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EXHIBIT 13.1
ARGO BANCORP, INC. AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 2000, 1999, AND 1998
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
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ARGO BANCORP, INC.
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CORPORATE PROFILE
Argo Bancorp, Inc. ("Argo Bancorp" or "the Company") was incorporated in
Delaware in August 1987, for the purpose of acquiring ARGO Federal Savings Bank,
FSB ("Savings Bank"). The Company is a unitary savings and loan holding company
and is registered as such with the Office of Thrift Supervision ("OTS"), Federal
Deposit Insurance Corporation ("FDIC"), and the Securities and Exchange
Commission ("SEC").
On December 31, 1996, the Company entered into a Stock Purchase Agreement ("the
Purchase Agreement") with The Deltec Banking Corporation Limited, a banking
corporation organized under the laws of the Commonwealth of the Bahamas
("Deltec") whereby Deltec acquired 25% of the issued and outstanding shares of
the Company as of that date. Pursuant to the Purchase Agreement, the Company and
Deltec also entered into a stockholder agreement ("the Stockholder Agreement").
The Stockholder Agreement provides to Deltec, among other matters, the right to
acquire additional shares (or sell back owned shares) from the Company when the
Company issues or sells additional shares (or repurchases shares) to third
parties in order that Deltec may maintain 25% ownership in the Company's common
stock. The Stockholder Agreement also granted Deltec registration rights in
respect of any shares of Common Stock owned by Deltec should it decide to sell
its interest in the Company. In 2000, Deltec advised the Company that it no
longer intended to maintain its ownership position of 25% of the issued and
outstanding shares of the Company, in accordance with the plan of liquidation
and dissolution of Deltec. In connection therewith and in furtherance of the
exercise of Deltec's registration rights, the Company has filed a Registration
Statement with the Securities and Exchange Commission, in part to register such
shares.
In October 1998, the Company formed Argo Capital Trust Co. ("Argo Capital
Trust"), a statutory business trust formed under the laws of the State of
Delaware. In November 1998, the Company and Argo Capital Trust offered 11%
Capital Securities ("Capital Securities") with a liquidation amount of $10.00
per security. The proceeds from the offering were $17,250,000. Argo Capital
Trust used the gross proceeds from the sale of the Capital Securities to
purchase Junior Subordinated Debentures of the Company. The Junior Subordinated
Debentures carry an interest rate of 11% paid quarterly in arrears and are
scheduled to mature, subject to the Company's right to prepay the debentures
under certain circumstances, on November 6, 2028.
On June 24, 2000, the Company incorporated a wholly owned subsidiary, Argo
Redemption Corporation ("ARC"), an Illinois corporation. ARC was chartered to
effectuate, from time to time, purchases of the Company's outstanding Capital
Securities by tender in the open market or by private agreement. Acquisitions
through the over-the-counter dealer market are anticipated to comprise the
majority of purchase activity. As of December 31, 2000, ARC had acquired 66,293
shares of Argo Capital Trust preferred securities at an average price of $8.61
per share.
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ARGO BANCORP, INC.
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CORPORATE PROFILE (Continued)
On March 31, 1999, the Company sold its wholly owned subsidiary On-Line
Financial Services, Inc. ("On-Line") to GFS Holdings, Co. of Palm Beach Gardens
Florida. The Company sold On-Line for cash proceeds of $6,700,000 and $4,600,000
of Series B Preferred Stock of GFS Holdings Co. The Company recorded a gain of
$1,928,000, net of taxes of $619,000, as of March 31, 1999 based on information
available at that date. Operating results from On-Line through March 31, 1999
are included in the financial statements in results of discontinued operations.
On January 31, 2000, six hundred (600) shares of the preferred stock were
redeemed by the Purchaser at $1,000 per share for a total redemption price of
$600,000. Subsequent to December 31, 2000, the Company received cash of
$3,900,000 for redemption of preferred stock and additional consideration of an
$8,025 per month credit to offset future data processing expenses for a period
not to exceed 48 months.
On September 27, 1999, the Company purchased 16,666 shares of Synergy Plan Ltd.
("Synergy") Class A Common Stock at $15.00 per share and 16,667 of Synergy's
Convertible Preferred Stock at $15.00 per share. The Company's total investment
was $500,000. On March 31, 2000, the Company exercised an option to acquire an
additional 33,333 shares of Synergy Class A Common Stock for a purchase price of
$15.00 per share. The convertible Preferred Stock owned by the Company is
convertible into 16,667 shares of Class A Common Stock of Synergy on or before
September 30, 2004, subject to Synergy's right to redeem the shares on September
30, 2002, at a redemption price of $25.00 per share. The Convertible Preferred
Shares have a stated dividend of $.90 per share, per annum, payable quarterly.
The Company owned at December 31, 2000, 2.9% of the Class A Common Stock and
100% of the Convertible Preferred Stock of Synergy. John G. Yedinak, Chief
Executive Officer and Chairman of the Board of Directors of the Company, and
Donald Wittmer a director of the Company, have been elected and serve on the
Board of Directors of Synergy.
On July 9, 2000, the Savings Bank established an Internet banking division of
the Savings Bank, which is marketed as "umbrellabank.com, a division of Argo
Federal Savings Bank, FSB" ("umbrellabank.com"). Umbrellabank.com is accessible
via the Internet at http://www.umbrellabank.com and allows consumers to conduct
online financial transactions with the Savings Bank, including but not limited
to opening account relationships, transferring funds, accessing account
information, processing bill payments, and applying for or obtaining loan
products, including but not limited to credit cards and residential mortgage
secured loans. At December 31, 2000, umbrellabank.com deposits totaled $149.3
million and represented 38.4% of consolidated total deposits of $388.5 million.
During the year ended December 31, 2000, the Savings Bank through its wholly
owned subsidiary, Dolton Riverdale Savings Services, Inc. ("Dolton Service"),
purchased 2,500 shares or 23.7% of the issued and outstanding stock of
Commercial Loan Corporation ("CLC") at a purchase price of $125,000. CLC, which
is owned by Chicagoland financial institutions, through its management
processes, underwrites, documents and services commercial loans for financial
institution investors. The services performed by CLC include monitoring post
closing performance of the loan, preparation of the loan summaries, ongoing
analysis of the performance of the loan and the borrower including review of
financial and operating
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ARGO BANCORP, INC.
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CORPORATE PROFILE (Continued)
statements of the borrower and collection and remittance of all loan payments.
CLC entered into a master loan participation agreement with each of its
shareholders or their affiliates, by which such investors purchase
participations in pools offered by CLC. Participation interests in commercial
loans originated are also sold to financial institution clients who are not
investors of CLC. At December 31, 2000, CLC originated 122 loans aggregating
$36.0 million, which were funded through 48 pools. The interest rates paid on
the pools to the investors, including the Bank, ranged from 7.50% to 9.50% and
consisted of both fixed and variable rates. As of December 31, 2000, the Bank
had purchased interest in twenty-five pools aggregating $14.8 million.
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ARGO BANCORP, INC.
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SELECTED CONSOLIDATED FINANCIAL DATA
At or For the Year Ended December 31,
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2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
CONSOLIDATED FINANCIAL CONDITION DATA:
Loans receivable, net $ 286,523 $ 277,460 $ 245,189 $ 184,358 $ 173,429
Stock in Federal Home Loan Bank of Chicago 2,615 2,303 1,911 3,271 3,428
Securities 42,196 40,891 7,901 4,974 5,788
Cash and cash equivalents 94,017 37,672 10,096 8,579 13,240
Mortgage loan servicing rights 4,784 4,958 5,062 6,706 5,264
Foreclosed real estate 2,498 2,280 3,875 4,251 3,913
Net assets of discontinued operation - - 6,545 5,114 3,546
Investment in GFS preferred stock 4,000 4,600 - - -
Other assets 26,460 22,066 19,963 12,991 13,310
---------- ---------- ---------- ---------- ----------
Total assets $ 463,093 $ 392,230 $ 300,542 $ 230,244 $ 221,918
========== ========== ========== ========== ==========
Deposits $ 388,537 $ 301,673 $ 232,980 $ 172,469 $ 150,627
Borrowed money 18,708 40,336 21,051 29,497 45,013
Custodial escrow balances for loans serviced 7,519 5,476 5,340 6,400 5,782
Other liabilities 7,968 7,907 5,507 3,774 3,936
Junior subordinated debt 16,587 17,250 17,250 - -
Stockholders' equity 23,774 19,588 18,414 18,104 16,560
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 463,093 $ 392,230 $ 300,542 $ 230,244 $ 221,918
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
Interest income $ 30,071 $ 23,896 $ 17,625 $ 18,263 $ 16,050
Interest expense 22,750 16,014 11,367 10,807 8,741
---------- ---------- ---------- ---------- ----------
Net interest income 7,321 7,882 6,258 7,456 7,309
Provision for loan losses 1,218 965 355 210 248
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses 6,103 6,917 5,903 7,246 7,061
Noninterest income 10,091 2,340 3,810 3,151 2,897
Noninterest expense 10,636 9,079 9,851 9,648 9,311
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 5,558 178 (138) 749 647
Income tax expense (benefit) 1,227 (336) (383) 51 49
---------- ---------- ------------ -------------------------
Income from continuing operations 4,331 514 245 698 598
Discontinued operations:
Income from discontinued operation
(net of tax) - 135 286 125 736
Gain on sale of discontinued operation
(net of tax) - 1,928 - - -
---------- ---------- ---------- ---------- ----------
$ 4,331 $ 2,577 $ 531 $ 823 $ 1,334
========== ========== ========== ========== ==========
Basic earnings per share from continuing
operations $ 2.16 $ .26 $ .12 $ .36 $ .48
Diluted earnings per share from continuing
operations 2.00 .25 .12 .33 .40
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ARGO BANCORP, INC.
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SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
At or For the Year Ended December 31,
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2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS AND OTHER DATA (1) (Dollars in thousands, except per share data)
---------------------------------------------
Return from continuing operations on average
assets (4) 1.05% 0.15% 0.10% 0.31% 0.32%
Return from continuing operations on average
equity (4) 20.93 2.68 1.34 3.92 4.88
Average equity to average assets (4) 5.00 5.54 7.58 7.94 6.55
Stockholders' equity to total assets (4) 5.13 5.09 6.12 7.86 7.45
Interest rate spread 2.34 2.54 3.05 4.03 4.62
Net interest margin 2.00 2.53 2.95 3.78 4.29
Noninterest expense to average assets (4) 2.57 3.77 3.80 4.28 4.99
Non-performing loans to net loans receivable (2) 1.59 2.25 2.80 3.57 3.12
Non-performing assets to total assets (3) (4) 1.50 2.12 3.45 4.25 3.53
Allowance for loan losses to non-performing
loans (2) 54.98 25.61 14.42 14.73 16.87
Allowance for loan losses to net loans receivable (3) 0.87 0.58 0.40 0.53 0.53
Ratio of net charge-offs to average loans
outstanding, excluding discounted loans 0.12 0.03 0.01 0.01 0.08
Average interest-earning assets to average
interest-bearing liabilities .94x 1.00x .96x .95x .94x
Book value per share $ 11.75 $ 9.75 $ 9.18 $ 9.25 $ 9.28
Full-service customer service facilities 2 5 5 5 5
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(1) Average balances are derived from month-end balances.
(2) The formula used to calculate the ratios excludes balances related to the
portfolio of discounted loans receivable from both the numerator and the
denominator.
(3) The formulas used to calculate the ratios exclude the portfolio of
discounted loans receivable.
(4) Restated to remove results of discontinued operation.
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ARGO BANCORP, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this Consolidated Annual Report may
include certain forward looking statements based on current management
expectations. Forward looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identified by use of the words "may," "could," "should," "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
The Company's actual results could differ materially from management's
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions; an increase in loan delinquencies or foreclosures; legislative and
regulatory changes; monetary and fiscal policies of the federal government;
changes in tax policies; rates and regulations of federal, state and local tax
authorities; changes in interest rates; a decline in real estate values; deposit
flows; the cost of funds; demand for loan products; demand for financial
services; competition; changes in the quality or composition of the Company's
loan and investment portfolios; changes in accounting principles, policies, or
guidelines; and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 2000 Form 10-K.
GENERAL
Argo Bancorp is a unitary savings and loan holding company and is registered as
such with the OTS. The Company is an active holding company with assets
consisting of investments in the Savings Bank, marketable securities, and
interest-earning deposits. Argo Bancorp is a Federal Housing Authority ("FHA")
approved originator and servicer, a licensed Illinois mortgage banker, and an
approved Federal National Mortgage Association ("FNMA") servicer.
The principal business of the Savings Bank consists of attracting deposits from
the general public and investing those deposits, together with deposits
associated with purchased mortgage servicing rights ("PMSRs") and funds
generated internally, primarily in one-to-four-family mortgage loans. The
Savings Bank is a member of the Federal Home Loan Bank ("FHLB") System, and its
deposits are insured to the maximum allowable amount by the FDIC.
The Savings Bank also offers "purchase/repurchase" mortgage loan facilities to a
number of third party mortgage banking firms. The Savings Bank
purchase/repurchase loans are one-to-four-family secured mortgage loans held for
sale by the Savings Bank, with mortgage loans acquired by the Savings Bank
generally delivered for sale to third party investors within 60 days of closing.
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ARGO BANCORP, INC.
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During 2000, the Savings Bank increased its commercial lending activities.
Through its investment in Commercial Loan Corporation, the Savings Bank invests
in commercial loan and commercial real estate loan participations in the Chicago
metropolitan area. The Savings Bank has also directly originated or participated
in commercial real estate development loans, primarily in the Chicagoland area.
The Savings Bank has also acquired interests in charter school lease
transactions, and diversified its commercial loan portfolio by acquisition of
participations in commercial real estate and development loans in the greater
Denver, Colorado area.
In addition to its lending activities, the Savings Bank also generates fee
income from an expanding network of regionally deployed ATMs. Deployment
activities have been concentrated primarily in the Midwest and mid-Atlantic
regions of the country, with current expansion into the southeastern United
States underway, and deployments west of the Mississippi planned during 2001.
Revenues are derived from interchange and surcharge fees, together with income
from related leasing and interest on currency used in operations. At December
31, 2000, the Savings Bank had deployed 776 ATMs in 17 states.
Since 1999, the Savings Bank has undertaken a number a steps, designed to
restructure and change the way the Savings Bank conducts banking activities in
its marketplace. The most significant of these changes was the establishment, on
July 9, 2000, of an Internet banking division operating under the name
'umbrellabank.com, a division of Argo Federal Savings Bank, FSB'
"umbrellabank.com"). Umbrellabank.com is accessible via the Internet at
http://www.umbrellabank.com and allows consumers to conduct online financial
transactions with the Savings Bank, including but not limited to opening account
relationships, transferring funds, accessing account information, processing
bill payments, and applying for or obtaining loan products, including, but not
limited to, credit cards and residential mortgage secured loans.
Prior to the establishment of the umbrellabank.com division, the Savings Bank
operated as a traditional savings and loan institution from five (5) physical
branch locations located in Chicago and suburban Cook County, Illinois. On June
29, 1999, the Savings Bank sold its five operating properties located at 7600
West 63rd Street and 5818 South Archer Road, Summit, Illinois; 8267 South
Roberts Road, Bridgeview, Illinois; 2154 West Madison Street, Chicago, Illinois;
and 14076 Lincoln Avenue, Dolton, Illinois, to a non-affiliated third party for
an aggregate contractual purchase price of $5,850,000 and simultaneously entered
into a 14 year, 2-month operating lease for each of the properties with the new
purchaser. Under the terms of the lease, the Savings Bank paid an initial
monthly rental of $48,000 per month or $576,000 per year, which increases at the
rate of 1% each year commencing January 1, 2000. The sale resulted in a profit
of $2,400,000 to the Savings Bank. The profit, under generally accepted
accounting principles, was deferred and included in income by the Savings Bank
over the lease term. As a result of this sale and leaseback transaction, the
Savings Bank rents, as opposed to owns, the properties from which it transacts
business.
SALE OF DEPOSITS AND LEASED FACILITIES
On November 17, 2000, the Savings Bank sold combined deposits of $113,585,000
from three (3) of its five (5) branch banking locations. The Company recognized
a gain of $7,974,000 on the deposit sale, net of expenses of $1,216,000. In
conjunction with the deposit sale, the Savings
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ARGO BANCORP, INC.
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Bank assigned the leases to the Summit and Bridgeview facilities sold in 1999,
together with the leased facility not subject to the 1999 sale located at 47 W.
Polk Street, Chicago, to the deposit acquirer. The Company recorded income,
before tax effects, of $591,000 in the fourth quarter of 2000, attributable to
the deferred gain on the sale of the Summit and Bridgeview branch office
buildings that were sold in June 1999. The Savings Bank funded the transaction
through short-term liquid investments, including deposits raised through the
umbrellabank.com Internet retail banking division.
SALE OF SUBSIDIARY
On March 31, 1999 the Company sold its wholly owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois ("On-Line"), to GFS Holdings,
Co. of Palm Beach Gardens, Florida ("Purchaser").
Under the terms of the transaction, in exchange for all of the outstanding stock
of On-Line, the Company received $11.3 million consisting of $6.7 million in
cash together with 4,600 shares of GFS Holdings Co. Series B Preferred Stock,
valued at $4.6 million. The preferred stock, par value $.01, originally paid the
Company a semi-annual dividend at the rate of 7.625%. The preferred stock was
restructured on January 31, 2000 to provide that the semi-annual dividend would
be paid at the rate of 8.625% per annum.
On January 31, 2000, six hundred (600) shares of the preferred stock were
redeemed by the Purchaser at $1,000 per share for a total redemption price of
$600,000. Subsequent to December 31, 2000, the Company received cash of
$3,900,000 for redemption of preferred stock and additional consideration of an
$8,025 per month credit to offset future data processing expenses for a period
not to exceed 48 months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits; proceeds from principal and
interest payments on the loan and mortgage-backed securities portfolios,
custodial deposit accounts related to loans serviced for others; maturing
investments; and borrowed money; FHLB advances, and loan sales. The most liquid
assets are cash and short-term investments. The levels of these assets are
dependent on operating, financing, and investing activities during any given
period. Cash and interest-earning deposits totaled $94.0 million at December 31,
2000. The Savings Bank has adequate alternative funding sources if short-term
liquidity needs arise.
The primary investing activity at the Savings Bank is the origination and
purchase of mortgage loans. During the years ended December 31, 2000 and 1999,
the Savings Bank originated and purchased $397.0 million and $395.2 million of
loans receivable, respectively. Purchases of securities available-for-sale and
held-to-maturity totaled $2.2 million and $38.0 million for 2000 and 1999,
respectively. These investing activities were primarily funded by principal
repayments on loans and mortgage-backed securities of $77.1 million and $84.1
million, for 2000 and 1999, and a net increase in deposits of $86.9 million and
$68.7 million for 2000 and 1999. The 2000 deposit increase is net of
$113,585,000 of deposits sold in 2000. In addition to these sources of funding,
the Company also utilizes advances and overnight borrowings from the FHLB and
purchases federal funds from other financial institutions. During 2000, the
Company repaid a $5.0 million FHLB advance at maturity and FHLB overnight
borrowings of
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ARGO BANCORP, INC.
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$17.1 million. At December 31, 2000, FHLB advances totaled $12.8 million. The
borrowings from the FHLB include a $10.0 million advance, which matures in
November 2006, and a $2.8 million advance, which matures in April 2003. During
1999, the Company had borrowings of $34.9 million outstanding from the FHLB. The
Company used margin accounts to purchase securities in both 2000 and 1999. At
December 31, 2000, there was $5.9 million in margin balances outstanding
compared to $5.4 million at December 31, 1999.
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulation. At December 31, 2000, the Savings Bank's liquid
assets represented 19.7% of its liquidity base as compared to the required level
of 4%. The level of liquidity maintained is believed by management to be
adequate to meet the requirements of normal operations, potential deposit
outflows, and current loan demand. Cash flow projections are updated regularly
to ensure necessary liquidity.
Liquidity management for the Savings Bank is both a daily and long-term function
of the Savings Bank's management. The Savings Bank's management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments.
At December 31, 2000, the Savings Bank's capital exceeded all capital
requirements of the OTS. The Savings Bank's Tier I capital to adjusted assets,
Tier I capital to risk weighted assets, and risk-based capital ratios were
5.95%, 11.24%, and 12.29%, respectively. The Savings Bank is considered "well
capitalized" under OTS prompt corrective action regulations.
At December 31, 2000, the Savings Bank had outstanding loan commitments and
unused lines of credit of $8.5 million and $3.9 million, respectively. The
Savings Bank also had Community Reinvestment Act investment commitments
outstanding of $2.5 million. These commitments include $598,000 to be funded
over 10 years for the investment in the Chicago Equity Fund, $336,000 to be
funded over 13 years for investment in the Community Investment Corporation,
$1.0 million to be funded for the Greater West Side Loan Fund, and $112,500 to
be funded over five years for investment in the Kedzie Limited Partnership.
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ARGO BANCORP, INC.
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FINANCIAL CONDITION
Total assets increased $70.9 million to $463.1 million at December 31, 2000 from
$392.2 million at December 31, 1999.
Cash and interest-earning deposits increased by $56.3 million to $94.0 million
at December 31, 2000 from $37.7 million at December 31, 1999. The increase was
attributable to deposits attracted by the Savings Bank's Internet division,
umbrellabank.com.
Loans receivable, which includes loans held for sale and discounted loans
receivable, increased $9.0 million, or 3.1%, in 2000 to $286.5 million at
December 31, 2000 after increasing by $32.3 million, or 13.2%, in 1999. The
increase in loans receivable for 2000 and 1999 is due to the origination and
purchase of seasoned fixed rate and adjustable rate loans secured by single-
family residences. New originations and purchases of loans contributed $397
million, which was partially offset by $17.9 million from the sale of similar
assets. These purchases and originations were primarily funded by principal
repayments of $77 million on loans receivable, discounted loans receivable, and
mortgage-backed securities, and an increase in deposits of $86.9 million.
Securities available-for-sale, which totaled $14.6 million at December 31, 2000,
are carried at fair value and include $1.6 million of mortgage-backed
securities, $2.9 million of marketable equity securities, $2.6 million of trust
preferred securities, $5.4 million of U.S. Agency securities, $375,000 of
municipal securities, and $1.6 million of corporate bonds.
The Company has been actively trading the marketable equity securities of FNMA
and FHLMC common stock. These securities are classified as trading and totaled
$1,099,000 and $668,000 at December 31, 2000 and 1999, respectively, with fair
value approximately equal to cost.
During 2000, the Company purchased securities totaling $2.2 million. These
securities are made up of $1.4 million of collateralized mortgage obligations
and $778,000 of corporate bonds.
As of December 31, 2000, the Company owned $4.0 million of Series B preferred
stock issued by GFS Holdings Company in connection with the acquisition of
On-Line by GFS. The preferred stock bears interest at 8.625% per annum payable
semi-annually.
On January 31, 2000, six hundred (600) shares of the preferred stock were
redeemed by the Purchaser at $1,000 per share for a total redemption price of
$600,000. Subsequent to December 31, 2000, the Company received cash of
$3,900,000 for redemption of preferred stock and additional consideration of an
$8,025 per month credit to offset future data processing expenses for a period
not to exceed 48 months.
Deposits increased $86.9 million, or 28.8%, to $388.5 million at December 31,
2000 after increasing by $68.7 million in 1999. The increase came despite the
sale of three banking centers with aggregate deposits of $113.6 million. The
Savings Bank's Internet banking division, umbrellabank.com, had deposit balances
totaling $149.3 million at December 31, 2000.
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Borrowings declined $21.6 million to $18.7 million at December 31, 2000. The
decrease was primarily due to the repayment of a $17.1 million FHLB open line
and a $5.0 million FHLB advance. At December 31, 2000, the Company had FHLB
advances totaling $12.8 million and margin account borrowings totaling $5.9
million.
Custodial escrow balances for loans serviced increased by $2.0 million to $7.5
million at December 31, 2000. The custodial accounts relate to escrowed payments
of taxes and insurance and the float on principal and interest payments on loans
serviced either for the Savings Bank or on behalf of others by an independent
mortgage servicing operation. The custodial accounts related to loans serviced
by others are maintained at the Savings Bank in non-interest-bearing accounts.
The custodial accounts associated with loans or purchased mortgage servicing
rights serviced for the Savings Bank are also maintained in noninterest-bearing
accounts. At December 31, 2000 and 1999, $5.0 million and $6.0 million,
respectively, of all custodial escrow balances pertain to loans subserviced on
behalf of the Savings Bank for portfolio loans, servicing retained loans, and
purchased mortgage servicing rights. Due to the nature of custodial escrow
deposits, balances may fluctuate widely on a day-to-day basis.
During 1999, the ESOP borrowed $498,000 from the Company and bought an
additional 49,136 shares at an average price of $10.13 per share. At December
31, 2000 the ESOP loan balance was $405,943 and 34,506 shares remained
unallocated.
PURCHASED MORTGAGE SERVICING RIGHTS
The Savings Bank's principal investment in mortgage servicing rights is through
a $2.9 million equity interest in a limited partnership whose business
activities are to purchase mortgage servicing rights and a $1.5 million
investment in subordinated debentures of the partnership. There are several
unaffiliated equity investors in the limited partnership. The purchase of the
mortgage servicing rights is then leveraged, allowing the limited partnership to
purchase mortgage servicing rights equaling one to three times the equity
investment by its partners. The cost of the borrowings, as well as the servicing
income and expense and related amortization, is recorded at the limited
partnership level. Each quarter, financial statements are issued to the limited
partnership by Dovenmuehle Mortgage, Inc. ("DMI"), the general partner of the
limited partnership and the pro-rata share of the income for each investor is
calculated by DMI. The Savings Bank records its share of income or loss on the
equity method for the partnership investment. At the end of five years or at
such time as the investors may agree, the mortgage servicing rights will be sold
and the proceeds divided pro-rata among the investors. As with a direct
investment in PMSRs, the collateral behind the equity investment is the
servicing rights. All limited partnership purchases of servicing rights must be
approved by all equity investors and undergo the same guidelines for direct
purchases of mortgage servicing rights. The task of finding and acquiring the
PMSRs controlled by the limited partnership, as well as all associated
administrative duties, is assigned to DMI. DMI also sub-services the PMSRs in
the partnership. The limited partnership is audited annually by an independent
auditor and an independent third party valuation of the partnership's PMSRs is
performed quarterly. In addition, unaudited financial statements of the limited
partnership are distributed quarterly by DMI to each investor. The audited
financial statements, the unaudited quarterly financial statements, and the
quarterly valuations are sent directly to each equity investor. Although the
latest independent appraisal at November 30, 2000 supported the carrying value
of PMSRs at that date, management chose to increase its valuation reserve on
11.
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ARGO BANCORP, INC.
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PMSRs by $300,000 during the fourth quarter of 2000 due to the effects of the
rapidly declining interest rate environment in December 2000.
In addition to its investment in the limited partnerships, at December 31, 2000,
the Savings Bank had a $397,000 investment in a PMSRs portfolio that it owns
directly, which consisted of 771 mortgage loans having an outstanding principal
balance of $29.3 million.
ASSET QUALITY
Argo Bancorp and the Savings Bank regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for loan
losses is established when, in the opinion of management, the net realizable
value of the property collateralizing the loan is less than the outstanding
principal and interest, and the collectibility of the loan's principal and
interest becomes doubtful. The allowance for loan losses totaled $2.4 million
and $1.6 million at December 31, 2000 and 1999, respectively.
The total amount of loans (excluding discounted loans) 90 days or more past due
at December 31, 2000 was $4.4 million, or 1.59%, of total loans receivable as
compared to $6.0 million, or 2.25%, on December 31, 2000. The total amount of
discounted loans 90 days or more past due at December 31, 1999 was $1.0 million,
or 14.5%, of total discounted loans receivable. The total amount of discounted
loans 90 days or more past due at December 31, 1999 was $1.7 million or 18.7% of
total discounted loans receivable.
At December 31, 2000, Argo Bancorp had 41 properties totaling $2.5 million
classified as foreclosed as compared to 58 properties totaling $2.3 million on
December 31, 1999. The underlying properties at December 31, 2000 consist
primarily of single-family residences. The foreclosed real estate has been
written down to its estimated net realizable value at December 31, 2000. During
2000, foreclosed real estate properties were sold resulting in net losses of
$18,000 compared to sales of foreclosed properties in 1999 resulting in net
losses of $533,000.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 TO THE
YEAR ENDED DECEMBER 31, 1999
General: Net income for the year ended December 31, 2000 was $4.3 million or
$2.00 per diluted share, including the after-tax gain of $5.7 million, or $2.71
per diluted share, on the sale of three of the Savings Bank's branch deposits.
Net income for the year ended December 31, 1999 was $2.6 million, or $1.25 per
diluted share, including the after tax gain of $1.9 million, or $.94 per diluted
share, on the sale of On-Line. Income from continuing operations totaled
$514,000, or $.25 per diluted share, for the twelve months ended December 31,
1999.
Interest Income: Interest income increased by $6.2 million, or 25.9%, to $30.1
million for the year ended December 31, 2000 from $23.9 million for last year.
The improvement in interest income was the result of a $54.3 million increase in
average interest-earning assets to $365.7
12.
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ARGO BANCORP, INC.
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million and a 55 basis point increase in the yield on interest-earning assets to
8.22% for the year ended December 31, 2000 from 7.67% for 1999.
Interest Expense: Interest expense increased by $6.8 million, or 42.1%, to $22.8
million in 2000 from $16.0 million in 1999, as a result of a $75.1 million
increase in average interest-bearing liabilities and a 75 basis point increase
in the average cost of interest-bearing liabilities to 5.88% for the year ended
2000 from 5.13% for 1999.
Net Interest Income: Net interest income declined by $561,000 to $7.3 million
for the twelve months ended December 31, 2000 from $7.9 million for last year.
The decrease in net interest income was the result of a 53 basis point decline
in the net interest margin to 2.00% for the year ended December 31, 2000 from
2.53% in 1999. The interest rate spread decreased by 20 basis points to 2.34% in
2000 from 2.54% in 1999.
13.
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ARGO BANCORP, INC.
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The following table sets forth certain information relating to Argo Bancorp's
consolidated average balance sheets and reflects the average yield on assets and
average cost of liabilities for the continuing operations for the years
indicated. Such yields and costs are derived by dividing income or expense by
the average of assets or liabilities, respectively, for the periods presented.
Average balances are derived from month-end balances. Management believes that
the use of month-end balances instead of daily average balances has not caused a
material difference in the information presented.
---------------------------------------- ---------------------------------------
2000 1999
---------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------- ------------ ------------- ------------- ------------ ------------
Assets
Interest-earning assets:
Loans receivable (1) $ 280,777 $ 23,585 8.40% $ 245,739 $ 19,799 8.06%
Mortgage-backed securities 1,627 103 6.33% 1,816 114 6.28%
Interest-earning deposits 36,666 3,161 8.62% 31,120 1,805 5.80%
Securities 46,590 3,222 6.92% 32,707 2,178 6.66%
---------------------------------------- ---------------------------------------
Total interest-earning assets 365,660 30,071 8.22% 311,382 23,896 7.67%
Non-interest-earning assets (2) 48,605 33,877
------------- -------------
Total assets $ 414,265 $ 345,259
============= =============
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits $ 344,075 19,089 5.55% $ 268,727 12,542 4.67%
FHLB advances and other borrowings 25,773 1,753 6.80% 26,016 1,567 6.02%
Junior subordinated debt 17,180 1,908 11.11% 17,250 1,905 11.04%
---------------------------------------- ---------------------------------------
Total interest-bearing liabilities 387,028 22,750 5.88% 311,993 16,014 5.13%
Other liabilities 6,609 14,175
------------- -------------
Total liabilities 393,637 326,168
Equity 20,695 19,091
------------- -------------
Total liabilities and equity $ 414,332 $ 345,259
============= ------------ ============= ------------
Net interest income/interest rate spread (3) $ 7,321 2.35% $ 7,882 2.54%
============ ============= ============ ============
Net interest-earning asset/(liabilities)/net
interest margin (4) $ (21,368) 2.00% $ (611) 2.53%
============= ============= ============= ============
Ratio of average interest-earning assets to
average interest-bearing liabilities 94.00 x 1.00 x
============= =============
----------------------------------------
1998
----------------------------------------
Average
Average Yield/
Balance Interest Cost
------------- ------------ -------------
Assets
Interest-earning assets:
Loans receivable (1) $ 194,378 $ 16,624 8.55%
Mortgage-backed securities 2,284 143 6.26%
Interest-earning deposits 10,066 606 6.02%
Securities 5,428 252 4.64%
----------------------------------------
Total interest-earning assets 212,156 17,625 8.31%
Non-interest-earning assets (2) 39,029
-------------
Total assets $ 251,185
=============
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits $ 188,680 9,414 4.99%
FHLB advances and other borrowings 29,260 1,681 5.75%
Junior subordinated debt 2,519 272 10.80%
----------------------------------------
Total interest-bearing liabilities 220,459 11,367 5.16%
Other liabilities 12,139
-------------
Total liabilities 232,598
Equity 18,587
-------------
Total liabilities and equity $ 251,185
============= ------------
Net interest income/interest rate spread (3) $ 6,258 3.15%
============ =============
Net interest-earning asset/(liabilities)/net
interest margin (4) $ (8,303) 2.95%
============= =============
Ratio of average interest-earning assets to
average interest-bearing liabilities 96.00 x
=============
(1) Loans receivable include loans held for sale, portfolio loans
receivable, and discount loans receivable.
(2) Included in the balances are PMSRs of approximately $4.6 million, $5.0
million, and $5.1 million in 2000, 1999, and 1998, respectively.
(3) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average cost of total interest-earning
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
14.
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ARGO BANCORP, INC.
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The table below sets forth certain information regarding changes in interest
income and interest expense of Argo Bancorp for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change
in volume multiplied by prior rate); (2) changes in rates (change in rate
multiplied by prior volume); and (3) net changes in rate-volume. The change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
2000 Compared to 1999 1999 Compared to 1998
----------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest-earning assets:
Loans receivable, net $ 2,907 $ 879 $ 3,786 $ 4,191 $ (1,016) $ 3,175
Interest-earning deposits 364 992 1,356 1,222 (23) 1,199
Mortgage-backed securities (12) 1 (11) (29) - (29)
Investment securities 957 87 1,044 1,773 153 1,926
--------- --------- --------- --------- --------- --------
Total 4,216 1,959 6,175 7,157 (886) 6,271
Interest-bearing liabilities:
Deposits 3,913 2,634 6,547 3,770 (642) 3,128
FHLB advances and other
borrowings (14) 200 186 (230) 116 (114)
Junior subordinated debt 3 - 3 1,633 - 1,633
--------- --------- --------- --------- --------- --------
Total 3,902 2,834 6,736 5,173 (526) 4,647
--------- --------- --------- --------- --------- --------
Net change in interest income $ 314 $ (875) $ (561) $ 1,984 $ (360) $ (1,624)
========= ========= ========= ========= ========= ========
Provision for Loan Losses: The Savings Bank recorded provision for loan losses
of $1.2 million for the year ended December 31, 2000 compared to $965,000 for
1999, resulting in total allowances for loan losses of $2.4 million, or .87%, of
total loans receivables and 54.98% of total non-performing loans at December 31,
2000. The allowance for loan losses balance at December 31, 1999 was $1.6
million, or .58% of loans receivable, excluding discounted loans receivable. The
allowance was increased due to purchases in the fourth quarter of commercial and
commercial real estate loans and direct financing leases, which are considered
of higher risk than the Bank's traditional loan products primarily secured by
residential real estate. The allowance was also increased to bring the ratio of
the allowance to gross loans closer to that of peer financial institutions, as
recommended by the Savings Bank's regulators. The commercial real estate and
commercial loan balances totaled $48.7 million at December 31, 2000 compared to
$16.3 million at December 31, 1999.
Our evaluation of risk in maintaining the allowance for loan losses includes the
review of all loans on which the collectibility of principal may not be
reasonably assured. We consider the following factors as part of this
evaluation: our historical loan loss experience, known and inherent risks in the
loan portfolio, the estimated value of the underlying collateral, peer group
information and current economic and market trends. There may be other factors
that may warrant our consideration in maintaining an allowance at a level
sufficient to provide for probable losses. This evaluation is inherently
subjective as it requires estimates that are
15.
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ARGO BANCORP, INC.
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susceptible to significant revisions as more information becomes available or as
future events change. Although we believe that we have established and
maintained the allowance for loan losses at adequate levels, future additions
may be necessary if economic and other conditions in the future differ
substantially from the current operating environment.
In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. The Office of Thrift Supervision may require us to
increase the allowance for loan losses or the valuation allowance for foreclosed
real estate based on their judgments of information available to them at the
time of their examination, thereby adversely affecting our results of
operations.
Noninterest Income: Noninterest income increased by $7.8 million to $10.1
million for the year ended December 31, 2000 compared to $2.4 million in 1999.
This increase was primarily the result of the $7.9 million pre-tax gain on the
sale of deposits from three of the Savings Bank's branches. The purchaser of the
branches also assumed the lease contracts on those buildings, which resulted in
an additional gain of $591,000 recorded from the previously deferred profit on
the 1999 sale of two of those branch buildings. In 2000, the amortization of the
deferred gain on the sale of five operating properties of the Savings Bank in
the sale leaseback transaction was $128,000 compared to $86,000 for 1999. These
gains were partially offset by an addition of $300,000 to the Valuation
allowance for PMSRs. The sale of foreclosed real estate resulted in net losses
of $18,000 for the year ended December 31, 2000, an improvement of $515,000 from
net losses of $533,000 recorded in 1999. Profits on the sale of trading account
securities increased by $95,000 to $214,000 in 2000 from $119,000 in 1999. Fee
income and service charges increased by $375,000 to $1.0 million for the year
ended December 31, 2000 from $638,000 for last year. The increase in fees and
service charges was primarily the result of the Savings Bank's deployment of 776
ATMs in a 17 state area. In addition, loan servicing income declined to $109,000
for the year ended December 31, 2000 from $1.4 million for 1999. The decline in
loan servicing income was a result of management's decision to restructure the
mortgage-banking operations of Margo Financial Services, LLC ("Margo") and a
management services agreement dated June 1, 1999 between the Savings Bank and
E-Conduit which limited the Savings Bank's revenue to a six basis point per
transaction license fee. Loan servicing income is expected to remain at the 2000
level during 2001.
Noninterest Expense: Noninterest expense increased by $1.5 million to $10.6
million in 2000 from $9.1 million in 1999. The increase is primarily the result
of the start-up expenses related to the Savings Bank's Internet banking
division, umbrellabank.com, which incurred operating expenses totaling $2.1
million. Partially offsetting the increase were reduced expenses related to
Margo totaling $879,000. This decline was the result of the Margo restructuring
and the management services agreement with E-Conduit.
Income Tax Expense: The Company recorded a tax provision of $1.2 million for
2000 compared to a tax benefit of $336,000 for 1999. The 2000 tax expense
increased primarily due to taxes on the deposit sale, partially offset by
$360,000 of low-income housing tax credits. The 1999 tax benefit resulted
primarily from lower pre-tax income and low-income housing tax credits totaling
$300,000.
16.
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ARGO BANCORP, INC.
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COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 TO THE
YEAR ENDED DECEMBER 31, 1998
General: Net income for the year ended December 31, 1999 was $2.6 million or
$1.25 per diluted share, including the after-tax gain of $1.9 million, or $.94
per diluted share, on the sale of On-Line. Net income for the twelve months
ended December 31, 1998 was $531,000, or $.26 per diluted share.
Income from continuing operations totaled $514,000, or $.25 per diluted share,
compared to $245,000, or $.12 per diluted share, for 1998. The increase in
income from continuing operations was primarily due to a $1.6 million
improvement in net interest income and a $772,000 reduction in operating
expenses, which offset a $610,000 increase in the provision for loan losses and
a $1.5 million decline in non-interest income.
Interest Income: Interest income increased by $6.3 million, or 35.6%, to $23.9
million for the year ended December 31, 1999 from $17.6 million for the same
period last year. The improvement in interest income was the result of a $99.3
million increase in average interest-earning assets to $311.5 million which
offset a decline of 64 basis points in the yield on interest-earning assets to
7.67% for the year ended December 31, 1999 from 8.31% for 1998.
Interest Expense: Interest expense increased by $4.6 million, or 40.9%, to $16.0
million in 1999 from $11.4 million in 1998, as a result of a $91.5 million
increase in average interest-bearing liabilities. The average cost of
interest-bearing liabilities declined by 3 basis points to 5.13% for the year
ended 1999 from 5.16% for 1998.
Net Interest Income: Net interest income increased by $1.6 million to $7.9
million for the twelve months ended December 31, 1999 from $6.3 million for the
same period last year. The increase to net interest income was despite a 42
basis point decline in the net interest margin to 2.53% for the year ended
December 31, 1999 from 2.95% in 1998. The interest rate spread decreased to
2.54% in 1999 from 3.15% in 1998.
Provision for Loan Losses: The provision for loan losses totaled $965,000 for
the year ended December 31, 1999 compared to $355,000 for 1998, resulting in an
allowance for loan losses of $1.6 million, or .58% of total loans receivables
and 25.61% of total non-performing loans, at December 31, 1999. The allowance
for loan losses balance at December 31, 1998 was $940,000, or .40% of loans
receivable excluding discounted loans receivable. The increase in the provision
for loan losses was primarily due to the increase in the Savings Bank's loan
portfolio. In determining the provision for loan losses and adequacy of the
corresponding allowance for loan losses, management considers changes in the
asset quality, charge-off experience, and economic conditions.
17.
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ARGO BANCORP, INC.
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Noninterest Income: Noninterest income declined by $1.5 million to $2.3 million
for the year ended December 31, 1999 compared to $3.8 million in 1998. This
decrease was in part the result of a $1.2 million decline in gains on the sale
of loans held for sale and discounted loans receivable. The sale of foreclosed
real estate resulted in net losses of $533,000 for the year ended December 31,
1999, or $205,000 higher than the net losses of $228,000 recorded in 1998.
Profits on the sale of trading account securities declined by $126,000 to
$119,000 in 1999 from $245,000 in 1998. The Company also recorded a net loss of
$2,000 on the sale of securities available-for-sale in 1999 compared to net
gains of $245,000 in 1998. In addition, loan servicing income declined by
$254,000 to $1.4 million for the year ended December 31, 1999 from $1.6 million
for 1998. The decline in loans servicing income was as a result of the
management services agreement dated June 1, 1999 between the Savings Bank and
E-Conduit, which limited the Savings Bank's revenue to a six basis point per
transaction license fee. In addition, in 1998, the Company had a $976,000 gain
on the sale of a branch, which was offset by $1,399,000 of losses from the
investment in the limited partnership. In 1999, the gain recognized on the sale
of five operating properties of the Bank in the sale leaseback transaction was
$86,000 and there was net income from the limited partnership of $166,000.
Noninterest Expense: Noninterest expense declined by $772,000 to $9.1 million in
1999 from $9.9 million in 1998. This decline was in part the result of the Margo
restructuring and the management services agreement with E-Conduit which reduced
the operating expenses related to Margo by $693,000 to $879,000 in 1999 from
$1.6 million in 1998. In addition, professional services fees declined by
$420,000 to $572,000 in 1999 from $992,000 in 1998 as management focused on
controlling these costs during 1999. Finally, compensation and benefits
decreased as a result of the client services agreement with Synergy and as a
result of a reduction in full-time employees.
Income Tax Expense: The Company recorded a tax benefit from continuing
operations of $336,000 for 1999 compared to a tax benefit of $383,000 for 1998.
The 1999 tax benefit resulted primarily from recognizing low-income housing tax
credits totaling $300,000. The Company has low-income housing tax credit
carryforwards in the amount of $914,000 expiring in 2012 and 2019. In addition,
the Company has state net operating loss carryforwards of $5,921,000 expiring in
2012 through 2019.
ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standard No. 133 ("Statement No. 33") on
derivatives will, effective January 1, 2001, require all derivatives to be
recorded at fair value on the balance sheet, with changes in fair value charged
or credited to income. If derivatives are documented and effective as hedges,
the change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item. Under the new standard, securities
held-to-maturity can no longer be hedged, except for changes in the issuer's
creditworthiness. Therefore, upon adoption of Statement No. 133, companies will
be able to reclassify securities held-to-maturity to either trading or
available-for-sale, provided certain criteria are met. Since the Company has no
significant derivative instruments or hedging activities, adoption of Statement
No. 133 will not have a material impact on the Company's financial statements.
18.
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ARGO BANCORP, INC.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its normal operations, the Savings Bank is subject to interest-rate
risk on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Investment Committee, which includes members of
senior management and directors, monitors and determines the strategy of
managing the rate and sensitivity repricing characteristics of the individual
asset and liability portfolios the Savings Bank maintains. The overall goal is
to manage this interest rate risk to most efficiently utilize the Savings Bank's
capital, as well as to maintain an acceptable level of change to its net
portfolio value ("NPV"), and net interest income. The Savings Bank's strategy is
to minimize the impact of sudden and sustained changes in interest rates on NPV
and its net interest margin.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Savings Bank's change in NPV in the event of hypothetical
changes in interest rates, as well as interest rate sensitivity gap analysis,
which monitors the repricing characteristics of the Savings Bank's
interest-earning assets and interest-bearing liabilities. The Board of Directors
has established limits to changes in NPV and net interest income across a range
of hypothetical interest rate changes. If estimated changes to NPV and net
interest income are not within these limits, the Board may direct management to
adjust its asset/liability mix to bring its interest rate risk within Board
limits.
In an effort to reduce its interest rate risk, the Savings Bank has focused on
strategies limiting the average maturity of its assets by emphasizing the
origination of adjustable-rate mortgage loans. The Savings Bank, from time to
time, also invests in long-term fixed-rate mortgages provided it is compensated
with an acceptable spread.
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by calculating the estimated change in the NPV of its cash
flows from interest sensitive assets and liabilities, as well as certain
off-balance sheet items, in the event of a series of sudden and sustained
changes in interest rates ranging from 100 to 300 basis points. Management
assumes that a 200 basis point movement up or down is considered reasonable and
plausible for purposes of managing its interest-rate risk on a day-to-day basis.
NPV is the market value of portfolio equity and is computed as the difference
between the market value of assets and the market value of liabilities, adjusted
for the value of off-balance sheet items. The following table presents the
Savings Bank's projected change in NPV for the various rate shocks as of
December 31, 2000 and 1999.
19.
21
ARGO BANCORP, INC.
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Estimated Increase
(Decrease) in NPV
Change in Estimated -----------------
Interest Rate NPV Amount Percent
------------- --- ------ -------
(Dollars in thousands)
2000
300 basis point rise $ 18,765 $ (7,605) (29)%
200 basis point rise 21,750 (4,620) (18)
100 basis point rise 24,260 (2,110) (8)
Base scenario 26,370 - -
100 basis point decline 28,013 1,643 6
200 basis point decline 29,503 3,133 12
300 basis point decline 31,003 4,633 18
1999
300 basis point rise $ 10,005 $ (14,099) (58)%
200 basis point rise 15,915 (8,189) (34)
100 basis point rise 20,893 (3,211) (13)
Base scenario 24,104 - -
100 basis point decline 25,715 1,611 7
200 basis point decline 26,805 2,701 11
300 basis point decline 27,806 3,701 15
The Savings Bank is less sensitive to a sudden rise in interest rates at
December 31, 2000 as compared to December 31, 1999. A decline in interest rates,
however, would have a similar impact to the Savings Bank at either December 31,
2000 or at December 31, 1999.
The NPV is calculated by the Savings Bank using guidelines established by the
OTS related to interest rates, loan prepayment rates, deposit decay rates and
market values of certain assets under the various interest rate scenarios. These
assumptions should not be relied upon as indicative of actual results due to the
inherent shortcomings of the NPV analysis. These shortcomings include (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV, (ii) certain assets, including adjustable-rate loans,
have features which affect the potential repricing of such instruments, which
may vary from the assumptions used, and (iii) the likelihood that as interest
rates are changing, the Investment Committee would likely be changing strategies
to limit the indicated changes in NPV as part of its management process.
The Savings Bank does not use derivative instruments to control interest rate
risk. In addition, interest rate risk is the most significant market risk
affecting the Savings Bank. Other types of market risk, such as foreign currency
exchange risk and commodity price risk, do not arise in the normal course of the
Company's business activities and operations.
20.
22
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, 2000 and
1999 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Argo Bancorp, Inc.
and Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 16, 2001
21.
23
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Cash $ 19,885 $ 5,603
Interest-earning deposits 74,132 32,069
----------- -----------
Total cash and cash equivalents 94,017 37,672
Trading account securities 1,099 668
Securities available-for-sale 14,574 14,364
Securities held-to-maturity (fair value of $26,253 and $24,082) 26,523 25,859
Loans held for sale 38,899 18,894
Loans receivable, net 240,521 249,396
Discounted loans receivable, net 7,103 9,170
Mortgage loan servicing rights 397 464
Investment in limited partnership 4,387 4,494
Investment in GFS preferred stock 4,000 4,600
Stock in Federal Home Loan Bank of Chicago 2,615 2,303
Foreclosed real estate, net 2,498 2,280
Premises and equipment, net 9,823 8,514
Debt issuance costs related to junior subordinated debt, net 1,774 1,838
Accrued interest receivable 3,988 3,392
Prepaid expenses and other assets 10,875 8,322
----------- -----------
Total assets $ 463,093 $ 392,230
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 388,537 $ 301,673
Borrowed money 18,708 40,336
Advance payments by borrowers for taxes and insurance 846 902
Custodial escrow balances for loans serviced for others 7,519 5,476
Accrued interest payable 2,156 966
Other liabilities 4,966 6,039
Junior subordinated debt 16,587 17,250
Stockholders' equity
Preferred stock 3 3
Common stock 20 20
Additional paid-in capital 8,893 8,829
Retained earnings - substantially restricted 16,189 12,260
Employee Stock Ownership Plan loan (405) (426)
Unearned stock awards (248) (248)
Accumulated other comprehensive loss (678) (850)
----------- -----------
Total stockholders' equity 23,774 19,588
----------- -----------
Total liabilities and stockholders' equity $ 463,093 $ 392,230
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22.
24
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
INTEREST INCOME
Loans receivable $ 22,425 $ 18,564 $ 14,445
Discounted loans receivable 1,160 1,235 2,179
Mortgage-backed securities available-for-sale 103 114 143
Securities available-for-sale 1,436 1,011 252
Securities held-to-maturity 1,786 1,167 -
Interest-earning deposits 3,161 1,805 606
---------- ---------- ----------
Total interest income 30,071 23,896 17,625
---------- ---------- ----------
INTEREST EXPENSE
Deposits 19,089 12,542 9,414
Borrowed money 1,753 1,567 1,681
Junior subordinated debt 1,908 1,905 272
---------- ---------- ----------
Total interest expense 22,750 16,014 11,367
---------- ---------- ----------
NET INTEREST INCOME 7,321 7,882 6,258
Provision for loan losses 1,218 965 355
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,103 6,917 5,903
NONINTEREST INCOME
Loan servicing income 109 1,372 1,626
Net gain (loss) on sale of
Loans held for sale 107 200 853
Discounted loans receivable - 188 695
Foreclosed real estate (18) (533) (228)
Securities available-for-sale (111) (2) 234
Profits on trading account activity 214 119 245
Branch deposits 7,974 - 976
Branch facilities 591 86 -
Fees and service charges 1,013 638 702
Net income (loss) on investment in limited partnership (107) 166 (1,399)
Other 319 106 106
---------- ---------- ----------
Total noninterest income 10,091 2,340 3,810
---------- ---------- ----------
- --------------------------------------------------------------------------------
(Continued)
23.
25
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
NONINTEREST EXPENSE
Compensation and benefits $ 3,377 $ 3,741 $ 4,038
Occupancy and equipment 2,154 1,637 1,663
Federal deposit insurance premiums 62 146 112
Loan expense 722 797 816
Professional fees 650 572 992
Advertising and promotion 438 253 315
Goodwill amortization - 47 102
Data processing 693 396 334
Other 2,540 1,490 1,479
---------- ---------- ----------
Total noninterest expense 10,636 9,079 9,851
---------- ---------- ----------
Income (loss) from continuing operations before income taxes 5,558 178 (138)
Income tax expense (benefit) 1,227 (336) (383)
---------- ---------- ----------
Income from continuing operations 4,331 514 245
Income from discontinued operation (net of tax) - 135 286
Gain on sale of discontinued operation (net of tax) - 1,928 -
---------- ---------- ----------
Income from discontinued operations - 2,063 286
---------- ---------- ----------
Net income $ 4,331 $ 2,577 $ 531
========== ========== ==========
Per share amounts
Income from continuing operations
Basic $ 2.16 $ .26 $ .12
Diluted 2.00 .25 .12
Income from discontinued operations
Basic $ - $ 1.06 $ .15
Diluted - 1.00 .14
Net income
Basic $ 2.16 $ 1.32 $ .27
Diluted 2.00 1.25 .26
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24.
26
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 1999, and 1998
(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, 1998 $ - $ 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
Comprehensive income:
Net income - - - 4,331 - - - 4,331
Other comprehensive income - - - - - - 172 172
---------
Total comprehensive income 4,503
Release of ESOP shares - - - - 21 - - 21
Proceeds from exercise of stock
options - - 64 - - - - 64
Cash dividends ($.20 per share) - - - (402) - - - (402)
-------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 $ 3 $ 20 $ 8,893 $ 16,189 $ (405) $ (248) $ (678) $ 23,774
======== ========= ========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25.
27
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 4,331 $ 514 $ 245
Adjustments to reconcile income from continuing operations
to net cash from operating activities
Depreciation and amortization 1,796 1,100 757
Accretion of discounts and deferred loan fees (64) 1,761 (1,867)
Deferred income tax expense (benefit) 981 (780) (580)
Provision for losses on loans receivable and foreclosed real estate 1,218 965 355
Loss (gain) on sale of
Loans held for sale (107) (200) (853)
Discounted loans receivable - (188) (695)
Securities available-for-sale 111 2 (234)
Trading account securities (214) (119) (245)
Foreclosed real estate 18 533 228
Branch facilities (719) (86) -
Branch deposits (7,974) - (976)
Federal Home Loan Bank of Chicago stock dividend (134) - -
Net change in trading account activity (217) 279 (448)
Net change in investment in limited partnership 107 (25) 1,443
Loans originated and purchased for sale, net (20,005) 10,305 (33,751)
Proceeds from sale of discounted loans receivable - 2,162 10,827
Payments received on discounted loans 1,067 - -
Goodwill amortization - 47 102
Amortization of purchased loan servicing rights 67 129 201
Amortization of debt issuance costs 64 64 -
MRP stock and ESOP shares earned 21 108 117
Decrease (increase) in accrued interest receivable and prepaid
expenses and other assets (4,235) 2,855 (5,489)
Increase (decrease) in accrued interest payable and other liabilities 1,039 62 1,725
--------- ---------- -----------
Net cash from operating activities (22,849) 19,488 (29,138)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated and purchased for portfolio, net 6,170 (49,025) (37,708)
Proceeds from maturities of and principal repayments on
Securities available-for-sale 180 3,402 645
Securities held-to-maturity 138 - -
Proceeds from sale of
Securities available-for-sale 1,144 420 2,993
Stock in Federal Home Loan Bank of Chicago - - 1,360
Foreclosed real estate 2,422 3,011 3,010
Purchased loan servicing rights - 11,100 -
Premises and equipment - - 89
On-Line Financial Services, Inc., net - 4,583 -
Branch deposits, including cash and cash equivalents (105,611) - (11,965)
Banking facilities - 5,850 -
- --------------------------------------------------------------------------------
(Continued)
26.
28
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999, and 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Purchase of
Loan servicing rights $ - $ (11,100) $ -
Securities available-for-sale (1,368) (12,099) (6,157)
Securities held-to-maturity (802) (25,859) -
Premises and equipment (3,579) (8,267) (2,065)
Stock in Federal Home Loan Bank of Chicago (178) (392) -
Payment received on GFS preferred stock 600 - -
Cash paid to former stockholders of On-Line (203) (575) (454)
--------- ---------- -----------
Net cash from investing activities (101,087) (78,951) (50,252)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 200,923 68,693 73,760
Proceeds from borrowed money 472 24,885 73,968
Repayment of borrowed money (22,100) (5,600) (81,875)
Proceeds from issuance of junior subordinated debentures,
net of debt issuance expenses - (245) 16,115
Repurchase of junior subordinated debentures (663) - -
Purchase of additional ESOP shares - (498) -
Proceeds from exercise of stock options 64 - 186
Dividends paid (402) (401) (359)
Net change in advance payment by borrowers for taxes
and insurance (56) 49 112
Net change in custodial balances for loans serviced 2,043 136 (1,060)
---------- ---------- -----------
Net cash from financing activities 180,281 87,019 80,847
Net cash provided by discontinued operations - 20 60
---------- ---------- -----------
- 20 60
---------- ---------- -----------
Net change in cash and cash equivalents 56,345 27,576 1,517
Cash and cash equivalents at beginning of year 37,672 10,096 8,579
---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 94,017 $ 37,672 $ 10,096
========== ========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 21,560 $ 15,709 $ 10,970
Income taxes 900 240 15
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 branch deposits
Assets sold $ 474 351
Cash paid 106,085 12,316
---------- -----------
Net liabilities sold 105,611 11,965
Transfer of loans to foreclosed real estate $ 2,658 2,219 3,102
Deferred gain on sale lease back - 2,410 -
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27.
29
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- -------------------------------------------------------------------------------
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 subsidiaries, Argo Federal Savings Bank, FSB (Argo Savings or the
Savings Bank) and Argo Redemption Corporation (Argo Redemption); and the Savings
Bank's wholly owned subsidiary, Dolton-Riverdale Savings Service Corporation
(Dolton Service). 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, 1998. 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 and an Internet site.
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 a nonbank affiliate, the Savings Bank
also provides mortgage banking activities that focus on the purchase and sale of
mortgage loans into the secondary market.
During 2000, Argo Savings established an Internet banking division, which is
marketed as "umbrellabank.com, a division of Argo Federal Savings Bank, FSB"
("umbrellabank.com"). Umbrellabank.com allows consumers to conduct online
financial transactions with the Savings Bank, including but not limited to
opening account relationships, transferring funds, accessing account
information, processing bill payments, and applying for or obtaining loan
products, including but not limited to credit cards and residential mortgage
secured loans. Argo Savings expensed $626,000 during the year ended December 31,
2000 related to organizational expenses of umbrellabank.com, which are
classified with other expense in the consolidated statements of operations.
- --------------------------------------------------------------------------------
(Continued)
28.
30
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
- --------------------------------------------------------------------------------
(Continued)
29.
31
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2000, 1999, or 1998.
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.
- --------------------------------------------------------------------------------
(Continued)
30.
32
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 two lines of business; banking and discount loan operations.
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 did not have a
material effect as the Company had no derivative holdings at December 31, 2000.
- --------------------------------------------------------------------------------
(Continued)
31.
33
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 1998 and 1999
information to make it comparable with the 2000 presentation.
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,
1999 (through the date of sale) and 1998 consolidated statements of operations
are presented in the following table:
(In thousands)
1999 1998
----------- -----------
Revenues $ 4,247 $ 14,177
Costs and expenses 4,029 13,716
----------- -----------
Operating income 218 461
Income tax expense 83 175
----------- -----------
Income from discontinued operations $ 135 $ 286
=========== ===========
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.
- --------------------------------------------------------------------------------
(Continued)
32.
34
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 2 - SALE OF ON-LINE FINANCIAL SERVICES, INC. (Continued)
At December 31, 2000, the Company estimated the liability for future contingent
payments to be $295,000. The actual amount to be paid will be impacted by future
revenue streams.
NOTE 3 - SECURITIES
Securities available-for-sale are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ----------- ----------- --------
(In thousands)
December 31, 2000
Municipal securities $ 370 $ 5 $ -- $ 375
U.S. agency securities 5,500 -- (81) 5,419
Corporate bonds 1,908 -- (285) 1,623
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 81 -- (2) 79
Federal National Mortgage
Association 1,526 -- (12) 1,514
Trust preferred securities 3,033 5 (388) 2,650
Marketable equity securities 3,252 22 (360) 2,914
-------- -------- -------- --------
$ 15,670 $ 32 $ (1,128) $ 14,574
======== ======== ======== ========
December 31, 1999
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
======== ======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
33.
35
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Securities held-to-maturity are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
December 31, 2000
U.S. agency securities $ 24,451 $ 1 $ (272) $ 24,180
Collateralized mortgage obligations 1,294 7 (1) 1,300
Corporate bonds 778 -- (5) 773
-------- -------- -------- --------
$ 26,523 $ 8 $ (278) $ 26,253
======== ======== ======== ========
December 31, 1999
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, 2000 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.
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ -------------------
(In thousands) (In thousands)
Due after one through five years $ 1,747 $ 1,474 $ 4,000 $ 4,000
Due after five years through ten years 2,031 2,013 3,000 2,991
Due after ten years 4,000 3,930 18,229 17,962
------- ------- ------- -------
7,778 7,417 25,229 24,953
Mortgage-backed securities and
collateralized mortgage obligations 1,607 1,593 1,294 1,300
Trust preferred securities 3,033 2,650 -- --
Marketable equity securities 3,252 2,914 -- --
------- ------- ------- -------
$15,670 $14,574 $26,523 $26,253
======= ======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
34.
36
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
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,
-----------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Proceeds for sales $ 1,144 $ 420 $ 2,993
Gross realized gains 151 27 234
Gross realized losses (262) (29) --
At December 31, 2000 and 1999, trading account securities primarily consist of
marketable equity securities which are carried at fair value. The unrealized
gain (loss) of $24,000 and $(52,000) at December 31, 2000 and 1999 is reflected
as a component of current earnings.
At December 31, 2000 and 1999, $3,546,000 and $5,600,000 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,
------------------------
2000 1999
--------- ---------
(In thousands)
One-to-four-family mortgage loans $ 209,066 $ 238,502
Commercial real estate loans 41,872 13,887
Direct financing leases 18,456 8,671
Commercial loans 6,779 2,416
Home equity loans 4,436 4,738
Other loans 856 1,168
--------- ---------
Total gross loans receivable 281,465 269,382
Add (deduct)
Allowance for loan losses (2,440) (1,551)
Deferred loan costs 1,373 1,384
Unearned discounts (978) (925)
--------- ---------
$ 279,420 $ 268,290
========= =========
Weighted-average interest rate 9.25% 7.98%
========= =========
- --------------------------------------------------------------------------------
(Continued)
35.
37
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Included in first mortgage loans are loans held for sale totaling approximately
$38.9 million and $18.9 million at December 31, 2000 and 1999. The loans held
for sale at December 31, 2000 and 1999 included $38.0 million and $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
There were no impaired loans at or for the years ended December 31, 2000, 1999,
or 1998.
The following is a summary of the changes in the allowance for loan losses:
Year ended December 31,
------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Balance at beginning of year $ 1,551 $ 940 $ 814
Provision for loan losses 1,218 965 355
Allowance on acquired loans -- -- 30
Charge-offs (329) (354) (259)
------- ------- -------
Balance at end of year $ 2,440 $ 1,551 $ 940
======= ======= =======
Loans receivable on nonaccrual are as follows:
Percentage
of Loans
Number Receivable,
of Net of
Loans Amount Discount
------ ------ ----------
(Dollars in Thousands)
December 31, 2000 71 $4,438 1.56%
December 31, 1999 86 6,039 2.25
First mortgage loans at December 31, 2000 and 1999 include approximately $138.6
million and $141.3 million in out-of-area purchased participation and whole
loans, which are secured by single-family homes, with approximately 10.7% in
California, 5.8% in New York, and 83.5% spread throughout the remainder of the
country at December 31, 2000. There is no geographic concentration of
nonperforming loans.
- --------------------------------------------------------------------------------
(Continued)
36.
38
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 5 - DISCOUNTED LOANS RECEIVABLE
Discounted loans receivable, net, are as follows:
December 31,
---------------------
2000 1999
-------- --------
(In thousands)
Discounted first mortgage loans $ 8,378 $ 11,040
Unearned discount (1,275) (1,870)
-------- --------
$ 7,103 $ 9,170
======== ========
Discounted loans receivable on nonaccrual are as follows:
Percentage
of Discount
Number Loans
of Loans Amount Receivable
-------- ------ ----------
(In thousands)
December 31, 2000 55 $ 1,030 14.50%
December 31, 1999 64 1,718 18.74
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment, net, are summarized as follows:
December 31,
--------------------
2000 1999
-------- --------
(In thousands)
Land $ 75 $ --
Office buildings and improvements 412 341
Leasehold improvements 785 472
Furniture, fixtures, and equipment 13,916 11,640
-------- --------
15,188 12,453
Less accumulated depreciation and amortization (5,365) (3,939)
-------- --------
$ 9,823 $ 8,514
======== ========
- --------------------------------------------------------------------------------
(Continued)
37.
39
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
Included in occupancy and equipment expense is depreciation expense of office
properties and equipment of approximately $1,796,000, $1,100,000, and $757,000
for the years ended December 31, 2000, 1999, and 1998.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The gain of $2,400,000 was deferred as the Company leased
these facilities from the purchaser. During 2000, deposits totaling $113,585,000
for two of these locations and a third location which was leased by the Company
were sold to a party unrelated to the 1999 transaction, and all three leases
were assumed by that entity. The Company recognized a gain of $7,974,000 on the
deposit sale, net of expenses of $1,216,000. In addition, during 2000, the
Company recognized a portion of the deferred gain for the two branch facilities
sold. Activity in the deferred gain account was as follows for the years ended
December 31, 2000 and 1999 (in thousands):
2000 1999
------- -------
Balance at beginning of year $ 2,314 $ --
Deferred gain -- 2,400
Amortization of deferred gain (128) (86)
Recognized upon lease assumption (591) --
------- -------
Balance at end of year $ 1,595 $ 2,314
======= =======
The three remaining facilities at December 31, 2000 are being leased back over a
period of 170 months. The leases contain renewal options for three additional
periods, the first for ten years and the final two for five years each.
The Company leases office space under its noncancelable operating leases. Rent
expense for the years ended December 31, 2000, 1999, and 1998 totaled $668,000,
$457,000, and $118,000. The lease expense for 2000 included $304,000 related to
the three branch facilities that were sold.
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 sale
of these deposits.
- --------------------------------------------------------------------------------
(Continued)
38.
40
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
The estimated minimum rental payments under the terms of the leases at December
31, 2000 are as follows:
Year ended December 31 Amount
---------------------- ------
(In thousands)
2001 $ 383
2002 387
2003 391
2004 395
2005 399
Thereafter 3,156
----------
Total minimum lease payments $ 5,111
==========
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, 2000 and 1999,
Argo Savings held $397,000 in purchased mortgage servicing rights (PMSRs) with
underlying principal balances of approximately $29.3 million and $35.7 million.
During 1999, the Company bought $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.
The balance of investment in limited partnership of $4.4 million and $4.5
million at December 31, 2000 and 1999 represents Argo Savings' investment in
various divisions of a single limited partnership. The investment at December
31, 2000 includes a $3.1 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 2000, the Company recorded a $300,000
reserve against its interest in the limited partnership due to the impact of the
loan prepayment speeds on the value of PMSRs. In 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
- --------------------------------------------------------------------------------
(Continued)
39.
41
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 7 - LOAN SERVICING, PURCHASED MORTGAGE SERVICING RIGHTS, AND
INVESTMENT IN LIMITED PARTNERSHIP (Continued)
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.
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
2000 1999
---------------------------------- --------------------------------
Amount Percent Weighted Amount Percent Weighted
in of Average in of Average
Thousands Total Rate Thousands Total Rate
--------- -------- -------- --------- ------- --------
Non-interest-bearing $ 9,744 2.5% -% $ 6,072 2.0% -%
Passbook accounts 5,291 1.4 2.20 19,873 6.6 2.20
NOW accounts 4,918 1.3 2.65 10,612 3.5 1.36
Money market accounts 69,035 17.7 6.86 4,426 1.5 2.90
-------- -------- -------- -------
88,988 22.9 5.60 40,983 13.6 1.77
Certificate accounts:
4.00% - 4.99% 9,779 2.5 4.72 47,892 15.9 4.58
5.00% - 5.99% 32,494 8.4 5.68 118,805 39.4 5.61
6.00% - 6.99% 107,869 27.8 6.69 93,542 31.0 6.37
7.00% - 7.99% 149,407 38.4 7.18 443 .1 7.17
8.00% - 8.99% -- -- -- 8 -- 8.53
-------- -------- -------- -------
299,549 77.1 6.74 260,690 86.4 5.70
-------- -------- -------- --------
$388,537 100.0% 6.48 $301,673 100.0% 5.16
======== ======== ======== =======
- --------------------------------------------------------------------------------
(Continued)
40.
42
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS (Continued)
Contractual maturities of certificate accounts at December 31, 2000 are as
follows (in thousands):
Under 12 months $ 177,566
12 months to 36 months 95,286
Over 36 months 26,697
---------
$ 299,549
=========
The Savings Bank has pledged investment securities of approximately $345,000 and
$3,323,000 at December 31, 2000 and 1999 as collateral to secure certain public
deposits. In addition to securities at December 31, 2000 and 1999, the Savings
Bank also had letters of credit totaling $14,280,000 as collateral to secure
several State of Illinois certificates. The total State of Illinois certificates
secured by letters of credit and securities totaled approximately $13,076,000
and $15,523,000 at December 31, 2000 and 1999. The aggregate amount of
certificate of deposit accounts with a balance greater than $100,000 was
$81,932,000 and $75,134,000 at December 31, 2000 and 1999.
Interest expense on deposit accounts is summarized as follows:
Year ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
Passbook and certificate accounts $18,015 $12,247 $ 8,960
NOW accounts 149 143 230
Money market accounts 925 152 224
------- ------- -------
$19,089 $12,542 $ 9,414
======= ======= =======
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.
- --------------------------------------------------------------------------------
(Continued)
41.
43
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 9 - BORROWINGS (Continued)
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 were capitalized related to the
debenture offering and are being amortized over the 30-year life of the junior
subordinated debentures.
In 2000, Argo Redemption was formed for the purpose of purchasing back a portion
of the 11% capital securities. Argo Redemption purchased 66,293 of the 11%
capital securities for $570,557 and recorded a gain of $92,373, which is
recorded with other income in the consolidated statement of operations. The 11%
capital share can be resold.
Borrowed money at December 31 is summarized as follows:
Weighted Interest Rate Balance
December 31, December 31,
---------------------- ---------------------
Maturity 2000 1999 2000 1999
-------- -------- ------ --------- ---------
(In thousands)
Advances from the Federal
Home Loan Bank of Chicago
Open line --% 4.74% $ -- $17,100
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
------- -------
6.49 5.56 12,832 34,932
Margin accounts Open line 8.92 7.79 5,876 5,404
------- -------
7.26 5.86 $18,708 $40,336
======= =======
The required aggregate principal balance of first mortgage loans securing
advances is determined by the Federal Home Loan Bank (FHLB). At December 31,
2000 and 1999, approximately $65 million and $63 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.
- --------------------------------------------------------------------------------
(Continued)
42.
44
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 9 - BORROWINGS (Continued)
There are also four securities having a carrying value of $1,500,000 pledged to
secure the advances.
The Savings Bank has an open line with the FHLB for up to $50 million that 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, 2000 by securities which are held by the broker and have
a market value of $9.9 million.
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS
Income tax expense (benefit) from continuing operations consists of the
following:
Year ended December 31,
----------------------------------
2000 1999 1998
-------- --------- --------
(In thousands)
Federal
Current $ 75 $ 572 $ 90
Deferred 1,054 (908) (473)
-------- --------- --------
1,129 (336) (383)
State
Current 120 318 107
Deferred (22) (318) (107)
-------- --------- --------
Total income tax expense (benefit) $ 1,227 $ (336) $ (383)
======== ========= ========
- --------------------------------------------------------------------------------
(Continued)
43.
45
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS (Continued)
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000 and
1999 are summarized as follows:
December 31,
-------------------
2000 1999
------- -------
(In thousands)
Deferred tax assets
Net operating loss carryforwards $ -- $ 281
Unused tax credits 168 914
Allowance for loan losses 1,005 713
Deferred gain on sale of fixed assets 622 900
Unrealized losses on securities available-for-sale 418 523
------- -------
Gross deferred tax assets 2,213 3,331
------- -------
Deferred tax liabilities
Excess tax bad debt deduction (15) (20)
Limited partnership interest (814) (851)
Depreciation -- (2)
Other (100) (37)
------- -------
Gross deferred tax liabilities (929) (910)
------- -------
Net deferred tax asset $ 1,284 $ 2,421
======= =======
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,
------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Federal income tax at statutory rate $ 1,890 $ 61 $ (47)
Increase (decrease) in tax resulting from:
Amortization of discounts and goodwill, net -- 16 35
Municipal interest, net (11) (11) (11)
Tax credits (300) (300) (275)
Benefit of prior year net operating losses (258) -- --
Other (94) (102) (85)
------- ------- -------
Income tax expense (benefit) $ 1,227 $ (336) $ (383)
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
44.
46
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES - CONTINUING OPERATIONS (Continued)
At December 31, 2000, Argo Bancorp has low income housing and alternative
minimum tax credit carryforwards in the amount of $168,000 expiring through
2020.
Retained earnings at December 31, 2000 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 $60,000, $76,000,
and $71,000 to the plan for the years ended December 31, 2000, 1999, and 1998.
The plan also provides benefits in the event of death, disability, or other
termination of employment.
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 2000
and 1999, the ESOP used available cash in the plan to purchase an additional
1,880 and 2,500 shares respectively. Consolidated stockholders' equity was
reduced by the unpaid balance of the ESOP loan at December 31, 2000.
Contributions of $95,000, $72,000, and $60,000 were accrued or made to the ESOP
to fund principal and interest payments for the years ended December 31, 2000,
1999, and 1998. Selected ESOP information at December 31, 2000, 1999, and 1998
follows:
- --------------------------------------------------------------------------------
(Continued)
45.
47
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
2000 1999 1998
-------- -------- --------
Shares allocated 94,362 82,503 73,909
Unearned shares 34,506 44,485 1,443
-------- -------- --------
Total ESOP shares 128,868 126,988 75,352
======== ======== ========
Total value of unearned shares $362,313 $511,578 $ 13,709
======== ======== ========
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, 2000 and 1999, all 18,838 preferred shares were allocated
and 18,618 were allocated at December 31, 1998.
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 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. There are
no remaining MRP shares outstanding under this plan at December 31, 2000.
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 originally vested over a five-year period and the
aggregate purchase price of shares awarded was being expensed as a portion of
annual compensation. Due to the sale of On-Line, the shares became fully vested
and compensation
- --------------------------------------------------------------------------------
(Continued)
46.
48
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
expense of $36,000 was recognized in 1999. The expense totaled $12,000 for 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 expense was
recognized in 2000 and no additional shares were awarded for the years ended
December 31, 2000 and 1999.
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 2000, 17,196 options were forfeited and 18,213 options were
exercised at a weighted average exercise price of $3.52 per share. During 1999,
no options were exercised. In 1998, 42,980 of the options were exercised at a
weighted average exercise price of $3.60 per share. At December 31, 2000,
options to purchase 136,059 shares were outstanding, at an average price of
$6.51.
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, 2000, 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 2000, no options were exercised. In
1998, 3,580 of the options were exercised at a weighted average exercise price
of $8.87 per share. At December 31, 2000, 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 99,000,
23,000, and 12,000 shares were granted during 2000, 1999, and 1998, and options
to acquire 14,000 and 12,000 were forfeited during 2000 and 1999. At December
31, 2000 and 1999, 134,000 and 35,000 options for shares have been awarded by
Argo Bancorp under the plan. The exercise price for the options awarded was
greater than or equal to the fair market value of the common stock on the date
of grant ($10.58, $9.00, and $8.625 per
- --------------------------------------------------------------------------------
(Continued)
47.
49
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued)
share in 2000, 1999, and 1998, respectively). At December 31, 2000, options to
purchase 108,000 shares were outstanding at an average price of $10.44 per
share.
At December 31, 2000 and 1999, the total options outstanding under all plans
were 443,659 and 394,068, at an average price of $7.11 and $6.14.
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,
-------------------------------
2000 1999 1998
--------- -------- --------
(In thousands, except per share data)
Income from continuing operations
As reported $ 4,331 $ 514 $ 245
Pro forma 4,251 490 220
Earnings per share
Basic
As reported 2.16 .26 .12
Pro forma 2.12 .25 .11
Diluted
As reported 2.00 .25 .12
Pro forma 1.96 .23 .11
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 2000, 1999, and 1998:
Year ended December 31,
----------------------------
2000 1999 1998
-------- -------- ------
Dividend yield 1.79% 2.08% 2.07%
Risk-free interest rate 5.75% 5.50% 5.50%
Weighted average expected life 8.6 years 10 years 8 years
Expected volatility 20.6% 18.06% 13.93%
The weighted average per share fair values of options granted during 2000, 1999,
and 1998 were $3.19, $2.70, and $2.11.
- --------------------------------------------------------------------------------
(Continued)
48.
50
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
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 $1.0 million and $3.9 million at December 31, 2000 and 1999. The
fixed rate commitments at December 31, 2000 have rates ranging from 7.00% to
7.75%. 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 $7.5 million and $9.0 million
as of December 31, 2000 and 1999.
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. There were no firm commitments outstanding at December 31,
2000.
The Savings Bank had Community Reinvestment Act (CRA) investment commitments
outstanding of $2.5 million. These commitments include $1,000,000 to be funded
for investment in the Greater West Side Loan Fund, $598,000 to be funded over
ten years for 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
- --------------------------------------------------------------------------------
(Continued)
49.
51
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
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, 2000 and 1999
follows:
2000 1999
--------------- -------------
Par value per share $ .01 $ .01
Authorized shares 9,000,000 9,000,000
Shares issued 2,023,109 2,004,896
Information regarding preferred stock at December 31, 2000 and 1999 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.
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, 2000 and 1999, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, 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.
- --------------------------------------------------------------------------------
(Continued)
50.
52
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL MATTERS (Continued)
The Savings Bank's actual capital amounts (in thousands) and ratios are as
follows as of December 31, 2000 and 1999:
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
----------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ----------- ------- ----------- ---------
December 31, 2000
Total capital
(to risk-weighted
assets) $ 28,912 12.29% $ 18,617 8.00% $ 23,522 10.00%
Tier I capital
(to risk-weighted
assets) 26,448 11.24 9,409 4.00 14,113 6.00
Tier I capital
(to adjusted assets) 26,448 5.95 17,783 4.00 22,229 5.00
December 31, 1999
Total capital
(to risk-weighted
assets) $ 23,404 12.30% $ 15,191 8.00% $ 18,989 10.00%
Tier I capital
(to risk-weighted
assets) 21,853 11.50 7,596 4.00 11,394 6.00
Tier I capital
(to adjusted assets) 21,853 5.90 14,809 4.00 18,512 5.00
NOTE 14 - SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking and discount loan operations. As
discussed in Note 1, the Company simplified its organizational structure in
1999. As a result, mortgage banking operations were discontinued and therefore
are not disclosed as a separate operating segment in 2000. Loans, investments,
and deposits provide the revenues in the banking operation; fee income provided
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.
- --------------------------------------------------------------------------------
(Continued)
51.
53
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT FINANCIAL INFORMATION
Information reported internally for performance assessment follows. The column
for other information primarily includes activity between segments which is
being eliminated.
Discount Total
(In thousands) Banking Loans Other Segments
------------ ---------- --------- -----------
2000
Net interest income $ 6,435 $ 886 $ - $ 7,321
Provision for loan losses 1,178 40 - 1,218
Other revenue 10,593 (129) (373) 10,091
Other expenses 10,292 344 - 10,636
Income tax expense (benefit) 1,227 - - 1,227
Segment profit (loss) 4,331 373 (373) 4,331
Segment assets 462,896 12,285 (12,088) 463,093
Discount Mortgage Total
(In thousands) 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
Discount Mortgage Total
(In thousands) 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
- --------------------------------------------------------------------------------
(Continued)
52.
54
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
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,
------------------
2000 1999
------- -------
(In thousands)
Assets
Cash $ 2,875 $ 145
Interest-bearing deposits 125 39
------- -------
Total cash and cash equivalents 3,000 184
Trading securities 162 197
Securities available-for-sale 10,276 11,415
Investment in GFS preferred stock 4,000 4,600
Loans receivable 1,792 778
Discounted loans receivable 293 301
Investment in banking subsidiary 26,431 21,831
Investment in nonbank subsidiary 663 --
------- -------
Total investments in subsidiaries 27,094 21,831
Other assets 4,637 4,283
------- -------
Total assets $51,254 $43,589
======= =======
Liabilities and stockholders' equity
Borrowed money $ 5,876 $ 5,404
Other liabilities 4,354 1,347
Junior subordinated debentures 17,250 17,250
Stockholders' equity 23,774 19,588
------- -------
Total liabilities and stockholders' equity $51,254 $43,589
======= =======
- --------------------------------------------------------------------------------
(Continued)
53.
55
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Interest income $ 1,236 $ 971 $ 52
Interest expense (2,375) (2,093) (827)
------- ------- -------
Net interest expense (1,139) (1,122) (775)
Dividends from bank subsidiary 2,200 -- 500
Equity in undistributed earnings of subsidiaries 3,402 1,721 518
Gain (loss) on sales of securities available-for-sale 139 (2) 233
Profits (losses) on trading account activity (35) 29 --
Noninterest expense (968) (881) (762)
------- ------- -------
Income (loss) from continuing operations
before income taxes 3,619 (255) (286)
Income tax benefit (712) (769) (531)
------- ------- -------
Income from continuing operations 4,331 514 245
Income from discontinued operation (net of tax) -- 135 286
Gain on sale of discontinued operation (net of tax) -- 1,928 --
------- ------- -------
Net income $ 4,331 $ 2,577 $ 531
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
54.
56
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 4,331 $ 514 $ 245
Adjustments to reconcile income from
continuing operations to net cash provided by
operating activities
Net change in trading account activity -- (33) --
Loss (gain) on the sales of securities
available-for-sale (139) 2 (233)
(Gain) loss on trading account securities 35 (29) --
Equity in undistributed earnings of
subsidiaries (3,402) (1,721) (518)
Amortization of purchase price of
ESOP and MRP 21 108 69
Recognition of fair value of ESOP
shares scheduled to be released -- -- 48
Change in other assets (463) 655 (580)
Change in other liabilities 2,437 (206) 543
-------- -------- --------
Net cash from operating activities 2,820 (710) (426)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans purchased, net (1,006) (692) (325)
Proceeds from the sales of securities 1,144 420 2,388
Purchases of securities (876) (13,361) (3,740)
Redemption of GFS preferred stock investment 600 -- --
Proceeds from sale of On-Line Financial
Services, Inc., net -- 4,583 --
Net cash (paid) received in purchase of subsidiary -- (575) (454)
Contribution to MRP and ESOP -- 73 --
-------- -------- --------
Net cash from investing activities (138) (9,552) (2,131)
- --------------------------------------------------------------------------------
(Continued)
55.
57
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------
2000 1999 1998
-------- -------- ---------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of subordinated
debentures, net of debt issuance expenses $ -- $ (181) $ 16,115
Increase in borrowed money, net 472 5,085 --
Repayment of borrowed money -- -- (5,289)
Capital contributions to subsidiaries -- -- (2,899)
Proceeds from exercise of stock options 64 -- 186
Dividends paid (402) (401) (359)
-------- -------- --------
Net cash from financing activities 134 4,503 7,754
Net cash provided by discontinued operations -- 20 60
-------- -------- --------
Change in cash and cash equivalents 2,816 (5,739) 5,257
Cash and cash equivalents at beginning of year 184 5,923 666
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,000 $ 184 $ 5,923
======== ======== ========
Supplemental disclosure of noncash
investing activities
Investment in non-banking subsidiary $ 570 $ -- $ --
Preferred stock received related to sale
of On-Line Financial Services, Inc. -- 4,600 --
Transfer of securities available-for-sale
to trading account -- 135 --
Capital contribution to banking subsidiary
in the form of securities available-for-sale 1,250 3,000 --
- --------------------------------------------------------------------------------
(Continued)
56.
58
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Argo Bancorp's financial instruments as of December
31, 2000 and 1999 are set forth in the following table, followed by the methods
and assumptions used.
2000 1999
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(In thousands)
Financial assets
Cash $ 19,885 $ 19,885 $ 5,603 $ 5,603
Interest-earning deposits 74,132 74,132 32,069 32,069
Trading account securities 1,099 1,099 668 668
Securities available-for-sale 14,574 14,574 14,364 14,364
Securities held-to-maturity 26,523 26,253 25,859 24,082
Loans and discount loans receivable 286,523 287,623 277,460 277,859
Investment in GFS preferred stock 4,000 4,000 4,600 4,600
FHLB of Chicago stock 2,615 2,615 2,303 2,303
Accrued interest receivable 3,988 3,988 3,392 3,392
Financial liabilities
Deposits without stated maturities 88,988 88,988 40,983 40,983
Deposits with stated maturities 299,549 304,004 260,690 262,390
Borrowed money 18,708 18,953 40,336 40,042
Junior subordinated debt 16,587 14,618 17,250 23,707
Advance payments by borrowers
for taxes and insurance 846 846 902 902
Custodial escrow balances 7,519 7,519 5,476 5,476
Accrued interest payable 2,156 2,156 966 966
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)
57.
59
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(b) SECURITIES AVAILABLE-FOR-SALE, SECURITIES 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 junior subordinated debt at December 31, 2000 was estimated
using quoted market prices. The fair value of borrowed funds and junior
subordinated debt at December 31, 1999 is the present value of the contractual
cash flows, discounted by the current rate offered for similar remaining
maturities.
- --------------------------------------------------------------------------------
(Continued)
58.
60
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
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,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands, except per share data)
Numerator $ 4,331 $ 514 $ 245
=========== =========== ===========
Denominator
Basic earnings per share - weighted
average shares outstanding 2,008,056 1,946,744 1,948,843
Effect of dilutive stock options
outstanding 157,070 114,581 98,372
----------- ----------- -----------
Diluted earnings per share -
weighted average shares outstanding 2,165,126 2,061,325 2,047,215
=========== =========== ===========
Basic earnings per share $ 2.16 $ .26 $ .12
Diluted earnings per share 2.00 .25 .12
NOTE 18 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows:
2000 1999 1998
----- ----- -----
Unrealized holding gains (losses) on
securities available-for-sale $ 166 $(990) $ (97)
Less reclassification adjustments for gains
(losses) recognized in income (111) (2) 234
----- ----- -----
Net unrealized losses 277 (988) (331)
Tax effect (105) 376 126
----- ----- -----
Other comprehensive income (loss) $ 172 $(612) $(205)
===== ===== =====
- --------------------------------------------------------------------------------
(Continued)
59.
61
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
NOTE 19 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
-------- -------- -------- ---------
2000
Total interest income $ 7,189 $ 7,095 $ 7,309 $ 8,478
Net interest income 2,157 1,888 1,676 1,600
Net income (a) 455 436 89 3,351
Basic earnings per share 0.22 0.22 0.04 1.68
Diluted earnings per share 0.20 0.20 0.04 1.56
1999
Total interest income $ 5,027 $ 5,696 $ 6,428 $ 6,745
Net interest income 1,633 1,836 2,150 2,263
Net income from continuing
operations 5 133 336 40
Net income (b) 1,341 331 336 569
Basic earnings from continuing
operations per share - 0.07 0.17 .02
Basic earnings per share 0.67 0.17 0.17 .31
Diluted earnings from continuing
operations per share - 0.06 0.15 .04
Diluted earnings per share 0.62 0.15 0.15 .33
(a) During the fourth quarter of 2000, the Company sold deposits and the
acquirer assumed selected leased facilities. The allowance was increased
due to purchases in the fourth quarter of commercial and commercial real
estate loans and direct financing leases, which are considered of higher
risk than the Bank's traditional loan products primarily secured by
residential real estate. The allowance was also increased to bring the
ratio of the allowance to gross loans closer to that of peer financial
institutions, as recommended by the Savings Bank's regulators.
(b) During the first quarter of 1999, the Company sold its data processing
subsidiary.
- --------------------------------------------------------------------------------
(Continued)
60.
62
ARGO BANCORP, INC.
Shareholder Information
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ARGO BANCORP, INC.
John G. Yedinak Sergio Martinucci
President and Chief Executive Officer Senior Vice President,
Chairman of the Board Coldwell Banker Residential Realtors
Vice President and Director
Frances M. Pitts Donald G. Wittmer
Executive Vice President, President and Owner,
Secretary and Director Wittmer Financial Services, Ltd.
Director
Dominic M. Fejer Arthur E. Byrnes
Vice President, Controller Chairman, Deltec Asset
Management LLC
Director
ARGO FEDERAL SAVINGS BANK, FSB
John G. Yedinak Sergio Martinucci
President, Chief Executive Officer Senior Vice President,
and Director Coldwell Banker Residential Realtors
Chairman of the Board
Frances M. Pitts Richard B. Duffner
Senior Vice President, President and Owner,
General Counsel and Secretary RBD & Associates, Ltd.
Director
Colleen A. Kitch Emil T. Sergo
Executive Vice President Mayor, McCook, Illinois
Director
Dominic M. Fejer Dennis G. Carroll
Principal Accounting & Financial Officer Detective, City of Chicago Police Dept.
Director
Rebecca L. Leon Raymond E. Froula
Vice President, Retail Operations Retired
Director
Marie C. Goudie Mary Ann Gearhart
Assistant Vice President, Controller Member, Will County
Board of Commissioners
Director
Teena D. Juergens
Assistant Vice President
61.
63
ARGO BANCORP, INC.
Shareholder Information
- --------------------------------------------------------------------------------
STOCKHOLDER REFERENCE
Corporate Headquarters Independent Auditors
Argo Bancorp, Inc. Crowe, Chizek and Company LLP
5818 S. Archer Road One Mid America Plaza
Summit, Illinois 60501 Oak Brook, Illinois 60522
(708) 458-2002
Chicago Counsel Transfer Agent and Registrar
Kemp & Grzelakowski, Ltd. LaSalle Bank, N.A.
1900 Spring Road Trust and Asset Management Division
Suite 500 135 South LaSalle Street
Oak Brook, Illinois 60523-14495 Chicago, Illinois 60603
(312) 904-2584
Market Makers Annual Report on Form 10-K
Tucker Anthony, Incorporated Copies of Argo Bancorp, Inc.'s 2000
1 South Wacker Drive Annual Report on Form 10-K
Suite 1900 filed without exhibits with the Securities
Chicago, Illinois 60606 and Exchange Commission are available
(888) 655-4135 without charge to stockholders, upon
written request to:
Investor Information Frances M. Pitts, Corporate Secretary
Stockholders, investors, and analysts Argo Bancorp, Inc.
interested in additional information 5818 S. Archer Road
may contact: Summit, Illinois 60501
John G. Yedinak, President and CEO,
at the Corporate Headquarters Annual Meeting
The annual meeting of stockholders will
be held at 12:00 p.m. on April 26, 2001 at
5818 S. Archer Road
Summit, Illinois 60501
Stockholders are encouraged to attend.
OFFICE LOCATIONS
Home Office Branch Office
2154 W. Madison Street 14076 Lincoln Avenue
Chicago, Illinois 6060612 Dolton, Illinois 60419
(312) 563-5500 (708) 849-3770
62.
64
ARGO BANCORP, INC.
Shareholder Information
- --------------------------------------------------------------------------------
STOCK PRICE INFORMATION
Argo Bancorp Inc.'s common stock is traded on the NASDAQ Over the Counter Market
under the symbol ARGO. The table shows the reported high and low sale prices of
common stock and the dividends per share during the periods indicated.
High Low Dividends
--------- -------- ---------
Year ended December 31, 2000:
First Quarter $ 11.500 $ 10.500 $ .050
Second Quarter 13.000 9.000 .050
Third Quarter 10.125 9.000 .050
Fourth Quarter 16.000 10.500 .050
Year ended December 31, 1999:
First Quarter $ 9.375 $ 8.250 $ .050
Second Quarter 9.500 8.500 .050
Third Quarter 10.250 8.500 .050
Fourth Quarter 11.500 9.750 .050
Year ended December 31, 1998:
First Quarter $ 8.734 $ 8.625 $ .045
Second Quarter 8.875 8.625 .045
Third Quarter 8.875 8.825 .045
Fourth Quarter 9.500 8.250 .045
63.