1
EXHIBIT 13
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
2
ARGO BANCORP, INC. AND SUBSIDIARIES
Summit, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
CONTENTS
REPORT OF INDEPENDENT AUDITORS 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Argo Bancorp, Inc.
Summit, Illinois
We have audited the accompanying consolidated statements of financial condition
of Argo Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The accompanying consolidated financial
statements of the Company for the year ended December 31, 1997 were audited by
other auditors whose report dated March 24, 1998 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Argo
Bancorp, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 17, 2000
4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
Cash $ 5,603 $ 3,216
Interest-earning deposits 32,069 6,880
--------- ---------
Total cash and cash equivalents 37,672 10,096
Trading account securities 668 693
Securities available-for-sale 14,364 7,208
Securities held-to-maturity (fair value of $24,082) 25,859 --
Loans receivable, net 268,290 232,788
Discounted loans receivable, net 9,170 12,401
Mortgage loan servicing rights 464 593
Investment in limited partnership 4,494 4,469
Investment in GFS preferred stock 4,600 --
Stock in Federal Home Loan Bank of Chicago 2,303 1,911
Foreclosed real estate, net 2,280 3,875
Premises and equipment, net 8,514 4,787
Debt issuance costs related to junior subordinated debt, net 1,838 1,657
Accrued interest receivable 3,392 2,024
Prepaid expenses and other assets 8,856 12,029
Net assets of discontinued operation -- 6,545
--------- ---------
Total assets $ 392,764 $ 301,076
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 301,673 $ 232,980
Borrowed money 40,336 21,051
Advance payments by borrowers for taxes and insurance 902 853
Custodial escrow balances for loans serviced for others 5,476 5,340
Accrued interest payable 966 661
Other liabilities 6,039 3,993
Junior subordinated debt 17,784 17,784
Stockholders' equity
Preferred stock 3 3
Common stock 20 20
Additional paid-in capital 8,829 8,829
Retained earnings - substantially restricted 12,260 10,084
Employee Stock Ownership Plan loan (426) --
Unearned stock awards (248) (284)
Accumulated other comprehensive loss (850) (238)
--------- ---------
Total stockholders' equity 19,588 18,414
--------- ---------
Total liabilities and stockholders' equity $ 392,764 $ 301,076
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
5
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Interest income
Loans receivable $ 18,564 $ 14,445 $ 12,072
Discounted loans receivable 1,235 2,179 5,249
Mortgage-backed securities available-for-sale 114 143 293
Securities available-for-sale 1,011 252 288
Securities held-to-maturity 1,167 -- --
Interest-earning deposits 1,805 606 361
-------- -------- --------
Total interest income 23,896 17,625 18,263
-------- -------- --------
Interest expense
Deposits 12,542 9,414 8,581
Borrowed money 1,567 1,681 2,226
Junior subordinated debt 1,905 272 --
-------- -------- --------
Total interest expense 16,014 11,367 10,807
-------- -------- --------
Net interest income 7,882 6,258 7,456
Provision for loan losses 965 355 210
-------- -------- --------
Net interest income after provision for loan losses 6,917 5,903 7,246
Noninterest income
Loan servicing income 1,372 1,626 962
Net gain (loss) on sale of
Loans held for sale 200 853 217
Discounted loans receivable 188 695 279
Foreclosed real estate (533) (228) 19
Securities available-for-sale (2) 234 710
Profits on trading account activity 119 245 --
Branch locations 86 976 --
Fees and service charges 638 702 477
Net income (loss) on investment in limited partnership 166 (1,399) 341
Other 106 106 146
-------- -------- --------
Total noninterest income 2,340 3,810 3,151
-------- -------- --------
- --------------------------------------------------------------------------------
(Continued)
3.
6
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Noninterest expense
Compensation and benefits $ 3,741 $ 4,038 $ 4,301
Occupancy and equipment 1,637 1,663 1,347
Federal deposit insurance premiums 146 112 102
Loan expense 797 816 620
Professional fees 572 992 1,261
Advertising and promotion 253 315 382
Goodwill amortization 47 102 102
Data processing 396 334 289
Other 1,490 1,479 1,244
---------- ---------- ----------
Total noninterest expense 9,079 9,851 9,648
---------- ---------- ----------
Income (loss) from continuing operations before income taxes 178 (138) 749
Income tax expense (benefit) (336) (383) 51
---------- ---------- ----------
Income from continuing operations 514 245 698
Income from discontinued operation (net of tax) 135 286 125
Gain on sale of discontinued operation (net of tax) 1,928 - -
---------- ---------- ----------
Income from discontinued operations 2,063 286 125
---------- ---------- ----------
Net income $ 2,577 $ 531 $ 823
========== ========== ==========
Per share amounts
Income from continuing operations
Basic $ .26 $ .12 $ .36
Diluted .25 .12 .33
Income from discontinued operations
Basic $ 1.06 $ .15 $ .07
Diluted 1.00 .14 .06
Net income
Basic $ 1.32 $ .27 $ .43
Diluted 1.25 .26 .39
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
7
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Accumulated
Other
Com- Total
Additional Unearned prehensive Stock-
Preferred Common Paid-in Retained ESOP Stock Income holders'
Stock Stock Capital Earnings Loan Awards (Loss) Equity
-------- -------- -------- -------- --------- ---------- ---------- ---------
Balance at January 1, 1997 $ -- $ 4 $ 7,382 $ 9,444 $ (117) $ (165) $ 12 $ 16,560
Comprehensive income:
Net income -- -- -- 823 -- -- -- 823
Other comprehensive loss -- -- -- -- -- -- (45) (45)
Total comprehensive income 778
Proceeds from issuance of stock -- 1 411 -- -- -- -- 412
Release of ESOP shares -- -- 50 -- 60 -- -- 110
MRP stock awards earned -- -- -- -- -- 12 -- 12
Proceeds from exercise of stock
options -- -- 525 -- -- -- -- 525
Tax benefits of stock options
exercised -- -- 145 -- -- -- -- 145
Cash dividends ($.18 per share) -- -- -- (352) -- -- -- (352)
Purchase of additional MRP shares -- -- -- -- -- (486) -- (486)
Proceeds from sale of MRP shares -- -- 57 -- -- 343 -- 400
-------- -------- -------- -------- --------- --------- --------- ---------
Balance at December 31, 1997 -- 5 8,570 9,915 (57) (296) (33) 18,104
Comprehensive income:
Net income -- -- -- 531 -- -- -- 531
Other comprehensive loss -- -- -- -- -- -- (205) (205)
Total comprehensive income 326
Release of ESOP shares -- -- 48 -- 57 -- -- 105
MRP stock awards earned -- -- -- -- -- 12 -- 12
Proceeds from exercise of stock
options -- -- 186 -- -- -- -- 186
Tax benefits of stock options
exercised -- -- 40 -- -- -- -- 40
Four-for-one stock split -- 15 (15) -- -- -- -- --
Preferred stock dividend 3 -- -- (3) -- -- -- --
Cash dividends ($.185 per share) -- -- -- (359) -- -- -- (359)
-------- -------- -------- -------- --------- --------- --------- ---------
Balance at December 31, 1998 3 20 8,829 10,084 -- (284) (238) 18,414
Comprehensive income:
Net income -- -- -- 2,577 -- -- -- 2,577
Other comprehensive loss -- -- -- -- -- -- (612) (612)
Total comprehensive income 1,965
Purchase of ESOP shares -- -- -- -- (498) -- -- (498)
Release of ESOP shares -- -- -- -- 72 -- -- 72
MRP stock awards earned -- -- -- -- -- 36 -- 36
Cash dividends ($.20 per share) -- -- -- (401) -- -- -- (401)
-------- -------- -------- -------- --------- --------- --------- ---------
Balance at December 31, 1999 $ 3 $ 20 $ 8,829 $ 12,260 $ (426) $ (248) $ (850) $ 19,588
======== ======== ======== ======== ========= ========= ========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
8
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Income from continuing operations $ 514 $ 245 $ 698
Adjustments to reconcile income from continuing operations
to net cash from operating activities
Depreciation and amortization 1,100 757 676
Accretion of discounts and deferred loan fees 1,761 (1,867) (1,032)
Deferred income tax expense (benefit) (780) (580) 196
Provision for losses on loans receivable
and foreclosed real estate 965 355 248
Loss (gain) on sale of
Loans held for sale (200) (853) (217)
Discounted loans receivable (188) (695) (279)
Securities available-for-sale 2 (234) (710)
Trading account securities (119) (245) --
Foreclosed real estate 533 228 (19)
Branch location (86) (976) --
Net change in trading account activity 279 (448) --
Net change in investment in limited partnership (25) 1,443 (1,731)
Loans originated and purchased for sale, net 10,305 (33,751) 25,884
Proceeds from sale of discounted loans receivable 2,162 10,827 20,990
Goodwill amortization 47 102 104
Amortization of purchased loan servicing rights 129 201 169
MRP stock and ESOP shares earned 108 117 122
Decrease (increase) in accrued interest receivable and
prepaid expenses and other assets 2,855 (5,489) 1,571
Increase (decrease) in accrued interest payable and other liabilities 62 1,725 (1,152)
-------- -------- --------
Net cash from operating activities 19,424 (29,138) 45,518
Cash flows from investing activities
Loans originated and purchased for portfolio, net (49,025) (37,708) (61,368)
Proceeds from maturities of and principal repayments on
securities available-for-sale 3,402 645 855
Proceeds from sale of
Securities available-for-sale 420 2,993 8,668
Stock in Federal Home Loan Bank of Chicago -- 1,360 157
Foreclosed real estate 3,011 3,010 4,543
Purchased loan servicing rights 11,100 -- 120
Premises and equipment -- 89 --
On-Line Financial Services, Inc., net 4,583 -- --
Gurnee branch, net of cash and cash equivalents -- (11,965) --
Banking facilities 5,850 -- --
Purchase of
Loan servicing rights (11,100) -- --
Securities available-for-sale (12,099) (6,157) (8,088)
Securities held-to-maturity (25,859) -- --
Premises and equipment (8,267) (2,065) (3,553)
Stock in Federal Home Loan Bank of Chicago (392) -- --
Cash paid to former stockholders of On-Line (575) (454) --
-------- -------- --------
Net cash from investing activities (78,951) (50,252) (58,666)
- --------------------------------------------------------------------------------
(Continued)
6.
9
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from financing activities
Net increase in deposits $ 68,693 $ 73,760 $ 21,842
Proceeds from borrowed money 24,885 73,968 88,433
Repayment of borrowed money (5,600) (81,875) (103,720)
Proceeds from issuance of junior subordinated debentures,
net of debt issuance expenses (181) 16,115 --
Purchase of MRP shares -- -- (486)
Purchase of additional ESOP shares (498) -- --
Proceeds from stock issuance -- -- 412
Proceeds from sale of MRP stock -- -- 400
Proceeds from exercise of stock options -- 186 525
Dividends paid (401) (359) (352)
Net change in advance payment by borrowers for taxes
and insurance 49 112 717
Net change in custodial balances for loans serviced 136 (1,060) 618
--------- --------- ---------
Net cash from financing activities 87,083 80,847 8,389
Net cash provided by discontinued operations 20 60 98
--------- --------- ---------
20 60 98
Net change in cash and cash equivalents 27,576 1,517 (4,661)
Cash and cash equivalents at beginning of year 10,096 8,579 13,240
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,672 $ 10,096 $ 8,579
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 15,709 $ 10,970 $ 10,717
Income taxes 240 15 76
Supplemental disclosure of noncash investing and
financing activities
Assumption of liability related to sale of On-Line
Financial Services, Inc. $ 546
Preferred stock received related to sale of On-Line
Financial Services, Inc. 4,600
Sale of Gurnee branch
Assets sold $ 351
Cash paid 12,316
---------
Net liabilities sold $ 11,965
=========
Transfer of loans to foreclosed real estate 2,219 $ 3,102 4,955
Deferred gain on sale lease back 2,410
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
10
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Argo Bancorp, Inc. (Argo Bancorp or the Company) and its
wholly owned subsidiary, Argo Federal Savings Bank, FSB (Argo Savings or the
Savings Bank); and the Savings Bank's wholly owned subsidiary, Dolton-Riverdale
Savings Service Corporation (Dolton-Riverdale). Intercompany transactions and
balances are eliminated in consolidation.
During 1999 the Company simplified its organizational structure by merging Argo
Mortgage Corporation, a wholly owned subsidiary of the Savings Bank, and Margo
Financial Services, LLC, a majority-owned subsidiary of the Savings Bank, into
the Savings Bank and merging Empire/Argo Mortgage LLC, a consolidated joint
venture of Argo Bancorp, into Argo Bancorp. The mergers qualified as tax-free
reorganizations and were accounted for as internal reorganizations. Accordingly,
the notes to the consolidated financial statements have been restated to reflect
the internal reorganization as if they had occurred on January 1, 1997. Finally,
as discussed in a separate note, during 1999, the Company sold its wholly owned
subsidiary, On-Line Financial Services, Inc. (On-Line).
The Company, through its subsidiaries, provides a full range of financial
services through its locations in Cook County, Illinois. The Savings Bank's
primary business is the solicitation of savings deposits from the general public
and the purchase or origination of loans secured by one-to-four-family
residential real estate. In addition, the Savings Bank sells mortgage loans on a
service released basis into the secondary market, has an ATM network, and has
investments in a partnership which owns purchased mortgage servicing rights. In
addition, the Company is involved in the purchase and disposition of discounted
loans. Through its nonbank subsidiaries, the Savings Bank also provides mortgage
banking activities that focus on the purchase and sale of mortgage loans into
the secondary market.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments, amortization period of debt issuance costs, and valuation of the
limited partnership investment are particularly subject to change.
Securities: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are carried at fair value,
with unrealized holding gains and losses, net of taxes, reported in other
comprehensive income. Trading securities are carried at fair value, with changes
in unrealized holding gains and losses included in income. Other securities such
as Federal Home Loan Bank stock and investment in GFS preferred stock are
carried at cost.
- --------------------------------------------------------------------------------
(Continued)
8.
11
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities.
Loans: Loans are reported at the principal balance outstanding, net of unearned
discounts, deferred loan fees and costs, and an allowance for loan losses. Loans
held for sale are reported at the lower of cost or market, on an aggregate
basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Discounted Loans Receivable: The Company has from time to time purchased loans,
predominately secured by single-family homes, at moderate to deep discounts. The
moderate discount loans have been historically performing loans whereas the deep
discount loans have been nonperforming. These loans receivable are stated at
unpaid principal balance less unearned discount. Discounts on the performing
loans are accreted to interest income over the contractual life of the related
loans using the interest method. Discounts on purchased loans for which the
collection of principal and interest is not probable are only recognized in
income when the loan is sold or paid in full. Management evaluates
collectibility of the portfolio of discounted loans receivable on an aggregate
pool basis. There was no impairment expense recorded in 1999, 1998, or 1997.
- --------------------------------------------------------------------------------
(Continued)
9.
12
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate.
Foreclosed Real Estate: Foreclosed real estate acquired through or instead of
loan foreclosure is initially recorded at fair value when acquired, establishing
a new cost basis. If fair value declines, a valuation allowance is recorded
through expense. Costs after acquisition are expensed.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the assets' useful lives
on a straight-line basis.
Investment in Limited Partnership: The investment in limited partnership is
carried at the lower of fair value or the equity investment. The cost of
acquiring the rights to service mortgage loans is capitalized at the partnership
level as are other loan servicing costs. An independent valuation is performed
at least annually by the partnership.
Servicing Rights: The Company does not service loans sold. Purchased servicing
rights are recognized as assets and expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated based on
the fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Cash and Cash Equivalents: Cash and interest-earning deposits with banks with
original maturities less than 90 days are considered to be cash and cash
equivalents. The Company reports net cash flows for customer loan and deposit
activity.
Earnings Per Share: Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share is calculated by dividing net income by the weighted average
number of shares, adjusted for the dilutive effects of outstanding stock options
and the management retention plan.
- --------------------------------------------------------------------------------
(Continued)
10.
13
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available-for-sale, net of tax, which
are also recognized as separate components of equity.
Industry Segments: Internal financial information is primarily reported and
aggregated into three lines of business; banking, discount loan operations, and
mortgage banking.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
On-Line Significant Accounting Policies: Significant accounting policies of
On-Line prior to its sale were:
- - The cost of software licensing rights acquired and other product
conversion costs were capitalized and amortized to expense on a
straight-line basis over periods of 5 to 7 years.
- - Certain equipment was leased under capital lease agreements. The cost of
these assets was amortized on the straight-line basis.
Reclassification: Certain reclassifications have been made to the 1997 and 1998
information to make it comparable with the 1999 presentation.
- --------------------------------------------------------------------------------
(Continued)
11.
14
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SALE OF ON-LINE FINANCIAL SERVICES, INC.
On March 31, 1999, the Company sold On-Line for cash proceeds of $6,700,000 and
$4,600,000 in Series B preferred stock of GFS Holdings Co. After adjusting for
sale expenses of $298,000 and recording an accrual for contingent payments to
former On-Line shareholders of $546,000, the sale resulted in a pretax gain of
$2,922,000 which, net of $994,000 of income taxes, produced a gain on sale of
discontinued operations of $1,928,000.
Results from the data processing segment are shown as discontinued operations
with prior years restated. Components of amounts reflected in the December 31,
1998 consolidated balance sheet and the December 31, 1999 (through the date of
sale), 1998, and 1997 consolidated income statements are presented in the
following table:
(In thousands) 1998
----
Balance Sheet Data:
Current assets $ 3,186
Property, plant and equipment, net 5,920
Noncurrent assets 3,387
Current liabilities (3,229)
Noncurrent liabilities (2,719)
--------
Net assets of discontinued operations $ 6,545
========
Income Statement Data: 1999 1998 1997
---- ---- ----
Revenues $ 4,247 $14,177 $12,750
Costs and expenses 4,029 13,716 12,553
------- ------- -------
Operating income 218 461 197
Income tax expense 83 175 72
------- ------- -------
Income from discontinued operations $ 135 $ 286 $ 125
======= ======= =======
As part of the acquisition of On-Line by Argo Bancorp in 1995, a structured
schedule of contingent payments was established based on a percentage of future
net revenues of On-Line over the next seven years ending October 31, 2002. As a
condition of the acquisition, Argo Bancorp, Inc. retained this liability to the
former stockholders of On-Line.
At December 31, 1999, the Company estimated the liability for future contingent
payments to be $546,000 This liability has been recorded and reduced the gain on
sale to $2,922,000. The actual amount to be paid will be impacted by future
revenue streams.
- --------------------------------------------------------------------------------
(Continued)
12.
15
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
Securities available-for-sale are summarized as follows:
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Municipal securities $ 370 $ 8 $ -- $ 378
U.S. agency securities 5,500 -- (343) 5,157
Corporate bonds 411 -- (18) 393
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 88 -- (3) 85
Federal National Mortgage
Association 1,647 -- (50) 1,597
Trust preferred securities 3,960 -- (369) 3,591
Marketable equity securities 3,761 12 (610) 3,163
-------- -------- -------- --------
$ 15,737 $ 20 $ (1,393) $ 14,364
======== ======== ======== ========
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Municipal securities $ 370 $ 10 $ -- $ 380
U.S. agency securities 2,091 -- (3) 2,088
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 110 -- (1) 109
Federal National Mortgage
Association 1,827 3 (8) 1,822
Trust preferred securities 367 3 (2) 368
Marketable equity securities 2,828 2 (389) 2,441
-------- -------- -------- --------
$ 7,593 $ 18 $ (403) $ 7,208
======== ======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
13.
16
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Securities held-to-maturity are summarized as follows:
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
U.S. agency securities $ 24,157 $ -- $ (1,612) $ 22,545
Collateralized mortgage obligations 976 -- -- 976
Corporate bonds 726 -- (165) 561
-------- ------- -------- --------
$ 25,859 $ -- $ (1,777) $ 24,082
======== ======= ======== ========
The amortized cost and fair value of securities, by contractual maturity, at
December 31, 1999 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands) (In Thousands)
Due after one through five years $ -- $ -- $ 3,000 $ 2,975
Due after five years through ten years 2,281 2,235 4,000 3,816
Due after ten years 4,000 3,693 17,883 16,315
------- ------- ------- -------
6,281 5,928 24,883 23,106
Mortgage-backed securities and
collateralized mortgage obligations 1,735 1,682 976 976
Trust preferred securities 3,960 3,591 -- --
Marketable equity securities 3,761 3,163 -- --
------- ------- ------- -------
$15,737 $14,364 $25,859 $24,082
======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
14.
17
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Proceeds from sales of securities available-for-sale and the realized gross
gains and losses are as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Proceeds for sales $ 420 $2,993 $8,668
Gross realized gains 27 234 710
Gross realized losses (29) -- --
At December 31, 1999, trading account securities primarily consist of marketable
equity securities which are carried at fair value. The unrealized loss of
$52,000 at December 31, 1999 is reflected as a component of current earnings.
There were no unrealized gains or losses at December 31, 1998 or 1997.
At December 31, 1999 and 1998, $5,600,000 and $2,255,000 of securities were
pledged to secure short-term borrowings and Federal Home Loan Bank advances.
NOTE 4 - LOANS RECEIVABLE
Loans receivable and loans held for sale, net, are summarized as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
First mortgage loans $ 219,521 $ 198,178
Participating investment in first mortgage loans 30,021 22,701
Commercial real estate loans 997 1,390
Equity line of credit loans 7,512 3,521
Other loans 11,331 8,493
--------- ---------
Total gross loans receivable 269,382 234,283
Add (deduct)
Allowance for loan losses (1,551) (940)
Deferred loan costs 1,384 1,208
Unearned discounts (925) (1,763)
--------- ---------
$ 268,290 $ 232,788
========= =========
Weighted-average interest rate 7.98% 7.84%
========= =========
- --------------------------------------------------------------------------------
(Continued)
15.
18
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Included in first mortgage loans are loans held for sale totaling approximately
$18.9 million and $31.0 million at December 31, 1999 and 1998. The loans held
for sale at December 31, 1999 included $16.7 million of loans originated by Argo
Savings for an affiliate. The loans are originated with commitments to sell and
are usually sold within 30 days of funding
The following is a summary of the changes in the allowance for loan losses:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Balance at beginning of year $ 940 $ 814 $ 665
Provision for loan losses 965 355 210
Allowance on acquired loans - 30 -
Transfer to allowance for losses on
foreclosed real estate - - (50)
Charge-offs (354) (259) (11)
------------ ----------- -----------
Balance at end of year $ 1,551 $ 940 $ 814
============ =========== ===========
Loans receivable on nonaccrual are as follows:
Percentage
of Loans
Number Receivable,
of Net of
Loans Amount Discount
----- ------ --------
(Dollars in Thousands)
December 31, 1999 86 $ 6,039 2.25%
December 31, 1998 105 6,518 2.80
First mortgage loans at December 31, 1999 include approximately $141.3 million
in out-of-area purchased participation and whole loans, which are secured by
single-family homes, with approximately 9.9% in California, 5.4% in New York,
and 84.7% spread throughout the remainder of the country. There is no geographic
concentration of nonperforming loans.
- --------------------------------------------------------------------------------
(Continued)
16.
19
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 5 - DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net, are as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
Discounted first mortgage loans $ 11,040 $ 15,018
Unearned discount (1,870) (2,617)
--------- --------
$ 9,170 $ 12,401
========= ========
Discounted loans receivable on nonaccrual are as follows:
Percentage
of Discount
Number Loans
of Loans Amount Receivable
-------- ------ ----------
(In Thousands)
December 31, 1999 64 $ 1,718 18.74%
December 31, 1998 83 3,019 24.34
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment, net, are summarized as follows:
December 31,
----------------
1999 1998
---- ----
(In Thousands)
Land $ -- $ 537
Office buildings and improvements 341 4,159
Leasehold improvements 472 361
Furniture, fixtures, and equipment 11,640 4,330
-------- --------
12,453 9,387
Less accumulated depreciation and amortization (3,939) (4,600)
-------- --------
$ 8,514 $ 4,787
======== ========
- --------------------------------------------------------------------------------
(Continued)
17.
20
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
Included in occupancy and equipment expense is depreciation and amortization
expense of office properties and equipment of approximately $1,100,000,
$757,000, and $676,000 for the years ended December 31, 1999, 1998, and 1997.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The facilities are being leased back from the purchaser
over a period of 170 months. The leases are accounted for as operating leases.
The gain of $2,400,000 was deferred and is being recognized into income over the
life of the leases, with $86,000 recognized during the year ended December 31,
1999. The leases contain renewal options for three additional periods, the first
for ten years and the final two for five years each.
During the year ended December 31, 1998, Argo Savings sold its Gurnee, Illinois
branch to an unrelated party. The purchaser assumed selected deposit accounts as
part of this transaction. Argo Savings recorded a gain of $976,000 on the branch
sale.
The Company leases office space under noncancelable operating leases. Rent
expense for the years ended December 31, 1999, 1998, and 1997 totaled $457,000,
$118,000, and $58,000.
The estimated minimum rental payments under the terms of the leases at December
31, 1999 are as follows:
Year Ended December 31 Amount
---------------------- ------
(In Thousands)
2000 $ 683
2001 692
2002 701
2003 654
2004 605
Thereafter 5,453
----------
Total minimum lease payments $ 8,788
==========
- --------------------------------------------------------------------------------
(Continued)
18.
21
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 7 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND INVESTMENT IN
LIMITED PARTNERSHIP
For independently acquired servicing rights, the cost of acquiring the rights to
service mortgage loans is capitalized and amortized in proportion to and over
the period of the estimated net servicing income. On December 31, 1999 and 1998,
Argo Savings held $464,000 and $593,000 in purchased mortgage servicing rights
(PMSRs) with underlying principal balances of approximately $35.7 million and
$46.8 million. During 1999, the Company bought an additional $11.1 million of
servicing rights with underlying principal balances of approximately $823
million. At June 30, 1999, these servicing rights were called at the Company's
original purchase price. There was no gain or loss recorded. Servicing income
related to these loans approximated $619,000. During the year ended December 31,
1997, PMSRs totaling $120,000 with an underlying principal balance of $9.2
million were sold at cost by the Savings Bank. There were no sales of purchased
mortgage servicing rights for the year ended December 31, 1998.
The balance of investment in limited partnership of $4.5 million at December 31,
1999 and 1998 represents Argo Savings' investment in various divisions of a
single limited partnership. The investment includes a $3.3 million equity
interest in a limited partnership whose business activities are to purchase
mortgage servicing rights, and a $1.2 million investment in subordinated
debentures of the partnership. The debentures have an interest rate of 30%.
During 1999, the Company reinvested the equity in one division into another
previously owned division. The single business activity of this limited
partnership is the purchase of current mortgage servicing rights. There are
several equity investors in each division of the partnership. The purchase of
the servicing rights is leveraged, allowing the partnership to purchase
additional servicing rights. At the end of five years, or at such time as the
investors agree, the servicing rights will be sold and the proceeds divided pro
rata among the investors. As with typical investments in PMSRs, the collateral
underlying the equity investment is the servicing rights. All purchases of
servicing rights must be approved by all equity investors and undergo stringent
guidelines outlined previously for a purchase of servicing. The administration
and servicing of the purchased portfolios in each division is performed by the
general partner. During 1998, the net loss for the partnership resulted from the
temporary impairment of the PMSRs at the partnership level, due to a decrease in
the appraised value of the PMSRs, which exceeded income from the partnership.
- --------------------------------------------------------------------------------
(Continued)
19.
22
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
1999 1998
---- ----
Amount Percent Weighted Amount Percent Weighted
in of Average in of Average
Thousands Total Rate Thousands Total Rate
---------- ------- -------- ----------- ------- ---------
Non-interest-bearing $ 6,072 2.0% --% $ 18,244 7.8% --%
Passbook accounts 19,873 6.6 2.20 21,307 9.1 2.78
NOW accounts 10,612 3.5 1.36 9,045 3.9 1.97
Money market accounts 4,426 1.5 2.90 4,706 2.0 3.57
--------- ----- ---- ----------- ----- ----
40,983 13.6 1.77 53,302 22.8 1.76
Certificate accounts:
4.00% - 4.99% 47,892 15.9 4.58 28,491 12.2 4.72
5.00% - 5.99% 118,805 39.4 5.61 139,039 59.7 5.52
6.00% - 6.99% 93,542 31.0 6.37 11,665 5.0 6.29
7.00% - 7.99% 443 .1 7.17 475 .3 7.28
8.00% - 8.99% 8 -- 8.53 8 -- 8.53
--------- ----- ---- ----------- ----- ----
260,690 86.4 5.70 179,678 77.2 5.45
--------- ----- ---- ----------- ----- ----
$ 301,673 100.0% 5.16 $ 232,980 100.0% 4.60
========= ===== ==== =========== ===== ====
Contractual maturities of certificate accounts at December 31, 1999 are as
follows (in thousands):
Under 12 months $ 183,289
12 months to 36 months 71,779
Over 36 months 5,622
------------
$ 260,690
============
The Savings Bank has pledged investment securities of approximately $3,323,000
and $6,379,000 at December 31, 1999 and 1998 as collateral to secure certain
public deposits. In addition to securities at December 31, 1999 and 1998, the
Savings Bank also had letters of credit totaling $14,280,000 and $13,260,000 as
collateral to secure several State of Illinois certificates. The total State of
Illinois certificates secured by letters of credit and securities totaled
approximately $15,523,000 and $15,102,000 at December 31, 1999 and 1998. The
aggregate amount of certificate of deposit accounts with a balance greater than
$100,000 was $75,134,000 and $60,348,000 at December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
(Continued)
20.
23
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS (Continued)
Interest expense on deposit accounts is summarized as follows:
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- -------- --------
(In Thousands)
Passbook and certificate accounts $ 12,247 $ 8,960 $ 8,064
NOW accounts 143 230 270
Money market accounts 152 224 246
--------- -------- --------
$ 12,542 $ 9,414 $ 8,580
========= ======== ========
NOTE 9 - BORROWINGS
In 1998, the Company issued 11% junior subordinated debentures aggregating
$17,784,000 to Argo Capital Trust Company (Trust). The Trust issued 11% capital
securities with an aggregate liquidation amount of $17,250,000 ($10 per capital
security) to third-party investors. The capital securities and cash are the sole
assets of the Trust. The junior subordinated debentures are includable as Tier I
capital for regulatory capital purposes. The offering price was $10 per capital
security. The junior subordinated debentures and the capital securities pay
dividends and distributions, respectively, on a quarterly basis, which are
included in interest expense. The Trust is a statutory business trust formed
under the laws of the State of Delaware and is wholly owned by the Company. The
junior subordinated debentures will mature on November 6, 2028, at which time
the capital securities must be redeemed. The junior subordinated debentures and
capital securities can be redeemed contemporaneously, in whole or in part,
beginning November 6, 2003 at a redemption price of $10 per capital security.
The Company has provided a full and unconditional guarantee of the obligations
of the Trust under the capital securities in the event of the occurrence of an
event of default, as defined. Debt issuance costs totaling $1,913,000, including
$244,000 paid in 1999, were capitalized related to the debenture offering and
are being amortized over the 30-year life of the junior subordinated debentures.
- --------------------------------------------------------------------------------
(Continued)
21.
24
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 9 - BORROWINGS (Continued)
Borrowed money at December 31 is summarized as follows:
Weighted Interest Rate Balance
December 31, December 31,
------------ ------------
Maturity 1999 1998 1999 1998
-------- ---- ---- ---- ----
(In Thousands)
Advances from the Federal
Home Loan Bank of Chicago
Open line 4.74% 5.23% $ 17,100 $ 2,300
2/21/00 - 5.48 - 5,000
2/22/00 5.95 - 5,000 -
6/03/01 8.43 8.43 72 72
4/20/03 6.13 6.13 2,760 2,760
11/25/06 6.58 6.58 10,000 10,000
---------- ----------
5.56 6.10 34,932 20,132
Other borrowings
Margin accounts Open line 7.79 7.28 5,404 319
Federal funds purchased Daily - 5.50 - 600
---------- ----------
7.79 7.71 5,404 919
---------- ----------
5.86 6.10 $ 40,336 $ 21,051
========== ==========
The required aggregate principal balance of first mortgage loans securing
advances is determined by the Federal Home Loan Bank (FHLB). At December 31,
1999 and 1998, approximately $63 million and $48 million of loans were pledged
and delivered to the FHLB. In addition, the Savings Bank adopted a collateral
pledge agreement whereby the Savings Bank has agreed to at all times keep on
hand, free of all other pledges, liens, and encumbrances, first mortgages with
unpaid principal balances aggregating no less than 167% of the outstanding
secured advances and letters of credit from the Federal Home Loan Bank of
Chicago. All stock in the Federal Home Loan Bank of Chicago is also pledged as
collateral for these advances.
The open line with the FHLB bears interest at a rate that adjusts daily. All
other FHLB advances are at fixed interest rates.
The margin account loans are from third-party securities brokers and were
secured at December 31, 1999 by securities which are held by the broker and have
a market value of $24.4 million.
- --------------------------------------------------------------------------------
(Continued)
22.
25
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS
Income tax expense (benefit) from continuing operations consists of the
following:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Federal
Current $ 572 $ 90 $(145)
Deferred (908) (473) 196
----- ----- -----
(336) (383) 51
State
Current 318 107 --
Deferred (318) (107) --
----- ----- -----
Total income tax expense (benefit) $(336) $(383) $ 51
===== ===== =====
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are summarized as follows:
December 31,
------------
1999 1998
---- ----
(In Thousands)
Deferred tax assets
Net operating loss carryforwards $ 281 $ 537
Unused tax credits 914 490
Allowance for loan losses 713 472
Depreciation -- 57
Deferred gain on sale of fixed assets 900 --
Unrealized losses on securities available-for-sale 523 147
Gross deferred tax assets 3,331 1,703
------- ------
Deferred tax liabilities
Excess tax bad debt deduction $ (20) $ (26)
Limited partnership interest (851) (850)
Depreciation (2) --
Other (37) (8)
Gross deferred tax liabilities (910) (884)
------ ------
Net deferred tax asset $2,421 $ 819
====== ======
- --------------------------------------------------------------------------------
(Continued)
23
26
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS (Continued)
The effective income tax rate differs from the statutory federal tax rate of
34%. The major reasons for this difference related to income (loss) from
continuing operations for the years ended December 31 follow:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $ 61 $ (47) $ 212
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net 16 35 35
Municipal interest, net (11) (11) (13)
Tax credits (300) (275) (216)
Other (102) (85) 33
----- ----- -----
Income tax expense (benefit) $(336) $(383) $ 51
===== ===== =====
At December 31, 1999, state net operating loss carryforwards of $5,921,000 were
available for future use. These net operating losses expire from 2012 through
2019.
At December 31, 1999, Argo Bancorp has low income housing and alternative
minimum tax credit carryforwards in the amount of $914,000 expiring from 2012
through 2019.
Retained earnings at December 31, 1999 include $1,349,000 for which no provision
for Federal income tax has been made. These amounts represent allocations of
income to bad debt deductions for tax purposes only. Reduction of amounts so
allocated for purposes other than tax bad debt losses will create income, which
will be subject to the then-current corporate income tax rate.
NOTE 11 - EMPLOYEE BENEFIT PLANS
401(k) PLAN AND TRUST
The Argo Federal Savings 401(k) plan is an ERISA-qualified plan covering all
employees of the Savings Bank who have completed at least 1,000 hours of service
within a 12 consecutive month period and are age 21 or older. Participants may
make contributions to the plan from 1% to 12% of their earnings, subject to
Internal Revenue Service (IRS) limitations. Discretionary matching contributions
of 50% of each participant's contribution up to 12% may be made by the Savings
Bank each plan year. The Savings Bank made contributions of $76,000, $71,000,
and $82,000 to the plan for the years ended December 31, 1999, 1998, and 1997.
The plan also provides benefits in the event of death, disability, or other
termination of employment.
- --------------------------------------------------------------------------------
(Continued)
24
27
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Savings Bank 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 7% of the common stock to be issued in
the merger conversion (20,932 shares at $2.88 per share). The ESOP subsequently
borrowed additional funds from the same third-party lender in the amount of
$245,000 in order to purchase an additional 52,080 shares at an average price of
$4.70 per share. All of this debt was repaid during 1998. During 1999, the ESOP
borrowed funds from Argo Bancorp in the amount of $498,000 in order to purchase
49,136 shares at an average price of $10.13 per share. In addition, during 1999,
the ESOP used available cash in the plan to purchase an additional 2,500 shares.
Consolidated stockholders' equity was reduced by the unpaid balance of the ESOP
loan at December 31, 1999. Contributions of $72,000, $60,000, and $67,000 were
accrued or made to the ESOP to fund principal and interest payments for the
years ended December 31, 1999, 1998, and 1997. Selected ESOP information at
December 31, 1999, 1998, and 1997 follows:
1999 1998 1997
---- ---- ----
Shares allocated 82,503 73,909 63,424
Unearned shares 44,485 1,443 9,588
Total ESOP shares 126,988 75,352 73,012
======== ======= =======
Total value of unearned shares $511,578 $13,709 $93,483
======== ======= =======
During 1998, in connection with the goodwill convertible preferred stock
issuance (see Note 13), 18,838 shares of preferred stock were contributed to the
ESOP. At December 31, 1999, all 18,838 preferred shares were allocated. At
December 31, 1998, the total allocated preferred shares were 18,618 and the
unallocated shares were 220.
Argo Bancorp considers outstanding only those shares of the ESOP that are
allocated and committed to be released when calculating both basic and diluted
earnings per share. The Savings Bank records the difference between the fair
value of the shares committed to be released and the cost of those shares to the
ESOP as a charge to additional paid-in capital with the corresponding increase
or decrease to compensation expense.
MANAGEMENT RECOGNITION PLAN
The Board of Directors of the Savings Bank formed a management recognition plan
and trust (MRP) effective October 31, 1991, which purchased 6.8%, or 61,600
shares, of Argo Bancorp's
- --------------------------------------------------------------------------------
(Continued)
25
28
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
authorized but unissued common stock in December 1991. In addition, Argo Bancorp
contributed $34,385 to allow the MRP to purchase 11,960 shares in the merger
conversion or on the open market. All MRP shares have been awarded to employees
in key management positions with the Savings Bank. The awards 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 under the MRP. During
the year ended December 31, 1997, the Company sold 22,416 shares held by the
Savings Bank MRP for $219,000, reducing the total shares held by the plan to
400. The proceeds from this transaction were recorded as an increase in capital
at December 31, 1997. None of the remaining shares have been awarded.
The Board of Directors of Argo Bancorp formed a new MRP effective September 1,
1996, which purchased 50,000 shares of Argo Bancorp stock on September 24, 1996
for $115,000. Under this plan, employees in key management positions with Argo
Bancorp and all its subsidiaries are eligible for participation. During the year
ended December 31, 1997, 6,300 shares were awarded to certain key On-Line
employees. The awards vest over a five-year period, the aggregate purchase price
of shares awarded was being expensed as a portion of annual compensation, and
the remaining cost is reflected as a reduction of stockholders' equity. Due to
the sale of On-Line, the shares became fully vested and compensation expense of
$36,000 was recognized in 1999. The expense totaled $12,000 for each of the
years 1998 and 1997. No MRP shares were awarded during the years ended December
31, 1999 and 1998. Also during the year ended December 31, 1997, the Company
sold 18,608 shares held by the Argo Bancorp MRP plan for $181,000, reducing the
total shares held by the plan to 31,392, including the 6,300 awarded shares. The
proceeds from this transaction were recorded as an increase in capital at
December 31, 1997.
STOCK OPTION PLANS
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), under which up to 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. All 429,800 options were awarded during
1993. The exercise price for the options awarded was equal to or greater than
the fair market value of the common stock on the date of grant ($3.84 per
share). During 1999, no options were exercised. In 1998 and 1997, 42,980, and
95,988 of the options were exercised. The weighted average exercise price for
the options exercised in 1998 and 1997 was $3.60 and $3.85. At December 31,
1999, options to purchase 171,468 shares were outstanding, at an average price
of $5.90.
- --------------------------------------------------------------------------------
(Continued)
26
29
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan) in 1991, under
which up to 429,800 shares of Argo Bancorp's common stock were reserved for
issuance by Argo Bancorp upon exercise of nonincentive stock options to be
granted to nonemployee directors of the Savings Bank subsidiary from time to
time. Options for 4,000 shares were granted in 1997. At December 31, 1997, the
Board of Directors approved a resolution to discontinue any further grants under
this plan. At December 31, 1999, 252,400 options for shares had been awarded by
Argo Bancorp under the Non-Qualified Stock Option Plan. The exercise price for
the options awarded was equal to the fair market value of the common stock on
the date of grant ($6.02 per share). During 1999, no options were exercised. In
1998 and 1997, 3,580, and 34,000 of the options were exercised. The weighted
average exercise price for options exercised in 1998 and 1997 was $8.87 and
$4.56. At December 31, 1999, options to purchase 199,600 shares were outstanding
at an average price of $6.02.
Argo Bancorp's Board of Directors adopted the 1998 Incentive Stock Option Plan
for Employees in 1998, under which up to 400,000 shares of Argo Bancorp's common
stock were reserved for issuance by Argo Bancorp upon exercise of stock options
to be granted to employees from time to time. Options to purchase 23,000 and
12,000 shares were granted during 1999 and 1998, and options to acquire 12,000
were forfeited in 1999. At December 31, 1999 and 1998, 35,000 and 12,000 options
for shares have been awarded by Argo Bancorp under the plan. The exercise price
for the options awarded was equal to the fair market value of the common stock
on the date of grant ($9.00 per share 1999 and $8.625 in 1998). At December 31,
1999, options to purchase 23,000 shares were outstanding at an average price of
$9.00 per share.
At December 31, 1999 and 1998, the total options outstanding under all plans
were 394,068 and 383,068, at an average price of $6.14 and $6.05.
The Company applies ABP Opinion No. 25 in accounting for the stock option plans
and, accordingly, compensation cost based on the fair value at grant date has
not been recognized for its stock options in the consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income from continuing operations
would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands, Except Per Share Data)
Income from continuing operations
As reported $ 514 $ 245 $ 698
Pro forma 490 220 458
Earnings per share
Basic
As reported .26 .12 .36
Pro forma .25 .11 .24
Diluted
As reported .25 .12 .33
Pro forma .23 .11 .22
- --------------------------------------------------------------------------------
(Continued)
27
30
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model. The following assumptions were used in
estimating the fair value for options granted in 1999, 1998, and 1997:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Dividend yield 2.08% 2.07% 2.13%
Risk-free interest rate 5.50% 5.50% 6.11%
Weighted average expected life 10 years 8 years 8 years
Expected volatility 18.06% 13.93% 6.70
The weighted average per share fair values of options granted during 1999, 1998,
and 1997 were $2.70, $2.11, and $2.68.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of its business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations of interest rates. These
financial instruments represent commitments to originate and sell first mortgage
loans and letters of credit and involve credit and interest rate risk in excess
of the amount recognized in the consolidated statements of financial condition.
Commitments to originate fixed and adjustable rate mortgage loans amounted to
approximately $3.9 million and $22.2 million at December 31, 1999 and 1998. The
fixed rate commitments at December 31, 1999 have rates ranging from 7.63% to
9.00%. These commitments represent amounts which the Savings Bank plans to fund
in its normal commitment period. the Company evaluates each customer's
creditworthiness on a case-by-case basis.
Unused lines of credit amounted to approximately $9.0 million and $4.2 million
as of December 31, 1999 and 1998.
The Company also had outstanding firm commitments to originate mortgage loans
and sell the loans to the secondary market approximating $30.2 million at
December 31, 1999.
The Savings Bank had Community Reinvestment Act (CRA) investment commitments
outstanding of $2.6 million. These commitments include $1,000,000 to be funded
for investment in the Greater West Side Loan Fund, $703,000 to be funded over
ten years for
- --------------------------------------------------------------------------------
(Continued)
28
31
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
investment in the Chicago Equity Fund, and $336,000 to be funded over thirteen
years for investment in the Community Investment Corporation.
NOTE 13 - CAPITAL MATTERS
During 1998, the Company declared a dividend of goodwill convertible preferred
stock to all holders of common stock of the Company 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 as of August 31, 1998. The goodwill
preferred stock entitles the holders thereof to 75% of any settlement damages
awarded upon a final judgment to the Savings Bank, net of expenses and certain
other items, as a result of the Savings Bank's lawsuit against the United States
seeking damages for breach of contract related to the elimination and exclusion
of supervisory goodwill in the computation of the Savings Bank's regulatory
capital in connection with the Company's acquisition of the Savings Bank in
November 1998 ("Goodwill Litigation"). At the time of the final judgment and
award of damages, if any, the goodwill preferred stock will either be (1)
redeemed by the Company for cash or (2) become convertible into common stock.
The Company will be entitled to retain the remaining 25% of any damages awarded
to the Savings Bank, net of expenses and certain other items, in the Goodwill
Litigation.
Information regarding Class A common stock at December 31, 1999 and 1998
follows:
Par value per share $ .01
Authorized shares 9,000,000
Shares issued 2,004,896
Information regarding preferred stock at December 31, 1999 and 1998 follows:
Par value per share $ .01
Authorized shares 1,000,000
Shares issued 592,681
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of Savings Bank assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Savings Bank
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
- --------------------------------------------------------------------------------
(Continued)
29
32
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined) to risk-weighted
assets (as defined) and Tier I capital (as defined) to assets (as defined).
Management believes, as of December 31, 1999 and 1998, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office of the
Thrift Supervision categorized the Savings Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain minimum total risk-based, Tier
I risk-based, Tier I leverage, and tangible capital ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Savings Bank's actual capital amounts (in thousands) and ratios are as
follows as of December 31, 1999 and 1998:
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------ -------- ------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999
Total capital
(to risk-weighted
assets) $23,404 12.3% $15,191 8.00% $18,989 10.00%
Tier I capital
(to risk-weighted
assets) 21,853 11.5 7,596 4.00 11,394 6.00
Tier I capital
(to adjusted assets) 21,853 5.9 14,809 4.00 18,512 5.00
December 31, 1998
Total capital
(to risk-weighted
assets) $18,310 10.54% $13,898 8.00% $17,372 10.00%
Tier I capital
(to risk-weighted
assets) 17,370 9.91 7,011 4.00 10,517 6.00
Tier I capital
(to adjusted assets) 17,370 6.32 10,994 4.00 13,742 5.00
- --------------------------------------------------------------------------------
(Continued)
30
33
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
Effective April 1, 1999, the Office of Thrift Supervision's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under Office of Thrift Supervision regulations
(generally, compliance with all capital requirements and examination ratings in
one of two top categories); the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years; the institution would be undercapitalized following the
distribution; or the distribution would otherwise be contrary to a statute,
regulation, or agreement with the Office of Thrift Supervision. If an
application is not required, the institution must still give advance notice to
the Office of Thrift Supervision of the capital distribution.
NOTE 14 - SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, discount loan operations, and mortgage
banking. Loans, investments, and deposits provide the revenues in the banking
operation; fee income provides the primary revenue for mortgage banking interest
income; and discount accretion provides the primary revenue for discount loan
workout. All operations are domestic.
The accounting policies used for the operating segments are the same as those
described in the summary of significant accounting policies. Income taxes are
allocated to the banking segment. No indirect expenses are allocated.
Information reported internally for performance assessment follows. The column
for other information primarily includes activity between segments which is
being eliminated.
(In Thousands)
Discount Mortgage Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
1999
- ----
Net interest income $ 7,346 $ 536 $ -- $ -- $ 7,882
Provision for loan losses 695 270 -- -- 965
Other revenue 3,095 (313) 754 (1,196) 2,340
Other expenses 7,848 352 879 -- 9,079
Income tax expense (benefit 433 -- -- (769) (336)
Segment profit (loss) 1,465 (399) (125) (427) 514
Segment assets 419,763 11,879 34 (38,912) 392,764
- --------------------------------------------------------------------------------
(Continued)
31
34
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT FINANCIAL INFORMATION (Continued)
(In Thousands)
Discount Mortgage Total
Banking Loans Banking Other Segments
------- ----- ------- ----- --------
1998
- ----
Net interest income $ 5,226 $ 1,032 $ -- $ -- $ 6,258
Provision for loan losses 115 240 -- -- 355
Other revenue 3,622 740 1,637 (2,189) 3,810
Other expenses 7,592 695 1,571 (7) 9,851
Income tax expense (benefit 148 -- -- (531) (383)
Segment profit (loss) 993 837 66 (1,651) 245
Segment assets for
continuing operations 320,421 13,550 412 (39,852) 294,531
1997
- ----
Net interest income $ 4,884 $ 2,572 $ -- $ -- $ 7,456
Provision for loan losses 160 50 -- -- 210
Other revenue 4,598 281 977 (2,705) 3,151
Other expenses 7,408 1,288 955 (3) 9,648
Income tax expense 259 -- -- (208) 51
Segment profit (loss) 1,655 1,515 22 (2,494) 698
Segment assets for
continuing operations 244,560 35,876 191 (55,497) 225,130
- --------------------------------------------------------------------------------
(Continued)
32
35
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION
Condensed statements of financial condition, operations, and cash flows of Argo
Bancorp, Inc. follow:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
------------
1999 1998
---- ----
(In Thousands)
Assets
Cash $ 145 $ 5,673
Interest-bearing deposits 39 250
------- -------
Total cash and cash equivalents 184 5,923
Trading securities 197 --
Securities available-for-sale 11,415 2,505
Investment in GFS preferred stock 4,600 --
Loans receivable 778 387
Discounted loans receivable 301 --
Investment in banking subsidiary 21,831 17,592
Investment in limited liability corporation -- 837
Total investments in subsidiaries 22,831 18,429
Investment in discontinued operation -- 6,545
Other assets 4,817 4,243
------- -------
Total assets $44,123 $38,032
======= =======
Liabilities and stockholders' equity
Borrowed money $ 5,404 $ 319
Other liabilities 1,347 1,515
Junior subordinated debentures 17,784 17,784
Stockholders' equity 19,588 18,414
------- -------
Total liabilities and stockholders' equity $44,123 $38,032
======= =======
- --------------------------------------------------------------------------------
(Continued)
33
36
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Interest income $ 971 $ 52 $ 23
Interest expense (2,093) (827) (335)
------- ------- -------
Net interest expense (1,122) (775) (312)
Dividends from subsidiaries -- 500 2,242
Equity in undistributed (overdistributed)
earnings of subsidiaries 1,721 518 (1,269)
Gain (loss) on sales of securities available-for-sale (2) 233 618
Profits on trading account activity 29 -- --
Loss on sales of foreclosed real estate (3) -- --
Noninterest expense (878) (762) (789)
------- ------- -------
Income (loss) from continuing operations
before income taxes (255) (286) 490
Income tax benefit (769) (531) (208)
------- ------- -------
Income from continuing operations 514 245 698
Income from discontinued operation (net of tax) 135 286 125
Gain on sale of discontinued operation (net of tax) 1,928 -- --
------- ------- -------
Net income $ 2,577 $ 531 $ 823
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
34
37
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 514 $ 245 $ 698
Adjustments to reconcile net income to net cash
provided by operating activities
Net change in trading account activity (33) -- --
Loss (gain) on the sales of securities available-
for-sale 2 (233) (618)
Gain on trading account securities (29) -- --
Gains on the sales of foreclosed real estate 3 -- --
Equity in (undistributed) over-
distributed earnings of subsidiaries (1,721) (518) 1,144
Amortization of purchase price of
ESOP and MRP 108 69 72
Recognition of fair value of ESOP
shares scheduled to be released -- 48 50
Increase in other assets 652 (580) (702)
Increase (decrease) in other liabilities (206) 543 (143)
-------- -------- --------
Net cash from operating activities (710) (426) 501
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased, net (692) (325) (57)
Proceeds from the sales of securities 420 2,388 5,790
Purchases of securities (13,361) (3,740) (6,306)
Proceeds from sale of On-Line Financial
Services, Inc., net 4,583 -- --
Net cash (paid) received in purchase of subsidiary (575) (454) 916
Contribution to MRP and ESOP 73 -- (486)
-------- -------- --------
Net cash from investing activities (9,552) (2,131) (143)
- --------------------------------------------------------------------------------
(Continued)
35
38
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance $ -- $ -- $ 412
Proceeds from issuance of subordinated
debentures, net of debt issuance expenses (181) 16,115 --
Proceeds from borrowed money 5,085 -- 11,108
Repayment of borrowed money -- (5,289) (9,040)
Capital contributions to subsidiaries -- (2,899) (3,698)
Proceeds from exercise of stock options -- 186 525
Proceeds from sale of MRP stock -- -- 400
Dividends paid (401) (359) (351)
-------- -------- --------
Net cash from financing activities 4,503 7,754 (644)
Net cash provided by discontinued operations 20 60 98
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,739) 5,257 (188)
Cash and cash equivalents at beginning of year 5,923 666 854
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 184 $ 5,923 $ 666
======== ======== ========
Supplemental disclosure of noncash
investing activities
Preferred stock received related to sale
of On-Line Financial Services, Inc. $ 4,600
Transfer of securities available-for-sale
to tracing account 135
Capital contribution to banking subsidiary
in the form of securities available-for-sale 3,000
- --------------------------------------------------------------------------------
(Continued)
36
39
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Argo Bancorp's financial instruments as of December
31, 1999 and 1998 are set forth in the following table, followed by the methods
and assumptions used.
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets
Cash $ 5,603 $ 5,603 $ 3,216 $ 3,216
Interest-bearing deposits 32,069 32,069 6,880 6,880
Trading account securities 668 668 693 693
Securities available-for-sale 14,364 14,364 7,208 7,208
Securities held-to-maturity 25,859 24,082 -- --
Loans receivable 277,460 277,859 245,189 248,536
Investment in GFS preferred stock 4,600 4,600 -- --
FHLB of Chicago stock 2,303 2,303 1,911 1,911
Accrued interest receivable 3,392 3,392 2,024 2,024
Financial liabilities
Deposits without stated maturities 40,983 40,983 53,302 53,302
Deposits with stated maturities 260,690 262,390 179,678 178,061
Borrowed money 40,336 40,042 21,051 21,910
Junior subordinated debt 17,784 23,707 17,784 17,784
Advance payments by borrowers
for taxes and insurance 902 902 853 853
Custodial escrow balances 5,476 5,476 5,340 5,340
Accrued interest payable 966 966 661 661
Statement on Financial Accounting Standards No. 107 defined the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties other than a forced liquidation
sale. The following methods and assumptions are used by Argo Bancorp in
estimating the fair value amounts for its financial instruments.
(a) CASH AND INTEREST-BEARING DEPOSITS
The carrying value of cash and interest-bearing deposits approximates fair value
due to the short period of time between origination of the instruments and their
expected realization.
- --------------------------------------------------------------------------------
(Continued)
37
40
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(b) SECURITIES AVAILABLE-FOR-SALE, HELD-TO-MATURITY, TRADING SECURITIES, FHLB
OF CHICAGO STOCK, AND INVESTMENT IN GFS PREFERRED STOCK.
The fair value of securities available-for-sale and held-to-maturity and trading
securities was estimated using quoted market prices. The fair value of FHLB
stock is based on its redemption value. The fair value of the GFS preferred
stock is its carrying value based upon the market interest rate.
(c) LOANS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
The fair value of loans receivable is based on values obtained in the secondary
market. The loan portfolio is segmented into fixed and adjustable interest rate
categories. For fixed rate loans, fair value is estimated based on quoted market
prices of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. For adjustable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. The carrying amount of accrued interest receivable
approximates its fair value due to the relatively short period of time between
accrual and expected realization.
(d) DEPOSITS, ESCROWS, AND INTEREST PAYABLE
The fair value of deposits with no stated maturity, such as passbook savings,
NOW, and money market accounts, and escrows is disclosed as the amount payable
on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flows discounted using interest rates currently being offered
for deposits with similar remaining terms to maturity.
The carrying amount of interest payable approximates its fair value due to the
relatively short period of time between accrual and expected realization.
(e) BORROWED FUNDS AND JUNIOR SUBORDINATED DEBT
The fair value of borrowed funds and junior subordinated debt is the present
value of the contractual cash flows, discounted by the current rate offered for
similar remaining maturities.
- --------------------------------------------------------------------------------
(Continued)
38
41
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
NOTE 17 - EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings per
share from continuing operations:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands, Except Per Share Data)
Numerator $ 514 $ 245 $ 698
========== ========== ==========
Denominator
Basic earnings per share - weighted
average shares outstanding 1,946,744 1,948,843 1,931,572
Effect of dilutive stock options
outstanding 114,581 98,372 175,192
---------- ---------- ----------
Diluted earnings per share -
weighted average shares outstanding $2,061,325 $2,047,215 $2,106,764
========== ========== ==========
Basic earnings per share $ .26 $ .12 $ .36
Diluted earnings per share .25 .12 .33
NOTE 18 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1999 1998 1997
---- ---- ----
Unrealized holding gains (losses) on
securities available-for-sale $(990) $ (97) $ 639
Less reclassification adjustments for gains
(losses) recognized in income (2) 234 710
----- ----- -----
Net unrealized losses (988) (331) (71)
Tax effect 376 126 26
----- ----- -----
Other comprehensive loss $(612) $(205) $ (45)
===== ===== =====
- --------------------------------------------------------------------------------
(Continued)
39
42
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Argo Dolton Argo Argo
Federal Riverdale Savings Bancorp
Savings Savings Elimin- Consoli- Argo Elimin- Consoli-
Bank Serving Corp. nations dated Bancorp nations dated
---- ------------ ------- ----- ------- ------- -----
ASSETS
Cash $ 5,561 $ 8 $ (8) $ 5,561 $ 145 $ (103) $ 5,603
Interest-earning deposits 32,034 20 (20) 32,034 39 (4) 32,069
-------- -------- -------- -------- -------- -------- --------
Total cash and cash equivalents 37,595 28 (28) 37,595 184 (107) 37,672
Trading account securities 471 -- -- 471 197 -- 668
Securities available-for-sale 2,818 131 -- 2,949 11,415 -- 14,364
Securities held-to-maturity 25,859 -- -- 25,859 -- -- 25,859
Loans receivable, net 267,973 -- -- 267,973 778 (461) 268,290
Discounted loans receivable, net 8,869 -- -- 8,869 301 -- 9,170
Mortgage loan servicing rights 464 -- -- 464 -- -- 464
Investment in limited partnership 4,494 -- -- 4,494 -- -- 4,494
Investment in GFS preferred stock -- -- -- -- 4,600 -- 4,600
Stock in Federal Home Loan Bank
of Chicago 2,303 -- -- 2,303 -- -- 2,303
Foreclosed real estate, net 1,961 -- -- 1,961 319 -- 2,280
Premises and equipment, net 8,504 -- -- 8,504 10 -- 8,514
Debt issuance costs related to
junior subordinated debt, net -- -- -- -- 1,838 -- 1,838
Accrued interest receivable 3,031 -- -- 3,031 361 -- 3,392
Prepaid expenses and other assets 6,611 -- -- 6,611 2,289 (44) 8,856
Investments in subsidiaries 159 -- (159) -- 21,831 (21,831) --
-------- -------- -------- -------- -------- -------- --------
Total assets $371,112 $ 159 $ (187) $371,084 $ 44,123 $(22,443) $392,764
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Deposits $301,808 $ -- $ (28) $301,780 $ -- $ (107) $301,673
Borrowed money 35,393 -- -- 35,393 5,404 (461) 40,336
Advance payments by borrowers
for taxes and insurance 902 -- -- 902 -- -- 902
Custodial escrow balances for
loans serviced for others 5,476 -- -- 5,476 -- -- 5,476
Accrued interest payable 555 -- -- 555 411 -- 966
Other liabilities 5,147 -- -- 5,147 936 (44) 6,039
Junior subordinated debt -- -- -- -- 17,784 -- 17,784
-------- -------- -------- -------- -------- -------- --------
Total liabilities 349,281 -- (28) 349,253 24,535 (612) 373,176
-------- -------- -------- -------- -------- -------- --------
- --------------------------------------------------------------------------------
(Continued)
40
43
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Argo Dolton Argo Argo
Federal Riverdale Savings Bancorp
Savings Savings Elimin- Consoli- Argo Elimin- Consoli-
Bank Serving Corp. nations dated Bancorp nations dated
---- ------------- ------- ----- ------- ------- -----
Stockholders' equity
Preferred stock $ -- $ -- $ -- $ -- $ 3 $ -- $ 3
Common stock 1,060 1 (1) 1,060 20 (1,060) 20
Additional paid-in capital 12,866 125 (125) 12,866 8,829 (12,866) 8,829
Retained earnings - substantially
restricted 8,391 33 (33) 8,391 12,260 (8,391) 12,260
Employee Stock Ownership
Plan loan (426) -- -- (426) (426) 426 (426)
Unearned stock awards -- -- -- -- (248) -- (248)
Accumulated other
comprehensive loss (60) -- -- (60) (850) 60 (850)
--------- --------- --------- --------- --------- --------- ---------
Total stockholders' equity 21,831 159 (159) 21,831 19,588 (21,831) 19,588
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 371,112 $ 159 $ (187) $ 371,084 $ 44,123 $ (22,443) $ 392,764
========= ========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
(Continued)
41
44
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Argo Dolton Argo Argo
Federal Riverdale Savings Bancorp
Savings Savings Elimin- Consoli- Argo Elimin- Consoli-
Bank Serving Corp. nations dated Bancorp nations dated
---- ------------- ------- ----- ------- ------- -----
INTEREST INCOME
Loans receivable $ 18,531 $ -- $ -- $ 18,531 $ 58 $ (25) $ 18,564
Discounted loans receivable 1,175 -- -- 1,175 60 -- 1,235
Mortgage-backed securities
available-for-sale 114 -- -- 114 -- -- 114
Securities available-for-sale 164 -- -- 164 847 -- 1,011
Securities held-to-maturity 1,167 -- -- 1,167 -- -- 1,167
Interest-earning deposits 1,799 -- -- 1,799 6 -- 1,805
-------- --------- -------- -------- -------- -------- --------
Total interest income 22,950 -- -- 22,950 971 (25) 23,896
-------- --------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Deposits 12,542 -- -- 12,542 -- -- 12,542
Borrowed money 1,404 -- -- 1,404 188 (25) 1,567
Junior subordinated debt -- -- -- -- 1,905 -- 1,905
-------- --------- -------- -------- -------- -------- --------
Total interest expense 13,946 -- -- 13,946 2,093 (25) 16,014
-------- --------- -------- -------- -------- -------- --------
NET INTEREST INCOME 9,004 -- -- 9,004 (1,122) -- 7,882
Provision for loan losses 965 -- -- 965 -- -- 965
-------- --------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,039 -- -- 8,039 (1,122) -- 6,917
-------- --------- -------- -------- -------- -------- --------
NONINTEREST INCOME
Loan servicing income 1,372 -- -- 1,372 -- -- 1,372
Net gain (loss) on sale of
Loans held for sale 200 -- -- 200 -- -- 200
Discounted loans receivable 188 -- -- 188 -- -- 188
Foreclosed real estate (530) -- -- (530) (3) -- (533)
Securities available-for-sale -- -- -- -- (2) -- (2)
Profits on trading account
activity 90 -- -- 90 29 -- 119
Branch locations 86 -- -- 86 -- -- 86
Fees and service charges 638 -- -- 638 -- -- 638
Net income (loss) on investment
in limited partnership 166 -- -- 166 -- -- 166
Other 101 -- -- 101 5 -- 106
Equity in earnings of
subsidiaries (1) -- 1 -- 1,721 (1,721) --
-------- --------- -------- -------- -------- -------- --------
Total noninterest income 2,310 -- 1 2,311 1,750 (1,721) 2,340
-------- --------- -------- -------- -------- -------- --------
- --------------------------------------------------------------------------------
(Continued)
42
45
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Argo Dolton Argo Argo
Federal Riverdale Savings Bancorp
Savings Savings Elimin- Consoli- Argo Elimin- Consoli-
Bank Serving Corp. nations dated Bancorp nations dated
---- ------------- ------- ----- ------- ------- -----
NONINTEREST EXPENSE
Compensation and benefits $ 3,196 $ -- $ -- $ 3,196 $ 545 $ -- $ 3,741
Occupancy and equipment 1,633 -- -- 1,633 4 -- 1,637
Federal deposit insurance
premiums 146 -- -- 146 -- -- 146
Loan expense 779 -- -- 779 18 -- 797
Professional fees 495 -- -- 495 77 -- 572
Advertising and promotion 253 -- -- 253 -- -- 253
Goodwill amortization 47 -- -- 47 -- -- 47
Data processing 396 -- -- 396 -- -- 396
Other 1,250 1 -- 1,251 239 -- 1,490
------- ------- ------- ------- ------- ------- -------
Total noninterest expense 8,195 1 -- 8,196 883 -- 9,079
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before taxes 2,154 (1) 1 2,154 (255) (1,721) 178
Income tax expense (benefit) 433 -- -- 433 (769) -- (336)
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations 1,721 (1) 1 1,721 514 (1,721) 514
Income from discontinued
operations (net of tax) -- -- -- -- 135 -- 135
Gain on sale of discontinued
operations (net of tax) -- -- -- -- 1,928 -- 1,928
------- ------- ------- ------- ------- ------- -------
Income from discontinued
operations -- -- -- -- 2,063 -- 2,063
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,721 $ (1) $ 1 $ 1,721 $ 2,577 $(1,721) $ 2,577
======= ======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
43