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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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 2,004,896 shares outstanding as of November 13, 1998.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition as of
September 30, 1998, and December 31, 1997.................... 1
Consolidated Statements of Income for the Three and Nine
Month Periods ended September 30, 1998, and 1997............. 2
Consolidated Statements of Comprehensive Income for
the Three and Nine Month Periods ended September 30, 1998,
and 1997..................................................... 3
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 1998, and 1997............... 4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998, and 1997.................... 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... 21
PART II - OTHER INFORMATION
- -----------------------------
Item 1 Legal Proceedings............................................ 21
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............................................ 23
Item 6 Exhibits and Reports on Form 8-K............................. 24
Signature Page............................................... 25
2
ARGO BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS: 9/30/98 12/31/97
------- --------
Cash...................................................................... $ 9,509 $ 6,211
Interest-earning deposits................................................. 2,373 2,466
FHLB of Chicago Stock..................................................... 1,847 3,271
Securities available-for-sale............................................. 5,273 4,974
Loans receivable, net..................................................... 185,679 153,808
Discounted loans receivable............................................... 13,584 30,550
Accrued interest receivable............................................... 1,803 1,725
Foreclosed real estate, net............................................... 4,168 4,251
Premises and equipment, net............................................... 10,924 11,235
Mortgage loan servicing rights, net....................................... 4,998 6,706
Prepaid expenses and other assets......................................... 11,517 11,101
-------- --------
$251,675 $236,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits................................................................ $192,101 $172,469
Borrowed money.......................................................... 28,969 34,156
Interest-bearing custodial escrow balances
for loans serviced.................................................... --- 1
Custodial escrow balances for loans serviced............................ 5,709 6,399
Advance payments by borrowers for taxes and insurance................... 1,240 741
Other liabilities....................................................... 5,131 4,428
-------- --------
Total liabilities..................................................... $233,150 $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 2,004,896 and 1,990,576, respectively.. 20 5
Additional paid-in capital.............................................. 8,818 8,570
Retained earnings - substantially restricted............................ 10,283 9,915
Accumulated other comprehensive (loss).................................. (297) (33)
Common stock acquired by:
Employee Stock Ownership Plan......................................... (12) (57)
Management Recognition Plan........................................... (287) (296)
-------- --------
Total stockholders' equity.......................................... $ 18,525 $ 18,104
======== ========
Total Liabilities and Stockholders' Equity................................ $251,675 $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 Nine Months Ended
(Dollars in thousands, except per share data) 09/30/98 09/30/97 09/30/98 09/30/97
=====================================================================================================================
(Unaudited)
Interest income:
Loans receivable.................................................. $ 3,628 $3,075 $10,458 $ 9,513
Discounted loans receivable....................................... 618 658 1,833 3,868
Mortgage-backed securities........................................ 32 72 113 228
Interest-earning deposits......................................... 229 160 664 446
------- ------ ------- -------
Total interest income............................................ 4,507 3,965 13,068 14,055
------- ------ ------- -------
Interest expense:
Deposits.......................................................... 2,367 2,222 6,950 6,345
Custodial escrow balances for
loans serviced................................................... --- 2 --- 7
Borrowed money.................................................... 530 512 1,598 2,208
------- ------ ------- -------
Total interest expense........................................... 2,897 2,736 8,548 8,560
------- ------ ------- -------
Net interest income before provision
for loan losses.................................................. 1,610 1,229 4,520 5,495
Provision for loan losses......................................... 60 --- 295 60
------- ------ ------- -------
Net interest income after provision
for loan losses.................................................. 1,550 1,229 4,225 5,435
------- ------ ------- -------
Non-interest income:
Purchased mortgage servicing income (loss), net................... (1,259) 101 (1,536) 270
Mortgage banking.................................................. 332 173 993 522
Net gain (loss) on sale of:.......................................
Branch........................................................ 989 - 989 -
Loans held for sale.............................................. 156 174 540 207
Discounted loans receivable...................................... 115 34 830 57
Foreclosed real estate........................................... (6) (6) (97) 74
Securities available-for-sale.................................... 32 220 350 427
Fees for other customer services.................................. 157 112 516 335
Data processing................................................... 3,712 2,880 9,732 8,389
Other............................................................. 221 578 949 644
------- ------ ------- -------
Total non-interest income.......................................... 4,449 4,266 13,266 10,925
------- ------ ------- -------
Non-interest expense:
Compensation and benefits......................................... 2,182 1,913 6,527 6,443
Occupancy and equipment........................................... 1,393 1,273 4,102 3,626
Federal deposit insurance premiums................................ 26 27 82 74
Data processing cost of services.................................. 1,029 1,025 2,750 1,972
Other general and administrative expenses......................... 1,356 1,297 3,340 3,452
Amortization of goodwill.......................................... 26 26 77 78
------- ------ ------- -------
Total non-interest expense......................................... 6,012 5,561 16,878 15,645
------- ------ ------- -------
Earnings (loss) before provision for income tax expense (benefit).. (13) (66) 613 715
Income tax expense (benefit)....................................... 28 (78) (13) 79
------- ------ ------- -------
Net earnings (loss)............................................... (41) 12 626 636
------- ------ ------- -------
Basic earnings (loss) per share................................... (.02) .01 .32 .33
------- ------ ------- -------
Diluted earnings (loss) per share.................................. (.02) .01 .30 .31
------- ------ ------- -------
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 Nine Months Ended
(Dollars in thousands) 09/30/98 09/30/97 09/30/98 09/30/97
=================================================================================================================
(Unaudited)
Net Income (Loss)................................... $ (41) $ 12 $ 626 $ 636
Other Comprehensive Income:
Unrealized holding gains (losses) arising
during period, net of tax........................... (150) 116 (47) 209
----- ----- ----- -----
Less reclassification adjustment for gains included
in net income net of tax............................ (20) (136) (217) (265)
----- ----- ----- -----
Other comprehensive (loss)........................... (170) (20) (264) (56)
----- ----- ----- -----
Comprehensive income (loss).......................... (211) (8) 362 580
----- ----- ----- -----
- -------------------------------------------------------------------------------
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 Common
Additional Other Stock Stock Total
Common paid-in Retained Comprehensive acquired acquired Stockholders'
Stock Capital earnings Income (Loss) by ESOP by MRP Equity
-------- ---------- --------- -------------- --------- --------- ------------
Nine months ended September 30, 1997
- ------------------------------------
Balance at December 31, 1996.. $ 4 $7,382 $ 9,444 $ 12 ($117) ($165) $16,560
Net income.................... --- --- 636 --- --- --- 636
Proceeds from issuance of
stock........................ 1 411 --- --- --- --- 412
Other comprehensive income
(loss), net of tax........... --- --- --- (56) --- --- (56)
Principal payments on ESOP
loan......................... --- --- --- --- 45 --- 45
Purchase of MRP Stock......... --- --- --- --- --- (486) (486)
Amortization of purchase
price of MRP stock.......... --- --- --- --- --- 9 9
Proceeds from exercise of
stock options............... --- 525 --- --- --- --- 525
Tax benefit of stock options
exercised.................... --- 193 --- --- --- --- 193
Fair value adjustment for
committed ESOP shares........ --- 34 --- --- --- --- 34
Cash dividends................ --- --- (263) --- --- --- (263)
--- ----- ------ ---- --- ---- -------
Balance at September 30, 1997. $ 5 8,545 9,817 (44) (72) (642) 17,609
=== ===== ====== ==== === ==== =======
Nine-months ended September 30, 1998
- ------------------------------------
Balance at December 31, 1997.. $ 5 8,570 9,915 (33) (57) (296) 18,104
Net income.................... --- --- 626 --- --- --- 626
Proceeds from the issuance of
stock........................ 15 17 --- --- --- --- 32
Other comprehensive income
(loss), net of tax........... --- --- --- (264) --- --- (264)
Principal payments on ESOP
loan......................... --- --- --- --- 45 --- 45
Amortization of purchase
price of MRP stock.......... --- --- --- --- --- 9 9
Proceeds from exercise of
stock options................ --- 155 --- --- --- --- 155
Tax benefit of stock options
exercised.................... --- 39 --- --- --- --- 39
Fair value adjustment for
committed ESOP shares........ --- 37 --- --- --- --- 37
Cash dividends................ --- --- (258) --- --- --- (258)
--- ----- ------ ---- --- ---- -------
Balance at September 30, 1998. $20 8,818 10,283 (297) (12) (287) 18,525
=== ===== ====== ==== === ==== =======
See accompanying notes to unaudited consolidated financial statements.
4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
09/30/98 09/30/97
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income......................................................................... $ 626 $ 636
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation...................................................................... 1,718 1,604
Accretion of discounts and deferred loan fees..................................... (513) (852)
Provision for loan losses and foreclosed real estate.............................. 335 98
(Gain) loss on sale of:
Securities available-for-sale..................................................... (350) (427)
Loans receivable.................................................................. (540) (207)
Discounted loans receivable....................................................... (830) (57)
Foreclosed real estate............................................................ 97 (74)
Other.......................................................................... 616 ---
Loans originated and purchased for sale............................................ --- (14,428)
Proceeds from sale of loans receivable............................................. 26,265 39,880
Proceeds from sale of discounted loans receivable.................................. 9,969 14,736
Gain on sale of branch............................................................. 989 ---
Proceeds from PMSR sale............................................................ 135 ---
Amortization of goodwill........................................................... 77 78
Decrease in purchased mortgage servicing rights.................................... 166 136
Amortization of purchase price of MRP and ESOP stock............................... 54 54
Recognition of fair value of ESOP shares scheduled to be released.................. 37 34
FHLB stock redemption.............................................................. 1,424 157
Decrease in accrued interest receivable, prepaid expenses, and other assets....... 132 1,329
Increase (decrease) in accrued interest payable and other liabilities.............. 705 (1,228)
--------- ---------
Net cash provided by operating activities......................................... 41,112 41,469
--------- ---------
Cash flows from investing activities:
Loans originated and purchased for portfolio....................................... (108,848) (63,780)
Discounted loans receivable purchased.............................................. (444) (8,947)
Principal repayments on:
Loans receivable and discounted loans receivable................................... 57,451 36,806
Mortgage-backed securities......................................................... 602 713
Proceeds from sale of:
Foreclosed real estate............................................................ 2,241 2,704
Mortgage-backed securities........................................................ 374 ---
Premises and equipment............................................................ 169 ---
Securities available-for-sale..................................................... 5,526 4,074
Proceeds from liquidating dividend............................................. --- 67
Purchase of:
Securities available-for-sale..................................................... (6,882) (4,678)
Premises and equipment............................................................ (1,576) (3,259)
Loan Servicing Rights............................................................. (197) (1,617)
Net cash (paid) in purchase of subsidiary......................................... (503) (486)
--------- ---------
Net cash used in investing activities............................................... (52,087) (38,403)
--------- ---------
Cash flows from financing activities:
Net increase in deposits.......................................................... 19,631 18,521
Proceeds from borrowed funds...................................................... 21,473 76,392
Repayment of borrowed funds....................................................... (26,660) (96,647)
Proceeds from stock issuance...................................................... 32 412
Proceeds from exercise of stock options........................................... 155 525
Dividends paid.................................................................... (258) (263)
Net increase in advance payments by borrowers for taxes and insurance............. 498 520
Net increase (decrease) in custodial escrow balances for loans serviced........... (691) 1,135
--------- ---------
Net cash provided by financing activities........................................ 14,180 595
--------- ---------
Net increase in cash and cash equivalents......................................... 3,205 3,661
Cash and cash equivalents at beginning of period................................... 8,677 13,276
--------- ---------
Cash and cash equivalents at end of period......................................... $ 11,882 $ 16,937
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense................................................................... $ 8,002 $ 8,487
Income taxes....................................................................... $ 415 $ 80
Non-cash investing activity - transfer of loans to foreclosed real estate........... $ 2,476 $ 3,141
========= =========
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 nine-months ended September 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 "Company" or "Holding Company") and its
wholly owned subsidiaries, On-Line Financial Services, Inc. ("On-Line"), Argo
Federal Savings Bank, FSB ("Argo Savings," "Savings Bank" or "the 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 $51,000 and $61,000, to
the Plan for the nine-months ended September 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 $41,000 and $36,000 for the nine-months ended September
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.
Argo Savings maintains 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 20,932 shares at $2.88 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
September 30, 1998, the unpaid principal balance on the ESOP note was $12,300.
The note has an interest rate of 8.25% and matures on May 27, 1999. The ESOP
has purchased an additional 52,080 shares at an average price of $4.70 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 $47,000 and $51,000 were made to the ESOP to fund principal and
interest for the nine-months ended September 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 $37,000 and
$34,000 for the nine-months ended September 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 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
nine-months ended September 30, 1998. During the nine-months ended September 30,
1997, 6,300 shares were awarded to certain key On-Line employees. Amortization
expense totaled $9,000 for the nine-month period ended September 30, 1998.
The Board of Directors of Argo Savings formed a MRP effective October 31, 1991,
which purchased 6.8% or 61,600 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 11,960 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 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
7
to four hundred (400). 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 nine-months ended September
30, 1998. Amortization expense totaled $55,000 for the nine-months ended
September 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 400,000 shares may be
awarded. Employees and directors of the company and its subsidiaries are
eligible. As of September 30, 1998, 12,000 shares 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 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 and 42,980 of which were
exercised during the nine-months ended September 30, 1998. At September 30,
1998, options to purchase 171,468 shares were outstanding.
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 September 30, 1998, Argo
Savings' capital requirements under OTS regulations and its actual capital
ratios at that date:
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
---------- ---------- -------- ------- -------
(Dollars in Thousands)
Risk-based 8.0% 11.29% $10,563 $14,903 $ 4,340
Core 3.0 5.96 7,040 13,994 6,954
Tangible 1.5 5.96 3,520 13,994 10,474
NOTE D - EARNINGS PER SHARE
Basic earnings per share for the nine and three-month periods ended September
30, 1998, and 1997, is based on a weighted average number of shares outstanding
of 1,997,172, 1,919,916, 1,998,008, and 1,943,260, respectively. Diluted
earnings per share for the three and nine-month periods ended
8
September 30, 1998, and 1997, is based on a weighted average number of shares
outstanding of 2,103,300, 2,062,120, 2,124,136, and 2,085,464, respectively.
Three Months Ended Nine Months Ended
------------------ -----------------
09/30/98 09/30/97 09/30/98 09/30/97
-------------------------------------------------------
Net Income (loss)........................................................ $ (41,000) $ 12,000 $ 626,000 $ 636,000
Weighted average common shares outstanding............................... 1,998,008 1,943,260 1,977,172 1,919,916
Basic earnings (loss) per share......................................... $ (.02) $ .01 $ .32 $ .33
Total weighted average common shares outstanding......................... 1,998,008 1,943,260 1,977,172 1,919,916
Additional dilutive shares of stock options outstanding.................. 126,128 142,204 126,128 142,204
----------------------- ------------------------
Total weighted average common shares and
Equivalents outstanding for diluted computation.......................... 2,124,136 2,085,464 2,103,300 2,062,120
========== =========== ========== ==========
Diluted earnings (loss) per share....................................... $ (.02) $ .01 $ .30 $ .31
========== =========== ========== ==========
NOTE E - COMMITMENTS AND CONTINGENCIES
At September 30, 1998, Argo Savings had loan commitments totalling $29.5 million
and $5.7 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 $2.8 million.
NOTE F- STOCK SPLIT
On September 23, 1998, the Board of Directors declared a four-to-one stock split
of the outstanding Common shares of the Company, to all holders of Common Stock
(Common Stock equivalents) of record as of October 16, 1998. All references to
number of shares, except shares authorized, and to per share information in the
consolidated financial statements have been adjusted to reflect the stock split
on a retroactive basis.
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 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 ("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. 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.
10
Argo Savings is a member of the Federal Home Loan Bank ("FHLB") System, and its
deposits are insured to the maximum allowable amount by the Federal Deposit
Insurance Corporation ("FDIC").
Argo Savings operates one (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, offset by allowances recorded on 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 three and nine-month periods ended September 30,
1998, and 1997, the Company recorded gains of $115,000, $34,000, $830,000, and
$57,000, respectively, on sales of 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 September 30, 1998, totaled $13.6 million or 5.4% of total assets
as compared to $38.9 million or 17.0 % of total assets at September 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.
11
The original transaction value, including asset notes and contingent payments
(based on future defined net revenues of On-Line over a seven year period ending
October 2002), was not to exceed $10.0 million. During 1997, the Company
asserted claims that the selling shareholders on On-Line had breached certain
representations and warranties in the purchase contract. Following a series of
negotiations, the selling shareholders agreed to reduce the purchase price by
$1,098,000. As a result, at December 31, 1997, the amount paid or payable,
exclusive of the future contingent payments for On-Line, was $836,000 less than
the fair value of the net assets acquired. Any future contingent payments will
reduce this difference. The Company has purchased from certain of the former
shareholders their rights to 34.70% of the future contingent payments. The
Company paid $196,000 for these future contingent payments. Additionally, a
payment of $479,000 was made in April 1998, further reducing the remaining
contingent payments to former stockholders to an amount not to exceed $3.5
million. 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. On-Line currently provides data processing services to
thrifts, community banks, savings banks, and mortgage bankers throughout the
Midwest. In addition, On-Line provides data report retrieval services to an
insurance company with offices located throughout the United States. Management
believes that On-Line's orientation toward superior customer service and
specialized products allows it to effectively compete in these markets. The
acquisition by the Company 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 and high speed communication 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.
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
$11.9 million at September 30, 1998.
12
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the nine-months ended September 30, 1998, and 1997,
Argo Savings originated and purchased loans receivable and discounted loans
receivable in the principal amounts of $109.3 million and $87.2 million,
respectively. During the nine-months ended September 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
$58.1 million and $37.5 million, respectively, and the proceeds from the sale of
loans receivable and discounted loans receivable, securities available-for-sale
and foreclosed real estate of $44.5 million and $61.4 million, respectively.
During the nine-month periods ended September 30, 1998, and 1997, additional
funding was provided by the increase in deposits of $19.6 million and $18.5
million, respectively, partially offset by decreases in borrowings of $5.2
million and $20.3 million for the nine-month periods ended September 30, 1988,
and 1997.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At September 30, 1998, Argo Savings liquid assets were 9.33%
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 September 30, 1998, Argo Savings' capital exceeded all of the capital
requirements of the OTS. The Savings Bank's tangible, core and risk-based
capital ratios were 5.96%, 5.96% and 11.29%, 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 September 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 $ 15.4 million to $251.7 million at September 30, 1998,
from $236.3 million at December 31, 1997.
Cash and interest-earning deposits increased $3.2 million to $11.9 million at
September 30, 1998.
Loans receivable and discounted loans receivable increased $14.9 million to
$199.3 million at September 30, 1998, due to origination and purchase of $109.3
million of loans, and discount accretion of $513,000, partially offset by
principal repayments of $57.5 million, the sale of $34.9 million of loans
receivable and discounted loans receivable, and the transfer of $2.5 million of
loans and discounted loans receivable to foreclosed real estate.
Mortgage loan servicing rights ("PMSRs") decreased by $1.7 million to $5.0
million at September 30, 1998 primarily as a result of allowances recorded on
these assets totalling $1.6 million.
Deposits increased $ 19.6 million to $192.1 million at September 30, 1998, from
$172.5 million at December 31, 1997. The increase can primarily be attributed
to an aggressive marketing effort during the first nine-months of 1998, aimed at
attracting a larger customer base and interest credited of $6.3 million for the
nine-months ended September 30, 1998. Brokered deposits at September 30, 1998,
totaled $6.7 million and had a weighted average maturity of one (1) year.
Borrowings decreased $5.2 million to $29.0 million at September 30, 1998, from
$34.2 million at December 31, 1997. The decrease in advances was due to the
significant increase in deposits during the nine-months ended September 30,
1998.
Custodial escrow balances for loans serviced decreased $691,000 to $5.7 million
at September 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 September 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 $421,000 to $18.5 million at September 30, 1998,
from $18.1 million at December 31, 1997. The increase was caused by the
exercise of stock options for $155,000, a $45,000 principal payment on the ESOP
loan, $37,000 as a result of a fair value adjustment for committed ESOP shares,
$32,000 proceeds from the issuance of 895 shares, $9,000 from amortization of
the purchase price of MRP stock, a $39,000 tax benefit related to the exercise
of the options and net income of $626,000, partially offset by dividends paid of
$258,000 and an other comprehensive loss of $264,000.
14
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the investment in purchased mortgage servicing rights which provide a
source of non-interest income and also act as a hedge against the decline in the
value of fixed rate mortgages in a rising interest rate environment; (v) the
increase of non-interest bearing custodial accounts related to the purchased
mortgage servicing rights; and (vi) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a 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 $41.7 million or 17.8%
of total assets at September 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.
PURCHASED MORTGAGE SERVICING RIGHTS
At September 30, 1998, the Savings Bank owned directly and indirectly, $5.0
million in PMSRs. The Bank's principal investments in PMSRs is through a $4.7
million equity investment in three limited partnerships. The three limited
partnerships were established for the sole purpose of purchasing mortgage
servicing rights. The Bank's ownership of PMSRs carries interest rate risk
because the total amount of 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
economic trends, prevailing mortgage rates and the housing market in general.
15
During periods of declining interest rates, as existed in the third quarter,
many borrowers refinance their mortgage loans. Accordingly, prepayments of
mortgage loans increase and the loan administration income related to the
mortgage loan servicing rights corresponding to a mortgage loan ceases an
underlying loans are prepaid. Consequently, the market value of PMSRs tends to
decrease during periods of declining interest rates, since greater prepayments
can be expected. The income derived from and the market value of the Bank's
PMSRs, therefore, may be adversely affected during periods of declining interest
rates. The Bank accounts for its investment in the three limited partnerships
using the equity method. Income or loss is recorded based upon information
received from Dovenmuehle Mortgage, Inc. ("DMI"), which is a Delaware
corporation engaged principally in mortgage servicing activities. DMI obtains
quarterly valuations from an independent appraiser for each limited partnership.
At September 30, 1998, the valuation of all three of the Bank's limited
partnerships had a market value lower than the current book value. The general
partner recorded a valuation allowance during the three and nine months ended
September 30, 1998. The Bank's proportionate share of the valuation allowance
was $1.2 million and $1.6 million respectively for the three and nine-month
periods ended September 30, 1998. There can be no assurance that such reserves
are adequate or that additional reserves will not be required in the future.
YEAR 2000
Financial service organizations such as the Bank are heavily reliant upon
computer systems in processing and accounting for services provided to
customers. Substantially all of the Company's major computer processing is
contracted with third party providers. Although the contracted vendors bear the
responsibility of making their systems "Year 2000 Ready," assuming the costs
associated with necessary changes, keeping the Company apprised of their
progress in meeting established benchmarks, and certifying to the Company that
the systems are in fact "Year 2000 Ready," the Company bears ultimate
responsibility for testing, due diligence and assurance that its major vendors
will continue to provide service without interruption due to the change in
century at year-end 1999.
In 1996, the Company and the Bank established an internal Technology Committee
to identify and/or resolve issues related to the Year 2000 date change. The
Technology Committee has inventoried all of the systems used by the Company and
the Bank to verify that 1) testing is performed regularly, 2) necessary changes
are being identified and addressed, and 3) is in the process of developing a
contingency plan for the Company and the Bank.. The Bank management estimates
that its Year 2000 Readiness expenses will total approximately $100,000.
On-Line has implemented a company-wide business planning initiative to prepare
On-Line's multiple platform environment for the Year 2000, which includes due
diligence efforts, certain program remediation, and testing of all date-
sensitive hardware and operating systems, financial application systems product
offering, and other ancillary interface applications and systems. On-line
expects to incur primarily internal staffing and consulting services expenses
related to internal Year 2000 efforts, as well as costs for software tools and a
dedicated testing platform. Such costs for testing and conversion of On-Line's
infrastructure and applications within its processing environment are estimated
at $600,000 to $800,000 over the next three years. On-Line estimates
approximately $450,000 to $600,000 will be related to salaries and benefits for
additional personnel Year 2000 incentive plans. The remaining $150,000 to
$200,000 is estimated for indirect costs related to
16
depreciation and amortization expense on equipment and software. Through
September 30, 1998, On-Line has incurred approximately $100,000 in direct costs
and $7,000 in indirect costs related to Year 2000 efforts. In addition to the
direct and indirect costs necessary for On-Line to meet its contractual and
regulatory requirements for its existing and future clients to ensure "Year 2000
Readiness"' On-Line will also incur certain costs related to optional
subscription services for its clients to perform their own Year 2000 testing
both at On-Line's facility and from their institution locations. Costs
associated with these optional services are expected to be offset by revenues
earned from providing these testing services.
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 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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued by FASB in June 1998. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and, if so,
on the reason for holding it. If certain conditions are met, entities may elect
to designate a derivative instrument as a hedge of exposures to changes in fair
17
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instruments is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. The Company anticipates
that the adoption of SFAS No. 133 will not have a material impact on the
Company's financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective the first fiscal quarter after
December 15, 1998. This statement amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities". This statement revises the accounting for retained
securities and beneficial interests along with the classification of the
retained securities and beneficial interests. Management of the company does not
expect that the adoption of SFAS No. 134 will have a material 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 September 30, 1998, Argo Bancorp had ninety-seven (97) properties, totalling
$4.2 million classified as foreclosed real estate, as compared to one hundred
thirteen (113) properties totalling $4.3 million at December 31, 1997. The
underlying properties on September 30, 1998, consisted primarily of single
family residences. The foreclosed real estate has been written down to its
estimated net realizable value at September 30, 1998. The total amount of loans
receivable ninety (90) days or more past due at September 30, 1998, was $6.0
million or 3.23% of total loans receivable compared to $5.5 million or 3.57% of
total loans on December 31, 1997. At September 30, 1998, loans ninety (90) days
or more past due totalling $5.9 million were secured by one-to-four family
residences. Non-performing assets at September 30, 1998, totaled $10.2 million
or 4.0% of total assets compared to $9.8 million or 4.14% of total assets at
December 31, 1997. Excluded from these totals is $2.7 million of discounted
loans ninety (90) days or more past due at September 30, 1998. Discounted loans
that are often purchased with the intent to foreclose and sell the underlying
property are excluded from non-performing loans.
The allowance for loan losses is maintained at a level determined to be adequate
by management to absorb future charge-offs of loans deemed uncollectable. At
September 30, 1998 the allowance for loan losses totaled $910,000 or .49% of net
loans receivable as compared to $714,000 or .56% of net loans receivable at
September 30 ,1997. In addition the Bank maintains an allowance for losses on
Real Estate Owned ("REO"). At September 30, 1998 the allowance for REO loss was
$302,000 or 7.25% of the REO portfolio as compared to $76,000 or 1.75% at
September 30, 1997.
18
Determination of an appropriate level of allowance for loan losses necessarily
involves a high degree of judgement. Primary consideration in this evaluation
are prior loan loss experience, the character and mix of the loan portfolio,
adverse situations which may affect a borrower's ability to repay, size of the
loan portfolio, business and economic conditions and management's estimate of
potential losses. Management believes that the allowance for loan losses is
currently adequate. However, there can be no assurances as to whether such
allowance may be increased in future periods. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgement of information
available to them at the time of their examination.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE SIX AND THREE
MONTH PERIODS ENDED JUNE 30, 1998, AND 1997.
GENERAL
The Company recorded a net loss of $41,000 or ($0.02) per diluted share for the
three months ended September 30, 1998 as compared to net income of $12,000 or
$.01 per diluted share for the three months ended September 30, 1997. The loss
was primarily the result of a pre-tax allowance totalling $1.2 million recorded
on the Company's investment in limited partnerships, which invest in Mortgage
loan servicing rights. This allowance was partially offset by a pre-tax gain of
$989,000 recorded on the sale of the Bank's Gurnee Banking Center to CIB Bank.
Net income for the nine-months ended September 30, 1998, was $626,000 or $.30
per diluted share compared to net income of $636,000 or $.31 per diluted share
for the nine-months ended September 30, 1997.
INTEREST INCOME
Interest income for the three-months ended September 30, 1998, totaled $4.5
million as compared to $4.0 million for the comparable 1997 period. The $542,000
positive variance from the same period last year was primarily the result of an
increase of $27.6 million in average interest-earning assets which were
partially offset by a six (6) basis point decline in yield to 8.26%.
Interest income for the nine-months ended September 30, 1998, totaled $13.1
million, as compared to $14.1 million for the comparable 1997 period. The $1.0
million decrease was the result of a ninety-six (96) basis point decline in the
weighted average yield on interest earning assets to 8.50% for the nine-months
ended September 30, 1998. The decrease in yield is primarily attributable to the
decreased investment in discounted loans receivable, which typically have higher
yields. Partially offsetting the decline in yield was an increase of $7.0
million in the balance of average interest- earning assets for the nine months
ended September 30, 1998 when compared to the same period last year.
INTEREST EXPENSE
Interest expense for the three-months ended September 30, 1998, totaled $2.9
million as compared to $2.7 million for the comparable 1997 period. The higher
cost was the result of a $20.3 million increase in average interest-bearing
liabilities which were partially offset by a twenty one (21) basis point decline
in the weighted average cost of interest-bearing liabilities to 5.20% for the
three- months ended September 30, 1998 as compared to the same period last year.
19
Interest expense for the nine-months ended September 30, 1998, totaled $8.5
million as compared to $8.6 million for the comparable 1997 period. The
decrease was the result of a twelve (12) basis point decline in the weighted
average cost of interest-bearing liabilities to 5.36% which was partially offset
by an increase of $4.4 million in average interest-bearing liabilities.
NET INTEREST INCOME
Net interest income for the three-months ended September 30, 1998, was $1.6
million as compared to $1.2 million for the comparable 1997 period. The
$381,000 increase was primarily the result of a fifteen (15) basis point
improvement in the effective net spread to 3.03% from 2.88% for the three months
ended September 30, 1998 when compared to the same period last year.
Net interest income totaled $4.5 million for the nine-months ended September 30,
1998, reflecting a decrease of $975,000 from the amount recorded in the
comparable 1997 period. The decrease was primarily the result of an eighty-four
(84) basis point decrease in the effective net spread to 3.13% from 3.97% for
the comparable 1997 period.
PROVISION FOR LOAN LOSSES
A general loan loss provision of $60,000 and $295,000 was recorded during the
three and nine-month periods ended September 30, 1998, respectively, as compared
to $60,000 for the nine-months ended September 30, 1997. No provision was
recorded by the Company during the three-months ended September 30, 1997. The
increase in the loan loss provision for the three and nine-month periods ended
September 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. Charge-offs totaled
$1,000 and $20,000 for the three and nine month periods ended September 30, 1998
as compared to $11,000 for the nine months ended September 30, 1997. There were
no charge offs during the three months ended September 30, 1997. 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 by $183,000 for the three-months ended September
30, 1998 primarily as a result of a $989,000 gain recorded on the sale of Gurnee
branch to CIB Bank, a $832,000 improvement in data processing income which was
attributable to increased sales volume and to de-conversion revenues at the
OnLine subsidiary, and an increase of $159,000 in mortgage banking income.
Partially offsetting the increases to non-interest income was a decline of $1.4
million in purchased servicing income which was the result of a valuation
allowance totalling $1.2 million recorded on the Company's investment in limited
partnerships, which invest in mortgage loan servicing rights. There can be no
assurances that such reserves are adequate or that additional reserves will not
be required in the future. At September 30, 1998, the Company had $4.7 million
in such limited partnerships.
Non-interest income increased $ 2.3 million or 21.4% to $13.3 million for the
nine months ended September 30, 1998. The increase was in part the result of
the above mentioned sale of the Gurnee
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branch, and to an aggregate increase of $858,000 in gains on sale of loans
receivable, discounted loans receivable, securities available-for-sale, and
foreclosed real estate. In addition, data processing income increased by $1.3
million as a result of increased revenues at the On-Line subsidiary. Other
miscellaneous income also increased by $305,000 for the nine months ended
September 30, 1998 as compared to the year ago period as a result of increased
sales of add-on features by On-Line. Partially offsetting the increases to non-
interest income was a decline of $1.8 million in purchased servicing income
which was the result of valuation allowances totalling $1.6 million recorded on
the Company's investment in limited partnerships, which invest in mortgage loan
servicing rights.
NON-INTEREST EXPENSE
Non-interest expense increased $451,000 and $1.2 million the three and nine-
month periods ended September 30, 1998, respectively. The higher costs were
primarily due to increases in salaries and employee benefits, occupancy and data
processing cost of services. Salaries and employee benefits increased by
$269,000 and $84,000 for the three and nine-month periods ended September 30,
1998 primarily due to normal salary increases, additions to staff at the On-Line
subsidiary, and to higher commissions paid to mortgage loan originators as a
result of the increase in volume due to refinancing activity. Occupancy
expenses increased $120,000 and $476,000 for the three and nine-month periods
ended September 30, 1998, primarily due to facility improvements and equipment
upgrades at both Argo Savings and On-Line and to higher accrual for real estate
and property taxes. Also contributing to the increase was the opening of Argo
Savings permanent branch location on the Westside of Chicago, Illinois during
May 1997. The $778,000 increase in data processing cost of services for the
nine months ended September 30, 1998 was due to hardware and software upgrades
and increased hardware costs as a result of the increased hardware sales
activity at On-Line.
INCOME TAX EXPENSE
The provision for income taxes increased by $106,000 for the three months ended
September 30, 1998. This increase as compared to the same period last year was
primarily due to various tax benefits provided in the year ago period. For the
nine month period ended September 30, 1998, the Company recorded a net income
tax benefit of $13,000 which was a decrease of $92,000 as compared to the same
period last year. This nine month decrease was due in part to the decrease in
the nine month earnings as well as the current tax benefits reported for various
tax credits.
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.
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ITEM 2. CHANGES IN SECURITIES
On July 28, 1998, the Company declared a stock dividend of $0.005 Goodwill
Convertible Preferred Stock ("Goodwill Preferred Stock") to all holders of
common stock of the Company, par value $0.01 ("Common Stock") as of August 24,
1998 on a share for share basis. As a result, 592,681 shares of Goodwill
Preferred Stock were issued to holders of Common Stock on August 31, 1998. The
Goodwill Preferred Stock entitles the holders thereof to 75% of any settlement
damages awarded upon a final judgement to the Bank, net of expenses and certain
other items, as a result of the Bank's lawsuit against the United States seeking
damages for breach of contract related to the limitation and exclusion of
supervisory goodwill in the computation of the Bank's regulatory capital in
connection with the Company's acquisition of the Bank in November 1987
("Goodwill Litigation"). At the time of the final judgement and award of
damages, if any, the Goodwill Preferred Stock will either be (i) redeemed by the
Company for cash or (ii) become convertible into Common Stock. The Company will
be entitled to retain the remaining 25% of any damages awarded to the Bank, net
of expenses and certain other items, in the Goodwill Litigation.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held July 15, 1998 with the following
resolutions ratified and approved in all respects:
I. Amendment of Increase the Number of Authorized Shares
For: 464,966 votes 93.4% Against: 1,100 votes 0.02%
II. Amendment to Move Notice Provision for Stockholder Meetings to Bylaws
For: 464,936 votes 93.4% Against: 1,130 votes 0.02%
III. Amendment to Permit Board of Directors to Fix the Number of Directors
For: 464,936 votes 93.4% Against: 1,130 votes 0.02%
IV. Amendment to Provide that Directors Be Removable by the Stockholders
Only For Cause
For: 485,985 votes 93.6% Against: 101 votes
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V. Amendment to Increase the Vote Requirement for Approval of Certain
Business Combinations
For: 465,936 votes 93.6% Against: 130 votes
VI. Amendment to Permit Board of Directors to Consider Broader Interests in
Evaluating Offers
For: 464,964 votes 93.4% Against: 1,102 votes 0.02%
VII. Amendments to Provide Broader Indemnification
For: 464,935 votes 93.4% Against: 131 votes
VIII. Amendment to Make Technical Changes by Removing Certain Obsolete
Provisions
For: 464,966 votes 93.4% Against: 1,100 votes 0.02%
ITEM 5. OTHER INFORMATION
On November 10, 1998, the Company completed a $17,250,000 Trust Preferred
Securities offering issued through Argo Capital Trust Co. ("Argo Trust"), a
trust of which the Company owns 100% of the common securities. Pursuant to the
offering, Argo Trust sold 1,725,000 shares of 11% Capital Securities
(liquidation amount $10.00 per security) which were fully and unconditionally
guaranteed by the Company. The proceeds from the offering were simultaneously
invested in 11% Junior Subordinated Debentures issued by the Company which are
scheduled to mature on November 6, 2028.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.**
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share (See
Note D)
27.0 Financial Data Schedule (filed herewith)
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.
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SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: November 12, 1998 /S/ John G. Yedinak
-------------------- ------------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director
Date: November 12, 1998 /S/ George L. Koehm
-------------------- ------------------------------------------
George L. Koehm, Interim Chief Financial
Officer
25