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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 June 30, 1998
Commission File Number 0-19829
ARGO BANCORP, INC.
--------------------
(Exact name of small business issuer as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report(s),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The registrant had 497,644 shares outstanding as of July 31, 1998.
Transitional Small Business Disclosure Format (check one): Yes No X
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ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
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Part I - Financial Information Page No.
- ------------------------------ --------
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1998, (unaudited) and December 31, 1997......... 1
Consolidated Statements of Income for the Three and Six
Month Periods ended June 30, 1998, and 1997 (unaudited).. 2
Consolidated Statement of Comprehensive Income for
the Three and Six Month Periods ended June 30, 1998,
and 1997 (unaudited)..................................... 3
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1998, and 1997 (unaudited)..... 4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1998, and 1997 (unaudited)......... 5
Notes to Consolidated Financial Statements............... 6
Item 2 Management Discussion and Analysis of Financial
Condition and Results of Operations...................... 10
Item 3 Quantitative and Qualitative Disclosures about
Market Risk.............................................. 19
Part II - Other Information
- ---------------------------
Item 1 Legal Proceedings........................................ 19
Item 2 Changes in Securities.................................... 19
Item 3 Default Upon Senior Securities........................... 19
Item 4 Submission of Matters to a Vote of Security Holders...... 19
Item 5 Other Information........................................ 20
Item 6 Exhibits and Reports on Form 8-K......................... 20
Signature Page........................................... 21
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS: 6/30/98 12/31/97
------- --------
(Unaudited)
Cash............................................... $ 8,703 $ 6,211
Interest-earning deposits.......................... 9,923 2,466
FHLB of Chicago Stock.............................. 1,847 3,271
Securities available-for-sale...................... 4,993 4,974
Loans receivable, net.............................. 183,878 153,808
Discounted loans receivable........................ 17,001 30,550
Accrued interest receivable........................ 1,743 1,725
Foreclosed real estate, net........................ 4,179 4,251
Premises and equipment, net........................ 10,712 11,235
Mortgage loan servicing rights, net................ 6,349 6,706
Prepaid expenses and other assets.................. 10,430 11,101
-------- --------
$259,758 $236,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits......................................... $201,463 $172,469
Borrowed money................................... 28,388 34,156
Interest-bearing custodial escrow balances
for loans serviced............................. --- 1
Custodial escrow balances for loans serviced..... 5,891 6,399
Advance payments by borrowers for taxes and
insurance...................................... 746 741
Other liabilities................................ 4,545 4,428
-------- --------
Total liabilities............................... $241,033 $218,194
-------- --------
Stockholders' Equity:
Preferred stock, $0.01 par value;
Authorized 1,000,000 shares; none issued or
outstanding.................................... --- ---
Common Stock, $0.01 par value; Authorized
9,000,000 shares; issued and outstanding
497,644 shares................................. 5 5
Additional paid-in capital....................... 8,750 8,570
Retained earnings - substantially restricted..... 10,414 9,915
Accumulated other comprehensive income (loss).... (127) (33)
Common stock acquired by:
Employee Stock Ownership Plan.................. (27) (57)
Management Recognition Plan.................... (290) (296)
-------- --------
Total stockholders' equity................... $ 18,725 $ 18,104
======== ========
Total Liabilities and Stockholders' Equity......... $ 259,758 $ 236,298
========= =========
Commitments and contingencies (Note E)
See notes to accompanying unaudited consolidated financial statements
1
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended For the Six Months Ended
(Dollars in thousands, except per share data) 06/30/98 06/30/97 06/30/98 06/30/97
=========================================================================================================
(Unaudited)
Interest income:
Loans receivable.................................... $3,421 $3,464 $ 6,829 $ 6,438
Discounted loans receivable......................... 591 1,754 1,215 3,210
Mortgage-backed securities.......................... 37 76 82 156
Interest-earning deposits........................... 258 140 435 286
------ ------ ------- -------
Total interest income.............................. 4,307 5,434 8,561 10,090
------ ------ ------- -------
Interest expense:
Deposits............................................ 2,334 2,154 4,583 4,124
Custodial escrow balances for
loans serviced..................................... --- 2 --- 5
Borrowed money...................................... 446 924 1,068 1,695
------ ------ ------- -------
Total interest expense............................. 2,780 3,080 5,651 5,824
------ ------ ------- -------
Net interest income before provision
for loan losses.................................... 1,527 2,354 2,910 4,266
Provision for loan losses........................... 50 --- 235 60
------ ------ ------- -------
Net interest income after provision
for loan losses.................................... 1,477 2,354 2,675 4,206
------ ------ ------- -------
Non-interest income:
Purchased mortgage servicing income, net............ (390) 67 (278) 169
Mortgage banking.................................... 354 203 661 350
Net gain (loss) on sale of:
Loans held for sale................................ 393 28 384 31
Discounted loans receivable........................ 174 (227) 715 23
Foreclosed real estate............................. (70) 35 (91) 81
Securities available-for-sale...................... 153 124 318 207
Fees for other customer services.................... 187 129 359 222
Data processing..................................... 2,940 2,904 6,020 5,509
Other............................................... 487 34 729 66
------ ------ ------- -------
Total non-interest income............................ 4,228 3,297 8,817 6,658
------ ------ ------- -------
Non-interest expense:
Compensation and benefits........................... 2,240 2,256 4,345 4,529
Occupancy and equipment............................. 1,342 1,263 2,709 2,353
Federal deposit insurance premiums.................. 28 25 56 47
Data processing cost of services.................... 883 507 1,721 946
Other general and administrative fees............... 1,102 1,144 1,983 2,155
Amortization of goodwill............................ 26 26 51 53
------ ------ ------- -------
Total non-interest expense........................... 5,621 5,221 10,865 10,083
------ ------ ------- -------
Earnings before provision for income tax
expense............................................. 84 430 627 781
Income tax expense (benefit)......................... (198) 64 (40) 157
------ ------ ------- -------
Net earnings......................................... 282 366 667 624
------ ------ ------- -------
Basic earnings per share............................. .57 .76 1.35 1.31
------ ------ ------- -------
Diluted earnings per share........................... .53 .71 1.26 1.22
------ ------ ------- -------
See notes to accompanying unaudited consolidated financial statements
2
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended For the Six Months Ended
(Dollars in thousands) 06/30/98 06/30/97 06/30/98 06/30/97
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net Income............................................... $ 282 $ 366 $ 667 $ 624
Other Comprehensive Income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses) arising
during period, net of tax............................... (31) 81 103 92
----- ----- ----- -----
Less reclassification adjustment for gains included
in net income net of tax................................ (95) (77) (197) (128)
----- ----- ----- -----
Other comprehensive income (loss)........................ (126) 4 (94) (36)
----- ----- ----- -----
Comprehensive income..................................... 156 370 573 588
----- ----- ----- -----
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See notes to accompanying unaudited consolidated financial statements
3
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated Common
Additional Other Stock Stock Total
Common paid-in Retained Comprehensive acquired acquired Stockholders'
Stock Capital earnings Income (Loss) by ESOP by MRP Equity
----------------------------------------------------------------------------------
Six months ended June 30, 1997
- -----------------------------
Balance at December 31, 1996..................... $4 7,382 9,444 12 (117) (165) 16,560
Net income....................................... --- --- 624 --- --- --- 624
Proceeds from issuance of stock.................. 1 411 --- --- --- --- 412
Other comprehensive income, net of tax........... --- --- --- (36) --- --- (36)
Principal payments on ESOP loan.................. --- --- --- --- 30 --- 30
Amortization of purchase price of MRP stock..... --- --- --- --- --- 55 55
Proceeds from exercise of stock options......... --- 525 --- --- --- --- 525
Tax benefits of stock options.................... --- 193 --- --- --- --- 193
Fair value adjustment for committed ESOP shares.. --- 23 --- --- --- --- 23
Cash dividends................................... --- --- (175) --- --- --- (175)
------ ----- -------- ------------- -------- -------- ------
Balance at June 30, 1997......................... $5 8,534 9,893 (24) (87) (110) 18,211
====== ===== ======== ============= ======== ======== ======
Six-months ended June 30, 1998
- ------------------------------
Balance at December 31, 1997..................... $5 8,570 9,915 (33) (57) (296) 18,104
Net income....................................... --- --- 667 --- --- --- 667
Other comprehensive income (loss), net of tax.... --- --- --- (94) --- --- (94)
Principal payments on ESOP loan.................. --- --- --- --- 30 --- 30
Amortization of purchase price of MRP stock..... --- --- --- --- --- 6 6
Proceeds from exercise of stock options......... --- 116 --- --- --- --- 116
Tax benefits of stock options.................... --- 39 --- --- --- --- 39
Fair value adjustment for committed ESOP shares.. --- 25 --- --- --- --- 25
Cash dividends................................... --- --- (168) --- --- --- (168)
------ ----- -------- ------------- -------- -------- ------
Balance at June 30, 1998......................... $5 8,750 10,414 (127) (27) (290) 18,725
====== ===== ======== ============= ======== ======== ======
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended
06/30/98 06/30/97
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income........................................... $ 667 $ 624
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ 1,145 1,020
Accretion of discounts and deferred loan fees....... (302) (731)
Provision for loan losses and foreclosed real estate 265 98
(Gain) loss on sale of:
Securities available-for-sale....................... (318) (207)
Loans receivable.................................... (384) (31)
Discounted loans receivable......................... (715) (23)
Foreclosed real estate.............................. 91 (81)
Loans originated and purchased for sale.............. --- (12,998)
Proceeds from sale of loans receivable............... 18,335 27,092
Proceeds from sale of discounted loans receivable.... 7,635 14,125
Amortization of goodwill............................. 51 53
(Increase) decrease in purchased mortgage servicing
rights.............................................. 356 (1,476)
Amortization of purchase price of MRP and ESOP stock. 36 85
Recognition of fair value of ESOP shares scheduled
to be released...................................... 25 23
FHLB Stock redemption................................ 1,424 157
(Increase) decrease in accrued interest receivable,
prepaid expenses, and other assets.................. 1,185 893
Increase (decrease) in accrued interest payable and
other liabilities................................... 118 (675)
--------- ---------
Net cash provided by (used in) operating activities. 29,614 27,948
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio......... (77,738) (45,718)
Discounted loans receivable purchased................ (296) (8,731)
Principal repayments on:
Loans receivable and discounted loans receivable..... 34,994 24,644
Mortgage-backed securities........................... 235 333
Proceeds from sale of:
Foreclosed real estate.............................. 1,671 1,698
Securities available-for-sale....................... 5,271 2,079
Purchase of:
Securities available-for-sale....................... (5,365) (2,113)
Premises and equipment.............................. (622) (2,519)
Net cash (paid) in purchase of subsidiary........... (485) ---
--------- ---------
Net cash provided by (used in) investing activities... (42,335) (30,327)
--------- ---------
Cash flows from financing activities:
Net increase in deposits............................ 28,994 19,753
Proceeds from borrowed funds........................ 13,345 66,919
Repayment of borrowed funds......................... (19,113) (87,650)
Proceeds from exercise of stock options............. 116 937
Dividends paid...................................... (168) (175)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance.................. 5 857
Net increase (decrease) in custodial escrow
balances for loans serviced........................ (509) (283)
--------- ---------
Net cash provided by financing activities.......... 22,670 358
--------- ---------
Net increase (decrease) in cash and cash equivalents 9,949 (2,021)
Cash and cash equivalents at beginning of period..... 8,677 13,276
--------- ---------
Cash and cash equivalents at end of period........... $ 18,626 $ 11,255
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense..................................... $ 5,405 $ 5,268
Income taxes......................................... $ 225 $ 70
Non-cash investing activity - transfer of loans to
foreclosed real estate............................... $ 1,869 $ 2,130
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
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 six-months ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or "Holding Company") and its
wholly owned subsidiaries, On-Line Financial Services, Inc. ("On-Line"), Argo
Federal Savings Bank, FSB ("Argo Savings" or "Savings Bank") and Argo Savings'
wholly owned subsidiaries, Argo Mortgage Corporation, Dolton-Riverdale Savings
Service Corporation ("Dolton-Riverdale Savings"), and Argo Savings' majority
owned subsidiary MARGO Financial Services LLC ("MARGO"). The statements also
include Argo Bancorp's majority owned limited liability company, Argo / Empire
Mortgage LLC. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Note B - Stock Benefit Plans
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants may
make contributions to the Plan from 1.0% to 12.0% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $35,000 and $41,000, to
the Plan for the six-months ended June 30, 1998, and 1997, respectively. The
Plan also provides benefits in the event of death, disability, or other
termination of employment.
On-Line has a 401(k) Plan covering all employees who have completed one or more
years of service. Participants may make contributions to the Plan from 1.0% to
12.0% of their earnings, subject to Internal Revenue Service limitations.
Matching contributions of 50.0% of each participant's contribution up to 6.0% of
participant contributions are made at On-Line's discretion each year. On-Line
contributions totaled $29,000 and $28,000 for the six-months ended June 30,
1998, and 1997, respectively.
6
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.
In connection with the Merger Conversion, Argo Savings formed an Employee Stock
Ownership Plan ("ESOP") for eligible employees. The ESOP borrowed funds from an
unrelated third party lender in the amount of $60,180 in order to purchase 7.0%
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
additional shares. As of June 30, 1998, the unpaid principal balance on the
ESOP note was $27,000. The note has an interest rate of 8.25% and matures on
May 27, 1999. The ESOP has purchased an additional 13,020 shares at an average
price of $18.79 per share. Argo Savings will make scheduled discretionary cash
contributions to the ESOP sufficient to service the amounts borrowed. The
unpaid balance of the ESOP loan has been included in borrowed funds on the
unaudited consolidated statement of condition and stockholders' equity has been
reduced by a similar amount. Contributions of $32,000 and $34,000 were made to
the ESOP to fund principal and interest for the six-months ended June 30, 1998,
and 1997, respectively.
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 increased by $25,000 and
$23,000 for the six-months ended June 30, 1998, and 1997, respectively.
On-Line does not offer an ESOP for On-Line employees. On-Line employees are not
eligible for participation under the Savings Bank's ESOP.
The Board of Directors of Argo Bancorp formed a new Management Recognition Plan
and Trust ("MRP") effective September 1, 1996, which purchased 12,500 shares of
Argo Bancorp stock on September 24, 1996, for $115,000. During the year ended
December 31, 1997, the Company sold 4,652 shares held by the Argo Bancorp MRP
for $181,000 reducing the total shares held by the plan to 7,848. 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
six-months ended June 30, 1998. During the six-months ended June 30, 1997, 1,575
share were awarded to certain key On-Line employees. Amortization expense
totaled $6,000 for the six-month period ended June 30, 1998.
The Board of Directors of Argo Savings formed a MRP effective October 31, 1991,
which purchased 6.8% or 15,400 shares, of the Corporation's authorized but
unissued common stock in December 1991. In addition, Argo Savings contributed
$34,385 to allow the MRP to purchase 2,990 shares in the merger conversion or on
the open market. All initial MRP shares have been awarded to employees in key
management positions with the Savings Bank and are fully vested.
On April 26, 1995, an amendment to the MRP was approved, which increased the
amount of shares available to be awarded under the MRP to 24,498. 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 plan for $219,000, reducing the total shares held by the plan
7
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 six-months ended June 30,
1998. Amortization expense totaled $55,000 for the six-months ended June 30,
1997.
The Board of Directors of Argo Bancorp approved a new Employee Incentive Stock
Option Plan on May 20, 1998. Under this plan up to 100,000 shares may be
awarded. Employees and directors of the company and its subsidiaries are
eligible. As of June 30, 1998, no awards were granted under this plan.
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 107,450 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. Argo Bancorp awarded all 107,450 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 61,898 options exercised and 8,060 of which were exercised
during the six-months ended June 30, 1998. At June 30, 1998, options to
purchase 45,552 shares were outstanding.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 107,450
shares of Argo Bancorp's common stock were reserved for issuance by Argo Bancorp
upon exercise of non-incentive stock options to be granted to non-employee
directors of the Corporation and its subsidiaries from time to time. At June
30, 1998, Argo Bancorp has awarded 63,100 options for shares under the Non-
Qualified Stock Option Plan. To date, options to acquire 13,200 shares have
been exercised. No options were exercised during the six-months ended June 30,
1998. The exercise price for the options awarded were equal to the fair market
value of the common stock at the date of grant. At June 30, 1998, options to
purchase 49,900 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:
(1) a risk-based capital requirement of 8.0% of risk-weighted assets, (2) a
leverage ratio of 3.0% core capital to total adjusted assets, and (3) a tangible
capital requirement of 1.5% tangible core capital to total assets. Although the
minimum capital requirement is 3.0%, the OTS Regulations provide that an
institution with less than 4.0% core capital is deemed to be "under-
capitalized." The following table summarizes, as of June 30, 1998, Argo
Savings' capital requirements under OTS regulations and its actual capital
ratios at that date:
8
Required Actual Required Actual Excess
Capital Capital Capital Capital Capital
Percentage Percentage Balance Balance Balance
---------- ---------- ------- ------- -------
(Dollars in Thousands)
Risk-based 8.0% 11.05% $10,741 $14,838 $ 4,097
Core 3.0 5.68 7,374 13,958 6,584
Tangible 1.5 5.68 3,687 13,958 10,271
Note D - Earnings Per Share
Basic earnings per share for the six and three-month periods ended June 30,
1998, and 1997, is based on a weighted average number of shares outstanding of
494,293, 477,449, 497,644, and 484,020, respectively. Diluted earnings per share
for the six and three-month periods ended June 30, 1998, and 1997, is based on a
weighted average number of shares outstanding of 527,517, 512,510, 530,868, and
519,081, respectively.
Three Months Ended Six Months Ended
06/30/98 06/30/97 06/30/98 06/30/97
---------------------------------------------
Net Income......................................... $ 282,000 $ 366,000 $ 667,000 $ 624,000
========= ========= ========= =========
Weighted average common shares outstanding......... 497,644 484,020 494,293 477,449
Basic earnings per shares.......................... $ .57 $ .76 $ 1.35 $ 1.31
--------- --------- --------- ---------
Total weighted average common shares outstanding... 497,644 484,020 494,293 477,449
Additional dilutive shares of stock options
outstanding....................................... 33,224 35,061 33,224 35,061
--------- --------- --------- ---------
Total weighted average common shares and
Equivalents outstanding for diluted computation... 530,868 519,081 527,517 512,510
--------- --------- --------- ---------
Diluted earnings per share......................... $ .53 $ .71 $ 1.26 $ 1.22
--------- --------- --------- ---------
Note E - Commitments and Contingencies
At June 30, 1998, Argo Savings had loan commitments totaling $11.3 million and
$3.5 million in unused lines of credit. Commitments to fund loans have credit
risk essentially the same as that involved in extending loans to customers and
are subject to Argo Savings' normal credit policies. Argo Savings also had
community reinvestment act ("CRA") investment commitments outstanding of $2.9
million.
Note F Subsequent Events
On May 4, 1998, Argo Savings entered into an agreement to sell its Gurnee branch
to CIB Bank. The transaction included the sale of $13.2 million in deposits and
$149,000 in furniture, fixtures, and equipment. The sale closed on July 16,
1998, and resulted in a pre-tax gain of approximately $995,000, which will be
recorded by Argo Savings in the third quarter of 1998.
9
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. 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 1997 Form 10-KSB.
General
Argo Bancorp was incorporated in August 1987, for the purpose of acquiring Argo
Federal Savings Bank, FSB. Argo Bancorp was originally capitalized through the
sale of 210,000 shares of common stock to three investors for total proceeds of
$60,000. Argo Bancorp acquired Argo Savings on November 17, 1987 for a capital
infusion of $1.1 million. On May 26, 1992, the Corporation completed a merger
conversion whereby Dolton-Riverdale Savings converted from a state chartered
mutual association to a federally chartered stock association and simultaneously
merged with and into Argo Savings with Argo Savings as the surviving entity.
The transaction was accounted for under the pooling of interests method. There
was no goodwill or other intangible assets recorded as a result of the
transaction. As part of the merger conversion with Dolton-Riverdale Savings,
the Corporation sold an additional 74,750 shares of common stock at an issuance
price of $11.50. Net proceeds from the merger conversion were $326,000 after
the deduction of the conversion expenses. The Corporation retained 50.0% of the
net proceeds from the merger conversion and injected the remaining 50.0% into
Argo Savings. All proceeds were used for general business uses.
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Corporation is an active holding company with assets
consisting of Argo Savings stock, On-Line stock, marketable securities,
interest-earning deposits and a majority interest in Argo/Empire Mortgage LLC, a
limited liability company that engages in the purchase and disposition of loans.
Argo Bancorp is a Federal Housing Authority ("FHA") approved originator and
servicer, a licensed Illinois mortgage banker and an approved Federal National
Mortgage Association ("FNMA") servicer.
The principal business of Argo Savings consists of attracting deposits from the
general public and investing those deposits, together with custodial escrow
accounts associated with purchased mortgage servicing rights and funds generated
internally, primarily in one-to-four family mortgage loans. Argo
10
Savings is a member of the Federal Home Loan Bank ("FHLB") System, and its
deposits are insured to the maximum allowable amount by the Federal Deposit
Insurance Corporation ("FDIC").
Argo Savings operates one (1) wholly-owned service corporation subsidiary.
Dolton-Riverdale Savings is a wholly-owned subsidiary that offers life insurance
annuities to the customer base of Argo Savings. Argo Savings also has two (2)
operating subsidiaries, Argo Mortgage Corporation and MARGO. Argo Mortgage
Corporation is a wholly-owned operating subsidiary, which engages in mortgage
brokerage activities that focus on purchase and sale of mortgage loans into the
secondary market. MARGO is a majority owned operating subsidiary, which was
incorporated and fully operational on August 20, 1996. The activities of MARGO
relate to the origination, investment, sale and servicing of mortgage loans.
Argo Savings' results of operations are dependent primarily on net interest
income, representing the difference between the interest income earned on its
loans, mortgage-backed securities, investment securities and interest-earning
deposits and its cost of funds, consisting of the interest paid on its deposits,
escrows and borrowings. Argo Savings' operating results are also affected by
the profit recognized on the sale of mortgage loans and to a lesser extent, the
fees generated by its investment in purchased mortgage servicing rights,
customer service charges and other income. Argo Savings operating expenses
consist of employee compensation, occupancy expenses, federal insurance
premiums, amortization of goodwill, and other general and administrative
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
Through activities conducted by its Argo Mortgage Corporation subsidiary, in
recent years Argo Savings has acquired mortgage loans at a deep discount for
which the borrowers are either not current as to principal and interest payments
or there is doubt to the borrower's ability to pay in full the contractual
principal and interest outstanding. In determining the amount it will bid to
acquire such loans at private sales and auctions, 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. Investment in these assets has resulted in higher interest
yields and gains as a result of the ultimate sale of properties acquired through
these purchases. During the six and three-month periods ended June 30, 1998, and
1997, the Company recorded gains / (losses) of $715,000, $23,000, $174,000, and
($227,000), respectively, on its investment in discounted loans receivable.
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. Discounted loans
receivable at June 30, 1998, totaled $17.0 million or 6.5% of total assets as
compared to $37.3 million or 16.2% of total assets at June 30, 1997.
On October 31, 1995, Argo Bancorp acquired On-Line, an Oak Brook, Illinois based
computer services bureau, serving bank and thrift clients throughout the
Midwest. The purchase transaction was consummated through the use of a wholly-
owned subsidiary, OLF Acquisition Corporation, which acquired shares of three
separate state chartered savings and loan services corporations which owned, in
the aggregate, 98.9% of the outstanding shares of On-Line.
11
Sale of the remaining 1.1% of On-Line shares was made by a single institutional
stockholder which held shares in On-Line directly. The intervening acquisition
subsidiary and state chartered savings and loan service corporation shells were
liquidated and merged by Argo Bancorp during 1996.
Financial terms of the transaction included a cash sweep to shareholders of On-
Line funds on hand on the closing date, less amounts necessary to establish
certain agreed-upon escrow balances, a two (2) year asset note of approximately
$1,026,000, representing the closing date net book value of On-Line; a twenty-
six (26) month escrow note in the amount of $460,000, representing funds held
for future performance under a third party computer lease; and a structured
schedule of contingent payments based on future revenues of On-Line over a seven
(7) year period. 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 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. On April 28, 1998,
the Company funded $479,000 for its first scheduled contingent payment to the
old shareholders of On-Line. 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 to
financial institutions located throughout the Midwest. On-Line currently
provides data processing services to thrifts, community banks, savings banks,
and mortgage brokers representing over 1.2 million customer accounts in six
Midwestern states. On-Line has historically marketed its services to
institutions with assets of less than $1.0 billion, where On-Line'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 strategy to
implement and offer computer output laser disc storage technology and a full
line of document imaging services has been realized and is now being marketed to
a wide array of users of advanced technology. Together with aggressive marketing
to small and mid-size commercial and community banks, On-Line's business plan to
expand its traditional thrift institution client base is being implemented.
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, 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
$18.6 million at June 30, 1998.
12
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the six-months ended June 30, 1998, and 1997, Argo
Savings originated and purchased loans receivable and discounted loans
receivable in the principal amounts of $78.0 million and $67.4 million,
respectively. During the six-months ended June 30, 1998, and 1997, these
investing activities were primarily funded by principal repayments on loans
receivable and discounted loans receivable and mortgage-backed securities of
$35.2 million and $25.0 million, respectively, and the proceeds from the sale of
loans receivable and discounted loans receivable, securities available-for-sale
and foreclosed real estate of $32.9 million and $45.0 million, respectively.
During the six-month periods ended June 30, 1998, and 1997, additional funding
was provided by the increase in deposits of $29.0 million and $19.8 million,
respectively, partially offset by decreases in borrowings of $5.8 million and
$20.7 million for the six and three-month periods, respectively.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At June 30, 1998, Argo Savings liquid assets represented
6.66% of its liquidity base as compared to the required level of 4.0%. 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 June 30, 1998, Argo Savings' capital exceeded all of the capital requirements
of the OTS on a current and fully phased-in basis. The Savings Bank's tangible,
core and risk-based capital ratios were 5.68%, 5.68%, and 11.05%, respectively.
The Savings Bank is considered well-capitalized under OTS prompt corrective
action.
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 two hundred (200) basis point increase or decrease in market
interest rates divided by the estimated economic value of the institution's
assets. In calculating its total capital under the risk-based capital rule, a
savings institution whose measured interest rate risk exposure exceeds 2.0% must
deduct an amount equal to one-half of the difference between the institution's
measured interest rate risk and 2.0% multiplied by the estimated economic value
of the institution's interest rate risk component on a case-by-case basis. A
savings institution with assets of less than $300 million and risk-based capital
ratios in excess of 12.0% is not subject to the interest rate risk component,
unless the OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At June 30, 1998, 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.
13
Changes in Financial Condition
Total assets increased $23.5 million to $259.8 million at June 30, 1998, from
$236.3 million at December 31, 1997.
Cash and interest-earning deposits increased $9.9 million to $18.6 million at
June 30, 1998, primarily due to cash received from a loan sale at the end of
June 1998.
Loans receivable and discounted loans receivable increased $16.5 million to
$200.9 million at June 30, 1998, due to origination and purchase of $78.0
million of loans, and discount accretion of $305,000, partially offset by
principal repayments of $35.0 million, the sale of $24.9 million of loans
receivable and discounted loans receivable, and the transfer of $1.9 million of
loans and discounted loans receivable to foreclosed real estate.
Deposits increased $29.0 million to $201.5 million at June 30, 1998, from $172.5
million at December 31, 1997. The increase can primarily be attributed to an
aggressive marketing effort during the first six-months of 1998, aimed at
attracting a larger customer base and interest credited of $4.3 million for the
six-months ended June 30, 1998. Brokered deposits at June 30, 1998, totaled
$5.0 million and had a weighted average maturity of one (1) year.
Borrowings decreased $5.8 million to $28.4 million at June 30, 1998, from $34.2
million at December 31, 1997. The decrease in advances was due to the
significant increase in deposits during the six-months ended June 30, 1998.
Custodial escrow balances for loans serviced decreased $509,000 to $5.9 million
at June 30, 1998, from $6.4 million at December 31, 1997. This decrease
reflects normal fluctuations within these accounts. The custodial accounts
pertain to escrowed payments of taxes and insurance and the float on principal
and interest payments on loans serviced either for Argo Savings or on behalf of
others by an independent mortgage servicing operation. The custodial accounts
related to loans serviced by others are maintained at Argo Savings in both
interest-bearing and non-interest bearing accounts. The custodial accounts
associated with loans or purchased mortgage-servicing rights serviced for Argo
Savings are maintained in non-interest bearing accounts. At June 30, 1998, the
entire escrow balance pertains to loans subserviced on behalf of Argo Savings
for portfolio loans, servicing retained loans and purchased mortgage-servicing
rights.
Stockholders' equity increased $621,000 to $18.7 million at June 30, 1998, from
$18.1 million at December 31, 1997. The increase was caused by the exercise of
stock options for $116,000, a $39,000 tax benefit related to the exercise of the
options and net income of $667,000, partially offset by dividends paid of
$168,000, and an other comprehensive loss of $94,000.
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
14
loans and mortgage-backed securities; (ii) the origination of balloon mortgages;
(iii) the sale of newly originated long-term fixed rate mortgages; (iv) the
investment in purchased mortgage servicing rights which provide a source of non-
interest income and also act as a hedge against the decline in the value of
fixed rate mortgages in a rising interest rate environment; (v) the increase of
non-interest bearing custodial accounts related to the purchased mortgage
servicing rights; and (vi) the control of deposit growth and maintenance of
long-term deposits. The strategies listed have been implemented by Argo Savings
and are monitored on a quarterly basis by management. Argo Savings does not use
any derivative 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 $22.1 million or 9.0%
of total assets at June 30, 1998. 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 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 Bank Insurance Fund
("BIF") and SAIF funds will eventually merge. See Form 10-KSB for the fiscal
year ended December 31, 1997, for a discussion of the proposed legislation.
Accounting Developments
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
15
under current standards. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. Management of the
Company does not expect that the adoption of SFAS No. 131 will have a material
effect on the consolidated financial statements of the Company.
The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits," which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pension and other post-retirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful. The
Company adopted SFAS No. 132 on January 1, 1998. The adoption did not have an
effect on the consolidated financial statements of the Company.
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 June 30, 1998, Argo Bancorp had one hundred four (104) properties, totaling
$4.2 million classified as foreclosed real estate, as compared to one hundred
thirteen (113) properties totaling $4.3 million at December 31, 1997. The
underlying properties on June 30, 1998, consisted primarily of single family
residences. The foreclosed real estate has been written down to its estimated
fair value at June 30, 1998. The total amount of loans receivable ninety (90)
days or more past due at June 30, 1998, was $5.1 million or 2.78% of total loans
receivable compared to $5.5 million or 3.57% of total loans on December 31,
1997. At June 30, 1998, loans ninety (90) days or more past due totaling $5.0
million were secured by one-to-four family residences. Total non-performing
assets at June 30, 1998, totaled $9.3 million or 3.58% of total assets compared
to $9.8 million or 4.14% of total assets at December 31, 1997. Excluded from
these totals is $3.6 million of discounted loans ninety (90) days or more past
due at June 30, 1998. Discounted loans that are often purchased with the intent
to foreclose and sell the underlying property are excluded from non-performing
loans.
Results of Operations - Comparison of Operating Results for the Six and Three
Month Periods Ended June 30, 1998, and 1997.
General
Net income for the six-months ended June 30, 1998, was $667,000 or $1.26 per
diluted share compared to net income of $624,000 or $1.22 per diluted share for
the six-months ended June 30, 1997. Net income for the three-months ended June
30, 1998, was $282,000 or $0.53 per diluted share as compared to $366,000 or
$0.71 per diluted share for the three-months ended June 30, 1997. The $0.04
16
increase in diluted earnings per share during the six-month period ending June
30, 1998, is due to the $43,000 increase in net income during the period
partially off-set by an increase in weighted average common shares and
equivalents of 15,007. The $0.18 decrease in diluted earnings per share during
the three-month period ending June 30, 1998, is due to the $84,000 decrease in
net income and the increase in weighted average common shares and equivalents of
11,787.
Interest Income
Interest income for the six-months ended June 30, 1998, totaled $8.6 million, as
compared to $10.1 million for the comparable 1997 period. The $1.5 million
decrease was the result of a one hundred forty-three (143) basis point decrease
in the weighted average yield on interest earning assets to 8.44% for the six-
months ended June 30, 1998. The decrease in yield is primarily attributable to
the decreased investment in discounted loans receivable, which typically have
higher yields. Also contributing to the decrease was the $1.6 million decrease
in average interest-earning assets.
Interest income for the three-months ended June 30, 1998, totaled $4.3 million
as compared to $5.4 million for the comparable 1997 period. The $1.1 million
decrease in the comparable three-month interest income was the result of the
$5.9 million decrease in average interest-earning assets and the one hundred
eighty-eight (188) basis point decrease in the weighted average yield. The
decrease in yield is primarily attributable to the decreased investment in
discounted loans receivable.
Interest Expense
Interest expense for the six-months ended June 30, 1998, totaled $5.7 million as
compared to $5.8 million for the comparable 1997 period. The $173,000 decrease
was the result of a $2.2 million decrease in average interest-bearing
liabilities to $210.5 million for the six-months ended June 30, 1998, and an
eleven (11) basis point decrease in the weighted average cost of interest-
bearing liabilities to 5.37% for the six-months ended June 30, 1998.
Interest expense for the three-months ended June 30, 1998, totaled $2.8 million
as compared to $3.1 million for the comparable 1997 period. The $300,000
decrease was the result of the $3.8 million decrease in average interest-bearing
liabilities and the forty-six (46) basis point decrease in the weighted average
cost of interest-bearing liabilities to 5.18% for the three-months ended June
30, 1998.
Net Interest Income
Net interest income totaled $2.9 million for the six-months ended June 30, 1998,
reflecting a decrease of $1.4 million from the amount recorded in the comparable
1997 period. The decrease in net interest income for the six-months ended June
30, 1998, resulted from a one hundred thirty-one (131) basis point decrease in
the effective net spread to 3.07% from 4.38% for the comparable 1997 period.
Also contributing to the decrease was the $1.6 million decrease in average
interest-earning assets. Partially offsetting this decrease was the $2.2
million decrease in the average dollar amount of interest-bearing liabilities.
17
Net interest income for the three-months ended June 30, 1998, was $1.5 million
as compared to $2.4 million for the comparable 1997 period. The $827,000
decrease was caused by the one hunderd forty-three (143) basis point decrease
in the effective net spread to 3.12% from 4.55% and the $5.9 million decrease in
average interest-earning assets partially offset by the $3.8 million decrease in
the average interest-bearing liabilities.
Provision for Loan Losses
A general loan loss provision of $235,000 and $50,000 was recorded during the
six and three-month periods ended June 30, 1998, respectively, as compared to
$60,000 for the six-months ended June 30, 1997. No provision was recorded by
the Company during the three-months ended June 30, 1997. The increase in the
loan loss provision for the six and three-month periods ended June 30, 1998,
over the comparable 1997 periods is due to management's decision to increase
lending activities in line with the Company's overall strategy to engage in more
traditional banking activities. Management believes that loan loss provisions
are adequate and will continue to monitor the mortgage portfolio and substandard
assets for loss exposure.
Non-Interest Income
Non-interest income increased $2.2 million and $931,000 for the six and three-
month periods ended June 30, 1998, respectively. The increases were the result
of a $984,000 and $690,000 increase in gains on sale of loans receivable,
discounted loans receivable, securities available-for-sale, mortgage backed
securities, and foreclosed real estate, for the six and three-month periods,
respectively. Also contributing was the $511,000 and the $36,000 increase in
data processing income for the six and three-month periods, respectively.
Lastly, other income also increased $663,000 and $453,000 for the six and three-
month periods, respectively. The increase in other income was primarily
attributable to significant increases in gains on sale of hardware and increases
in other ancillary services at On-Line. Partially offsetting these increases
was a $447,000 and $457,000 decrease in purchased servicing income for the six
and three-month periods, as a result of a $392,000 valuation adjustment being
recorded on the Company's investment in limited partnerships, which invests in
mortgage loan servicing rights. At June 30, 1998, the Company had $5.7 million
in such limited partnership investments.
Non-Interest Expense
Non-interest expense increased $782,000 and $400,000 for the six and three-month
periods ended June 30, 1998, respectively. These increases are primarily due to
increases in occupancy and data processing cost of services. Occupancy
increased $356,000 and $79,000 for the six and three-month periods ended June
30, 1998, primarily due to facility improvements and equipment upgrades at both
Argo Savings and On-Line. Also contributing to the increase was the opening of
Argo Savings permanent branch location on the Westside of Chicago, Illinois
during May 1997. The $775,000 and $376,000 increase in data processing cost of
services is due to hardware and software upgrades and increased hardware costs
as a result of the increased hardware sales activity at On-Line during the six
and three-months periods ended June 30, 1998. Partially offsetting these
increases were decreases in compensation expense and
18
general and administrative fees during the six and three-month periods.
Compensation expense decreased $184,000 and $16,000 for the six and three-month
periods respectively. General and administrative expenses reflected a decrease
of $172,000 and $42,000 for the six and three-month periods ended June 30, 1998.
These decreases were due to company wide cost reduction measures.
Income Tax Expense
For the six and three-month periods ended June 30, 1998, the Company recorded a
net income tax benefit of $40,000 and $198,000, respectively. The provision for
income tax decreased $197,000 and $262,000 for the six and three-month periods
respectively. The decline in the provision was primarily due to the resolution
of various tax issues.
Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in market risk since December 31, 1997, 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
The Annual Meeting of Shareholders was held May 20, 1998, with the following
resolutions ratifies and approved in all respects:
I. Election of Directors: The election of Sergio Martinucci for a two (2) year
term
For: 279,880 votes 100.0% Withheld: 42 votes 0.02% Broker Non-votes: 0
votes 0.0%
II. Election of Directors: The election of John G. Yedinak for a two (2) year
term
For: 279,880 votes 100.0% Withheld: 42 votes 0.02% Broker Non-votes: 0
votes 0.0%
19
In addition, the following directors continue in office:
Frances M. Pitts, Secretary and Director
Executive Vice President, Argo Bancorp, Inc.
Donald G. Wittmer, Director
President and Owner, Wittmer Financial Services, Ltd.
Arthur Byrnes, Director
President, Deltec Asset Management Corporation
III. The approval of the Argo Bancorp, Inc. 1998 Incentive Stock Option Plan
For: 275,565 votes 98.44% Against: 142 votes 0.05% Withheld: 4,215 votes
1.51%
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 documents from Exhibits to Form
S-1, Registration Statement, and filed on July 21, 1998, any amendments
thereto, Registration No. 333-59435.
** 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.
20
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: August 14, 1998 /s/ John G. Yedinak
---------------- ----------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
Date: August 14, 1998 /s/ George L. Koehm
---------------- ----------------------------------------
George L. Koehm, Interim Chief Financial
Officer
21
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: August 14, 1998
---------------- ----------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
Date: August 14, 1998
---------------- ----------------------------------------
George L. Koehm, Interim Chief Financial
Officer
22