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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
- -------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No.: 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 West 63rd Street, Summit, Illinois 60501-1830
(Address of principal executive offices)
(708) 458-4800
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__ .
Indicate by checkmark if there is disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K and is not contained herein and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, i.e., persons other than directors and executive officers of the
Registrant is $2,225,435 and is based upon the last sales price as quoted in
NASDAQ for March 29, 1999.
The Registrant had 2,004,896 shares outstanding as of March 19, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1998, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1999, Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
2
INDEX
PART I PAGE NO.
--------
Item 1. Business.................................................................. 4
Item 2. Properties................................................................ 41
Item 3. Legal Proceedings......................................................... 41
Item 4. Submission of Matters to a Vote
of Security Holders....................................................... 41
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.................................... 41
Item 6. Selected Financial Data................................................... 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ....................................... 42
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk......................................................... 42
Item 8. Financial Statements and Supplementary Data............................... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................................ 42
Item 11. Executive Compensation.................................................... 42
Item 12. Security Ownership of Certain
Beneficial Owners and Management.......................................... 43
Item 13. Certain Relationships and Related
Transactions.............................................................. 43
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K......................................... 43
SIGNATURES................................................................ 46
3
BUSINESS OF ARGO BANCORP, INC.
ITEM 1. BUSINESS
Argo Bancorp, Inc. (the "Argo Bancorp" or "Company") was incorporated in
Delaware in August 1987, for the purpose of acquiring Argo Federal Savings Bank,
FSB ("Argo Savings" or "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 Loan Association
("Dolton", or "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 of the transaction was received on May 26, 1992, at
which time the 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 October 31, 1995, Argo Bancorp acquired ON-LINE Financial Services, Inc.
("ON-LINE"), an Oak Brook, Illinois based computer services bureau which, at the
time of the acquisition, served only bank, thrift and mortgage banking clients
throughout the Midwest. Financial terms of the transaction included a cash sweep
of ON-LINE funds on hand to shareholders, less amounts necessary to establish
certain agreed upon escrows; a two (2) year asset note of $1,026,000,
representing the closing date net book value of ON-LINE assets; a twenty-six
(26) month escrow note in the amount of $460,000, representing funds held for
future performance under a third party computer lease; and a structured schedule
of contingent payments based on future revenues of ON-LINE over the next seven
years. The total transaction value, including asset notes and contingent
payments, was not to exceed $8.9 million.
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 approximately
$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 additional shares to third parties in order that Deltec can maintain 25%
ownership in the Company's common stock.
In October of 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 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 on November 6,
2028. The costs of the debt issuance were approximately $1,669,000, and were
capitalized by the Company. The expenses are being amortized over 30 years.
However, the debentures, under certain circumstances may be prepaid prior to
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
4
capabilities, and by the Company for general corporate purposes, the enhancement
of operational capabilities and the potential purchase of loans.
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 December 31, 1998, on an
unconsolidated basis consisted of its investment in Argo Savings of $17.6
million, its investment in ON-LINE of $6.5 million, its investment in the
majority owned Empire/Argo Mortgage LLC ("Empire") of $837,000, securities
available for sale of $2.5 million, cash and other interest-earning deposits of
$250,000, and other assets of $4.2 million which includes $1.7 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
$319,000 at December 31, 1998, 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 broker and an approved
Federal National Mortgage Association ("FNMA") servicer.
BUSINESS OF ON-LINE FINANCIAL SERVICES, INC.
ON-LINE is a third party provider of electronic data processing services to
thrifts, community banks, savings banks, and other companies located throughout
the Midwest. Prior to the Company's acquisition, ON-LINE's business focus was
primarily on data processing only, utilizing the existing applications in place
at the time, and ON-LINE generally did not have the personnel or technological
infrastructure to meet the future technological needs of its clients, nor was
there an active pursuit to solicit new clients outside or within the financial
institution arena. Company management believed that it had acquired a mature,
but limited, technology company that required a new strategic vision and
enhanced technological capabilities to meet the needs of its evolving
marketplace. The Company's primary strategy during its 1996 and 1997 period of
transition was to evaluate the existing technological and operational
environment, including the internal business processes, existing products and
services, and technical viability of the equipment and resources. The Company's
strategy since the acquisition has been to enhance ON-LINE's strong foundation
as a data processing and data communications network provider by implementing
tools to continue supporting existing services, as well as evolve into a
provider of electronic commerce, Intranet and Internet services, technical
training services, and document management and imaging services.
BUSINESS OF EMPIRE/ARGO, LLC
In recent years, the Company has acquired Discounted Loans through Empire.
The Company estimates the amounts it will realize through foreclosure,
collection efforts or other resolution of each loan and the length of time
required to complete the collection process in determining the amounts it will
bid to acquire such loans. Investments in these assets has generally resulted in
higher yields and gains. Losses have also been incurred from certain properties
through REO activity. Discounted Loans receivable have also been acquired
through Argo Mortgage, Corp. ("Argo Mortgage"), a wholly-owned subsidiary of
Argo Savings.
BUSINESS OF ARGO FEDERAL SAVINGS BANK, FSB
The discussion that follows relates primarily to the business of Argo
Savings, a federally chartered depository institution. Argo Savings undertakes
the primary lending activities of the Company, accordingly, the discussion under
the caption "Lending Activities" materially relates only to Argo Savings. The
Company does, however, have certain investments in loans on an unconsolidated
basis at the holding company level,
5
as well as certain borrowings unrelated to the activities of Argo Savings.
Accordingly, there are certain references to the Company's activities under the
section caption "Sources of Funds and Borrowings." Unless otherwise stated, all
other descriptions of the business of the Company that follow relate to the
business of Argo Savings.
Argo Savings was originally chartered in 1908 as a mutual savings and loan
association in the State of Illinois. Argo Savings converted to a federal stock
charter in 1982 and was determined to be insolvent by the Federal Savings and
Loan Insurance Corporation ("FSLIC") in 1987. On November 17, 1987, the Company
acquired Argo Savings. Argo Savings is a member of the Federal Home Loan Bank
("FHLB") System and its deposits are insured by the FDIC. The principal
executive offices of the Company and home office of Argo Savings are located at
7600 West 63rd Street, Summit, Illinois. Argo Savings has four additional branch
offices in Cook County, Illinois.
On May 29, l996, Argo Savings incorporated a Tier I subsidiary, Margo
Financial Services, LLC ("Margo"). Margo is an Illinois chartered limited
liability corporation whose members are Argo Savings and Nip'n Tuck, Inc., an
Illinois corporation. Margo's primary objectives are to increase loan
origination volume and to serve as a wholesale mortgage banking operation using
a network of brokers, correspondents and conduits. Argo Savings has a 50.l%
ownership interest in Margo.
Argo Savings' primary business is the solicitation of savings deposits from
the general public and the purchase or origination of both conventional and
portfolio loans secured by one to four-family residential real estate. Through
its subsidiaries, Argo Mortgage and Margo, Argo Savings has engaged in mortgage
brokerage activities that focus on the origination, purchase and sale of
mortgage loans in the secondary market. Argo Savings, through Margo, also
offers, to a much lesser extent, Expanded Criteria Loans. These one-to
four-family loans are generally not Agency Qualified, due to the borrower's
credit profile, and are not as readily saleable in the secondary market as
Conventional Loans. The Expanded Criteria Loans also include home equity lines
of credit. Argo Savings generates income by the sale of these mortgage loans on
a "servicing released" basis into the secondary market and through investment in
Purchased Mortgage Servicing Rights ("PMSRs"). More recently, Argo Savings also
generates fee income from an expanding network of ATMs in the Chicago area and
service fees.
Through Argo Mortgage, Argo Savings also has acquired Discounted Loans for
which the borrowers may not be current as to principal and interest payments. In
determining the amount it will bid to acquire such loans at public sales and
auctions, Argo Savings estimates the amounts it will realize through
foreclosure, collection efforts, or other resolution of each loan and the length
of time required to complete the collection process. Investment in these assets
has often resulted in higher yields and gains. However, Argo Savings has also
incurred losses on certain properties which have become real estate owned.
Argo Savings continues to expand its operations to include additional ATMs,
and real estate secured consumer lending. Argo Savings also plans to expand, on
a limited basis, its commercial real estate lending and commercial checking.
Argo Savings also invests funds in securities approved for investment by federal
regulations, including obligations of the United States Government and its
agencies.
MARKET AREA
Argo Savings considers its primary market area to be the greater Chicago
metropolitan area (hereinafter referred to as its "primary market area"). Argo
Savings maintains its headquarters and a branch office in Summit, Illinois. It
also has branch offices in Bridgeview, the West side of Chicago, Dearborn
Station in the South Loop business district of downtown Chicago and Dolton,
Illinois.
6
Argo Savings' primary market area is urban and is comprised of high-density
residential neighborhoods interspersed with mixed-use and heavily industrialized
areas. The primary market area is fully developed with a relatively large number
of generally older homes.
In recent periods, Argo Savings has expanded the origination of loans
outside of its primary market area through its network of Margo correspondents.
As of December 31, 1998, Argo Savings was originating loans in numerous states,
with a primary focus in Illinois.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following tables set forth selected consolidated historical financial
data for the Company during the periods ended and at the dates indicated. This
information should be read in conjunction with the Consolidated Financial
Statements of the Company and notes thereto in the 1998 Annual Report to
Stockholders, portions of which are incorporated herein by reference.
7
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION DATA:
Loans receivable, net ...................... $245,189 $184,358 $173,429 $142,380 $118,063
FHLB of Chicago Stock, at cost ............. 1,911 3,271 3,428 2,669 2,576
Securities ................................. 7,901 4,974 5,788 7,573 12,491
Cash and cash equivalents .................. 10,156 8,677 13,276 11,061 9,286
Mortgage loan servicing rights ............. 5,062 6,706 5,264 4,033 3,641
Foreclosed real estate ..................... 3,875 4,251 3,913 2,234 359
Other assets ............................... 32,924 24,061 24,186 16,518 9,601
-------- -------- -------- -------- --------
Total assets ............................... $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Deposits ................................... $232,980 $172,469 $150,627 $123,484 $100,697
Borrowed money ............................. 25,227 34,156 50,879 38,181 30,820
Custodial escrow balances for loans serviced 5,340 6,400 5,782 9,696 14,691
Other liabilities .......................... 7,273 5,169 5,436 4,228 835
Junior subordinated debt ................... 17,784 -- -- -- --
Stockholders' equity ....................... 18,414 18,104 16,560 10,879 8,974
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity . $307,018 $236,298 $229,284 $186,468 $156,017
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Interest income ................... $ 17,627 $ 18,266 $ 16,074 $ 13,987 $ 10,282
Interest expense .................. 11,777 11,286 9,083 8,341 5,012
-------- -------- -------- -------- --------
Net interest income .............. 5,850 6,980 6,991 5,646 5,270
Provision for loan losses ......... 355 210 248 55 48
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ................. 5,495 6,770 6,743 5,591 5,222
Non-interest income ............... 17,675 15,585 14,194 4,479 1,838
Non-interest expense .............. 22,847 21,409 19,260 7,662 5,383
-------- -------- -------- -------- --------
Income before income taxes ........ 323 946 1,677 2,408 1,677
Income tax expense (benefit) ...... (208) 123 343 667 281
-------- -------- -------- -------- --------
Net income ....................... $ 531 $ 823 $ 1,334 $ 1,741 $ 1,396
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per share .......... $ .27 $ .43 $ 1.07 $ 1.47 $ 1.16
Diluted earnings per share ........ $ .26 $ .39 $ .90 $ 1.24 $ 1.02
AT DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL RATIOS AND OTHER DATA: (1)
8
Return on average assets ..................... 0.21% 0.35% 0.68% 1.00% 1.00%
Return on average equity ..................... 2.86 4.62 10.89 17.09 16.17
Average equity to average assets ............. 7.40 7.53 6.26 5.85 6.14
Stockholders' equity to total assets ......... 6.00 7.66 7.22 5.83 5.75
Interest rate spread during period ........... 2.97 3.80 4.62 3.69 4.25
Net interest margin .......................... 2.76 3.54 4.29 3.65 4.24
Non-interest expense to average assets ....... 9.09 9.05 9.83 4.40 3.83
Non-interest expense (exclusive of ON-LINE) to
average assets ............................. 3.80 4.28 4.99 3.61 --
Non-performing loans to net loans
receivable (2) ............................. 2.80 3.57 3.12 1.54 1.93
Non-performing assets to total assets (3) .... 3.39 4.14 3.43 2.26 1.72
Allowance for loan losses to non-performing
loans (2) ................................. 14.42 14.73 16.87 29.54 26.38
Allowance for loan losses to net loans
receivable (3) ............................. .40 .53 .53 .45 .52
Ratio of net charge-offs during the period to
average loans ................................ .01 .01 .08 .03 --
outstanding, excluding Discounted Loans
Average interest-earning assets to average
interest-bearing liabilities .............. .96x .95x .94x .99x 1.00x
Book value per share ......................... $ 9.18 $ 9.25 $ 9.28 $ 8.82 $ 7.73
Full-service customer service facilities ..... 5 5 5 5 4
- -------------------------
(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 excludes from the numerator the
balances related to the portfolio of Discounted Loans receivable.
LENDING ACTIVITIES
GENERAL. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and discounted loans receivable totaled $245.2
million, excluding accrued interest, at December 31, 1998, representing 79.9% of
Argo Savings' total assets. On that date, $233.5 million of total loans
outstanding, or 93.64% of its total gross loan portfolio, consisted of loans
secured by first mortgages on one- to four-family residential properties, $2.1
million, or 0.85%, consisted of loans secured by multi-family properties, and
$1.4 million, or 0.56%, consisted of loans that are secured by commercial
buildings primarily in suburban Cook and Lake County. In addition, at December
31, 1998, $12.0 million, or 4.95%, of its loan portfolio consisted of other
loans, primarily comprised of home equity and construction loans.
Argo Savings has focused its lending activities on the generation of
profits from the sale of loans. Argo Savings originates long-term, fixed-rate
mortgage loans with 15 and 30 year maturities generally for immediate sale in
the secondary mortgage market. Such loans are originated, in most instances,
through its mortgage brokerage subsidiary. Historically, Argo Savings' lending
activity has also included the origination and purchase of adjustable rate
mortgages ("ARMs"). The majority of the growth in the Argo Savings' loan
balances in the current year is due to the purchase and origination of
adjustable rate loans and seasoned fixed rate loans secured by single family
residences located throughout the country. Argo Savings originated and purchased
approximately $173.4 million of loans both for portfolio and for sale during
1998.
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Company's loan portfolio (loans held for sale are included in one- to
four-family mortgage loans) in dollar amounts and in percentages of the
portfolio at the dates indicated.
9
AT DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family: $233,461 93.64% $177,521 92.20% $177,345 92.50%
Multi-family...................... 2,128 .85 1,252 .65 1,468 .77
Commercial real estate............ 1,390 .56 1,951 1.01 4,523 2.36
------- ----- ------- ----- ------- -----
Total mortgage loans............ 236,979 95.05 180,724 93.86 183,336 95.63
Other loans:
Automobile........................ -- -- 4 -- 4 --
Mobile home....................... 188 .08 208 .11 248 .13
Other (1)......................... 12,134 4.87 11,597 6.03 8,142 4.24
------- ----- ------- ----- ------- -----
Total other loans............... 12,322 4.95 11,809 6.14 8,394 4.37
------- ----- ------- ----- ------- -----
Total loans receivable (2)...... 249,301 100.00% 192,533 100.00% 191,730 100.00%
----- ----- -----
----- ----- -----
Unearned discounts, premiums and 3,172
Deferred loan fees, net......... 7,361 17,636
Allowance for loan losses......... 940 814 665
------- ------- -------
Loans receivable, net........... $245,189 $184,358 $173,429
------- ------- -------
------- ------- -------
AT DECEMBER 31,
-------------------------------------------------
1995 1994
-------------------------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ----------
Mortgage loans:
One- to four-family: $143,931 93.57% $112,393 93.57%
Multi-family...................... 1,180 .77 1,177 .98
Commercial real estate............ 2,379 1.55 1,684 1.40
------- ----- ------- -----
Total mortgage loans............ 147,490 95.89 115,254 95.95
Other loans:
Automobile........................ 5 -- 28 .02
Mobile home....................... 379 .25 472 .39
Other (1)......................... 5,941 3.86 4,364 3.64
------- ----- ------- -----
Total other loans............... 6,325 4.11 4,864 4.05
------- ----- ------- -----
Total loans receivable (2)...... 153,815 100.00% 120,118 100.00%
----- -----
----- -----
Unearned discounts, premiums and
Deferred loan fees, net......... 10,847 1,442
Allowance for loan losses......... 587 613
------- -------
Loans receivable, net........... $142,381 $118,063
------- -------
------- -------
- ----------------------------
(1) Consists primarily of $3.5 million of home equity loans secured by one- to
four-family properties and $2.7 million of construction loans at
December 31, 1998.
(2) Includes loans receivable and discounted loans receivable.
10
LOAN ORIGINATIONS, PURCHASES AND SALES. Set forth below is a table showing
Argo Savings' loan originations and loan purchases and sales for the periods
indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------------------------------------
(IN THOUSANDS)
Loans originated:
One- to four-family(1)............................ $ 82,287 $ 56,318 $ 12,904
Multi-family...................................... 360 333 455
Commercial real estate............................ -- -- 1,440
---------- --------- ---------
Total mortgage loans originated................. 82,647 56,651 14,799
Loans purchased:
Mortgage loans.................................... 79,623 39,521 58,722
Discounted loans.................................. -- 8,858 41,061
Other loans....................................... 12,750 -- --
---------- --------- ---------
Total loans purchased........................... 92,373 48,379 99,783
---------- --------- ---------
Total loans originated and purchased............ $ 175,020 $ 123,167 $135,496
---------- --------- ---------
---------- --------- ---------
Loans Sold:
Mortgage loans receivable (2)..................... $ 37,401 $ 48,466 $ 39,550
Discounted loans.................................. 11,893 20,711 7,515
Other loans....................................... 1,067 -- --
---------- --------- ---------
Total loans sold.................................. $ 50,361 $ 69,177 $ 47,065
---------- --------- ---------
---------- --------- ---------
- -----------------
(1) Originations and sales exclude $90.1 million, $38.0 million, and $ 3.5
million for the years ended December 31, 1998, 1997 and 1996, respectively,
of loans originated and immediately sold directly to third party investors.
(2) Gains related to these sales were $695,000, $279,000 and $1,843,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
11
LOAN MATURITY AND REPRICING. The following table shows the maturity or period to
repricing of Argo Savings' loan portfolio at December 31, 1998. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $75.9 million, $48.2 million, and $46.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.
LOANS
---------------------------------------------------------------------
ONE- TO COMMERCIAL REAL
FOUR-FAMILY MULTI-FAMILY ESTATE OTHER LOANS (1) TOTAL
---------------------------------------------------------------------
(IN THOUSANDS)
Amounts due:
Within one year ........... $ 81,262 $ 557 $ 175 $ 3,699 $ 85,693
--------- --------- --------- --------- ---------
After one year:
one to three years ........ 21,099 1,087 1,215 138 23,539
three to five years ....... 1,595 113 -- 6 1,714
five to 10 years .......... 11,981 3 -- 421 12,405
10 to 20 years ............ 10,459 286 -- 8,058 18,803
Over 20 years ............. 107,065 82 -- -- 107,147
--------- --------- --------- --------- ---------
Total due after one year .. 152,199 1,571 1,215 8,623 163,608
--------- --------- --------- --------- ---------
Total amounts due .......... 233,461 2,128 1,390 12,322 249,301
Unearned discounts, premiums
and deferred loan fees, net (3,177) -- -- 5
(3,172)
Allowance for loan losses .. (687) (14) (216) (23) (940)
--------- --------- --------- --------- ---------
Loans receivable, net ...... $ 229,597 $ 2,114 $ 1,174 $ 12,304 $ 245,189
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) Consists primarily of home equity loans secured by one- to four-family
properties in the amount of $3.5 million and $2.7 million of construction loans.
12
The following table sets forth at December 31, 1998, the dollar amount of all
loans due after December 31, 1999, and whether such loans have fixed or
adjustable interest rates.
AT DECEMBER 31, 1998
--------------------------------------------------------------------------------
FIXED RATES ADJUSTABLE RATES TOTAL
--------------------------------------------------------------------------------
(IN THOUSANDS)
Mortgage loans:
One- to four-family.............. $ 130,367 $ 21,832 $ 152,199
Multi-family..................... 1,571 -- 1,571
Commercial real estate........... 1,215 -- 1,215
Other loans...................... 8,623 -- 8,623
----------- ----------- ------------
Total loans receivable ............. $ 141,776 $ 21,832 $ 163,608
----------- ----------- ------------
----------- ----------- ------------
LOAN ORIGINATIONS AND PURCHASES. The Savings Bank's principal business is
attracting deposits from the general public and originating or purchasing loans
primarily secured by one- to four-family residential real estate. To a lesser
extent, the Savings Bank also originates multi-family and commercial real estate
mortgage loans, home equity loans, construction loans, deposit account loans and
other consumer loans. Historically the Savings Bank's lending portfolio
consisted of those loans in existence in 1992 when the Company acquired Dolton
Riverdale, which primarily consisted of one- to four-family residential mortgage
loans. Since 1992, the Savings Bank has acquired portfolios of loans consisting
primarily of performing seasoned one- to four-family residential mortgage loans.
From time to time and in limited amounts, the Savings Bank has purchased,
through Argo Mortgage and the Company through Empire, Discounted Loans.
Discounted Loans are purchased by the Savings Bank with a view toward bringing
such loans current for the Savings Bank's portfolio, for resale in the secondary
market or for foreclosure and liquidation. Primarily as a result of its
Discounted Loan Activities, the Savings Bank's level of non-performing loans to
total loans has been historically higher than that of its peers.
In order to expand its level of loan originations and purchases, in 1996
the Savings Bank established Margo as a majority-owned subsidiary. Since August
1996, the Savings Bank has engaged in both wholesale and retail lending
activities primarily through Margo. Margo focuses on the origination, purchase,
and sale of mortgage loans generally on a "servicing released" basis into the
secondary market. Through Margo, the Savings Bank has originated loans through
Correspondents located in various states throughout the country. ARM loans
originated by Margo are generally retained by the Savings Bank for its
portfolio, while fixed-rate loans originated by Margo are generally not retained
in the Savings Bank's portfolio but are immediately sold in the secondary
market. The Savings Bank will also sell ARM loans.
The Savings Bank continues to purchase performing seasoned one- to
four-family mortgage loans. For the years ended December 31, 1998, $79.6 million
of such loans were purchased by the Savings Bank. In addition, Argo Mortgage
purchases Discounted Loans for which the borrowers may not be current as to
principal and interest payments. For the years ended December 31, 1998, 1997 and
1996, Argo Mortgage purchased $0, $8.9 million and $41.1 million of Discounted
Loans, respectively. From time to time, Discounted Loans are also purchased by
Empire, although the Company is reducing its emphasis on the purchase of
Discounted Loans.
USE AND QUALIFICATIONS OF CORRESPONDENTS. The core of Margo's
Correspondents consist of a nationwide network of third party loan originators.
Additional Correspondents are regularly added to Margo's list of third party
originators through referrals (primarily from one of the five mortgage insurance
13
companies utilized by Margo) and from contacts made at trade shows, conferences,
and over the Internet. At December 31, 1998, Margo accepted applications from
approximately 100 Correspondents.
In order to be approved as a Correspondent for Margo, an applicant must
meet certain defined criteria. In evaluating potential Correspondents, Margo
looks at a number of criteria including, but not limited to, the financial
statements of potential Correspondent, participation in trade associations, and
continuing education. Quality control measures and historical performance with
respect to originations and volume selling are also significant in selecting and
continuing relationships with Correspondents. Margo seeks to enter into
relationships with Correspondents who are experienced, educated and financially
secure and who do not require day to day contact with Margo staff. In addition,
management will maintain a relationship with a Correspondent only if the
Correspondent brings an established level of loans to Margo on a monthly basis.
Management believes that it will be able to sustain relationships with
Correspondents meeting the foregoing criteria as it offers Correspondents what
it believes to be very competitive rates. In addition, as an additional
incentive to Correspondents to bring loans to Margo, Correspondents originating
an average of $250,000 per month on select portfolio products for Margo are paid
a servicing premium of 6.25 basis points on the outstanding principal balance on
such loans per year, up to a maximum of seven years. In the event loans are
sold, Correspondents are paid a fee equal to the present value of the remaining
service fee premiums less the amounts paid to date.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Argo Savings, through Margo,
originates, purchases and sells primarily fixed-rate and adjustable-rate
mortgage loans secured by one- to four-family residences. At December 31,1998,
Argo Savings' one- to four-family loan portfolio totaled $233.5 million, or
93.64% of Argo Savings' total loan portfolio. The loans generally fall into
three categories: (1) Conventional Loans--loans which conform to all of the
underwriting guidelines of Fannie Mae and Freddie Mac ("Agency Qualified"); (2)
Expanded Criteria Loans--loans which are (a) not Agency Qualified, generally due
to the borrower's credit profile, (b) are not as readily saleable in the
secondary market as Conventional Loans and (c) are generally fixed-rate loans
which are originated at interest rates higher than those of fixed-rate
Conventional Loans; and (3) Portfolio Loans--ARM loans which (a) are not Agency
Qualified, (b) are originated under specific criteria set forth by Argo Savings
and (c) are not Conventional or Expanded Criteria Loans.
The bulk of the loan originations by Margo have been sold. The Conventional
Loans are either fixed-rate or ARM loans ranging from $10,000 up to a maximum of
$240,000. These loans are sold into the secondary market through one of eight
third-party wholesale conduits with servicing released. In the future, as the
Company's cash flow and volume of Agency Qualified loans increases, Margo may
sell such loans directly to the Agencies.
The Portfolio Loans are adjustable-rate and, to a lesser extent, fixed-rate
mortgage loans originated by Argo Savings, through Margo, with principal
balances that range from $10,000 to $2.0 million and which are not necessarily
Agency Qualified. The yield on these loans is generally 100 basis points higher
than the yield on Agency Qualified loans. Portfolio Loans are generally retained
by Argo Savings. From time to time, the Savings Bank has made strategic sales of
such loans. Argo Savings, through Margo, also originates Portfolio Loans which
are jumbo residential mortgage loans. Jumbo loans are loans with principal
balances that generally range between $300,000 and $2.0 million. Adjustable-rate
jumbo mortgage loans under $600,000 are generally held in Argo Savings' loan
portfolio, while other jumbo mortgage loans are originated for sale. The yield
on jumbo loans is generally between 125 and 375 basis points higher than the
yield on Agency Qualified loans.
14
Since September 1996, Argo Savings, through Margo, has enlarged its product
offerings to include the origination of Expanded Criteria Loans. Since December
31, 1997, 3.6% of the loans originated by Margo were Expanded Criteria Loans.
These loans are originated, in many instances, when the borrower's credit
profile, or some aspect of the loan, does not adhere to the Agency underwriting
guidelines. Expanded Criteria Loans are perceived by management as being
advantageous to Argo Savings because they generally have higher interest rates
and origination and servicing fees and generally lower loan-to-value ratios than
loans that conform to Agency guidelines. In addition, management believes that
the resources are available through its third party servicers to adequately
service Expanded Criteria Loans as well as the experience to resolve loans that
may become non-performing.
As of December 31, 1998, the amount of Portfolio Loans originated by Margo
which are non-performing is $966,000. Argo Savings intends to continue to expand
the volume of Portfolio and Expanded Criteria Loans throughout the country
through its nationwide network of Correspondents.
Argo Savings requires title insurance to insure the priority of its lien on
all of its mortgage loans. It also requires fire, flood, and casualty insurance
on all its properties securing loans provided by Argo Savings and mortgage
insurance on all loans with a loan-to-value of 80% or greater.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LENDING AND COMMERCIAL REAL ESTATE
LENDING. Argo Savings also originates loans for the acquisition of existing
multi-family residences or for the refinancing of such properties, such as five
to twelve unit apartment buildings located in the greater Chicago metropolitan
area. At December 31, 1998, Argo Savings had gross loans secured by multi-family
properties in the amount of $2.1 million, or 0.85% of the total loan portfolio.
Loans originated on multi-family dwellings are generally 5-year fixed-rate
balloon mortgages amortized over thirty (30) years. An origination fee is
generally charged on such loans. Multi-family residential real estate lending
entails additional risk as compared with one- to four-family residential
property lending. Multi-family real estate loans typically involve large loan
balances to a single borrower or groups of affiliated borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project. Argo Savings evaluates all aspects of multi-family real
estate loan transactions in order to mitigate risk to the greatest extent
possible. To minimize these risks, Argo Savings generally limits its
multi-family lending to properties used solely for residential purposes. Argo
Savings seeks to ensure that the property securing the loan will generate cash
flow to adequately cover operating expenses and debt service payments. To this
end, multi-family real estate loans generally are made at a loan-to-value ratio
no greater than 75%.
COMMERCIAL REAL ESTATE LENDING. The commercial real estate loan portfolio
originated or purchased is primarily secured by office buildings and
income-producing commercial properties and amounted to $1.4 million or 0.56% of
the total gross loan portfolio at December 31, 1998.
Argo Savings will continue on a limited basis to originate loans secured by
commercial real estate. In underwriting these loans, consideration is given to
the property's operating history, future operating projections, current and
projected occupancy, position in the local and regional market, location and
physical condition. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower. An appraisal report is
prepared in accordance with OTS regulations by an outside appraiser qualified by
federal and state law to substantiate property values for every multi-family and
commercial real estate loan. These appraisal reports are reviewed by Argo
Savings prior to the closing of the loan to assure compliance with OTS appraisal
standards and policies and the adequacy of the value of the security property.
Argo Savings also typically obtains full personal loan guarantees from the
borrowers. Argo Savings validates such personal loan guarantees through an
investigation of the borrower's personal finances.
15
Commercial real estate lending entails significant additional risks as
compared with one- to four-family residential property lending. Commercial real
estate loans typically involve larger loan balances to a single borrower or
groups of affiliated borrowers. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such may be subject to a greater
extent to adverse conditions in the economy generally.
CONSUMER LENDING. Argo Savings generates various types of secured consumer
loans, primarily home equity loans and mobile home loans. The home equity loans
are made for terms of up to ten (10) years, while mobile home loans have terms
of up to fifteen (15) years. At December 31, 1998, Argo Savings' consumer loan
portfolio totaled $12.3 million, or 4.95%, of Argo Savings' total loan
portfolio, which included $2.7 million in construction loans.
Management considers consumer loans to involve more credit risk than
secured single family residential mortgage loans and, therefore, consumer loans
generally yield a higher return to Argo Savings and generally provide Argo
Savings with shorter maturities than single-family residential mortgage loans.
LOAN APPROVAL AND UNDERWRITING. Loan applications are accepted by both
Margo personnel and employees of the Savings Bank. Upon receipt of a loan
application, credit reports are ordered to verify specific information relating
to a loan applicant's employment, income, assets and credit standing, and for
independent verification of all credit, income and liability information
provided by the applicant. In the case of a real estate loan originated by the
Savings Bank, or by Margo for the Savings Bank, an appraisal of the real estate
intended to secure the proposed loan is undertaken by an independent appraiser
approved by the Savings Bank's Board of Directors. For loans originated for
Margo by third parties, an independent appraiser approved by Margo is used.
Margo uses five major mortgage insurance companies, any of which may act as
a contract underwriter on all loans originated through its network of
Correspondents. All loans originated for the Savings Bank's portfolio are also
underwritten by Margo in order to ensure such conform to the specific loan
program under which they are being originated. These insurance companies are
provided with the Savings Bank's underwriting manuals and guidelines and all
loans are underwritten to conform with the Savings Bank's guidelines. Written
assurances that the manuals and guidelines have been adhered to, in the form of
representations and warranties, are provided to Margo by the insurance company.
Upon completion of the loan application processing activities, all other
loan files are presented to the Savings Bank's loan underwriters if the loan is
originated on behalf of the Savings Bank, or to third party investors if the
loan is originated for immediate sale. In the case of the Savings Bank, certain
senior officers have lending authority and may approve loans of up to $350,000
in the case of commercial loans and $450,000 in the case of one- to four-family
loans, after completion of the underwriting process. Loans in excess of $350,000
but less than $500,000, in the case of commercial loans, and in excess of
$450,000 and less than $600,000, in the case of one- to four-family loans, must
be submitted to the Savings Bank's Lending Committee for approval. Loans in
excess of $500,000, in the case of commercial loans, and $600,000, in the case
of one- to four-family loans, are subject to approval by the Board of Directors
of the Savings Bank.
Loan applicants are promptly notified in writing of the final determination
of the loan request by either the Savings Bank or Margo. If approved, the terms
and conditions of the loan decision, including the amount of the loan, interest
rate, amortization term, brief description of the real estate securing the
mortgage as well as all conditions to final closing of the transaction are
provided in writing to the loan applicant. The
16
loan applicant is required to pay all costs incurred by Margo, as well as their
own costs in connection with the loan closing. If denied, disclosure of the
factors resulting in the denial is made pursuant to the requirements of
applicable federal and state law.
The loan documentation and processing activities utilized by the Savings
Bank/Margo in connection with the origination of real estate loans conforms to
standards imposed by the Agencies, as well as third party investor guidelines.
Loan documentation and processing activities utilized by the Savings Bank/Margo
also conform to requirements of the Agencies, as well as to the standards
promulgated by the Federal Housing Authority ("FHA"), the Department of Housing
and Urban Development ("HUD") and the Veterans Administration ("VA").
Additionally, written policies and procedures governing the origination of
mortgage and other loans conforming to regulatory guidelines promulgated by the
OTS are in place and utilized by the Savings Bank.
Statistics regarding the loan applications, including those both denied and
approved, are retained by the Savings Bank and Margo, and reported annually
under the Home Mortgage Disclosure Act. Quality control procedures verifying
data obtained through loan processing activities are in place at the Savings
Bank and Margo.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans
and commitment fees for making loans, Argo Savings earns fees in connection with
originating loans. Origination fees are a percentage of the principal amount of
the mortgage loan charged to the borrower for the granting of the loan. Loan
fees are accounted for by deferring all loan origination fees and certain direct
costs associated with originations. Net deferred fees or costs are amortized as
yield adjustments over the life of the related loans using the interest method,
adjusted for estimated prepayment based on the Savings Bank's historical
prepayment experience. At December 31, 1998, Argo Savings had $1.2 million in
net deferred loan costs that will be recognized in future periods.
Loan origination and commitment fee income varies with the volume and type
of loans and commitments made and purchased and with competitive conditions in
mortgage markets, which in turn tend to vary in response to the demand and
availability of money.
Argo Savings also receives other fees and charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in borrower or other loan modifications.
PROBLEM ASSETS AND ASSET CLASSIFICATION. In accordance with Federal
regulations, loans and other assets are reviewed by Argo Savings on a regular
basis for a determination of need to classify such assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor, or of the current realizable value of the collateral pledged.
"Substandard" assets include those characterized by the "distinct possibility"
that Argo Savings will sustain "some loss" if the deficiencies noted are not
corrected. Assets classified as "Doubtful" have all the weaknesses inherent in
those classified as "Substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
"currently existing facts, conditions and values," "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncorrectable"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. An allowance for
losses is established in amounts deemed prudent by management. General
allowances represent loss allowances which have been established by Argo Savings
to recognize the inherent risk associated with lending activities but which,
unlike specific allowances, have not been allocated to a particular problem
asset. When an asset is classified as "Loss," Argo Savings is required to
establish a specific allowance for such losses equal to 100% of the amount of
17
the asset so classified, or to charge-off such amount. Recently, the OTS
discontinued classifying Assets as "special mention" if such assets possessed
weakness but did not expose the institution to sufficient risk to warrant
classification in the Substandard category.
At December 31, 1998, Argo Savings had $6.5 million of loans and $3.9
million of REO classified as Substandard or Doubtful, respectively. Excluded
from this total is the $3.0 million of Discounted Loans ninety (90) days or more
past due. Management does not consider these loans non-performing and thus
excludes them from all non-performing loan analyses and from all general
valuation allowance analyses. If an asset or portion thereof is classified as
Loss, Argo Savings must either establish a specific allowance for loan losses in
the amount of 100 percent of the portion of the asset classified as Loss, or
charge off such amount. At December 31, 1998, Argo Savings had no assets
classified as Loss. Management evaluates collectibility of the Discounted Loans
receivable on an aggregate pool basis.
As a general rule, Argo Savings has entered into contractual arrangements
with third parties ("Sub-servicers") who collect principal and interest payments
from obligors on loans owned by Argo Savings, pay real estate property taxes and
ensure collateral securing loans remains insured for the benefit of Argo
Savings, in accordance with generally recognized servicing standards and
practices. Sub-servicers remit payments received from loan obligors and submit
monthly reports detailing delinquencies and other matters to Argo Savings. Argo
Savings may handle managing the process of collection and liquidation of loan
assets, however, in some instances, Sub-servicers are charged with such
responsibility. Generally, when a loan becomes 15 days or more past due, the
Sub-servicer submits a reminder notice to the loan obligor. For loans 30-89 days
delinquent, additional notices are submitted to the borrower, and the
Sub-servicer attempts telephonic contact. After principal and interest are 90
days or more past due, and the loan obligor has failed to respond to the
Sub-servicer and no forbearance or other repayment plan has been agreed to, the
Sub-servicer generally initiates foreclosure action. Argo Savings' policy is to
stop accruing interest for any loan in excess of 90 days delinquent separate
from management's analysis as to the future collectibility of interest.
Real estate acquired through foreclosure or deed in lieu of foreclosure or
in judgment is carried at the lower of the fair market value less cost to
dispose or the related loan balance at the date of foreclosure. An allowance for
loss is established by a charge to operations or a transfer from the allowance
for loan losses if the carrying value of REO exceeds its fair value less cost to
dispose. Sub-servicers generally manage the disposition process for Argo
Savings, contracting for security and maintenance of REO, listing REO with real
estate brokers for sale, submitting offers to purchase to Argo Savings for
review and approval, and arranging for final sale of REO utilizing attorneys and
title companies licensed in the jurisdiction where REO is located. The
disposition of REO related to Discounted Loans is now managed by Argo Savings
through its in-house personnel.
18
The following table sets forth information with respect to the Savings
Bank's non-performing assets as of the dates indicated. As of the dates shown,
the Savings Bank had no restructured loans.
AT DECEMBER 31,
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
1998 1997 1996 1995 1994
---------------------------- ----------------------------
Non-performing loans (1)(2) .................. $ 6,518 $ 5,525 $ 3,942 $ 1,987 $ 2,324
Foreclosed real estate, net (3) .............. 3,875 4,251 3,913 1,473 359
-------- -------- -------- -------- ---------
Total non-performing assets .................. $ 10,393 $ 9,776 $ 7,855 $ 3,460 $ 2,683
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Allowance for estimated loan losses as a
percentage of net loans receivable (1) ...... .40% .53% .53% .45% .52%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Allowance for loan losses to non-performing
loans ....................................... 14.42% 14.73% 16.87% 29.54% 26.38%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Non-performing loans as a percentage of loans
receivable (1) .............................. 2.80% 3.57% 3.12% 1.54% 1.93%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Non-performing assets as a percentage of total
assets (1) .................................. 3.39% 4.14% 3.43% 2.26% 1.72%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
- -------------------
(1) All non-performing loan totals exclude Discounted Loans receivable ninety
(90) days or more past due which at December 31, 1998, 1997, 1996 1995 and
1994 amounted to $3.0 million, $6.2 million, $15.5 million, $8.4 million
and $451,000, respectively.
(2) At December 31, 1998, $1.5 or 23.1% of the $6.5 million in non-performing
loans represent loans originated by the Savings Bank. The remaining loans
represent loans purchased by the Savings Bank.
(3) Includes $2.7 million of foreclosed real estate related to the Discounted
Loans receivable portfolio at December 31, 1998.
At December 31, 1998, the Savings Bank had $6.5 million of Portfolio Loans
receivable and loans held for sale and $3.0 million of Discounted Loans
receivable ninety (90) days or more delinquent. At both December 31, 1998 and
December 31, 1997, the Bank had approximately $3.9 million and $4.2 million,
respectively, of REO. This stabilization is the result of the Savings Bank's
reduction in its position in Discounted Loans receivable as the Company focuses
its resources on conventional lending.
19
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
AT DECEMBER 31, 1998
---------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
--------------------- -------------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family .... 114 $6,042 100 $6,128
Multi-family ........... 1 112 2 225
Commercial ............. -- -- -- --
------ ------ ------ ------
Total mortgage loans . 115 6,154 102 6,353
Other loans ............. 7 273 3 165
------ ------ ------ ------
Total ................ 122 $6,427 105 $6,518
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ... 2.76% 2.80%
------ ------
------ ------
AT DECEMBER 31, 1997
----------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
---------------------- --------------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family .... 107 $4,862 95 $5,474
Multi-family ........... -- -- -- --
Commercial ............. -- -- -- --
------ ------ ------ ------
Total mortgage loans . 107 4,862 95 5,474
Other loans ............. -- -- 9 51
------ ------ ------ ------
Total ................ 107 $4,862 104 $5,525
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ... 3.16% 3.57%
------ ------
------ ------
AT DECEMBER 31, 1996
------------------------------------------------
30-89 DAYS 90 DAYS OR MORE
--------------------- ----------------------
LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family ................ 115 $4,055 65 $3,908
Multi-family ....................... -- -- -- --
Commercial ......................... -- -- -- --
------ ------ ------ ------
Total mortgage loans ............. 115 4,055 65 3,908
Other loans ......................... 1 1 13 34
------ ------ ------ ------
Total ........................ 116 $4,056 78 $3,942
------ ------ ------ ------
------ ------ ------ ------
Delinquent loans to total
loans receivable (1) ............... 3.21% 3.12%
------ ------
------ ------
- ------------------------------
(1) Excludes balances related to portfolio of Discounted Loans receivable.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
maintained at a level determined to be adequate by management to absorb future
charge-offs of loans deemed uncollectible. At December 31, 1998, the Savings
Bank experienced a decrease in the percentage of net loans 90 days or more
delinquent from 3.57% of total loans receivable and loans held for sale
(excluding Discounted Loans at December 31, 1998) to 2.80% of total loans
receivable and loans held for sale (excluding Discounted Loans) at December 31,
1997. In addition to the allowance for loan losses, the Savings Bank maintains
an allowance for losses on foreclosed real estate. The balance at December 31,
1998, represents specific reserves currently in place on REO. As of December 31,
1998, all of the allowance for loan losses pertains to a general allowance. Argo
Savings had no specific reserves established at December 31, 1998, other than
the reserves against REO. The allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off.
Determination of an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and mix
20
of the loan portfolio, adverse situations which may affect a borrower's ability
to repay, size of the loan portfolio, business and economic conditions and
management's estimate of potential losses. While management uses all available
information, including the monitoring of the economic conditions in the
geographic regions in which the loan portfolio is located, future additions to
the allowance may be necessary based on estimates that are susceptible to
significant revision as a result of changes in economic conditions and other
factors. Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review Argo Savings' allowance for loan
losses. Such agencies may require Argo Savings to recognize additions to the
allowance based on their judgment of information available to them at the time
of their examination.
The following table sets forth information with respect to Argo Savings'
allowance for loan losses by loan category for the years and at the dates
indicated.
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
(IN THOUSANDS)
Balance at beginning of period:
Mortgage loans:
One- to four-family ........................ $ 61 $ 412 $ 330 $ 315 $ 313
Multi-family ............................... 14 14 14 14 14
Commercial loans ............................. 216 216 216 216 216
Other loans .................................. 23 23 27 68 70
----- ----- ----- ----- -----
Total ........................................ 814 665 587 613 613
Provision for loan losses:
Mortgage loans:
One- to four-family ........................ 355 210 248 96 45
Multi-family ............................... -- -- -- -- --
Commercial loans ............................. -- -- -- -- --
Other loans .................................. -- -- -- (41) 3
----- ----- ----- ----- -----
Total ........................................ 355 210 248 55 48
Purchased allowance one- to four-family loans . 30 -- -- -- --
Transfer to allowance for losses on foreclosed
real estate ................................ (240) (50) (77) (45) (43)
Charge-offs:
Mortgage loans:
One- to four-family ........................ (19) (11) (89) (36) --
Multi-family ............................... -- -- -- -- --
Commercial loans ............................. -- -- -- -- --
Other loans .................................. -- -- (4) -- (5)
----- ----- ----- ----- -----
Total ........................................ (19) (11) (93) (36) (5)
----- ----- ----- ----- -----
Balance at end of period:
Mortgage loans:
One- to four-family ........................ 687 561 412 330 315
Multi-family ............................... 14 14 14 14 14
Commercial loans ............................. 216 216 216 216 216
Other loans .................................. 23 23 23 27 68
----- ----- ----- ----- -----
Total ........................................ $ 940 $ 814 $ 665 $ 587 $ 613
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of net charge-offs during the period to
loans outstanding, excluding Discounted Loans .01% .01% .08% .03% --%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans ...... .40% .53% .53% .45% .52%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
21
PURCHASED MORTGAGE SERVICING RIGHTS
Purchase Mortgage Servicing Rights ("PMSRs") represent the right to receive
a fee for the collection and administration of the mortgage payments on the
loans being serviced for others. The cost of acquiring the right to service the
mortgage loans is carried as a capitalized asset and amortized proportionately
over the estimated remaining lives of the loans serviced. The servicing of
mortgages primarily consists of the collection of monthly principal and interest
payments, collection and disbursement of escrow funds for taxes and insurance,
providing various customer services and account maintenance, reporting,
foreclosure processing, and investor notification. For performing these
administrative tasks, the servicer retains a monthly servicing fee generally
calculated as a percentage of the outstanding loan balance, and holds the
escrowed payments for taxes and insurance in non-interest-bearing custodial
accounts. The servicing fee is intended to cover anticipated operating expenses
incurred in servicing the loans and to provide for an adequate profit margin.
The Company uses independent Sub-servicers to perform the administrative
activities discussed above under a sub-servicing agreement. The Company's
primary administrative task associated with PMSRs is to review monthly analyses
of all servicing and accounting reports prepared by the Sub-servicer and to
perform regular on-site inspections and reviews of the Sub-servicers'
operations.
Prior to completing any acquisition of servicing rights, the Company
analyzes a wide range of parameters with respect to each portfolio under
consideration. This review includes the projected revenues and expenses,
geographic distribution, interest rate distribution, loan-to-value ratios,
outstanding balances, delinquency history and other statistics. Due diligence is
either performed by Argo Savings' employees or a designated independent
contractor on a representative sample of the mortgages involved. The purchase
price is based on the present value of the expected future stream of cash flows,
computed by using a discount rate that management considers to approximately
reflect the risk associated with the investment, and using a loan prepayment
assumption that management considers to be conservative relative to the
characteristics of the serviced loans. Management does not purchase PMSRs with
recourse servicing, thus the Company is not subject to the risk of and costs
(including foreclosure costs) associated with borrower default on the underlying
loans.
Mortgage servicing activities carry interest rate risk since the total
amount of servicing fees earned, as well as the amortization of the investment
in the servicing rights, fluctuates based on loan prepayments which generally
result from changes in market interest rates and the effect of these changes on
the average life of the underlying residential mortgage loans. Prepayment of the
mortgage loans may be influenced by a variety of economic, geographic, social,
and other factors and, most importantly, the difference between interest rates
on the mortgage loans underlying the PMSRs and prevailing mortgage rates
available for comparable mortgages.
The value of PMSRs generally decrease in a declining interest rate
environment and increase in a rising interest rate environment due to the actual
or anticipated fluctuation in the prepayment speeds of the underlying mortgage
loans. The value of the PMSRs reacts inversely with the other interest-earning
assets of Argo Savings. The value of mortgage loans, comprising the majority of
Argo Savings' assets, decreases in a rising interest rate environment and
increases in a declining interest rate environment.
Argo Savings' principal investment is through a $4.5 million equity
interest in a limited partnership whose business activities are to purchase
mortgage servicing rights. There are several unaffiliated equity investors in
the limited partnership. The purchase of the servicing rights is then leveraged,
allowing the limited partnership to purchase rights equaling one to three times
the equity investment by its partners. The cost of the borrowings, as well as
the service income and expense and related amortization, is recorded at the
limited partnership level. Each quarter, financial statements are issued to the
limited partnership by
22
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. Argo Savings 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 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 outlined previously for direct
purchases of servicing. The task of finding and acquiring the servicing rights
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 PMSR 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. As a result of
the current decline in the interest rate market, DMI has actively moved to
retain servicing rights on refinancings. The loans may be refinanced at lower
rates, for longer terms, and, from time to time, with higher balances with the
servicing on such loans retained by the limited partnership.
Argo Savings accounts for the investment in the limited partnerships using
the equity method of accounting. Income or loss is recorded based upon
information received from DMI. DMI obtains quarterly valuations from an
independent appraiser for the limited partnership. At December 31, 1998, the
valuation had an appraisal value lower than the current book value. The general
partner recorded a valuation allowance. Argo Savings' proportionate share of the
writedown was $1.4 million which Argo Savings has recorded based upon
information received from DMI.
In addition to its investment in the limited partnerships, at December 31,
1998, the Savings Bank had a $593,000 investment in a PMSR portfolio that it
owns directly. At December 31, 1998, this directly owned PMSR portfolio
consisted of 1,184 mortgage loans having an outstanding principal balance of
$46.8 million.
A secondary benefit derived from the PMSRs is the interest free custodial
accounts comprised of the borrowers' taxes and insurance escrows and, for a
short time period, the float on their principal and interest payments. The
custodial balances are maintained in non-interest-bearing accounts and are not
affected by changes in interest rates. The custodial balances relating to the
servicing owned at December 31, 1998, were $5.3 million.
INVESTMENT ACTIVITIES
The Savings Bank must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Savings Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 1998, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 6.35%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and
23
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Savings Bank is to invest funds
among various categories of investments and maturities based upon the Savings
Bank's asset/liability management policies, liquidity needs and performance
objectives, and investment quality and marketability. It is the Savings Bank's
general policy to invest in certificates of deposit, overnight funds, and
securities, which are securities of government sponsored entities and federal
agency obligations, and other issues that are rated investment grade. At
December 31, 1998, the Company had $7.6 million of investment securities
available for sale with an aggregate market value of $7.2 million.
The Company maintains a portfolio of readily marketable equity securities,
generally comprised of the equity securities of government sponsored entities
and the holding companies for local, regional and national banks, savings banks
and savings and loan associations. Generally, the Company has acquired
non-control positions in financial institution equities which management
believes, after analysis of market pricing, business practices, and earnings
potential, are under-valued and represent an opportunity for profit from sales
of such securities. At December 31, 1998, the Company and the Savings Bank had
$2.8 million in these securities.
In addition, the Company has been actively trading various marketable
equity securities, primarily Fannie Mae and FHLMC stock. These securities
were classified as trading at December 31, 1998. The balance of the trading
portfolio was $693,000 at December 31, 1998 and market value approximated
cost.
24
The following table sets forth the composition of the Company's debt and
equity and mortgage-backed securities portfolios in dollar amounts and
percentages at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
FAIR % OF FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------------------- -------------------- ---------------------
Debt securities:
U.S. Government and agency
obligations .......................... $ 2,088 28.97% $ -- ---% $ -- ---%
Municipal bonds ....................... 380 5.27 380 7.64 602 10.40
------- ------- ------- ------ ------- ------
Total debt securities ............... $ 2,468 34.29% $ 380 7.64% $ 602 10.40%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Equity securities ...................... $ 2,809 38.97% $ 1,667 33.51% $ 282 4.87%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Mortgage-backed securities:
Freddie Mac ........................... $ 109 1.51% $ 124 2.51% $ 826 14.27%
Fannie Mae ............................ 1,797 24.93 2,799 56.26 3,949 68.23
Ginnie Mae ............................ -- -- -- -- 152 2.62
------- ------- ------- ------ ------- ------
Total mortgage-backed securities .... 1,906 26.44% 2,923 58.77% 4,927 85.12%
Net premium (discount) ................ 32 .44 39 .78 60 1.04
Unrealized loss on securities
available-for-sale .................. (7) (.09) (35) (.70) (83) (1.43)
------- ------- ------- ------ ------- ------
Net mortgage-backed securities ........ $ 1,931 26.79% $ 2,927 58.85% $ 4,904 84.73%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
Total securities available-for-sale $ 7,208 100% $ 4,974 100% $ 5,788 100%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
FHLB of Chicago stock .................. $ 1,911 100% $ 3,271 100% $ 3,428 100%
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
The following table sets forth the amortized cost and fair values of the
Company securities at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------------------- ---------------------- --------------------
Securities available-for-sale:
U.S. Government and agency
obligations ...................... $2,091 $2,088 $--- $--- $--- $---
Municipal bonds ................... 370 380 370 380 557 602
Equity securities ................. 3,195 2,809 1,695 1,667 226 282
Mortgage-backed securities:
Freddie Mac ...................... 110 109 $ 125 124 826 834
Fannie Mae ....................... 1,827 1,822 2,837 2,803 4,009 3,910
Ginnie Mae ....................... -- -- -- -- 152 160
------ ------ ------ ------ ------ ------
Total mortgage-backed securities . 1,937 1,931 2,962 2,927 4,987 4,904
------ ------ ------ ------ ------ ------
Total securities available-for-sale $7,593 $7,208 $5,027 $4,974 $5,770 $5,788
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
FHLB-Chicago stock ................. $1,911 $1,911 $3,271 $3,271 $3,428 $3,428
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
25
The table below sets forth certain information regarding the amortized costs,
weighted average yields and contractual maturities of investment securities as
of December 31, 1998.
DECEMBER 31, 1998
-----------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
-----------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
------------------------------------------------------------------
Investment securities
Available-for-sale:
Municipal Bonds........ $ -- --% $ -- --% $ -- --%
Equity Securities (1).. 4,786 -- -- -- 250 --
Mortgage-backed
securities:
Freddie Mac ......... -- -- -- -- -- --
Fannie Mae .......... -- -- -- -- -- --
------- ---- -------- ----- ------ -----
Total
mortgage-backed
securities ..... -- -- -- -- -- --
------- ---- -------- ----- ------ -----
Total investment
securities
available-for-
sale ............. $ 4,786 --% $ -- --% $ 250 --
------- ---- -------- ----- ------ -----
------- ---- -------- ----- ------ -----
FHLB-Chicago stock (1) ... $ -- --% $ -- --% $ -- --%
------- ---- -------- ----- ------ -----
------- ---- -------- ----- ------ -----
DECEMBER 31, 1998
--------------------------------------------
MORE THAN TEN
YEARS TOTAL
--------------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
--------------------------------------------
Investment securities
Available-for-sale:
Municipal Bonds........ $ 370 9.50% $ 370 9.50%
Equity Securities (1).. 250 6.29 5,286
Mortgage-backed
securities:
Freddie Mac ......... 110 6.11 110 6.11
Fannie Mae .......... 1,827 6.48 1,827 6.48
------- ------ -------- ------
Total
mortgage-backed
securities ..... 1,937 6.46 1,937 6.46
------- ------ -------- ------
Total investment
securities
available-for-
sale ............. $ 2,557 6.88% $ 7,593 --%
------- ------ -------- ------
------- ------ -------- ------
FHLB-Chicago stock (1) ... $ -- --% $ 1,911 --%
------- ------ -------- ------
------- ------ -------- ------
- --------------
(1) Weighted average yield does not include equity securities.
SOURCES OF FUNDS AND BORROWINGS
GENERAL. Deposits are the major source of Argo Savings' funds for lending
and other investment purposes. In addition to deposits, Argo Savings derives
funds from loan principal repayments, proceeds from sales of loans, borrowings,
and the custodial balances on loans serviced for others. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in the availability of other
sources of funds. They may also be used on a longer term basis for general
business purposes. In addition, the Company's sources of funds include borrowed
money, which includes advances from the Federal Home Loan Bank, a note payable,
a margin account and federal funds purchased. In addition, the Company has
issued junior subordinated debentures.
DEPOSITS. Argo Savings offers a number of deposit accounts, including
tiered passbook accounts, NOW accounts, money market accounts and certificate
accounts currently ranging in maturity from seven days to ten years. Deposit
accounts vary as to terms, with the principal differences being the minimum
balance required, the period the funds must remain on deposit and the interest
rate. Argo Savings in the past has utilized brokered deposits, and will continue
to use this source of funds as needed in the future. Argo Savings had $7.4
million in brokered deposits at December 31, 1998. Argo Savings has
traditionally priced its deposit products at or near market rates in its primary
market.
26
DEPOSIT FLOW. The following table sets forth the change in dollar amount of
savings accounts offered by Argo Savings between the dates indicated.
AMOUNT AT PERCENT AMOUNT AT PERCENT
DECEMBER 31, OF TOTAL INCREASE DECEMBER 31, OF TOTAL INCREASE
1998 DEPOSITS (DECREASE) 1997 DEPOSITS (DECREASE)
-------------- ------------------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-interest bearing accounts $ 18,244 7.8% $ 13,748 $ 4,496 2.6% $ 885
Passbook accounts ........... 21,307 9.1 3,700 17,607 10.2 (742)
NOW accounts ................ 9,045 3.9 316 13,225 5.1 (86)
Money market accounts ....... 4,706 2.0 (1,517) 6,223 3.6 1,266
-------- ------ -------- -------- ----- --------
Total ..................... 53,302 22.8 16,247 37,055 21.5 1,323
-------- ------ -------- -------- ----- --------
Certificate accounts:
3.99% or less .............. -- -- (10) 10 -- (42)
4.00% to 4.99% ............. 28,491 12.2 27,617 874 .5 105
5.00% to 5.99% ............. 139,039 59.7 76,104 62,935 36.5 (8,234)
6.00% to 6.99% ............. 11,665 5.0 (58,297) 69,962 40.5 30,768
7.00% to 7.99% ............. 475 0.3 (1,038) 1,513 0.9 (2,099)
8.00% to 8.99% ............. 8 -- (112) 120 0.1 21
-------- ------ -------- -------- ----- --------
Total ..................... 179,678 77.2 44,264 135,414 78.5 20,519
-------- ------ -------- -------- ----- --------
Total deposits .............. $232,980 100.00% $ 60,511 $172,469 100.0% $ 21,842
-------- ------ -------- -------- ----- --------
-------- ------ -------- -------- ----- --------
Weighted Average Rate ....... 4.76% 5.18%
---- ----
---- ----
AMOUNT AT PERCENT
DECEMBER 31, OF TOTAL INCREASE
1996 DEPOSITS (DECREASE)
-------------- ------------------------
Non-interest bearing accounts $ 3,611 2.4% $ 323
Passbook accounts ........... 18,349 12.2 (167)
NOW accounts ................ 8,815 5.9 (727)
Money market accounts ....... 4,957 3.3 474
-------- ----- --------
Total ..................... 35,732 23.8 (97)
-------- ----- --------
Certificate accounts:
3.99% or less .............. 52 -- 34
4.00% to 4.99% ............. 769 0.5 (4,688)
5.00% to 5.99% ............. 71,169 47.2 34,232
6.00% to 6.99% ............. 39,194 26.0 8,634
7.00% to 7.99% ............. 3,612 2.4 (10,938)
8.00% to 8.99% ............. 99 0.1 (34)
-------- ----- --------
Total ..................... 114,895 76.2 27,240
-------- ----- --------
Total deposits .............. $150,627 100.0% $ 27,143
-------- ----- --------
-------- ----- --------
Weighted Average Rate ....... 5.13%
-----
-----
27
CERTIFICATE ACCOUNTS. The following table presents the amount of
certificate accounts outstanding at December 31, 1998, and the periods to
maturity or repricing.
WEIGHTED
AVERAGE
AMOUNT RATE
-------- --------
(DOLLARS IN THOUSANDS)
Within one year (1)..... $154,178 5.43%
One to three years...... 22,142 5.40
Thereafter ............. 3,358 5.95
-------- ----
Total .................. $179,678 5.45%
-------- ----
-------- ----
- ----------------
(1) Includes a $13 million certificate that matured on February 22, 1999 and
was renewed at that time for an additional 90 days.
At December 31, 1998, Argo Savings had outstanding $54.9 million of
certificate of deposit accounts in amounts of $100,000 or more maturing or
repricing as follows:
AMOUNT
--------------
(IN THOUSANDS)
Three months or less ........... $19,719
Over three through six months... 11,720
Over six through 12 months ..... 18,865
Over 12 months ................. 4,597
-------
Total .......................... $54,901
-------
-------
Argo Savings had pledged investment securities with principal balances
totaling approximately $6.4 million at December 31, 1998, as collateral to
secure certain public deposits. In addition to securities at December 31, 1998
and 1997, the Savings Bank also had letters of credit totaling $13,260,000 and
$15,402,000 as collateral to secure several State of Illinois certificates. The
total State of Illinois certificates secured by letters of credit and securities
totaled approximately $15,102,000 and $14,100,000 in 1998 and 1997,
respectively.
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
----------- ------------ -------------
(IN THOUSANDS)
Deposits in excess of withdrawals........... $51,770 $ 13,262 $ 20,710
Interest credited........................... 8,741 8,580 6,433
------- --------- ---------
Net increase in savings
deposits................................ $60,511 $ 21,842 $ 27,143
------- --------- ---------
------- --------- ---------
28
Substantially all of Argo Savings' depositors are residents of the States
of Illinois and Indiana.
BORROWINGS. The Company's borrowings at December 31, 1998 include a note
payable, a margin account, capital lease obligations, FHLB advances, federal
funds purchased and junior subordinated debentures.
During 1998, the Company issued 11% junior subordinated debentures
aggregating $17,784,000 to Argo Capital Trust Company (Trust). The Trust issued
11% capital securities with an aggregate liquidation amount of $17,250,000 ($10
per capital security) to third-party investors. The capital securities and cash
are the sole assets of the Trust. The junior subordinated debentures are
includable as Tier I capital for regulatory capital purposes. The offering price
was $10 per capital security. The junior subordinated debentures and the capital
securities pay dividends and distributions, respectively, on a quarterly basis,
which are included in interest expense. The Trust is a statutory business trust
formed under the laws of the State of Delaware 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
the 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 $1,669,000 were
capitalized related to the debenture offering, and are being amortized over the
30-year life of the junior subordinated debentures.
Although savings deposits are the primary source of funds of Argo Savings'
lending and investment activities and for its general business purposes, Argo
Savings can also borrow funds from the FHLB of Chicago to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. The FHLB has
served as Argo Savings' primary borrowing source. Advances from the FHLB are
secured by Argo Savings' stock in the FHLB and a portion of Argo Savings'
portfolio of first mortgage loans. The rates on these advances vary from time to
time in response to general economic conditions. At December 31, 1998, Argo
Savings had $17.8 million of fixed rate advances and $2.3 million of
adjustable-rate advances from the FHLB with interest rates ranging from 5.48% to
8.43%. The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, Argo Savings is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States Government or its agencies)
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and the amount of advances is based either on a fixed percentage
of an association's net worth or on the FHLB's assessment of an institution's
creditworthiness.
The note is payable by ON-LINE for $865,000 drawn on a $1.0 million open
line of credit with a third party financial institution. This note is also
collateralized by accounts receivable of ON-LINE and the line of credit is
guaranteed by the Company. The line of credit is due to mature on August 17,
1999. The rate of interest is the lender's prime rate.
The margin account loan is from a third-party securities broker. The rate
of interest on the loan is 2% over a rate negotiated with the broker (7.28% at
December 31, 1998). The margin account loan was secured at December 31, 1998 by
securities held by the broker having a market value of $1.5 million.
29
Included in other borrowings at December 31, 1998, is $3.3 million in
capital lease obligations for premises and equipment related to ON-LINE.
30
The following table sets forth information regarding borrowings by the
Company on a consolidated basis at the end of and during the years indicated.
The borrowings at and during the years consisted of FHLB advances, promissory
notes, federal funds purchased, and capital lease obligations. The weighted
average was computed on a monthly average basis.
AT DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
Weighted average interest rate at end of year on:
FHLB advances ............................................ 6.10% 6.22% 5.80%
Other borrowings ......................................... 7.71 8.63 8.48
Maximum amount of borrowings outstanding at any month end:
FHLB advances ............................................ $ 20,132 $ 49,587 $ 45,257
Other borrowings ......................................... 14,658 11,542 8,760
Average borrowings outstanding with respect to:
FHLB advances ............................................ $ 18,987 $ 30,191 $ 34,608
Other borrowings ......................................... 12,624 10,621 7,669
---------- ---------- ----------
Total ................................................. $ 31,611 $ 40,812 $ 42,277
---------- ---------- ----------
---------- ---------- ----------
Weighted average interest rate during the period paid on:
FHLB advances ............................................ 5.69% 5.98% 6.17%
Other borrowings ......................................... 8.60 8.43 8.32
---------- ---------- ----------
Total Weighted Average ................................ 6.20% 6.60% 6.91%
---------- ---------- ----------
---------- ---------- ----------
31
SUBSIDIARIES
Argo Savings has two wholly-owned subsidiaries, Argo Mortgage Corp. ("Argo
Mortgage") and Dolton-Riverdale Savings Service Corp. ("Dolton-Riverdale"). Argo
Mortgage engages in mortgage brokerage activities that focus on the purchase and
sale of deeply discounted mortgage loans into the secondary market.
Dolton-Riverdale sells insurance annuities to the customer base of Argo Savings.
Argo Savings also has a majority interest in a limited liability corporation,
Margo Financial Services, LLC ("Margo"). The primary activity of Margo is the
origination of mortgage loans for portfolio and sale into the secondary market.
At December 31, 1998, Argo Savings had an equity investment in Argo Mortgage,
Dolton-Riverdale, and Margo of $12.5 million, $161,000 and $30,000,
respectively.
COMPETITION
Argo Savings faces strong competition in attracting deposits and in
originating loans. Its most direct competition for deposits has historically
come from other savings institutions, credit unions, and savings banks and from
commercial banks located in its primary market area. Particularly in times of
high interest rates, Argo Savings also faces additional significant competition
for investor funds from short-term money market securities and other corporate
and government securities. Argo Savings' competition for loans comes principally
from other thrift institutions, commercial banks and mortgage banking companies.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
Argo Savings competes for loans principally through the interest rates and
loan fees it charges and the efficiency and quality of the services it provides
borrowers, real estate brokers and home builders. It competes for deposits by
offering depositors a wide variety of savings accounts, checking accounts, and
convenient office locations.
Argo Savings is a community oriented savings institution and competes with
many financial institutions in its primary market area, most of which have
assets which are significantly larger than the assets of Argo Savings.
Management considers the Savings Bank's reputation for financial strength and
customer service as its major competitive advantage in attracting and retaining
customers in its market area. The Savings Bank also believes it benefits from
its community bank orientation as well as it has a relatively high core deposit
base.
PERSONNEL
As of December 31, 1998, the Savings Bank including its subsidiaries, had
ninety (90) employees (seventy-six (76) full-time employees and fourteen (14)
part-time employees). ON-LINE had ninety-five (95) full-time employees and no
part-time employees. A collective bargaining unit does not represent the
employees. The Company believes its relationship with its employees is good.
32
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Savings Bank, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
Argo Savings is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Savings Bank
is a member of the Federal Home Loan Bank ("FHLB") System and its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Savings Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Savings Bank's safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Savings Bank and their operations. Certain of the regulatory requirements
applicable to the Savings Bank and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on Argo Savings and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that Argo Savings continues
to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire
33
savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. Argo Savings must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities that are
not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS
capital regulation based on the risks the OTS believes are inherent in the type
of asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
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, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half
34
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the institution's assets. That
dollar amount is deducted from an institution's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings institution with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The Director of the OTS may waive or defer
a savings institution's interest rate risk component on a case-by-case basis.
For the present time, the OTS has deferred implementation of the interest rate
risk component. At December 31, 1998, Argo Savings met each of its capital
requirements.
The following table presents Argo Savings' capital position, amounts and
ratios at December 31, 1998:
(DOLLARS IN THOUSANDS)
Actual Amount Required Amount Excess Amount Actual Percent Required Percent
Tangible ................. $17,370 $ 4,127 $13,247 6.32% 1.5%
Core (Leverage) .......... 17,370 8,248 9,124 6.32 3.0
Risk-based:
Tier I (core) .......... 17,370 10,994 6,276 6.32 4.0
Total .................. 18,310 13,898 5,385 10.54 8.0
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Savings Bank are presently
insured by SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During
35
1998, FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF" -- the deposit insurance fund that covers most commercial
bank deposits) members paid 1.22 basis points. By law, there will be equal
sharing of FICO payments between the members of both insurance funds on the
earlier of January 1, 2000 or the date the two insurance funds are merged.
The Argo Savings' assessment rate for the year ended December 31, 1998 was
6.1 basis points and the premium paid for this period was $112,000, which was
applied toward the payment of FICO bonds. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Argo Savings Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of Argo Savings does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. Legislation enacted in 1996 provided that
BIF and SAIF would merge by January 1, 1999, if there were no savings
associations in existence on that date. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. Argo Savings is unable to
predict whether such legislation would be enacted or the extent to which the
legislation would restrict or disrupt its operations.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1998, Argo Savings' limit on loans to one borrower was $2.6 million. At December
31, 1998, the Argo Savings' largest aggregate outstanding balance of loans to
one borrower was $2.0 million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings institution that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, Argo Savings maintained 93.0% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during
36
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event the Savings Bank's capital
fell below its regulatory requirements or the OTS notified it that it was in
need of more than normal supervision, the Savings Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. At December 31, 1998, the Bank was
classified as a Tier 1 Bank.
The OTS' has adopted new capital distribution regulations which will become
effective on April 1, 1999. Under the new regulations, an application to and the
prior approval of the Office of Thrift Supervision will be required before an
institution makes a capital distribution if (1) the institution does not meet
certain criteria for "expedited treatment" for applications under the
regulations, (2) the total capital distributions by the institution for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, (3) the institution would be
undercapitalized following the distribution or (4) the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution may still need to give advance
notice to the OTS of the capital distribution.
LIQUIDITY. The Savings Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Savings Bank's average liquidity ratio
for the year ended December 31, 1998 was 6.35%, which exceeded the applicable
requirements. The Savings Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Savings Bank's latest
quarterly thrift financial report. The assessments paid by the Savings Bank for
the fiscal year ended December 31, 1998 totaled $63,000.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (I.E., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, be on terms and under circumstances, including credit
standards, that are substantially the same or at least
37
as favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement was $1.395 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. Argo Savings Bank maintained
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to Argo
Savings or Argo Bancorp. The Companies have not been audited by the IRS during
the last ten (10) years. For federal income tax purposes Argo
38
Bancorp and its subsidiaries (except Margo) file consolidated income tax returns
and report their income on a calendar year basis using the accrual method of
accounting and subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the tax reserve for
bad debts, discussed below. Margo Financial Services, LLC files a separate
partnership income tax return.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act'), for federal income tax
purposes, thrift institutions such as Argo Savings, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specific limitations, be
deducted in arriving at their taxable income. Argo Savings' deduction with
respect to "qualifying loans", which are generally loans secured by certain
interests in real property, could be computed using an amount based on a six (6)
year moving average of Argo Savings' actual loss experience (the "Experience
Method"), or a percentage equal to 8.0% of Argo Savings' taxable income (the
"PTI Method"), computed without regard to this deduction and with additional
modifications and reduced by the amounts of any permitted addition to the
non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and Argo Savings
is required to use the Experience Method of computing additions to its bad debt
reserve for taxable years beginning after December 31, 1995. In addition, Argo
Savings will be required to recapture (i.e., take into taxable income) over a
six (6) year period, beginning with the Savings Bank's taxable year beginning
January 1, 1998, the excess of the balance of its bad debt reserves (other than
the supplemental reserve) as of December 31, 1995, over the greater of (s) its
"base year reserve," i.e., the balance of such reserves as of December 31, 1987,
or (b) an amount that would have been the balance of such reserves as of
December 31, 1995, had Argo Savings always computed the additions to its
reserves using the Experience Method.
DISTRIBUTIONS. To the extent that Argo Savings makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from Argo Savings base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Savings Bank's taxable income.
Nondividend distributions include distributions in excess of Argo Savings'
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute nondividend
distributions and, therefore, will not be included in Argo Savings' income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, in certain instances,
approximately one and one-half times the nondividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34.0%
federal corporate income tax rate.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20.0%. Only 90.0% of AMTI can be offset by net operating
loss carryovers. AMTI is also adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income resulting from the
regular tax treatment of those items. Thus, Argo Savings' AMTI is increased by
an amount equal to 75.0% of the amount by which the Savings Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). AMT cannot be reduced by tax
credits,
39
other than foreign tax credits. Accordingly, the Savings Bank's low income
housing tax credits may not be used to reduce AMT. The AMT has limited the
utilization of these tax credits in 1998, 1997 and 1996.
ELIMINATION OF DIVIDENDS: DIVIDENDS RECEIVED DEDUCTION. The Company may
exclude from its income 100.0% of dividends received from Argo Savings as a
member of the same affiliated group of corporations. A 70.0% dividends received
deduction generally applies with respect to dividends received from domestic
corporations that are not members of such affiliated group, except that an 80.0%
dividends received deduction applies if the Company and Argo Savings own more
than 20.0% of the stock of the corporation paying a dividend.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company and Argo Savings file Illinois income tax
returns. For Illinois income tax purposes, the Company and Argo Savings are
taxed at an effective rate equal to 7.25% of Illinois Taxable Income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing the Illinois taxable income of the
Savings Bank.
As a Delaware holding company, the Company has registered as a foreign
corporation authorized to transact business in Illinois. As such, it files an
Illinois Foreign Corporation Annual Report and pays an annual franchise tax to
the State of Illinois.
STATE OF DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but files
an annual report with and pays an annual franchise tax to the State of Delaware.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards (Statement) No. 133 on
derivatives will, in 2000, require all derivatives to be recorded at fair value
in 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 have another one-time window of
opportunity 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 the Company's financial
statements. Management has not decided whether to adopt Statement No. 133 early.
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 the Company.
American Institute of Certified Public Accountants Statement of Position
98-1, effective in 1999, sets the accounting requirement 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 after the
preliminary project
40
stage, up to the date when all testing has been completed and the software is
substantially ready for use. All training costs, research and development costs,
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. Statement of Position 98-1 is not expected to have a material
impact on the Company.
American Institute of Certified Public Accountants Statement of Position
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 is not expected to have a
material impact on the Company.
The Financial Accounting Standards Board continues to study several issues,
including recording all financial instruments at fair value and abolishing
pooling-of-interests accounting. Also, it is likely that APB 25's measurement
for stock option plans will be limited to employees and not to nonemployees such
as directors, thereby causing compensation expense to be required for 1999
awards of stock options to outside directors.
ITEM 2. PROPERTIES
The Company is located and conducts its business at its home office in
Summit, Illinois, located at 7600 W. 63rd Street, Summit. The Savings Bank
conducts its business through its home office and four additional branch offices
located in Bridgeview, the near West Side of Chicago, downtown Chicago, and
Dolton, Illinois. ON-LINE is located and conducts its business at its office in
Oak Brook, Illinois located at 900 Commerce Drive. The Company believes that
Argo Savings' and ON-LINE's current facilities are adequate to meet the present
and immediately foreseeable needs of the Company. See Note 7 to the Notes to
Consolidated Financial Statements for the net book value of the property of the
Company.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" in the
1998 Annual Report to Stockholders on pages A-58 through A-61 is incorporated
herein by reference.
41
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data appears under the Selected Consolidated
Financial Condition and other Data of the Corporation the Registrant's 1998
Annual Report to stockholders on page A-2 and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation" of
the 1998 Annual Report to Stockholders on pages A-3 through A-14 and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The above-captioned information appears under the caption "Quantitative
and Qualitative Disclosure about Market Risk" of the 1998 Annual Report to
Stockholders on pages A-13 through A-14 and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1998, together with the report thereon by
Crowe Chizek and Company LLP appears in the Registrant's 1998 Annual Report
to Stockholders, on pages A-16 through A-57 incorporated herein by reference.
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1997 and 1996 appear in the Registrant's
1998 Annual Report to Stockholders, on pages A-18 through A-57 incorporated
herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated herein by reference to the Company's Form 8-K, and any
amendments thereto, originally filed on December 4, 1998.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999
under "Information with respect to the Nominee, Continuing Directors and Certain
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 27, 1999 under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
42
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999
under "Security of Certain Beneficial Owners" and "Information with respect to
the Nominee, Continuing Directors and Certain Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 27, 1999 under "Indebtedness
of Management and Transactions with Certain Related Persons."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant and its
subsidiaries, together with the Independent Auditors Report, appearing in
the 1998 Annual Report of Stockholders are incorporated herein by
reference.
Consolidated Statements of Financial Condition as of December 31, 1998, and
1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.
Notes to the Consolidated Financial Statements.
The remaining information appearing in the Annual Report is not deemed to
be filed as a part of this report, except as expressly provided herein.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) EXHIBITS
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and By-Laws.
3.1 Amended and Restated Certificate of Incorporation of Argo Bancorp,
Inc.*
3.2 By-Laws of Argo Bancorp, Inc.*
Exhibit No. 4.
4.1 Stock Certificate of Argo Bancorp, Inc.*
43
4.2 Indenture of Argo Bancorp, Inc. relating to the Junior Subordinated
Debentures *
4.3 Certificate of Junior Subordinated Debenture *
4.4 Certificate of Trust of ARGO Capital Trust Company *
4.5 Capital Security Certificate of ARGO Capital Trust Company *
4.6 Guarantee of Argo Bancorp, Inc. relating to Capital Securities *
4.7 Amended and Restated Declaration of Trust of ARGO Capital Trust
Company *
4.8 Form of Goodwill Convertible Preferred Stock Certificate of Argo
Bancorp, Inc.*
Exhibit No. 10. Material Contracts.
10.1 Stockholder Agreement dated as of December 31, 1996, between Argo
Bancorp, Inc., The Deltec Corporation Limited, and John G. Yedinak.
*
10.2 Argo Bancorp, Inc. 1998 Incentive Stock Option Plan.*
10.3 1996 Argo Bancorp, Inc. Management Recognition and Retention Plan. *
10.4 Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and John G. Yedinak. *
10.5 Amended and Restated Employment Agreement between Argo Bancorp, Inc.
and Frances M. Pitts. *
Exhibit No. 11.
11 Computation of earnings per share (included in Note 8 to the Company's
audited financial statements).
Exhibit No. 13.
13 Portions of the 1998 Annual Report to Stockholders.
Exhibit No. 16.
16 Letter regarding change in independent accountant (filed herewith).
Exhibit No. 21.
21 Subsidiary information is incorporated herein by reference to "Part I
- Subsidiaries."
Exhibit No. 23.
23.1 Consent of Crowe, Chizek and Company LLP (filed herewith).
23.2 Consent of KPMG LLP (filed herewith).
Exhibit No. 27.
27 Financial Data Schedule (filed herewith)
Exhibit No. 99.
99 Proxy Statement**
-----------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, filed on July 20, 1998 and any
amendments thereto, Registration No. 333-59435.
** To be filed within 120 days of the company's fiscal year end.
44
(a)(4) REPORTS ON FORM 8-K
A Form 8-K (and the amendments thereto) was filed with the Commission on
December 4, 1998, disclosing a change in the Registrant's independent
accountants.
On December 14, 1998, the Registrant filed with the Commission a Form 8-K
announcing the initial payment and record dates with respect to the Argo
Capital Trust 11% Capital Securities.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARGO BANCORP, INC.
------------------
(Registrant)
Date: March 30, 1999 By: /S/ JOHN G. YEDINAK
---------------------------
John G. Yedinak,
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Date: March 30, 1999 By: /S/ JOHN G. YEDINAK
---------------------------
John G. Yedinak,
Chief Executive Officer
and Director (Principle
executive officer)
Date: March 30, 1999 By: /S/ SERGIO MARTINUCCI
---------------------------
Sergio Martinucci,
Vice President
and Director
Date: March 30, 1999 By: /S/ ARTHUR BYRNES
---------------------------
Arthur Byrnes, Director
Date: March 30, 1999 By: /S/ DONALD G. WITTMER
---------------------------
Donald G. Wittmer, Director
Date: March 30, 1999 By: /S/ FRANCES M. PITTS
---------------------------
Frances M. Pitts, Secretary
and Director
Date: March 30, 1999 By: /S/ DOMINIC M. FEJER
---------------------------
Dominic M. Fejer
(principal accounting and
financial officer)
46