1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-19829
ARGO BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3620612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7600 W. 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 496-6010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
The registrant had 2,004,896 shares outstanding as of August 13, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
================================================================================
2
ARGO BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1999, and December 31, 1998 (unaudited)............... 3
Consolidated Statements of Income For the Three and Six
Month Periods ended June 30, 1999, and 1998 (unaudited)............... 4
Consolidated Statement of Comprehensive Income For
the Three and Six Months ended June 30, 1999,
and 1998 (unaudited).................................................. 5
Consolidated Statements of Stockholders' Equity
for the Three and Six Months ended June 30, 1999,
and 1998 (unaudited) ................................................. 6
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998 (unaudited) .................. 7
Notes to Consolidated Financial Statements ........................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk............ 24
PART II - OTHER INFORMATION
Item 1 Legal Proceedings .................................................... 25
Item 2 Changes in Securities ................................................ 25
Item 3 Default Upon Senior Securities ....................................... 25
Item 4 Submission of Matters to a Vote
of Security Holders ................................................ 25
Item 5 Other Information .................................................... 26
Item 6 Exhibits and Reports on Form 8-K ..................................... 26
Form 10Q Signature Page ....................................................... 27
2
3
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS 6/30/99 12/31/98
--------- ---------
(Unaudited)
Cash ................................................................. $ 41,876 $ 3,276
Interest-earning deposits ............................................ 9,881 6,880
Stock in Federal Home Loan Bank of Chicago ........................... 2,303 1,911
Trading account securities ........................................... 681 693
Securities available-for-sale ........................................ 40,525 7,208
Loans receivable, net ................................................ 227,596 232,788
Discounted loans receivable, net ..................................... 10,393 12,401
Accrued interest receivable .......................................... 2,245 2,024
Foreclosed real estate, net .......................................... 2,478 3,875
Premises and equipment, net .......................................... 7,781 10,707
Mortgage loan servicing rights, net .................................. 3,509 593
Investment in limited partnership .................................... 4,434 4,469
Debt issuance costs related to junior subordinated debt, net ......... 1,870 1,657
Prepaid expenses and other assets .................................... 7,476 18,536
--------- ---------
$ 363,048 $ 307,018
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ........................................................... $ 285,115 $ 232,980
Borrowed money ..................................................... 24,217 25,227
Advance payments by borrowers for taxes and insurance .............. 992 853
Accrued interest payable ........................................... 825 661
Custodial escrow balances for loans serviced ....................... 4,995 5,340
Other liabilities .................................................. 10,337 5,759
Junior subordinated debt ........................................... 17,250 17,784
Stockholders' Equity
Preferred stock .................................................... 3 3
Common stock ....................................................... 20 20
Additional paid-in capital ......................................... 8,829 8,829
Retained earnings - substantially restricted ....................... 11,554 10,084
Accumulated other comprehensive loss ............................... (311) (238)
Common stock acquired by:
Employee Stock Ownership Plan .................................... (498) --
Management Recognition Plan ...................................... (280) (284)
--------- ---------
Total stockholders' equity ..................................... 19,317 18,414
--------- ---------
Total Liabilities and Stockholders' Equity ........................... $ 363,048 $ 307,018
========= =========
3
4
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Three Months Ended For the Six Months Ended
06/30/99 06/30/98 06/30/99 06/30/98
------------ ------------ ------------ ------------
(Unaudited)
Interest income
Loans receivable ............................................. $ 4,611 $ 3,421 $ 9,263 $ 6,829
Discounted loans receivable .................................. 99 591 237 1,215
Securities available-for-sale ................................ 612 37 642 82
Interest-earning deposits .................................... 374 258 581 435
------------ ------------ ------------ ------------
Total interest income ........................................... 5,696 4,307 10,723 8,561
------------ ------------ ------------ ------------
Interest expense:
Deposits ..................................................... 3,051 2,334 5,673 4,583
Borrowed money ............................................... 329 353 640 876
Junior subordinated debt ..................................... 480 -- 941 --
------------ ------------ ------------ ------------
Total interest expense ..................................... 3,860 2,687 7,254 5,459
------------ ------------ ------------ ------------
Net interest income before provision
for loan losses ............................................ 1,836 1,620 3,469 3,102
------------ ------------ ------------ ------------
Provision for loan losses .................................... 360 50 545 235
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ............................................ 1,476 1,570 2,924 2,867
------------ ------------ ------------ ------------
Non-interest income:
Purchased mortgage servicing income .......................... 535 (390) 572 (278)
Mortgage banking ............................................. 228 354 729 661
Gain (Loss) on sale of loans receivable, discounted
loans receivable, securities available for sale,
trading account securities and foreclosed real estate ...... (69) 650 82 1,326
Fees and service charges ..................................... 215 187 365 359
Other ........................................................ 16 43 34 60
------------ ------------ ------------ ------------
Total non-interest income ....................................... 925 844 1,782 2,128
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and benefits .................................... 896 1,018 1,896 1,982
Occupancy and equipment ...................................... 322 371 781 774
Amortization of goodwill ..................................... 22 26 47 51
Other general and administrative fees ........................ 1,074 979 2,018 1,758
------------ ------------ ------------ ------------
Total non-interest expense ...................................... 2,314 2,394 4,742 4,565
------------ ------------ ------------ ------------
Net income from continuing operations before
provision for income taxes .................................... 87 20 (36)
430
Income tax expense/(benefit) .................................... (46) (222) (172) (115)
------------ ------------ ------------ ------------
Net income from continuing operations ...................... 133 242 136 545
------------ ------------ ------------ ------------
Discontinued operations:
Net income from discontinued Data Processing operation
(less applicable income taxes of $24, $83,
and $74, respectively ......................................... -- 39 135
122
Gain on sale of Data Processing operation
(less applicable income taxes of $102,
and $721 respectively ......................................... 198 -- 1,399 --
------------ ------------ ------------ ------------
Net income ...................................................... $ 331 $ 281 $ 1,670 $ 667
============ ============ ============ ============
Basic earnings per share:
Income from continuing operations ............................... $ .07 $ .12 $ .07 $ .28
Income from discontinued operations ............................. -- .02 .07 .06
Gain on sale of discontinued operations ......................... .10 -- .70 --
------------ ------------ ------------ ------------
Net income ...................................................... $ .17 $ .14 $ .84 $ .34
============ ============ ============ ============
Fully diluted earnings per share:
From continuing operations ...................................... $ .06 $ .11 $ .06 $ .26
From discontinued operations .................................... -- .02 .06 .06
Gain on sale of discontinued operations ......................... .09 -- .66 --
------------ ------------ ------------ ------------
Net income ...................................................... $ .15 $ .13 $ .78 $ .32
============ ============ ============ ============
See notes to accompanying unaudited financial statements
4
5
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
or the Three Months Ended, For the Six Months Ended
06/30/99 06/30/98 06/30/99 06/30/98
---------- ---------- ---------- ----------
(Unaudited)
Net Income ....................................................................$ 331 $ 281 $ 1,670 $ 667
Other Comprehensive Income:
Net increase/(decrease) in fair value of securities
Classified as available for sale, net of tax (expense)/
benefit of ($60), $19, $44, and ($63) respectively ............. 98 (31) (71) 103
Less reclassification adjustment for gains included
in net income net of tax benefits of $5, $58, $1,
and $121 respectively ................................................ (07) (95) (02) (197)
---------- ---------- ---------- ----------
Other comprehensive income .................................................... 91 (126) (73) (94)
---------- ---------- ---------- ----------
Comprehensive income ..........................................................$ 422 $ 155 $ 1,597 $ 573
========== ========== ========== ==========
5
6
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Additional
Preferred Common paid-in Retained
Stock Stock Capital earnings
------------ ------------ ------------ ------------
Six months ended June 30, 1998
Balance at December 31, 1997 ......................... $ -- $ 5 $ 8,570 $ 9,915
Net income ........................................... -- -- -- 667
Other comprehensive income, net of tax ............... -- -- -- --
Principal payments on ESOP loan ...................... -- -- -- --
Amortization of purchase price of MRP stock ......... -- -- -- --
Proceeds from exercise of stock options ............. -- -- 116 --
Tax benefits of stock options ........................ -- -- 39 --
Fair value adjustment for committed ESOP shares ...... -- -- 25 --
Cash dividends ....................................... -- -- -- (168)
------------ ------------ ------------ ------------
Balance at June 30, 1998 ............................ $ -- $ 5 $ 8,750 $ 10,414
============ ============ ============ ============
Six months ended June 30, 1999
Balance at December 31, 1998 ......................... $ 3 $ 20 $ 8,829 $ 10,084
Net income ........................................... -- -- -- 1,670
Other comprehensive income, net of tax ............... -- -- -- --
Amortization of purchase price of MRP stock ......... -- -- -- --
Stock acquired by ESOP ............................... -- -- -- --
Cash dividends ....................................... -- -- -- (200)
------------ ------------ ------------ ------------
Balance at June 30, 1999 ........................... $ 3 $ 20 $ 8,829 $ 11,554
============ ============ ============ ============
Accumulated
Other Stock Stock Total
Comprehensive acquired acquired Stockholders'
Income/(Loss) by ESOP by MRP Equity
------------- ------------ ------------ ------------
Six months ended June 30, 1998
Balance at December 31, 1997 ......................... $ (33) $ (57) $ (296) $ 18,104
Net income ........................................... -- -- -- 667
Other comprehensive income, net of tax ............... (94) -- -- (94)
Principal payments on ESOP loan ...................... -- 30 -- 30
Amortization of purchase price of MRP stock ......... -- -- 6 6
Proceeds from exercise of stock options ............. -- -- -- 116
Tax benefits of stock options ........................ -- -- -- 39
Fair value adjustment for committed ESOP shares ...... -- -- -- 25
Cash dividends ....................................... -- -- -- (168)
------------ ------------ ------------ ------------
Balance at June 30, 1998 ............................ $ (127) $ (27) $ (290) $ 18,725
============ ============ ============ ============
Six months ended June 30, 1999
Balance at December 31, 1998 ......................... $ (238) $ -- $ (284) $ 18,414
Net income ........................................... -- -- -- 1,670
Other comprehensive income, net of tax ............... (73) -- -- (73)
Amortization of purchase price of MRP stock ......... -- -- 4 4
Stock acquired by ESOP ............................... -- (498) -- (498)
Cash dividends ....................................... -- -- -- (200)
------------ ------------ ------------ ------------
Balance at June 30, 1999 ........................... $ (311) $ (498) $ (280) $ 19,317
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
6
7
ARGO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended June 30,
1999 1998
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net income ..................................................................................... $ 1,670 $ 667
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation ................................................................................. 789 1,145
Accretion of discounts and deferred loan fees ................................................ (82) (302)
Provision for loan losses .................................................................... 545 265
(Gain) loss on sale of:
Securities available for sale ................................................................ 3 (318)
Trading account securities ................................................................... (131) --
Data processing operation .................................................................... (2,120) --
Loans receivable ............................................................................. (330) (1,099)
Foreclosed real estate ....................................................................... 376 91
Loans originated and purchased for sale ........................................................ (19,416) --
Proceeds from sale of loans receivable ......................................................... 26,254 18,335
Proceeds from sale of discounted loans receivable .............................................. 897 7,635
Amortization of goodwill ....................................................................... 47 51
(Increase) decrease in purchased mortgage servicing rights ..................................... 155 356
Amortization of purchase price of MRP and ESOP stock ........................................... 4 36
Recognition of fair value of ESOP shares scheduled to be released .............................. -- 25
FHLB Stock redemption .......................................................................... -- 1,424
Decrease in accrued interest receivable, prepaid
expenses, and other assets ................................................................... 6,318 1,185
Increase in accrued interest payable and other liabilities ..................................... 7,519 118
---------- ----------
Net cash provided by operating activities ............................................... 22,498 29,614
---------- ----------
Cash flows from investing activities:
Loans originated and purchased for portfolio ................................................... (90,633) (77,738)
Discounted loans receivable purchased .......................................................... -- (296)
Principal repayments on:
Loans receivable and discounted loans receivable .............................................. 89,177 34,994
Securities-available-for sale ................................................................. 78 235
Proceeds from sale of:
Foreclosed real estate ....................................................................... 2,080 1,671
Securities available for sale ................................................................ 11,126 5,271
Premises and equipment ....................................................................... 5,169 --
Mortgage Servicing Rights .................................................................... 8,100 --
Data Processing operation .................................................................... 6,207 --
Purchase of:
Securities available for sale ................................................................ (44,497) (5,365)
Premises and equipment ....................................................................... (6,398) (622)
FHLB Stock ................................................................................... (890) --
Net cash (paid) in purchase of subsidiary ................................................... -- (485)
Loan servicing rights ........................................................................ (11,136) --
---------- ----------
Net cash used in investing activities ................................................... (31,617) (42,335)
---------- ----------
Cash flows from financing activities:
Net increase in deposits ..................................................................... 52,135 28,994
Proceeds from borrowed funds ................................................................. 16,617 13,345
Repayment of borrowed funds .................................................................. (17,626) (19,113)
Proceeds from exercise of stock options ...................................................... -- 116
Dividends paid ............................................................................... (200) (168)
Net increase in advance payments by borrowers for taxes and insurance ........................ 139 5
Net decrease in custodial escrow balances for loans serviced ................................. (345) (509)
---------- ----------
Net cash provided by financing activities ............................................... 50,720 22,670
---------- ----------
Net increase (decrease) in cash and cash equivalents ......................................... 41,601 9,949
Cash and cash equivalents at beginning of period ............................................... 10,156 8,677
---------- ----------
Cash and cash equivalents at end of period ..................................................... $ 51,757 $ 18,626
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ............................................................................... $ 7,258 $ 5,405
Income taxes ................................................................................... $ 200 $ 225
Non-cash investing activity - transfer of loans to foreclosed real estate ......................... $ 1,042 $ 1,869
---------- ----------
See accompanying notes to unaudited consolidated financial statements
7
8
ARGO BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals considered necessary for fair presentation have been included. The
results of operations for the three and six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
The unaudited consolidated financial statements include the accounts of Argo
Bancorp, Inc. ("Argo Bancorp," the "Corporation" or the "Company") and its
wholly owned subsidiaries, Argo Federal Savings Bank, FSB ("Argo Savings" or
"Savings Bank") and Argo Savings' wholly owned subsidiaries, Argo Mortgage
Corporation, Dolton-Riverdale Savings Service Corporation, and Argo Savings'
majority owned subsidiary Margo Financial Services LLC ("Margo"). The statements
also include Argo Bancorp's majority owned limited liability corporation, Argo /
Empire Mortgage LLC. Significant intercompany accounts and transactions have
been eliminated in consolidation.
On March 31, 1999 The Company sold its wholly owned subsidiary On-Line
Financial, Inc. ("On-Line"), to GFS Holdings, Inc. of Palm Beach Gardens,
Florida. Operating results from On-Line are included in the financial statements
as results of discontinued operations. The following table reflects the
components of income from discontinued operations:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
(In Thousands)
Income Statement Data
Revenues ............................... -- $ 3,357 $ 4,158 $ 6,631
Costs & Expenses ....................... -- 3,294 3,940 6,435
-------- -------- -------- --------
Operating Income ....................... -- 63 218 196
Income Tax Expense ..................... -- 24 83 74
-------- -------- -------- --------
Income from discontinued operations .... $ -- $ 39 $ 135 $ 122
======== ======== ======== ========
8
9
On June 1, 1999 Argo Federal Savings Bank, FSB entered into a management
services agreement ("Agreement") with E-Conduit Network, Inc. ("E-Conduit").
Under the agreement E-Conduit acquired certain assets and liabilities of Margo
and assumed the day to day operations related to the origination of mortgage
loans for the Savings Bank portfolio and for sale into the secondary market. The
Agreement also requires E-Conduit to pay a six basis point per transaction
license fee, in return E-Conduit is allowed to use the Margo name and all the
intellectual properties of Margo. As a result of this transaction Margo has
discontinued its wholesale mortgage operation and is focusing on fee generation
through its licensing activities.
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 will pay an initial
monthly rental of $48,000 per month or $576,000 per year which will increase at
the rate of 1% each year commencing January 1, 2000. The net proceeds of the
sale to the Savings Bank after deducting customary closing cost including title
charges, environmental studies, surveys and legal fees was $5,230,662 resulting
in a profit of $2,246,862 to the Savings Bank. The profit, under generally
accepted accounting principles, will be taken into income by the Savings Bank
over the lease term. As a result of this sale and leaseback transaction the Bank
is not the record title holder of any of the properties from which it transacts
business.
NOTE B - STOCK BENEFIT PLANS
The Savings Bank adopted the Argo Federal Savings 401(k) Plan ("Plan") effective
October 1, 1988, for the exclusive benefit of eligible employees of the Savings
Bank. The Plan is a qualified plan covering all employees of the Savings Bank
who have completed at least 1,000 hours of service within a twelve (12)
consecutive month period and are age twenty-one (21) or older. Participants may
make contributions to the Plan from 1.0% to 12.0% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions of 50.0% of each
participant's contribution up to 12.0% are made at the Savings Bank's discretion
each Plan year. The Savings Bank made contributions of $37,000 and $35,000 to
the Plan for the six months ended June 30, 1999, and 1998. The Plan also
provides benefits in the event of death, disability, or other termination of
employment.
In 1991, Argo Savings formed an Employee Stock Ownership Plan ("ESOP") for
eligible employees. The ESOP borrowed funds from an unrelated third party lender
in the amount of $60,180 in order to purchase 7.0% of the Common Stock issued in
the Merger Conversion (20,932 shares at $2.875 per share). The ESOP subsequently
borrowed an $245,000 from the same third party lender to purchase 52,080 shares
at an average price of $4.70 per share. The remaining balance of the borrowed
funds was repaid in 1998. A contribution of $29,000 was made to the ESOP to fund
principal and interest payments for the six months ended June 30, 1998. In May
1999 the ESOP borrowed from the Company $497,502 to purchase 49,136 shares at an
average price of $10.125. A contribution of $6,000 was made to the ESOP to fund
principal and interest payments for the six months ended June 30, 1999.
9
10
The Board of Directors of Argo Bancorp formed a MRP effective September 1, 1996,
which purchased 50,000 shares of Argo Bancorp stock on September 24, 1996, for
$115,000. During the year ended December 31, 1997, the Company sold 18,608
shares held by the Argo Bancorp MRP for $181,000 reducing the total shares held
by the plan to 31,392. Under this Plan, employees in key management positions
with Argo Bancorp and all its subsidiaries are eligible for participation. No
shares were awarded during the six months ended June 30, 1999. Amortization
expense totaled $4,000 for the six month periods ended June 30, 1999, and $6,000
for the Six month period ended June 30, 1998.
On April 26, 1995, an amendment to the Argo Federal Savings Bank MRP was
approved, which increased the amount of shares available to be awarded under the
MRP to 97,992. An additional 15,188 and 7,628 shares were purchased in 1996 and
1995, respectively, under the MRP. During the year ended December 31, 1997, the
Company sold 22,416 shares held by the plan for $219,000, reducing the total
shares held by the plan to 100. Employees earn the awards over a three-year
period. Once awarded the aggregate purchase price of the shares will be
amortized to expense as a portion of annual compensation as the employees become
vested in their stock awards and the amortized cost is reflected as a reduction
of stockholders' equity. No shares were awarded or vested during the six-months
ended June 30, 1999.
Argo Bancorp's Board of Directors adopted the 1991 Stock Option and Incentive
Plan (the 1991 Stock Option Plan), which was approved by its shareholders
effective December 23, 1991, under which up to 429,800 shares of Argo Bancorp's
common stock were reserved for issuance by Argo Bancorp upon exercise of
incentive stock options to be granted to full-time employees of Argo Bancorp and
its subsidiaries from time to time. Argo Bancorp awarded all 429,800 options
under the 1991 Stock Option Plan. The exercise price for the options awarded
were equal to the fair market value of the common stock at the date of grant. To
date there have been 258,332 options exercised; no options were exercised during
the six months ended June 30, 1999. At June 30, 1999, options to purchase
171,468 shares were outstanding under this plan.
Argo Bancorp's Board of Directors adopted the Non-Qualified Stock Option Plan
for Non-Employee Directors (Non-Qualified Stock Option Plan), which was approved
by its shareholders effective December 23, 1991, under which up to 429,800
shares of Argo Bancorp's common stock were reserved for issuance by Argo Bancorp
upon exercise of non-incentive stock options to be granted to non-employee
directors of the Corporation and its subsidiaries from time to time. At June 30,
1999, Argo Bancorp has awarded 276,400 options for shares under the
Non-Qualified Stock Option Plan. To date, options to acquire 52,800 shares have
been exercised. No options were exercised during the six month periods ended
June 30, 1999. The exercise price for the options awarded were equal to the fair
market value of the common stock at the date of grant. At June 30, 1999, options
to purchase 223,600 shares were outstanding under the Non-Qualified Stock Option
Plan.
10
11
NOTE C - REGULATORY CAPITAL
Pursuant to the Office of Thrift Supervision ("OTS") regulations, savings
institutions must meet three separate minimum capital-to-assets requirements.
The following table summarizes, as of June 30, 1999 and at December 31, 1998,
Argo Savings' capital requirements under OTS regulations and its actual capital
ratios at those dates:
REQUIRED ACTUAL REQUIRED ACTUAL EXCESS
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
JUNE 30, 1999 PERCENTAGE PERCENTAGE BALANCE BALANCE BALANCE
- ------------- ---------- ---------- ------- ------- -------
(Dollars in Thousands)
Risk-based................. 8.0% 11.25% $15,146 $21,293 $ 6,147
Core....................... 4.0 5.84 12,061 19,916 7,855
Tangible................... 1.5 5.84 5,120 19,916 14,796
DECEMBER 31, 1998
- -----------------
Risk-based................. 8.0% 10.54% $13,898 $18,310 $ 4,412
Core....................... 4.0 6.32 10,994 17,370 6,376
Tangible................... 1.5 6.32 4,123 17,370 13,247
11
12
NOTE D - EARNINGS PER SHARE
Basic earnings per share for the three and six-month periods ended June 30,
1999, and 1998 was based on weighted average number of shares outstanding of
2,004,896, 1,990,576, 2,004,896 and 1,977,172 respectively. Diluted earnings per
share for the three and six-month periods ended June 30, 1999 and 1998, were
based on weighted average number of shares outstanding of 2,135,012, 2,123,472,
2,135,012, and 2,110,068 respectively.
Three Months Ended Six Months Ended
06/30/99 06/30/98 06/30/99 06/30/98
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Income from continuing operations ......................................... $ 133 $ 242 $ 136 $ 545
Net income from discontinued operation .................................... -- 39 135 122
Gain on Sale of Data Processing operation ................................. 198 -- 1,399 --
---------- ---------- ---------- ----------
Net income ................................................................ $ 331 $ 281 $ 1,670 $ 667
========== ========== ========== ==========
Basic earnings per share
weighted average common shares outstanding ............................ 2,005 1,991 2,005 1,977
Additional dilutive shares ................................................ 130 133 130 133
---------- ---------- ---------- ----------
Total weighted average common shares and
Equivalents outstanding for diluted computation ........................... 2,135 2,124 2,135 2,110
========== ========== ========== ==========
Basic earnings per shares from continuing operations ...................... $ .07 $ .12 $ .07 $ .28
Basic earnings per share from discontinued operation ...................... -- .02 .07
.06
Basic earnings per share from gain on sale of discontinued operation .... $ .10 -- .70
---------- ---------- ---------- ----------
Basic earnings per share .................................................. $ 17 $ .14 $ .84 $ .34
========== ========== ========== ==========
Diluted earnings per share from continuing operations ..................... $ .06 $ .11 $ .06 $ .26
Diluted earnings per share from discontinued operations ................... -- .02 .06 .06
Diluted earnings per share from gain on sale of discontinued operation .... .09 -- .66 --
---------- ---------- ---------- ----------
Diluted earnings per share ................................................ $ .15 $ .13 $ .78 $ .32
========== ========== ========== ==========
NOTE E - COMMITMENTS AND CONTINGENCIES
At June 30, 1999, Argo Savings had loan commitments totaling $18.8 million and
$20.0 million in unused lines of credit. Commitments to fund loans have credit
risk essentially the same as that involved in extending loans to customers and
are subject to Argo Savings' normal credit policies. Argo Savings also had
community reinvestment act ("CRA") investment commitments outstanding of $2.5
million.
12
13
NOTE F- SEGMENT FINANCIAL INFORMATION
The operating segments are determined by the products and services offered,
primarily distinguished between banking, acquisition of discount loans, and
mortgage banking. Loans, investments, and deposits provide the revenues in the
banking operation, fee income provides the primary revenue for mortgage banking
and discount accretion provides the primary revenue for discount loan workout.
Information reported internally for performance assessment follows for the six
months ended June 30, 1999. The column for other information primarily includes
activity between segments which is being eliminated.
Discount Mortgage
Total
Banking Loans Banking Other Segments
--------- --------- ------- ------- ---------
(In Thousands)
1999
Net interest income ............... $ 3,232 $ 237 $ -- $ -- $ 3,469
Provision for loan losses ......... 485 60 -- -- 545
Other revenue ..................... 1,709 (231) 730 (426) 1,782
Other expenses .................... 3,672 204 866 -- 4,742
Income tax benefit ................ (172) -- -- -- (172)
Segment profit (loss) ............. 956 (258) (136) (426) 136
Segment assets ............... 387,850 12,240 60 (37,102) 363,048
1998
Net interest income ............... $ 2,525 $ 577 $ -- $ -- $ 3,102
Provision for loan loss ........... 55 180 -- -- 235
Other revenue ..................... 2,267 684 670 (1,493) 2,128
Other expenses .................... 3,527 400 638 -- 4,565
Income tax benefit ................ (115) -- -- -- (115)
Segment profit (loss) ............. 1,325 681 32 (1,493) 545
Segment assets ............... 271,964 19,357 309 (31,872) 259,758
13
14
ARGO BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this 10-Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies, and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 1998 Form 10-K.
GENERAL
The Company was incorporated in Delaware in August 1987, for the purpose of
acquiring the Savings Bank. The Company acquired Argo Savings on November 17,
1987, for a capital infusion of $1.1 million. On August 29, 1991, the Board of
Directors of Dolton Riverdale Savings and Argo Savings adopted a Plan of Merger
Conversion ("Plan"), whereby Dolton agreed to convert from a state-chartered
mutual association to a federally-chartered stock association and merge with and
into Argo Savings with Argo Savings as the surviving entity. Final regulatory
approval was received on May 26, 1992, at which time the merger conversion
("Merger Conversion") was completed. The transaction was accounted for under a
pooling of interests method. There was no goodwill or other intangible assets
recorded as a result of the transaction. The Company retained 50.0% of the net
proceeds from the merger conversion and injected the remaining 50.0% into Argo
Savings. The Company is a unitary savings and loan holding company and is
registered as such with the Office of Thrift Supervision ("OTS"), Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC").
On December 31, l996, Argo Bancorp entered into a stock purchase agreement with
The Deltec Banking Corporation Limited ("Deltec"), a banking corporation
organized under the laws of the Commonwealth of the Bahamas. Under the terms of
the agreement, Argo Bancorp agreed to issue and sell 446,256 shares of the
Company's authorized and unissued common stock to Deltec at a purchase price of
$9.50 per share. Total proceeds from this transaction were approximately $4.2
million. A five (5.0%) percent investment advisory fee was paid to Charles E.
Webb and Company reducing the net proceeds of the transaction to $4.0 million.
The stock purchase agreement also provides that Deltec may acquire additional
shares of common stock from the Company when the company issues or sells
14
15
additional shares to third parties in order that Deltec can maintain 25.0%
ownership in the Company's common stock.
In October of 1998, the Company formed Argo Capital Trust, a statutory business
trust formed under the laws of the State of Delaware. In November 1998, the
Company and Argo Capital Trust offered 11.0% Capital Securities with a
liquidation amount of $10.00 per security. The proceeds from the sale offering
were $17,250,000. Argo Capital Trust used the gross proceeds from the sale of
the Capital Securities to purchase Junior Subordinated Debentures of the
Company. The Junior Subordinated Debentures carry an interest rate of 11.0%,
paid quarterly in arrears and are scheduled to mature on November 6, 2028. The
costs of the debt issuance were approximately $1.7 million, and were capitalized
by the Company. The expenses are being amortized over 30 years. However, the
debentures, under certain circumstances maybe prepaid prior to the maturity
date. The proceeds from the sale of the Junior Subordinated Debentures are being
used by Argo Savings for general lending purposes and enhancements of
operational capabilities, and by the Company for general corporate purposes.
Unlike many savings and loan holding companies, the Company is an active holding
company with only a portion of its future anticipated operating income dependent
upon the earnings of Argo Savings. As an operating company, Argo Bancorp has
assets, liabilities and income that are unrelated to the operations of Argo
Savings. Argo Bancorp's assets at June 30, 1999, on an unconsolidated basis
consisted of its investment in Argo Savings of $19.9 million, its investment in
the majority owned Empire/Argo Mortgage LLC of $809,000, securities
available-for-sale of $16.6 million, cash and other interest-earning deposits of
$621,000, and other assets of $3.8 million which include $1.9 million of debt
issuance costs associated with the Junior Subordinated Debentures. Argo Bancorp
also had outstanding borrowings on an unconsolidated basis in the amount of
$4,085,000 at June 30, 1999, incurred in connection with capital infusions to
its subsidiaries. Argo Bancorp is a Federal Housing Authority ("FHA") approved
originator and servicer, a licensed Illinois mortgage banker and an approved
Federal National Mortgage Association ("FNMA") servicer.
SALE OF SUBSIDIARY
On March 31, 1999 The Company sold its wholly-owned subsidiary, On-Line
Financial Services, Inc. of Oak Brook, Illinois, to GFS Holdings, Inc. of Palm
Beach Gardens, Florida ("Purchaser").
Under the terms of the transaction, the Company received $11.3 million in cash
and securities in exchange for all of the outstanding stock of On-Line. The
Company received $6.7 million in cash at closing, together with 4,600 shares of
GFS Holdings Co. Series B Preferred Stock, valued at $4.6 million. The Preferred
Stock, par value $.01, pays the Company a semi-annual dividend at the rate of
7.625%. Mandatory redemption of up to 1,400 shares will be made subject to
completion of certain conditions precedent on each of July 31, 1999, January 31,
2000 and July 31, 2000. An additional redemption of up to 3,200 shares is
available on April 30, 2000, subject to obtaining certain financial objectives.
All shares will be redeemed, to the extent not redeemed earlier, on March 31,
2006.
15
16
LIQUIDITY AND CAPITAL RESOURCES
Argo Savings' primary sources of funds are deposits, proceeds from principal and
interest payments on the loan and securities available-for-sale portfolio,
custodial deposit accounts related to loans serviced for others, and the sale of
discounted loans receivable and newly originated fixed rate long-term mortgage
loans. The most liquid assets are cash and short-term investments. The levels of
these assets are dependent on the operating, financing and investing activities
during any given period. Cash and interest-earning deposits totaled $51.8
million at June 30, 1999.
The primary investment activity of Argo Savings is the origination and purchase
of mortgage loans. During the three months ended June 30, 1999, and 1998, Argo
Savings originated and purchased loans receivable and discounted loans
receivable in the principal amounts of $110.0 million and $78.0 million,
respectively. During the six months ended June 30, 1999, and 1998, these
investing activities were primarily funded by principal repayments on loans
receivable and discounted loans receivable and securities available-for-sale of
$89.3 million and $35.2 million, respectively, and the proceeds from the sale of
loans receivable and discounted loans receivable, securities available-for-sale
and foreclosed real estate of $40.4 million and $32.9 million, respectively.
During the six months ended June 30, 1999, additional funding was provided by
the increase in deposits of $52.1 million, partially offset by a $1.0 million
decrease in borrowings. During the six months ended June 30, 1998, additional
funding was provided by the increase in deposits of $29.0 million, partially
offset by a $5.8 million decrease in borrowings.
Argo Savings is required to maintain minimum levels of liquid assets as defined
by OTS regulation. At June 30, 1999, Argo Savings liquid assets represented
15.15% of its liquidity base as compared to the required level of 5.0%. The
level of liquidity maintained is believed by management to be adequate to meet
the requirements of normal operations, potential deposit outflows, and the
current loan demand.
Liquidity management for Argo Savings is both a daily and long-term function of
the Argo Savings' senior management. Argo Savings' management meets on a daily
basis and monitors interest rates, current and projected commitments to purchase
loans and the likelihood of funding such commitments, and projected cash flows.
Excess funds are generally invested in short-term investments such as federal
funds. Cash flow projections are updated regularly to assure necessary
liquidity.
At June 30, 1999, Argo Savings' capital exceeded all of the capital requirements
of the OTS on a current and fully phased-in basis. The Savings Bank's tangible,
core and risk-based capital ratios were 5.84%, 5.84%, and 11.25%, respectively.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2.0% must deduct
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2.0% multiplied by the estimated economic value of the
institution's interest rate risk component on a
16
17
case-by-case basis. A savings institution with assets of less than $300 million
and risk-based capital ratios in excess of 12.0% is not subject to the interest
rate risk component, unless the OTS determines otherwise. For the present time,
the OTS has deferred implementation of the interest rate risk component. At June
30, 1999, the Savings Bank met each of its capital requirements, and it is
anticipated that Argo Savings will not be subject to the interest rate risk
component.
CHANGES IN FINANCIAL CONDITION
Total assets increased $56.0 million to $363.0 million at June 30, 1999, from
$307.0 million at December 31, 1998.
Cash and interest-earning deposits increased $41.6 million to $51.8 million at
June 30, 1999. Included in the increase was $29.8 million in cash utilized to
fund a network of 565 ATM's through a partnership between the Savings Bank,
EFmark Inc. of Westmont, Illinois and Dairy Mart convenience stores of Hudson,
Ohio. In addition, the net proceeds of $5.2 million from the June 30, 1999 sale
of the buildings is included here as is the proceeds from the payoff of $8.2
million from a PMSR investment.
Securities available-for-sale increased by $33.3 million to $40.5 million at
June 30, 1999 from $7.2 million at December 31, 1998. Included in the increase
is $4.6 million of GFS Holdings Co. Preferred Stock obtained in the sale of
On-Line. In addition, the Savings Bank has utilized excess cash to purchase
securities consistent with Management's asset-liability strategy.
Loans receivable and discounted loans receivable declined $7.2 million to $238.0
million at June 30, 1999 from $245.2 million at December 31, 1998, as a result
of loan originations and purchases totaling $110.0 million offset by sales of
loans of $27.2 million, principal repayments totaling $89.2 million, and
transfers of loans to foreclosed real estate of $1.0 million.
Premises and equipment declined by a net $2.9 million to $7.8 million at June
30, 1999 from $10.7 million at December 31, 1998. The decrease in premises and
equipment was in part the result of the sale of the operating properties, which
had a net book value of $2.9 million, and the sale of On-Line, which had
equipment with a net book balance $5.9 million at December 31, 1998. This
decline was partially offset by an investment of $5.8 million in a 565 unit ATM
network.
Prepaid expenses and other assets declined by $11.1 million to $7.5 million at
June 30, 1999 from $18.5 million at December 31, 1998 primarily as a result of
the On-Line sale. The December 31, 1998 balance of prepaid expenses and other
assets at On-Line was $6.2 million.
Deposits increased $52.1 million to $285.1 million at June 30, 1999, from $233.0
million at December 31, 1998. The increase can be attributed to increases in
negotiated certificate of deposits, which the Savings Bank utilized to fund its
asset growth that occurred during the six months ended June 30, 1999.
Other Liabilities increased by $4.6 million due in part to the deferred gain of
$2.2 million on the sale of the buildings and to the accrued expenses and
reserves for estimated contingent payments totaling $1.6 million in connection
with the On-Line sale.
17
18
Stockholders' equity increased $903,000 to $19.3 million at June 30, 1999, from
$18.4 million at December 31, 1998. The increase was the result of net income of
$1.7 million partially offset by cash dividends of $200,000 the purchase of ESOP
shares at a cost of $497,000 and additional unrealized net losses in the
available-for-sale investment portfolio of $73,000.
INTEREST RATE RISK
Argo Savings' financial objective is to reduce the sensitivity of its earnings
to interest rate fluctuations by attempting to achieve a match between the
interest rate sensitivity of its assets and liabilities. The major strategies
Argo Savings has implemented are (i) the origination and purchase of adjustable
rate loans and mortgage-backed securities; (ii) the origination of balloon
mortgages; (iii) the sale of newly originated long-term fixed rate mortgages;
(iv) the increase of non-interest bearing custodial accounts related to the
purchased mortgage servicing rights; and (v) the control of deposit growth and
maintenance of long-term deposits. The strategies listed have been implemented
by Argo Savings and are monitored on a monthly basis by management. Argo Savings
does not use any artificial hedge products to reduce its exposure to interest
rate risk.
As part of its asset/liability strategy, Argo Savings' objective is to maintain
the cumulative one-year hedged gap within a range of plus or minus 15.0% of
total assets, which helps maintain a more stable net interest spread in various
interest rate environments. The gap ratio fluctuates as a result of market
conditions and management's expectations of future interest rate trends.
Argo Savings had an excess of interest sensitive liabilities that mature or
reprice within one year over interest sensitive assets of $63.0 million or 18.5%
of total assets at June 30, 1999. As a result of the excess of interest
sensitive liabilities over interest sensitive assets, Argo Savings is "Net
Liability Sensitive" which would indicate that its earnings would be negatively
affected by rising interest rates. In periods of falling interest rates,
however, the opposite effect on net interest income is expected.
In determining the gap position, Argo Savings has assumed that passbook
accounts, NOW accounts, money market accounts, and interest-bearing escrows are
withdrawn based on assumptions prepared by the OTS in its latest gap analysis
report. The assumptions used, although standardized, may not be indicative of
the actual withdrawals experienced by Argo Savings. Fixed maturity deposits
reprice at maturity. The combined effect of these assumptions on passbook, NOW,
money market accounts and interest-bearing escrows assumes 17.0% of these
accounts withdrawn within three years, and 15.0% per year, thereafter.
Management believes that these decay rate assumptions are reasonable.
THRIFT RECHARTERING LEGISLATION
The proposed legislation regarding elimination of the federal thrift charter and
related issues remains pending before Congress. The Savings Bank, whose deposits
are insured by the Savings Association Insurance Fund ("SAIF"), is unable to
predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF ("Bank
Insurance Fund") and SAIF funds will eventually merge.
18
19
ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standard (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value on the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will be able to reclassify
held-to-maturity securities to either trading or available-for-sale, provided
certain criteria are met. This Statement may be adopted early at the start of a
calendar quarter. Since the Company has no significant derivative instruments or
hedging activities, adoption of Statement No. 133 is not expected to have a
material impact on Argo Bancorp's financial statements. Management has decided
against early adoption of Statement No.133.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available-for-sale, or, in certain
circumstances, held-to-maturity. Currently, these must be classified as trading.
Since the Company has not securitized mortgage loans, Statement No. 134 is not
expected to affect Argo Bancorp.
American Institute of Certified Public Accountants Statement of Position ("SOP")
98-1, effective in 1999, sets the accounting requirements to capitalize costs
incurred to develop or obtain software that is to be used solely to meet
internal needs. Costs to capitalize are those direct costs incurred to convert
data, and all other general and administrative costs are to be expensed as
incurred. The capitalized cost of internal-use software is amortized over its
useful life and reviewed for impairment using the criteria in Statement No. 121.
With the sale of On-Line Statement of Position 98-1 does not have a material
impact on Argo Bancorp.
SOP 98-5, also effective in 1999 requires all start-up, pre-opening, and
organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. Statement of Position 98-5 does not have a material
impact on the Company.
YEAR 2000 DISCUSSIONS
The year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the year 2000 from the year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems.
The federal banking regulators have recently issued guidelines establishing
minimum safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and
19
20
managing Year 2000 project plans, testing remediation efforts and planning for
contingencies. The guidelines previously issued by the agencies under the
auspices of the Federal Financial Institutions Examination Council (the "FFIEC")
are not intended to replace or supplant the FFIEC guidelines which will continue
to apply to all federally insured depository institutions.
The guidelines were issued under the section 39 of the Federal Deposit Insurance
Act (the "FDIA"), as amended, which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has
been accepted by its primary federal regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth or require the institution to take any
action the regulator deems appropriate under the circumstances. In addition to
the enforcement procedures established by the regulatory guidelines there may
also be grounds for other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty assessments.
In 1996, the Company established an internal Technology Committee to identify
and/or resolve issues related to the year 2000 change. This committee has
inventoried all of the systems used by the Company, and has identified those
which are deemed "critical" to its business. The Committee is charged with
administering the strategic plan for Year 2000 compliance as developed by the
Company. The plan follows guidelines set forth by the FFIEC.
The status of each of the five phases of the FFIEC Year 2000 plan are:
1. Awareness 100.0% complete
2. Assessment 100.0% complete
3. Renovation 100.0% complete
4. Validation 100.0% complete
5. Implementation 100.0% complete
While the Company will incur some expenses during the remaining months of 1999,
the Company has not identified any situations at this time that will require
material cost expenditures to become fully compliant. It is impossible at this
time to quantify the estimated future costs due to possible business disruption
caused by vendors, suppliers, customers, or even the possible loss of electric
power or phone service; however, such cost could be substantial.
Through June 30, 1999 the Company has spent approximately $20,000 in connection
with testing, and upgrading equipment and software for Year 2000 compliance. The
Saving Bank's contingency plan calls for the backup of critical application
systems at December 31, 1999 in the event of a systems disaster subsequent to
year end. The contingency plan calls for running the banking centers offline if
systems and/or phone lines are unavailable subsequent to year end. The plan
incorporates provisions which include manually processing daily work for each
business day after the close of business at a data recovery center northwest of
the Savings Bank's main operating facility. Additionally, the Savings
20
21
Bank's deposit and loan systems are contractually protected by a back-up
disaster recovery plan outsourced to a third party. The worst case scenario,
including the possible loss of electric power and phone lines, could have a
material impact on the operations of the Savings Bank.
PURCHASED MORTGAGE SERVICING RIGHTS
At June 30, 1999, the Savings Bank owned directly and indirectly, $7.9 million
in PMSRs. Argo Saving's principal investments in PMSRs is through a $4.5 million
equity investment in a limited partnership that was established for the sole
purpose of purchasing mortgage servicing rights. During the six months ended
June 30, 1999, the Savings Bank invested an additional $11.1 million in PMSR's.
Of that investment $8.2 million had been sold at June 30, 1999. The Savings
Bank's ownership of PMSRs, as well as its investment in the limited partnership
carry interest rate risk because the total amount of the servicing fees earned,
as well as the amortization of the investment in the servicing rights,
fluctuates based on loan prepayments (affecting the expected average life of a
portfolio of PMSRs). The rate of prepayment of mortgage loans may be influenced
by changing national and regional trends, prevailing mortgage rates and the
housing market in general. During periods of declining interest rates, as
existed for most of 1998, many borrowers refinanced their mortgage loans.
Accordingly, prepayments of mortgage loans increased and the loan administration
income related to the mortgage loan servicing rights corresponding to a mortgage
loan ceased as underlying loans were prepaid. Consequently, the market value of
PMSRs tend to decrease during periods of declining interest rates, since greater
prepayments can be expected. The income derived from and market value of the
PMSRs and its investment in the limited partnership, therefore, may be adversely
affected during periods of declining interest rates. Argo Savings accounts for
its investment in the limited partnership using the equity method. Income or
loss is recorded based upon information received from Dovenmuehle Mortgage, Inc.
("DMI"), a Delaware Corporation engaged principally in mortgage servicing
activities. DMI obtains quarterly valuations from an independent appraiser for
each limited partnership. The Savings Bank recorded no further impairment of its
investment during the three and six months ended June 30, 1999.
ASSET QUALITY
Argo Bancorp and Argo Savings regularly review assets to determine proper
valuation. Loans are reviewed on a regular basis and an allowance for possible
loan losses is established when, in the opinion of management, the net
realizable value of the property collateralizing the loan is less than the
outstanding principal and interest, and the collectibility of the loan's
principal and interest becomes doubtful.
At June 30, 1999, Argo Savings had sixty-four (64) properties, totaling $2.5
million classified as foreclosed real estate, as compared to ninety (90)
properties totaling $3.9 million at December 31, 1998. The underlying properties
on June 30, 1999, consisted primarily of single family residences. The
foreclosed real estate has been written down to estimated fair value at June 30,
1999. The total amount of loans receivable ninety (90) days or more past due at
June 30, 1999, was $8.8 million or 3.81% of total loans receivable compared to
$6.5 million or 2.80% of total loans on December 31, 1998. Loans
21
22
ninety (90) days or more past due are primarily secured by one-to-four family
residences. Total non-performing assets at June 30, 1999, totaled $11.3 million
or 3.11% of total assets compared to $10.4 million or 3.39% of total assets at
December 31, 1998. Excluded from these totals are $2.2 million of discounted
loans ninety (90) days or more past due at June 30, 1999, and $1.8 million at
December 31, 1998. Discounted loans that are often purchased with the intent to
foreclose and sell the underlying property are excluded from non-performing
loans.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999, AND 1998.
GENERAL
Net income for the three months ended June 30, 1999 was $331,000 or $.15 per
diluted share. Included in net income was an additional profit of $198,000 after
tax gain or $.09 per diluted share on the sale of the On-Line subsidiary. The
additional gain was the result of a reduction in the anticipated costs related
to the sale. Net income for the six months ended June 30, 1999 was $1.7 million
or $.78 per diluted share including the after tax gain of $1.4 million or $.66
per diluted share on the sale of the On-Line subsidiary.
INTEREST INCOME
Interest income for the three months ended June 30, 1999, totaled $5.7 million,
as compared to $4.3 million for the comparable 1998 period. The increase of $1.4
million was the result of a $75.4 million increase in average interest-earning
assets. This increase was partially offset by a 24 basis point decline in the
yield on interest earning assets for the second quarter of 1999 compared to the
same period last year. The decrease in yield is primarily attributable to the
refinancing of higher yielding mortgage loans to lower current rates and to the
decreased investment in discounted loans receivable, which typically have higher
than market yields. For the six months ended June 30, 1999 interest income
totaled $10.7 million, an increase of $2.2 million from the $8.6 million
recorded for the same period last year. The increase was the result of a $87.0
million increase in average interest earning assets partially offset by a 104
basis point decline in yield for the six months ended June 30, 1999 as compared
to the same period last year.
INTEREST EXPENSES
Interest expense for the three months ended June 30, 1999, totaled $3.9 million
as compared to $2.7 million for the comparable 1998 period. The $1.2 million
increase was primarily the result of a $93.6 million rise in average interest
bearing liabilities which was only partially offset by a 3 basis point decline
in the weighted average cost of interest-bearing liabilities to 5.07% for the
three-months ended June 30, 1999 as compared to the same period last year.
Included in interest bearing liabilities was $17.3 million of junior
subordinated debt at a rate of 11.0%, which accounted for $480,000 of the
increase in interest expense for the three months ended June 30, 1999. Excluding
the junior subordinated debt, the cost of interest bearing liabilities would
have declined to 4.71% for the three months ended June 30, 1999.
For the six months ended June 30, 1999 interest expense totaled $7.3 million an
increase of $1.8 million
22
23
from the $5.5 million recorded for the same period last year. The increase was
primarily the result of a $88.1 million increase in average interest bearing
liabilities partially offset by a 22 basis point decline in the cost of
interest-bearing liabilities for the six months ended June 30, 1999 as compared
to the same period last year. The junior subordinated debt accounted for
$941,000 of the increase in interest expense for the six months ended June 30,
1999. Excluding the junior subordinated debt, the cost of interest bearing
liabilities would have declined to 4.56% for the six months ended June 30, 1999.
NET INTEREST INCOME
Net interest income totaled $1.8 million for the three months ended June 30,
1999, an increase of $216,000 from the amount recorded in the comparable 1998
period. The increase in net interest income for the three months ended June 30,
1999, resulted from the $75.4 million increase in average interest-earning
assets which was partially offset by the $93.6 million increase in average
interest-bearing liabilities and a 22 basis points decrease in the effective net
spread to 2.98% from 3.20% for the comparable 1998 period. Excluding the junior
subordinated debt, the net spread would have increased by 14 basis points to
3.34%.
Net interest income for the six months ended June 30, 1999 increased by $367.000
to $3.5 million from $3.1 million for the same period last year. The increase
was the result of the $87.0 million increase in average interest earning assets
and partially offset by the increase of $88.1 million in average interest
bearing liabilities and a 68 basis point decline in the effective net spread to
2.48% from 3.16% for the comparable 1998 period. The net spread would have
declined by 31 basis points had the junior subordinated debt been excluded from
net interest income.
PROVISION FOR LOAN LOSSES
Provision for loan losses increased to $360,000 for the three months ended June
30, 1998 from $50,000 for the same period last year. Management chose to
increase the provision to increase the ratio of reserves to loans outstanding to
.60% at June 30, 1999 from .40% at December 31 1998 following a review of the
Company's non-performing assets. The allowance for loan losses totaled $1.4
million at June 30, 1999 compared to $940,000 at December 31, 1998. For the six
months ended June 30, 1999 provision for losses totaled $545,000 as compared to
$235,000 for the same period last year. Management believes that loan loss
provisions are adequate and will continue to monitor the mortgage portfolio and
substandard assets for loss exposure.
NON-INTEREST INCOME
Non-interest income increased to $925,000 for the three months ended June 30,
1999 from $844,000 for the same period last year. The increase was the result of
income on PMSR's totaling $535,000 for the period compared to a net loss of
$390,000 recorded for the same period last year. The income recorded on PMSR's
for the three months ended June 30, 1999 is primarily related to a $11.1
investment in PMSR's made during the six months ended June 30, 1999 of which
$8.2 million had been sold at June 30, 1999.
For the six months ended June 30, 1999 non-interest income declined to $1.8
million as compared to $2.1 million for the same period last year. The decline
was the result of a $620,000 decrease in gains on
23
24
the sale of loans, and losses on the sale of foreclosed real estate which
increased to $357,000 for the six months ended June 30, 1999 from $91,000 for
the same period last year.
NON-INTEREST EXPENSE
Non-interest expense declined to $2.3 million for the three months ended June
30, 1999 from $2.4 million for the same period last year. The decline is the
result of a $100,000 reduction in compensation and benefits related to
restructuring at Margo and to a $50,000 decline in occupancy expenses related to
the sale of the buildings. For the six months ended June 30, 1999 non-interest
expense increased by $177,000 to $4.7 million as compared to $4.6 million for
the same period last year. The increase in expenses was due to higher loan and
real estate owned costs and to increased expenses for the six months at the
Margo subsidiary as result of higher loan volumes.
INCOME TAX EXPENSE
The provision for income tax expense yielded an accrued benefit of $46,000 for
the three months ended June 30, 1999 compared to an accrued benefit of $222,000
for the same period last year. The 1999 benefit is based on a 38.0% provision on
the pre-tax income of $87,000 less the utilization of low income housing credits
of $78,000. The 1998 result includes the resolution of various tax issues. For
the six months ended June 30, 1999 the provision for income taxes yielded an
accrued benefit of $172,000 compared to a accrued benefit of $115,000 for the
same period last year. The tax benefit for the six months ended June 30, 1999
includes low income housing credits of $158,000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31, 1998, as
reported in the Company's Form 10-K.
24
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Argo Bancorp and Argo Savings are not engaged in any legal proceedings of a
material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held April 27, 1999, with the following
resolutions ratified and approved in all respects:
I. Election of Director: The election of Donald G. Wittmer for a two (2)
year term
For: 1,967,084 votes 98.1% Withheld: 620 votes 0.02%
Broker Non-votes: 0 votes 0.0%
In addition, the following directors continue in office:
John G. Yedinak, Chairman of the Board President and Chief Executive
Officer, Argo Bancorp, Inc.
Frances M. Pitts, Secretary and Director Executive Vice President, Argo
Bancorp, Inc.
Sergio Martinucci, Director Senior Vice-President of Coldwell
Banker-Residential Brokerage
Arthur E. Byrnes, Director Chairman, The Deltec Asset Management
Corporation
II. Ratification of Appointment of Crowe, Chizek and Company LLP as
Independent Auditors:
For: 1,965,692 votes 98.0% Against: 42 votes 0.00%
Withheld: 1,970 votes 0.10% Broker non-votes: 0 votes
25
26
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are incorporated herein by reference:
(3) The Certificate of Incorporation and By-Laws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
4.0 Stock Certificate of Argo Bancorp, Inc.*
11.0 Statement regarding Computation of Earnings Per Share
(See Note D)
27.0 Financial Data Schedule (filed herewith)
B. Reports of Form 8-K
An 8K was filed on April 1, 1999 regarding the sale of the Online
Financial Services, Inc. subsidiary.
- --------------------------------------------------------------------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, and filed on January 28, 1992, any
amendments thereto, Registration No. 33-45222.
26
27
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARGO BANCORP, INC.
Date: August 13, 1999 /s/ John G. Yedinak
------------------------------- -------------------------------------
John G. Yedinak, Chairman of the Board,
President, Chief Executive Officer, and
Director