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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission File Number 0-19829
ARGO BANCORP, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No_____
-----
The registrant had 2,004,896 shares outstanding as of May 14, 1999.
Transitional Small Business Disclosure Format (check one): Yes _____ No X
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ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
-----
Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1999, and
December 31, 1998 (unaudited).................................................. 3
Consolidated Statements of Income For the Three
Months Ended March 31, 1999, and 1998 (unaudited).............................. 4
Consolidated Statement of Comprehensive Income For
the Three Months Ended March 31, 1999 and 1998 (unaudited)..................... 5
Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1999,
and 1998 (unaudited)........................................................... 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999
and 1998 (unaudited)........................................................... 7
Notes to Consolidated Financial Statements..................................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk..................... 22
Part II - Other Information
- ---------------------------
Item 1 Legal Proceedings.............................................................. 22
Item 2 Changes in Securities.......................................................... 22
Item 3 Default Upon Senior Securities................................................. 22
Item 4 Submission of Matters to a Vote
of Security Holders........................................................... 22
Item 5 Other Information.............................................................. 22
Item 6 Exhibits and Reports on Form 8-K............................................... 23
Signature Page................................................................. 24
2
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS 3/31/99 12/31/98
-------- --------
(Unaudited)
Cash.......................................................... $ 11,159 $ 3,276
Interest-earning deposits.................................... 2,214 6,880
Stock in Federal Home Loan Bank of Chicago.................... 1,911 1,911
Trading account securities.................................... 596 693
Securities available-for-sale................................. 18,349 7,208
Loans receivable, net......................................... 238,120 232,788
Discounted loans receivable,net............................... 11,979 12,401
Accrued interest receivable................................... 2,071 2,024
Foreclosed real estate, net................................... 3,128 3,875
Premises and equipment, net................................... 5,339 10,707
Mortgage loan servicing rights, net........................... 564 593
Investment in limited partnership............................. 9,457 4,469
Debt issuance costs related to junior subordinated debt, net.. 1,871 1,657
Prepaid expenses and other assets............................. 7,030 18,536
-------- ---------
$313,788 $ 307,018
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits..................................................... $239,752 $ 232,980
Borrowed money............................................... 20,775 25,227
Advance payments by borrowers for taxes and insurance........ 792 853
Accrued interest payable..................................... 811 661
Custodial escrow balances for loans serviced................. 5,348 5,340
Other liabilities............................................ 9,565 5,759
Junior subordinated debt..................................... 17,250 17,784
Stockholders' Equity
Preferred stock.............................................. 3 3
Common stock................................................. 20 20
Additional paid -in capital................................. 8,829 8,829
Retained earnings - substantially restricted................. 11,325 10,084
Accumulated other comprehensive loss......................... (402) (238)
Common stock acquired by:....................................
Management Recognition Plan................................. (280) (84)
-------- ---------
Total stockholders' equity................................. 19,495 18,414
-------- ---------
Total Liabilities and Stockholders' Equity.................... $313,788 $ 307,018
======== =========
3
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Three Months Ended March 31,
1999 1998
---- ----
(Unaudited)
Interest income
Loans receivable................................................. $4,652 $3,408
Discounted loans receivable...................................... 138 624
Securities available-for-sale.................................... 30 45
Interest-earning deposits........................................ 207 177
------ ------
Total interest income............................................. 5,027 4,254
------ ------
Interest expense:
Deposits......................................................... 2,622 2,249
Borrowed money................................................... 311 523
Junior subordinated debt......................................... 461 ---
------ ------
Total interest expense.......................................... 3,394 2,772
------ ------
Net interest income before provision
for loan losses................................................. 1,633 1,482
Provision for loan losses........................................ 185 185
------ ------
Net interest income after provision
for loan losses................................................. 1,448 1,297
------ ------
Non-interest income:
Purchased mortgage servicing income.............................. 37 112
Mortgage banking................................................. 502 307
Gain on sale of loans receivable, discounted loans receivable,
securities available for sale, trading account securities
and foreclosed real estate...................................... 151 676
Fees and service charges......................................... 150 172
Other............................................................ 18 17
------ ------
Total non-interest income......................................... 858 1,284
------ ------
Non-interest expense:
Compensation and benefits........................................ 1,000 964
Occupancy and equipment.......................................... 459 403
Federal deposit insurance premiums............................... 30 28
Amortization of goodwill......................................... 25 25
Other general and administrative fees............................ 913 751
------ ------
Total non-interest expense........................................ 2,427 2,171
------ ------
Net income from continuing operations before provision for income taxe (121) 410
Income tax expense/(benefit)...................................... (126) 107
------ ------
Net income from continuing operations............................ 5 303
------ ------
Discontinued operations:
Net income from discontinued Data Processing operation
(less applicable income taxes of ; 1999 $82, 1998 $51)......... 135 83
Gain on sale of Data Processing operation
(less applicable income taxes of $ 619) 1,201 ---
------ ------
Net income........................................................ $1,341 $ 386
====== ======
Basic earnings per share:
Income from continuing operations................................. $ .00 $.16
Income from discontinued operations............................... .07 .04
Gain on sale of discontinued operations........................... .60 ---
------ ------
Net income........................................................ $ .67 $.20
====== ======
Fully diluted earnings per share:
From continuing operations........................................ $ .00 $.15
From discontinued operations...................................... .06 .04
Gain on sale of discontinued operations........................... .56 ---
------ ------
Net income........................................................ $ .62 $.19
====== ======
4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Three Months Ended March 31,
1999 1998
---- ----
(Unaudited)
Net Income................................................. $ 1,341 $ 386
Other Comprehensive Income:
Unrealized gains on available-for sale securities:
Unrealized holding gains (losses) arising
during period, net of tax (expense)/
benefit of $100 in 1999 and ($65) in 1998............... (158) 102
Less reclassification adjustment for gains included
in net income net of tax of $3 in 1999 and $44 in 1998.... 6 70
-------- -----
Other comprehensive income................................. (164) 32
-------- -----
Comprehensive income....................................... $ 1,177 $ 418
======== =====
5
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated
Additional Other
Preferred Common paid-in Retained Comprehensive
Stock Stock Capital earnings Income/(Loss)
-----------------------------------------------------------
Three months ended March 31, 1998
- ---------------------------------
Balance at December 31, 1997................................. $ --- $ 5 $ 8,570 $ 9,915 $ (33)
Net income................................................... --- --- --- 386 ---
Other comprehensive income, net of tax....................... --- --- --- --- 32
Principal payments on ESOP loan.............................. --- --- --- --- ---
Amortization of purchase price of MRP stock.................. --- --- --- --- ---
Proceeds from exercise of stock options...................... --- --- 116 --- ---
Tax benefits of stock options................................ --- --- 39 --- ---
Fair value adjustment for committed ESOP shares.............. --- --- 12 --- ---
Cash dividends............................................... --- --- --- (79) ---
----- ------ ------- ------- ------
Balance at March 31, 1998.................................... $ --- $ 5 $ 8,737 $10,222 $ (1)
===== ====== ======= ======= ======
- -------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
- ---------------------------------
Balance at December 31, 1998................................. $ 3 $ 20 $ 8,829 $10,084 $ (238)
Net income................................................... --- --- --- 1,341 ---
Other comprehensive income, net of tax....................... --- --- --- --- (164)
Amortization of purchase price of MRP stock................. --- --- --- --- ---
Cash dividends............................................... --- --- --- (100) ---
----- ------ ------- ------- ------
Balance at March 31, 1999................................... $ 3 $ 20 $ 8,829 $11,325 $ (402)
===== ====== ======= ======= ======
- -------------------------------------------------------------------------------------------------------------------------
Stock Stock Total
acquired acquired Stockholders'
by ESOP by MRP Equity
------------------------------------
Three months ended March 31, 1998
- ---------------------------------
Balance at December 31, 1997................................. $ (57)) $ (296)) $ 18,104
Net income................................................... --- --- 386
Other comprehensive income, net of tax....................... --- --- 32
Principal payments on ESOP loan.............................. 15 --- 15
Amortization of purchase price of MRP stock.................. --- 3 3
Proceeds from exercise of stock options...................... --- --- 116
Tax benefits of stock options................................ --- --- 39
Fair value adjustment for committed ESOP shares.............. --- --- 12
Cash dividends............................................... --- --- (79)
------ ------ --------
Balance at March 31, 1998.................................... $ (42) $ (293) $ 18,628
====== ====== ========
- --------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
- ---------------------------------
Balance at December 31, 1998................................. $ --- $ (284)) $ 18,414
Net income................................................... --- --- 1,341
Other comprehensive income, net of tax....................... --- --- (164)
Amortization of purchase price of MRP stock................. --- 4 4
Cash dividends............................................... --- --- (100)
------ ------ --------
Balance at March 31, 1999.................................... $ --- $ (280) $ 19,495
====== ====== ========
- --------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
6
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31,
1999 1998
(Unaudited)
Cash flows from operating activities:
Net income................................................................................... $ 1,341 $ 386
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation................................................................................ 607 591
Accretion of discounts and deferred loan fees............................................... (41) (66)
Provision for loan losses................................................................... 185 185
(Gain) loss on sale of:
Securities available for sale............................................................... (9) (114)
Trading account securities.................................................................. (75) (51)
Data processing operation................................................................... (1,820) ---
Loans receivable............................................................................ (171) 9
Discounted loans receivable................................................................. --- (541)
Foreclosed real estate...................................................................... 104 21
Loans originated and purchased for sale...................................................... (11,044) ---
Proceeds from sale of loans receivable....................................................... 13,299 12,459
Proceeds from sale of discounted loans receivable............................................ --- 5,400
Amortization of goodwill..................................................................... 25 25
(Increase) decrease in purchased mortgage servicing rights................................... 41 (74)
Amortization of purchase price of MRP and ESOP stock......................................... 4 18
Recognition of fair value of ESOP shares scheduled to be released............................ --- 12
Decrease in accrued interest receivable, prepaid
expenses, and other assets.................................................................. 7,374 437
Increase in accrued interest payable and other liabilities................................... 3,359 64
-------- --------
Net cash provided by operating activities................................................... 13,179 18,761
-------- --------
Cash flows from investing activities:
Loans originated and purchased for portfolio................................................. (30,015) (23,621)
Discounted loans receivable purchased........................................................ --- (178)
Principal repayments on:
Loans receivable and discounted loans receivable............................................ 22,378 14,582
Securities-available-for sale............................................................... 29 53
Proceeds from sale of:
Foreclosed real estate...................................................................... 1,142 1,014
Securities available for sale............................................................... 5,790 3,129
Premises and equipment...................................................................... 2,223 ---
Data Processing operation................................................................... 6,207 ---
Purchase of:
Securities available for sale............................................................... (17,045) (3,342)
Premises and equipment...................................................................... (914) (254)
Loan servicing rights....................................................................... (5,000) ---
-------- --------
Net cash used in investing activities............................................... (15,205) (8,617)
-------- --------
Cash flows from financing activities:
Net increase in deposits.................................................................... 6,772 7,363
Proceeds from borrowed funds................................................................ 7,532 5,650
Repayment of borrowed funds................................................................. (8,908) (11,296)
Proceeds from exercise of stock options..................................................... --- 116
Dividends paid.............................................................................. (100) (79)
Net increase (decrease) in advance payments by borrowers for taxes and insurance............ (61) 722
Net increase (decrease) in custodial escrow balances for loans serviced..................... 8 (818)
-------- --------
Net cash provided by financing activities.................................................. 5,243 1,658
-------- --------
Net increase (decrease) in cash and cash equivalents................................ 3,217 11,802
Cash and cash equivalents at beginning of period............................................. 10,156 8,677
-------- --------
Cash and cash equivalents at end of period................................................... $ 13,373 $ 20,479
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense............................................................................. $ 3,244 $ 2,805
Income taxes................................................................................. $ 160 $ ---
Non-cash investing activity - transfer of loans to foreclosed real estate..................... $ 512 $ 1,117
See accompanying notes to unaudited consolidated financial statements.
7
ARGO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals considered necessary for fair presentation have been included. The
results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or the "Company") and its
wholly owned subsidiaries, Argo Federal Savings Bank, FSB ("Argo Savings" or
"Savings Bank") and Argo Savings' wholly owned subsidiaries, Argo Mortgage
Corporation, Dolton-Riverdale Savings Service Corporation, and Argo Savings'
majority owned subsidiary Margo Financial Services LLC ("Margo"). The
statements also include Argo Bancorp's majority owned limited liability
corporation, Argo / Empire Mortgage LLC. Significant intercompany accounts and
transactions have been eliminated in consolidation.
On March 31, 1999 The Company sold its wholly owned subsidiary On-Line
Financial, Inc. ("On-Line"), to GFS Holdings, Inc. of Palm Beach Gardens
Florida. Operating results from On-Line are included in the financial
statements in results of discontinued operations. The following table reflects
the components of income from discontinued operations:
Three Months Ended
March 31,
1999 1998
--------------------------
(In Thousands)
Income Statement Data
Revenues.............................. $ 4,158 $ 3,274
Costs & Expenses...................... 3,940 3,140
------- -------
Operating Income...................... 218 134
Income Tax Expense.................... 83 51
------- -------
Income from discontinued operations $ 135 $ 83
======= =======
Note B - Stock Benefit Plans
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants
8
may make contributions to the Plan from 1.0% to 12.0% of their earnings, subject
to Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $18,000 and $17,000, to
the Plan for the three months ended March 31, 1999, and 1998. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
In 1991, Argo Savings formed an Employee Stock Ownership Plan ("ESOP") for
eligible employees. The ESOP borrowed funds from an unrelated third party
lender in the amount of $60,180 in order to purchase 7.0% of the Common Stock to
be issued in the Merger Conversion (20,932 shares at $2.875 per share). The
ESOP has subsequently borrowed additional funds from the same third party lender
in the amount of $245,000 in order to purchase additional shares. The ESOP has
purchased an additional 52,080 shares at an average price of $4.70 per share.
The remaining balance of the borrowed funds were repaid in 1998. A contribution
of $16,000 was made to the ESOP to fund principal and interest for the three
months ended March 31, 1998.
The Board of Directors of Argo Bancorp formed a MRP effective September 1, 1996,
which purchased 50,000 shares of Argo Bancorp stock on September 24, 1996, for
$115,000. During the year ended December 31, 1997, the Company sold 18,608
shares held by the Argo Bancorp MRP for $181,000 reducing the total shares held
by the plan to 31,392. Under this Plan, employees in key management positions
with Argo Bancorp and all its subsidiaries are eligible for participation. No
shares were awarded during the three months ended March 31, 1999. Amortization
expense totaled $3,000 for each three month period ended March 31, 1999, and
1998, respectively.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 97,992. An additional
15,188 and 7,628 shares were purchased in 1996 and 1995, respectively, under the
MRP. During the year ended December 31, 1997, the Company sold 22,416 shares
held by the plan for $219,000, reducing the total shares held by the plan to one
hundred (100). Employees earn the awards over a three-year period. Once awarded
the aggregate purchase price of the shares will be amortized to expense as a
portion of annual compensation as the employees become vested in their stock
awards and the amortized cost is reflected as a reduction of stockholders'
equity. No shares were awarded or vested during the three-months ended March 31,
1999.
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 429,800 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. Argo Bancorp awarded all 429,800 options
under the 1991 Stock Option Plan. The exercise price for the options awarded
was equal to the fair market value of the common stock at the date of grant. To
date there have been 258,332 options exercised of which none exercised during
the three months ended March 31, 1999. At March 31, 1999, options to purchase
171,468 shares were outstanding under this plan.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 429,800
shares of Argo Bancorp's common stock were
9
reserved for issuance by Argo Bancorp upon exercise of non-incentive stock
options to be granted to non-employee directors of the Corporation and its
subsidiaries from time to time. At March 31, 1999, Argo Bancorp has awarded
267,400 options for shares under the Non-Qualified Stock Option Plan. To date,
options to acquire 52,800 shares have been exercised. No options were exercised
during the three months ended March 31, 1999. The exercise price for the options
awarded was equal to the fair market value of the common stock at the date of
grant. At March 31, 1999, options to purchase 214,600 shares were outstanding
under the Non-Qualified Stock Option Plan.
Note C - Regulatory Capital
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements.
The following table summarizes, as of March 31, 1999 and at December 31, 1998,
Argo Savings' capital requirements under OTS regulations and its actual capital
ratios at those dates:
Required Actual Required Actual Excess
Capital Capital Capital Capital Capital
March 31, 1999 Percentage Percentage Balance Balance Balance
- -------------- ---------- ---------- ------- ------- -------
(Dollars in Thousands)
Risk-based 8.0% 11.90% $14,094 $20,962 $ 6,868
Core 4.0 6.65 12,061 20,039 7,978
Tangible 1.5 6.65 4,523 20,039 15,516
December 31, 1998
- -----------------
Risk-based 8.0% 10.54% $13,898 $18,310 $ 4,412
Core 4.0 6.32 10,994 17,370 6,376
Tangible 1.5 6.32 4,123 17,370 13,247
10
Note D - Earnings Per Share
Basic earnings per share is based on a weighted average number of shares
outstanding of 2,004,896 and 1,963,620 for the three months ended March 31,
1999, and 1998, respectively. Diluted earnings per share for the three months
ended March 31, 1999, and 1998, is based upon a weighted average number of
shares outstanding of 2,141,931 and 2,089,408, respectively.
Three months ended
March 31,
-------------------------
1999 1998
----------- ----------
Net Income from continuing operations................................... $ 4,879 $ 303,016
Net income from discontinued operation.................................. 135,329 82,576
Gain on Sale of Data Processing operation............................... 1,201,174 ---
Net income.............................................................. $1,341,382 $ 385,592
========== ==========
Basic earnings per share
weighted average common shares outstanding...................... 2,004,896 1,963,620
Additional dilutive shares.............................................. 137,035 125,788
---------- ----------
Total weighted average common shares and
Equivalents outstanding for diluted computation......................... 2,141,931 2,089,408
========== ==========
Basic earnings per shares from continuing operations.................... $ .00 $ .16
Basic earnings per share from discontinued operation.................... $ .07 $ .04
Basic earnings per share from gain on sale of discontinued operation... $ .60 ---
---------- ----------
Basic earnings per share................................................ $ .67 $ .20
========== ==========
Diluted earnings per share from continuing operations................... $ .00 $ .15
Diluted earnings per share from discontinued operations................. $ .06 $ .04
Diluted earnings per share from gain on sale of discontinued operation.. $ .56 ---
---------- ----------
Diluted earnings per share.............................................. $ .62 $ .19
========== ==========
Note E - Commitments and Contingencies
At March 31, 1999, Argo Savings had loan commitments totaling $12.9 million and
$18.7 million in unused lines of credit. Commitments to fund loans have credit
risk essentially the same as that involved in extending loans to customers and
are subject to Argo Savings' normal credit policies. Argo Savings also had
community reinvestment act ("CRA") investment commitments outstanding of $2.6
million.
11
Note F- Segment Financial Information
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, and
mortgage banking. Loans, investments, and deposits provide the revenues in the
banking operation, fee income provides the primary revenue for mortgage banking
and discount accretion provides the primary revenue for discount loan workout
Information reported internally for performance assessment follows. The column
for other information primarily includes activity between segments which is
being eliminated.
Discount Data Mortgage Total
Banking Loans Processing Banking Other Segments
------- ----- ---------- ------- ----- --------
(In Thousands)
1999
- ----
Net interest income $ 1,537 $ 96 $ --- $ --- $ --- $ 1,633
Provision for loan losses 155 30 185
Other revenue 745 (119) --- 501 (269) 858
Other expenses 1,781 100 --- 546 --- 2,427
Income tax expense (126) --- --- --- --- (126)
Segment profit (loss) 472 (153) --- (45) (269) 5
Segment assets 344,877 13,351 --- 574 (45,014) 313,788
1998
- ----
Net interest income $ 1,172 $ 310 $ --- $ --- $ --- $ 1,482
Provision for loan loss 175 10 --- --- --- 185
Other revenue 1,600 534 --- 308 (1,158) 1,284
Other expenses 1,709 171 --- 291 --- 2,171
Income tax expense 107 --- --- --- --- 107
Segment profit (loss) 781 663 --- 17 (1,158) 303
Segment assets 240,265 24,923 10,862 189 (37,733) 227,644
12
ARGO BANCORP, INC.
Management Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this 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. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Bank's loan and investment portfolios, changes in accounting principles,
policies or guidelines and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in detail in Item 1, "Business" of the Company's 1998 Form
10-K.
General
The Company was incorporated in Delaware in August 1987, for the purpose of
acquiring the Savings Bank. The Company acquired Argo Savings on November 17,
1987, for a capital infusion of $1.1 million. On August 29, 1991, the Board of
Directors of Dolton Riverdale Savings and Argo Savings adopted a Plan of Merger
Conversion ("Plan"), whereby Dolton agreed to convert from a state-chartered
mutual association to a federally-chartered stock association and merge with and
into Argo Savings with Argo Savings as the surviving entity. Final regulatory
approval was received on May 26, 1992, at which time the merger conversion was
completed. The transaction was accounted for under a pooling of interests
method. There was no goodwill or other intangible assets recorded as a result
of the transaction. The Company retained 50.0% of the net proceeds from the
merger conversion and injected the remaining 50.0% into Argo Savings The
Company is a unitary savings and loan holding company and is registered as such
with the Office of Thrift Supervision ("OTS"), Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").
On December 31, 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 446,256 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$9.50 per share. Total proceeds from this transaction were approximately $4.2
million. A five (5.0%) percent investment advisory fee was paid to Charles E.
Webb and Company reducing the net proceeds of the transaction to $4.0 million.
The stock purchase agreement also provides that Deltec may acquire additional
shares of common stock from the Company when the company issues or sells
13
additional shares to third parties in order that Deltec can maintain 25%
ownership in the Company's common stock.
In October of 1998, the Company formed Argo Capital Trust, a statutory
business trust formed under the laws of the State of Delaware. In November
1998, the Company and Argo Capital Trust offered 11% Capital Securities with a
liquidation amount of $10.00 per security. The proceeds from the sale offering
were $17,250,000. Argo Capital Trust used the gross proceeds for the sale of
the Capital Securities to purchase Junior Subordinated Debentures of the
Company. The Junior Subordinated Debentures carry an interest rate of 11%, paid
quarterly in arrears and are scheduled to mature on November 6, 2028. The costs
of the debt issuance were approximately $1.7 million, and were capitalized by
the company. The expenses are being amortized over 30 years. However, the
debentures, under certain circumstances maybe prepaid prior to the maturity
date. The proceeds from the sale of the Junior Subordinated Debentures are
being used by Argo Savings for general lending purposes and enhancements of
operational capabilities, and by the Company for general corporate purposes, the
enhancement of operational capabilities and the potential purchase of loans..
Unlike many savings and loan holding companies, the Company is an active
holding company with only a portion of its future anticipated operating income
dependent upon the earnings of Argo Savings. As an operating company, Argo
Bancorp has assets, liabilities and income that are unrelated to the operations
of Argo Savings. Argo Bancorp's assets at March 31, 1999, on an unconsolidated
basis consisted of its investment in Argo Savings of $20.0 million, its
investment in the majority owned Empire/Argo Mortgage LLC of $829,000,
securities available for sale of $7.6 million, cash and other interest-earning
deposits of $132,000, and other assets of $4.0 million which include $1.9
million of debt issuance costs associated with the Junior Subordinated
Debentures. Argo Bancorp also had outstanding borrowings on an unconsolidated
basis in the amount of $643,000 at March 31, 1999, incurred in connection with
capital infusions to its subsidiaries. Argo Bancorp is a Federal Housing
Authority ("FHA") approved originator and servicer, a licensed Illinois mortgage
banker and an approved Federal National Mortgage Association ("FNMA") servicer.
Sale of Subsidiary
On March 31, 1999 The Company sold its wholly-owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois, to GFS Holdings, Inc. of Palm
Beach Gardens, Florida ("Purchaser")
Under the terms of the transaction, the Company received $11.3 million in cash
and Preferred Stock in exchange for all of the outstanding stock of On-Line.
The Company received $6.7 million in cash at closing, together with 4,600 shares
of GFS Holdings Co. Series B Preferred Stock, valued at $4.6 million. The
Preferred Stock, par value $.01, pays the Company a semi-annual dividend at the
rate of 7.625%. Mandatory redemption of up to 1,400 shares will be made subject
to completion of certain conditions precedent on each of July 31, 1999, January
31, 2000 and July 31, 2000. An additional redemption of up to 3,200 shares is
available on April 30, 2000, subject to obtaining certain financial objectives.
All shares will be redeemed, to the extent not redeemed earlier, on March 31,
2006.
14
Liquidity and Capital Resources
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and securities available-for-sale portfolio,
custodial deposit accounts related to loans serviced for others, and the sale of
discounted loans receivable and newly originated fixed rate long-term mortgage
loans. The most liquid assets are cash and short-term investments. The levels
of these assets are dependent on the operating, financing and investing
activities during any given period. Cash and interest-earning deposits totaled
$13.4 million at March 31, 1999.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the three months ended March 31, 1999, and 1998, Argo
Savings originated and purchased loans receivable and discounted loans
receivable in the principal amounts of $41.1 million and $23.8 million,
respectively. During the three months ended March 31, 1999, and 1998, these
investing activities were primarily funded by principal repayments on loans
receivable and discounted loans receivable and securities available-for-sale of
$22.4 million and $14.6 million, respectively, and the proceeds from the sale of
loans receivable and discounted loans receivable, securities available for sale
and foreclosed real estate of $20.2 million and $22.0 million, respectively.
During the three months ended March 31, 1999, additional funding was provided by
the increase in deposits of $6.8 million, partially offset by a $1.4 million
decrease in borrowings. During the three months ended March 31, 1998, additional
funding was provided by the increase in deposits of $7.4 million, partially
offset by a $5.6 million decrease in borrowings.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At March 31, 1999, Argo Savings liquid assets represented
7.8% of its liquidity base as compared to the required level of 5.0%. The level
of liquidity maintained is believed by management to be adequate to meet the
requirements of normal operations, potential deposit outflows, and the current
loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At March 31, 1999, Argo Savings' capital exceeded all of the capital
requirements of the OTS on a current and fully phased-in basis. The Savings
Bank's tangible, core and risk-based capital ratios were 6.65%, 6.65%, and
11.90%, respectively.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk
15
exposure exceeds 2.0% must deduct an amount equal to one-half of the difference
between the institution's measured interest rate risk and 2.0% multiplied by the
estimated economic value of the institution's interest rate risk component on a
case-by-case basis. A savings institution with assets of less than $300 million
and risk-based capital ratios in excess of 12.0% is not subject to the interest
rate risk component, unless the OTS determines otherwise. For the present time,
the OTS has deferred implementation of the interest rate risk component. At
March 31, 1999, the Savings Bank met each of its capital requirements, and it is
anticipated that Argo Savings will not be subject to the interest rate risk
component.
Changes in Financial Condition
Total assets increased $6.8 million to $313.8 million at March 31, 1999, from
$307.0 million at December 31, 1998.
Cash and interest-earning deposits increased $3.2 million to $13.4 million at
March 31, 1999, primarily due to the receipt of $6.7 million in cash from the
sale of On-Line on March 31, 1999.
Securities available-for-sale increased by $11.1 million to $18.3 million at
March 31, 1999 from $7.2 million at December 31, 1998. The Savings Bank
utilized excess cash to purchase securities consistent with Management's asset-
liability strategy.
Loans receivable and discounted loans receivable increased $4.9 million to
$250.1 million at March 31, 1999 from $232.8 million at December 31, 1998, as a
result of loan originations and purchases totaling $41.1 million offset by sales
of loans of $13.3 million, principal repayments totaling $22.4 million, and
transfers of loans to foreclosed real estate of $512,000.
Premises and equipment declined by $5.4 million to $5.3 million at March 31,
1999 from $10.7 million at December 31, 1998. This decrease was a result of
the sale of On-Line which had a net book balance $5.9 million at December 31,
1998.
Prepaid expenses and other assets declined by $11.5 million to $7.0 million at
March 31, 1999 from $18.5 million at December 31, 1998 primarily as a result of
the On-Line sale. The December 31, 1998 balance of prepaid expenses and other
assets at On-Line was $6.2 million.
Deposits increased $6.7 million to $239.8 million at March 31, 1999, from $233.0
million at December 31, 1998. The increase can be attributed to a certificate
of deposit promotion that occurred during the three months ended March 31, 1999.
Borrowings decreased $4.5 million to $20.8 million at March 31, 1999, from $25.2
million at December 31, 1998. The decrease was due to the $6.7 million increase
in deposits, and the $6.7 million proceeds from the sale of On-Line which were
used in part to repay borrowings.
Other Liabilities increased by $3.8 million due in part to accrued expenses and
reserves for estimated contingent payments totaling $1.9 million in connection
with the On-Line sale and to purchases of securities available-for-sale totaling
$2.1 million which had not yet settled as of March 31, 1999.
16
Stockholders' equity increased $1.1 million to $19.5 million at March 31, 1999,
from $18.4 million at December 31, 1998. The increase was the result of net
income of $1.3 million partially offset by cash dividends of $100,000 and
additional unrealized net losses in the available-for-sale investment portfolio
of $164,000.
Interest Rate Risk
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the increase of non-interest bearing custodial accounts related to the
purchased mortgage servicing rights; and (v) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo
Savings does not use any artificial hedge products to reduce its exposure to
interest rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15.0% of
total assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities that mature or
reprice within one year over interest sensitive assets of $62.6 million or 20.8%
of total assets at March 31, 1999. As a result of the excess of interest
sensitive liabilities over interest sensitive assets, Argo Savings is "Net
Liability Sensitive" which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest gap analysis
report. The assumptions used, although standardized, may not be indicative of
the actual withdrawals experienced by Argo Savings. Fixed maturity deposits
reprice at maturity. The combined effect of these assumptions on passbook, NOW,
money market accounts and interest-bearing escrows assumes 17.0% of these
accounts withdrawn within three years, and 15.0% per year, thereafter.
Management believes that these decay rate assumptions are reasonable.
Thrift Rechartering Legislation
The proposed legislation regarding elimination of the federal thrift charter and
related issues remains pending before Congress. The Savings Bank, whose
deposits are insured by the Savings Association Insurance Fund ("SAIF"), is
unable to predict whether such legislation would be enacted, the extent to which
the legislation would restrict or disrupt its operations or whether the BIF
("Bank Insurance Fund") and SAIF funds will eventually merge.
17
Accounting Developments
Statement of Financial Accounting Standard (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value on the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will be able to reclassify held-to-
maturity securities to either trading or available-for-sale, provided certain
criteria are met. This Statement may be adopted early at the start of a
calendar quarter. Since the Company has no significant derivative instruments
or hedging activities, adoption of Statement No. 133 is not expected to have a
material impact on Argo Bancorp's financial statements. Management has decided
against early adoption of Statement No.133.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available-for-sale, or, in certain
circumstances, held-to-maturity. Currently, these must be classified as
trading. Since the Company has not securitized mortgage loans, Statement No.
134 is not expected to affect Argo Bancorp.
American Institute of Certified Public Accountants Statement of Position ("SOP")
98-1, effective in 1999, sets the accounting requirements to capitalize costs
incurred to develop or obtain software that is to be used solely to meet
internal needs. Costs to capitalize are those direct costs incurred to convert
data, and all other general and administrative costs are to be expensed as
incurred. The capitalized cost of internal-use software is amortized over its
useful life and reviewed for impairment using the criteria in Statement No. 121.
With the sale of On-Line Statement of Position 98-1 does not have a material
impact on Argo Bancorp.
SOP 98-5, also effective in 1999 requires all start-up, pre-opening, and
organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. Statement of Position 98-5 does not have a material
impact on the Company.
Year 2000 Discussions
The year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems.
The federal banking regulators have recently issued guidelines establishing
minimum safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for contingencies.
The guidelines previously issued by the agencies under the auspices of the
Federal Financial Institutions Examination Council (the "FFIEC") are not
intended to replace or supplant the FFIEC
18
guidelines which will continue to apply to all federally insured depository
institutions.
The guidelines were issued under the section 39 of the Federal Deposit Insurance
Act (the "FDIA"), as amended, which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Such an order is enforceable in court in the same manner as a cease and desist
order. Until the deficiency cited in the regulator's order is cured, the
regulator may restrict the institution's rate of growth or require the
institution to take any action the regulator deems appropriate under the
circumstances. In addition to the enforcement procedures established by the
regulatory guidelines there may also be grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
In 1996, the Company established an internal Technology Committee to identify
and/or resolve issues related to the year 2000 change. This committee has
inventoried all of the systems used by the Company, and has identified those
which are deemed "critical" to its business. The Committee is charged with
administering the strategic plan for Year 2000 compliance as developed by the
Company. The plan follows guidelines set forth by the FFIEC.
The status of each of the five phases of the FFIEC Year 2000 plan are:
1. Awareness 100.0% complete
2. Assessment 100.0% complete
3. Renovation 100.0% complete
4. Validation 90.0% complete
5. Implementation 80.0% complete
The 10% of validation and 20% of Implementation which remain consists of two
issues. The bank's General Ledger system with updated software to accommodate
year 2000 will be tested in June 1999 and Argo Saving's Fed-Line system is
scheduled to be tested in May 1999.
While the Company will incur some expenses during the remaining months of 1999,
the Company has not identified any situations at this time that will require
material cost expenditures to become fully compliant. It is impossible at this
time to quantify the estimated future costs due to possible business disruption
caused by vendors, suppliers, customers, or even the possible loss of electric
power or phone service; however, such cost could be substantial.
Through March 31, 1999 the Company has spent approximately $20,000 in connection
to testing, and upgrading equipment and software for Year 2000 compliance. The
Saving Bank's contingency plan calls for the backup of critical application
systems at December 31, 1999 in the event of a systems disaster subsequent to
year end. The contingency plan calls for running the banking centers offline if
systems, and or phone lines are unavailable subsequent to year end. The plan
incorporates provisions which includes manually processing daily work for each
business day after the close of business at a data recovery center northwest of
the Savings bank's main operating facility. Additionally, the Savings Bank's
deposit and loan systems are contractually protected by a back-up disaster
recovery plan outsourced to a third party. The worst case scenario including the
possible loss of electric power and or phone lines could have a material impact
on the operations of the Savings Bank.
Purchased Mortgage Servicing Rights
At March 31, 1999, the Savings Bank owned directly and indirectly, $10.0 million
in PMSRs. Argo Saving's principal investments in PMSRs is through a $4.5
million equity investment in a limited partnership was established for the sole
purpose of purchasing mortgage servicing rights. During the three months ended
March 31, 1999, the Savings Bank invested an additional $5.0
19
million in PMSRs. This investment reflects a 41.7% ownership interest in a
portfolio of servicing rights with an underlying principal balance of $791.0
million. The Savings Bank's ownership of PMSRs, as well as its investment in the
limited partnership carry interest rate risk because the total amount of the
servicing fees earned, as well as the amortization of the investment in the
servicing rights, fluctuates based on loan prepayments (affecting the expected
average life of a portfolio of PMSRs). The rate of prepayment of mortgage loans
may be influenced by changing national and regional trends, prevailing mortgage
rates and the housing market in general. During periods of declining interest
rates, as existed for most of 1998, many borrowers refinanced their mortgage
loans. Accordingly, prepayments of mortgage loans increased and the loan
administration income related to the mortgage loan servicing rights
corresponding to a mortgage loan ceased as underlying loans were prepaid.
Consequently, the market value of PMSRs tend to decrease during periods of
declining interest rates, since greater prepayments can be expected. The income
derived from and market value of the PMSRs and its investment in the limited
partnership, therefore, may be adversely affected during periods of declining
interest rates. Argo Savings accounts for its investment in the limited
partnership using the equity method. Income or loss is recorded based upon
information received from Dovenmuehle Mortgage, Inc. ("DMI"), a Delaware
Corporation engaged principally in mortgage servicing activities. DMI obtains
quarterly valuations from an independent appraiser for each limited partnership.
The Savings Bank recorded no further impairment of its investment during the
three months ended March 31, 1999.
Asset Quality
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest and the collectibility of the loan's
principal and interest becomes doubtful.
At March 31, 1999, Argo Savings had seventy-eight (78) properties, totaling $3.1
million classified as foreclosed real estate, as compared to ninety (90)
properties totaling $3.9 million at December 31, 1998. The underlying
properties on March 31, 1999, consisted primarily of single family residences.
The foreclosed real estate has been written down to estimated fair value at
March 31, 1999. The total amount of loans receivable ninety (90) days or more
past due at March 31, 1999, was $8.0 million or 3.20% of total loans receivable
compared to $6.5 million or 2.80% of total loans on December 31, 1998. Loans
ninety (90) days or more past due are primarily secured by one-to-four family
residences. Total non-performing assets at March 31, 1999, totaled $11.1
million or 3.54% of total assets compared to $10.4 million or 3.39% of total
assets at December 31, 1998. Excluded from these totals are $1.8 million of
discounted loans ninety (90) days or more past due at March 31, 1999, and $4.2
million at March 31, 1998. Discounted loans that are often purchased with the
intent to foreclose and sell the underlying property are excluded from non-
performing loans.
20
Results of Operations - Comparison of Operating Results for the Three Months
Ended March 31, 1999, and 1998.
General
Net income for the three months ended March 31, 1999 was $1.3 million or $.62
per diluted share. Included in net income was the $1.2 million after tax gain on
the sale of the On-Line Financial subsidiary. Also included in first quarter
earnings was $135,000 of net income from the discontinued On-Line operations.
Net of the gain on sale and the discontinued operations of On-Line, earnings
totaled $5,000 for the three months ended March 31,1999 compared to net income
from continuing operations of $303,000 for the same period last year. The
decrease in earnings from continuing operations was primarily the result of
lower gains on sales of assets recorded for the three months ended March 31,
1999 as compared to the same period last year.
Interest Income
Interest income for the three months ended March 31, 1999, totaled $5.0 million,
as compared to $4.3 million for the comparable 1998 period. The $773,000
increase was the result of a $64.1 million increase in average interest-earning
assets. This increase was partially offset by a 66 basis point decline in the
yield on interest earning assets for the first quarter of 1999 compared to the
same period last year. The decrease in yield is primarily attributable to the
refinancing of higher yielding mortgage loans to lower current rates and to the
decreased investment in discounted loans receivable, which typically have higher
then market yields.
Interest Expenses
Interest expense for the three months ended March 31, 1999, totaled $3.4 million
as compared to $2.8 million for the comparable 1998 period. The $623,000
increase was primarily the result of a $65.1 million rise in average interest
bearing liabilities partially offset by a 44 basis point decline in the weighted
average cost of interest-bearing liabilities to 5.14% for the three-months
ended March 31, 1999 as compared to the same period last year. Interest-bearing
liabilities include $17.3 million of 11.0% junior subordinated debt securities
which the Company raised in November of 1998.
Net Interest Income
Net interest income totaled $1.6 million for the three months ended March 31,
1999, an increase of $151,000 from the amount recorded in the comparable 1998
period. The increase in net interest income for the three months ended March
31, 1999, resulted from the $64.1 million increase in average interest-earning
assets partially offset by the $65.1 million increase in average interest
bearing liabilities and a 22 basis point decline in the effective net spread to
2.84% from 3.06% for the comparable 1998 period.
Provision for Loan Losses
A general loan loss provision of $185,000 was recorded for each of the three
months ended March 31, 1999, and 1998. Management believes that loan loss
provisions are adequate and will continue to monitor the mortgage portfolio and
substandard assets for loss exposure.
21
Non-Interest Income
Non-interest income declined $426,000 to $858,000 for the three months ended
March 31, 1999, as compared to $1.3 million for the three months ended March 31,
1998. The decline was the result of a $525,000 decrease in gains on the sale of
assets, and a $75,000 decrease in servicing income. This decrease was
partially offset by a $200,000 increase in mortgage banking fee income
Non-Interest Expense
Non-interest expense increased $256,000 to $2.4 million for the three months
ended March 31, 1999 from $2.2 million for the same period last year. The
increase in operating expenses was primarily due to a $210,000 increase in
expenses at the Company's majority owned subsidiary Margo attributable to higher
loan volumes. In addition, other general and administrative expenses not
related to Margo increased by $40,000.
Income Tax Expense
The provision for income tax expense yielded an accrued tax benefit for the
first quarter of $126,000 compared to tax expense of $107,000 for the same
period last year. The 1999 benefit is based on a 38.0% benefit calculated on the
pre-tax loss of $121,000 plus the utilization of affordable housing tax credits
totaling $79,000 for the three months ended March 31, 1999.
Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since December 31, 1998, as
reported in the Company's Form 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
22
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share (See
Note D)
27.0 Financial Data Schedule (filed herewith)
B. Reports of Form 8-K
None.
- --------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
23
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: May 14, 1999 /S/ John G. Yedinak
--------------- -------------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
24