values
presented herein are not necessarily representative of the underlying value
of Argo Bancorp. Rather, the disclosures are limited to reasonable
estimates of the fair value of only Argo Bancorp's financial instruments.
The use of assumptions and various valuation techniques, as well as the
absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. Argo Bancorp does not plan to sell most of its assets or
settle most of its liabilities at these fair values. The estimated fair
values of Argo Bancorp's financial instruments as of December 31, 1997 and
1996 are set forth in the following table, followed by the methods and
assumptions used.
- --------------------------------------------------------------------------------
1997 1996
---------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------------
(in thousands)
Financial assets:
Cash $ 6,211 6,211 12,518 12,518
Interest-bearing deposits 2,466 2,466 758 758
FHLB of Chicago stock 3,271 3,271 3,428 3,428
Securities available-for-sale 4,974 4,974 5,788 5,788
Loans receivable 184,358 201,466 173,429 190,655
Accrued interest receivable 1,725 1,725 2,089 2,089
- ------------------------------------------------------------------------------------------
Financial liabilities:
Deposits without stated maturities $ 37,055 37,055 35,732 35,732
Deposits with stated maturities 135,414 135,582 114,895 115,184
Borrowed money 34,156 34,205 50,879 50,018
Interest-bearing custodial escrow balances 1 1 76 76
Custodial escrow balances 6,399 6,399 5,706 5,706
Accrued interest payable 264 264 267 267
- ------------------------------------------------------------------------------------------
(Continued)
49
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following methods and assumptions are used by Argo Bancorp in
estimating the fair value amounts for its financial instruments.
(A) CASH AND INTEREST-BEARING DEPOSITS
The carrying value of cash and interest-bearing deposits approximates
fair value due to the short period of time between origination of the
instruments and their expected realization.
(B) SECURITIES AVAILABLE-FOR-SALE
and FHLB of Chicago Stock
The fair value of these securities available-for-sale were estimated
using quoted market prices. The fair value of FHLB stock is based on its
redemption value.
(C) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the
secondary market. The loan portfolio is segmented into fixed and adjustable
interest rate categories. For fixed rate loans, fair value is estimated
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. For adjustable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The carrying amount of accrued interest receivable approximates its
fair value due to the relatively short period of time between accrual and
expected realization.
(D) DEPOSITS, CUSTODIAL ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook
savings, NOW, and money market accounts and custodial escrows are disclosed
as the amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being
offered for deposits with similar remaining terms to maturity.
The carrying amount of interest payable approximates its fair value due
to the relatively short period of time between accrual and expected
realization.
(E) BORROWED FUNDS
The fair value of borrowed funds is the present value of the contractual
cash flows, discounted by the current rate offered for similar remaining
maturities.
50
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ARGO BANCORP, INC.
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer President and Owner, Coldwell Banker
Chairman of the Board Stanmeyer Realtors
Vice President and Director
Frances M. Pitts Donald G. Wittmer
Executive Vice President, Secretary and Director President and Owner, Wittmer Financial Services,
Ltd.
Director
Lawrence H. Chlum Arthur E. Byrnes
Executive Vice President and Chairman, Deltec Asset Management Corporation
Chief Financial Officer Director
ARGO FEDERAL SAVINGS BANK, FSB
John G. Yedinak Sergio Martinucci
President, Chief Executive Officer and Director President and Owner, Coldwell Banker
Stanmeyer Realtors
Frances M. Pitts Chairman of the Board
Senior Vice President, General Counsel and Secretary
Richard B. Duffner
President and Owner, RBD & Associates, Ltd.
Ruth M. Louie Director
Senior Vice President and
Director of Community Lending and Development Emil T. Sergo
Mayor, McCook, Illinois
George L. Koehm Director
Senior Vice President and Chief Operating Officer
Dennis G. Carroll
Frank J. Lis Detective, City of Chicago Police Department
Vice President and Director
Chief Financial Officer
Raymond E. Froula
Patricia E. Reid Retired
Assistant Vice President, Controller Director
Maria L. Horstmann Mary Ann Gearhart
Assistant Secretary Member, Will County Board of Commissioners
Director
51
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- -------------------------------------------------------------------------------
ON-LINE FINANCIAL SERVICES, INC.
John G. Yedinak Gordon L. Grevengoed
Chief Executive Officer and Chairman of the Board Vice Chairman and CEO
Ameribank, fsb
Colleen Kitch Director
Senior Vice President
Chief Operating Officer Dennis Kosobucki
President and Chairman of the Board
Frances M. Pitts West Town Savings Bank
Senior Vice President and Secretary Director
David Birk Sergio Martinucci
Vice President, President and Owner, Coldwell Banker
Information Systems Development Stanmeyer Realtors
Director
Greg Wright
Vice President, Sales Thomas F. Prisby
Chairman
Steve Szopa Citizens Financial Services FSB
Vice President, Director
Information Systems
Joseph J. Renn
Edward E. Whalen President, Chairman of the Board and
Chairman of the Board Chief Executive Officer
Lincoln Federal Savings Bank Lisle Savings & Loan
Director Director
Donald G. Wittmer David H. Stack
President and Owner, President
Wittmer Financial Services, Ltd. Superior Savings Bank
Director Director
52
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
STOCKHOLDER REFERENCE
Corporate Headquarters Independent Auditors
Argo Bancorp, Inc. KPMG Peat Marwick LLP
7600 W. 63rd Street 303 E. Wacker Drive
Summit, Illinois 60501 Chicago, Illinois 60601
(708) 496-6010
Washington Counsel Transfer Agent and Registrar
Patton Boggs, L.L.P. Harris Trust and Savings Bank
2550 M. Street, N.W. Shareholder Services Division
20037-1350 311 W. Monroe 11th floor
Chicago, Illinois 60690
312-461-2545
Chicago Counsel Annual Report on Form 10-K
Kemp & Grzelakowski, Ltd. Copies of Argo Bancorp, Inc.'s 1997 Annual
1900 Spring Road Report on Form 10-K filed without exhibits
Suite 500 with the Securities and Exchange Commission
Oak Brook, Illinois 60523-14495 are available without charge to stockholders,
upon written request to:
Market Makers
R. W. Baird, Incorporated Frances M. Pitts, Corporate Secretary
Chicago, Illinois Argo Bancorp, Inc.
(312) 578-2060 7600 W. 63rd Street
Summit, Illinois 60501
Investor Information
Stockholders, investors, and analysts interested Annual Meeting
in additional information may contact: The annual meeting of stockholders will be held at
John G. Yedinak, President 3:00 p.m. on May 20, 1998, at Argo Federal Savings Bank,
and CEO at the Corporate FSB, 7600 W. 63rd Street, Summit, Illinois 60501.
Headquarters
Stockholders are encouraged to attend.
OFFICE LOCATIONS
Home Office Branch Offices
7600 W. 63rd Street 8267 S. Roberts Road 2154 W. Madison Street
Summit, Illinois 60501 Bridgeview, Illinois 60455 Chicago, Illinois 60612
(708) 496-6010 (708) 496-6020 (312) 563-5500
14076 Lincoln Avenue 6121 Washington Street
Dolton, Illinois 60419 Gurnee, Illinois 60031
(708) 849-3770 (847) 855-2100
53
ARGO BANCORP, INC. AND SUBSIDIARIES
Shareholder Information
- --------------------------------------------------------------------------------
STOCK PRICE INFORMATION
Argo Bancorp's Inc.'s common stock is traded on the NASDAQ Over the Counter
Market under the symbol ARGO. The table shows the reported high and low sale
prices of common stock and the dividends per share during the periods indicated.
- --------------------------------------------------------------------------------
High Low Dividends
- --------------------------------------------------------------------------------
Year ended December 31, 1997:
First Quarter $32 3/4 31 1/4 .18
Second Quarter 33 7/8 32 3/4 .18
Third Quarter 34 1/8 33 7/8 .18
Fourth Quarter 39 34 1/8 .18
- --------------------------------------------------------------------------------
Year ended December 31, 1996:
First Quarter $ 30 26 3/4 .17
Second Quarter 30 1/4 30 1/8 .17
Third Quarter 30 1/2 30 1/4 .18
Fourth Quarter 31 1/4 30 1/2 .18
- --------------------------------------------------------------------------------
Year ended December 31, 1995:
First Quarter $ 25 25 .17
Second Quarter 25 1/4 25 .17
Third Quarter 26 1/4 25 1/4 .17
Fourth Quarter 26 1/4 26 1/4 .17
- --------------------------------------------------------------------------------
54