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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, 1999
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 [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, i.e., persons other than directors and
executive officers of the Registrant is $3,254,402 and is based upon the last
sales price as quoted on Nasdaq for MARCH 29, 2000.
The Registrant had 2,004,896 shares outstanding as of March 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1999, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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INDEX
PART I PAGE NO.
------ --------
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 39
Item 3. Legal Proceedings.............................................................. 40
Item 4. Submission of Matters to a Vote of Security Holders............................ 40
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters...................................................... 40
Item 6. Selected Consolidated Financial Data........................................... 40
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 41
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................................. 41
Item 8. Consolidated Financial Statements and Supplementary
Data......................................................................... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................................... 41
PART III
--------
Item 10. Directors and Executive Officers of the Registrant............................. 41
Item 11. Executive Compensation......................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................... 41
Item 13. Certain Relationships and Related Transactions................................. 42
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................................. 42
SIGNATURES ............................................................................. 44
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PART 1
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 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 $1,913,000 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 capabilities, and by the Company for general corporate purposes, the
enhancement of operational capabilities and the potential purchase of loans.
On September 27, 1999, the Company purchased 16,666 shares of Synergy
Plan Ltd. ("Synergy") Class A Common Stock at $15.00 per share and 16,667 of
Synergy's Convertible Preferred Stock at $15.00 per share. The Company's total
investment was $500,000. The Company also received an option to acquire on or
before March 31, 2000 up to 33,333 shares of Synergy Class A Common Stock for a
purchase price of $15.00 per share. The convertible Preferred Stock
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owned by the Company is convertible into 16,667 shares of Class A Common Stock
of Synergy on or before September 30, 2004, subject to Synergy's right to redeem
the shares on September 30, 2002, at a redemption price of $25.00 per share. The
Convertible Preferred Shares have a stated dividend of $.90 per share, per
annum, payable quarterly. The Company owned at December 31, 1999, 2.9% of the
Class A Common Stock and 100% of the Convertible Preferred Stock of Synergy. As
a condition of the Company's purchase of shares, John G. Yedinak, the Chief
Executive Officer and Chairman of the Board of Directors of the Company, was
elected to the board of Directors of Synergy. Donald Wittmer, a director of the
Company, also serves on the board of Synergy. Synergy is a professional employer
organization, formed in 1989, which is in the business of leasing individuals in
its employ to various companies. The Company on September 30, 1999 entered into
a Client Services Agreement with Synergy effective October 1, 1999 whereunder
employees of the Company and its subsidiaries were transferred to Synergy. The
Company estimates that the cost savings to the Company and Argo Savings under
the Client Services Agreement will be $50,000 annually.
ON-LINE FINANCIAL SERVICES, INC.
Argo Bancorp acquired on October 31, 1995 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. 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 strategy was to enhance On-Line's strong foundation
as a data processing and data communications network provided 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.
On March 31, 1999, the Company sold On-Line to GFS Holdings Co. of
(GFS) Palm Beach Gardens, Florida. Under the terms of the transaction, the
Company received $11.3 million in cash and securities in exchange for all of the
outstanding stock of On-Line. The Company received $6.7 million in cash at
closing, together with 4,600 shares of GFS Series B Preferred Stock, valued at
$4.6 million. The Preferred Stock, par value $.01 pays the Company a semi-annual
dividend at the rate of 7.625%. Mandatory redemption of up to 1,400 shares
subject to completion of certain conditions precedent were to be made by GFS on
July 31, 1999. The Company voluntarily waived its right of a redemption of 600
shares of the Preferred Stock at July 31, 1999. During January 2000, GFS
redeemed 600 shares of the Preferred Stock.
BUSINESS OF EMPIRE/ARGO, LLC
During 1999, the Company simplified its organizational structure by
merging Empire/Argo LLC ("Empire"), a consolidated joint venture of Argo
Bancorp, into Argo Bancorp. The merger qualified as a tax-free reorganization
and was accounted for as an internal reorganization.
In recent years, the Company has acquired discounted loans through
Empire. The Company estimated the amounts it would 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 have 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
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Mortgage"), a wholly owned subsidiary of Argo Savings. Argo Savings discontinued
additional investments in Discounted Loans in 1997.
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 and 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, 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.
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
During 1999, Argo Mortgage Corporation ("Argo Mortgage"), a wholly
owned subsidiary of the Savings Bank, merged into the Savings Bank. The merger
qualified as a tax-free reorganization and was accounted for as an internal
reorganization. Argo Savings had a 50.1% ownership interest in Margo Financial
Services, LLC ("Margo"). On June 1, 1999, Margo was restructured in that all of
the assets and liabilities of Margo were distributed and/or assumed by the
owners in accordance with their equity ownership.
Margo is an Illinois chartered limited liability corporation whose
other member is E-Conduit Network, Inc. ("E-Conduit"), an Illinois corporation.
Margo's primary objectives were to increase loan origination volume and to serve
as a wholesale mortgage banking operation using a network of brokers,
correspondents and conduits.
On June 1, 1999, Argo Savings entered into a management services
agreement with E-Conduit Network, Inc. ("E-Conduit"). Under the agreement,
E-Conduit assumed the day-to-day operations of Margo, relating to the
origination of mortgage loans. The agreement also provided a license to
E-Conduit allowing the company to use the Margo name and all the intellectual
properties of Margo retained after the restructure. In exchange for the license
of Margo assets, under the agreement E-Conduit is required to pay a six basis
point per transaction license fee on loans originated on behalf of Argo Savings.
As a result of this transaction, Margo has discontinued its wholesale mortgage
operation and is focusing on fee generation through its licensing activities.
Margo will be a franchiser and license the use of various proprietary assets and
products retained by the company.
Through its subsidiaries, Argo Mortgage and Margo, and on its own since
the 1999 dissolution of Argo Mortgage and reorganization of Margo, Argo Savings
has engaged in mortgage
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brokerage activities that focus on the origination, purchase and sale of
mortgage loans in the secondary market. Argo Savings also offers, to a much
lesser extent, Expanded Criteria Loans. These one-to four-family loans which 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 mortgage loans on a "servicing released" basis
into the secondary market and through investment in purchased mortgage servicing
rights ("PMSRs"). More recently, Argo Savings has also generated fee income from
an expanding network of regionally deployed ATMs, both in the Chicago midwest
area and in mid-Atlantic.
Through Argo Mortgage and on its own, Argo Savings 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 estimated the amounts it would
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 discontinued additional investments in
Discounted Loans in 1998.
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, commercial
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.
On June 29, 1999, Argo Savings sold its five operating properties
located at 7600 West 63rd Street and 5818 South Archer Road, Summit, Illinois;
8267 South Roberts Road, Bridgeview, Illinois; 2154 West Madison Street,
Chicago, Illinois; and 14076 Lincoln Avenue, Dolton, Illinois, to a
non-affiliated third party for an aggregate contractual purchase price of
$5,850,000 and simultaneously entered into a 14 year, 2-month operating lease
for each of the properties with the new purchaser. Under the terms of the lease,
Argo Savings will pay an initial monthly rental of $48,000 per month or $576,000
per year which will increase at the rate of 1% each year commencing January 1,
2000. The net proceeds of the sale realized Argo Savings after deducting
customary closing cost including broker's commissions, title charges,
environmental studies, surveys and legal fees, was $5,230,662 resulting in a
profit of $2,246,862 to Argo Savings. The profit, under generally accepted
accounting principles, will be taken into income by Argo Savings over the lease
term. As a result of this sale and leaseback transaction, Argo Savings rents, as
opposed to owns, the properties from which it transacts business.
MARKET AREA
Argo Savings considers its primary market area to be the greater
Chicago metropolitan area (thereinafter 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.
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
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market area through its network of Margo correspondents. As of December 31,
1999, 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 1999 Annual Report
to Stockholders, portions of which are incorporated herein by reference.
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SELECTED CONSOLIDATED FINANCIAL DATA
At and for the
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
CONSOLIDATED FINANCIAL CONDITION DATA:
Loans receivable, net $ 277,460 $ 245,189 $ 184,358 $ 173,429 $ 142,380
Stock in Federal Home Loan Bank of Chicago 2,303 1,911 3,271 3,428 2,669
Securities 40,891 7,901 4,974 5,788 7,573
Cash and cash equivalents 37,672 10,096 8,579 13,240 9,890
Mortgage loan servicing rights 4,958 5,062 6,706 5,264 4,033
Foreclosed real estate 2,280 3,875 4,251 3,913 2,234
Net assets of discontinued operation - 6,545 5,114 3,546 1,403
Investment in GFS preferred stock 4,600 - - - -
Other assets 22,600 20,497 12,991 13,310 11,204
---------- ---------- ---------- ---------- ----------
Total assets $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
Deposits $ 301,673 $ 232,980 $ 172,469 $ 150,627 $ 123,484
Borrowed money 40,336 21,051 29,497 45,013 36,755
Custodial escrow balances for loans serviced 5,476 5,340 6,400 5,782 9,696
Other liabilities 7,907 5,507 3,774 3,936 572
Junior subordinated debt 17,784 17,784 - - -
Stockholders' equity 19,588 18,414 $ 18,104 $ 16,560 $ 10,879
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 392,764 $ 301,076 $ 230,244 $ 221,918 $ 181,386
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
Interest income $ 23,896 $ 17,625 $ 18,263 $ 16,050 $ 13,973
Interest expense 16,014 11,367 10,807 8,741 8,299
---------- ---------- ---------- ---------- ----------
Net interest income 7,882 6,258 7,456 7,309 5,674
Provision for loan losses 965 355 210 248 55
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 6,917 5,903 7,246 7,061 5,619
Noninterest income 2,340 3,810 3,151 2,897 2,465
Noninterest expense 9,079 9,851 9,648 9,311 6,034
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 178 (138) 749 647 2,050
Income tax expense (benefit) (336) (383) 51 (49) 531
---------- ---------- ---------- ---------- ----------
Income from continuing operations 514 245 698 598 1,519
Discontinued operations:
Income from discontinued operation
(net of tax) 135 286 125 736 222
Gain on sale of discontinued operation
(net of tax) 1,928 - - - -
---------- ---------- ---------- ---------- ----------
NET INCOME $ 2,577 $ 531 $ 823 $ 1,334 $ 1,741
========== ========== ========== ========== ==========
Income from continuing operations
Basic $ .26 $ .12 $ .36 $ .48 $ 1.28
Diluted .25 .12 .33 .40 1.08
Net income
Basic $ 1.22 $ .27 $ .43 $ .48 $ 1.28
Diluted 1.25 .26 .39 .40 1.08
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At and for the
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data (1) (Dollars in thousands, except per share data)
---------------------------------------------
Return from continuing operations on average
assets (4) 0.15% 0.10% 0.31% 0.32% 0.91%
Return from continuing operations on average
equity (4) 2.68 1.34 3.92 4.88 14.91
Average equity to average assets (4) 5.54 7.58 7.94 6.55 6.08
Stockholders' equity to total assets (4) 5.09 6.12 7.86 7.45 6.25
Interest rate spread 2.54 3.15 4.03 4.62 3.69
Net interest margin 2.53 2.95 3.78 4.29 3.65
Noninterest expense to average assets (4) 3.77 3.80 4.28 4.99 3.61
Non-performing loans to net loans receivable (2) 2.25 2.80 3.57 3.12 1.54
Non-performing assets to total assets (3) (4) 2.12 3.45 4.25 3.53 1.91
Allowance for loan losses to non-performing
loans (2) 25.61 14.42 14.73 16.87 29.54
Allowance for loan losses to net loans receivable (3) .58 .40 .53 .53 .45
Ratio of net charge-offs to average loans
outstanding, .03 .01 .01 .08 .03
excluding Discounted Loans
Average interest-earning assets to average
interest-bearing liabilities 1.01x .96x .95x .94x .99x
Book value per share $ 9.75 $ 9.18 $ 9.25 $ 9.28 $ 8.82
Full-service customer service facilities 5 5 5 5 5
- -------------------------
(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 the portfolio of
Discounted Loans receivable.
(4) Restated to remove results of discontinued operation.
LENDING ACTIVITIES
General. Argo Savings' loans receivable, which includes loans held for
sale, portfolio loans receivable, and Discounted Loans receivable, totaled
$277.5 million at December 31, 1999, representing 70.64% of consolidated total
assets. On that date, $249.5 million of total loans outstanding, or 88.99% of
its total loan portfolio, consisted of loans secured by first mortgages on one-
to four-family residential properties, $1.5 million, or 0.55%, consisted of
loans secured by multi-family properties, and $1.0 million, or 0.35%, consisted
of loans that are secured by commercial real estate primarily in suburban Cook
and Lake Counties. In addition, at December 31, 1999, $28.3 million, or 10.11%,
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 were originated, in most instances,
through Margo prior to its 1999 reorganization. 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 $129.7 million of loans both for portfolio and for sale during
1999.
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Analysis of Loan Portfolio. The following table sets forth the composition of
the Company's loan portfolio, including loans held for sale, in dollar amounts
and in percentages of the portfolio at the dates indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- --------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family:.............. $249,542 88.99% $233,461 93.64% $177,521 92.20% $177,345 92.50%
Multi-family...................... 1,539 .55 2,128 .85 1,252 .65 1,468 .77
Commercial real estate............ 997 .35 1,390 .56 1,951 1.01 4,523 2.36
------- ------ -------- ------- -------- ------ -------- ------
Total mortgage loans............ 252,078 89.89 236,979 95.05 180,724 93.86 183,336 95.63
Other loans:
Mobile home....................... 161 .06 188 .08 208 .11 248 .13
Other (1)......................... 28,183 10.05 12,134 4.87 11,601 6.03 8,146 4.24
------- ------ -------- ------- -------- ------ -------- ------
Total other loans............... 28,344 10.11 12,322 4.95 11,809 6.14 8,394 4.37
------- ------ -------- ------- -------- ------ -------- ------
Total loans receivable (2)...... 280,422 100.00% 249,301 100.00% 192,533 100.00% 191,730 100.00%
======= ====== ======== ======= ======== ====== ======== ======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 1,411 3,172 7,361 17,636
Allowance for loan losses......... 1,551 940 814 665
------- -------- -------- --------
Loans receivable, net........... $277,460 $245,189 $184,358 $173,429
======= ======== ======== ========
AT DECEMBER 31,
------------------------
1995
------------------------
AMOUNT % OF TOTAL
Mortgage loans:
One- to four-family:.............. $143,931 93.57%
Multi-family...................... 1,180 .77
Commercial real estate............ 2,379 1.55
-------- -------
Total mortgage loans............ 147,490 95.89
Other loans:
Mobile home....................... 379 .25
Other (1)......................... 5,946 3.86
-------- -------
Total other loans............... 6,325 4.11
-------- -------
Total loans receivable (2)...... 153,815 100.00%
=======
Less:
Unearned discounts and
premiums and deferred loan
fees, net....................... 10,847
Allowance for loan losses......... 587
--------
Loans receivable, net........... $142,381
========
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(1) Consists primarily of $11.0 million and $3.5 million of home equity loans
secured by one- to four-family properties and $4.8 million and $2.7 million
of construction loans at December 31, 1999 and 1998.
(2) Includes loans receivable and Discounted Loans receivable.
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Loan Originations, Purchases and Sales. Set forth below is a table
showing Argo Savings' loan originations and loan purchases and sales for the
years indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Loans originated:
One- to four-family (1) $ 88,157 $ 82,287 $ 56,318
Multi-family - 360 333
------------ ------------ ------------
Total mortgage loans originated 88,157 82,647 56,651
Loans purchased:
Mortgage loans 33,123 79,623 39,521
Discounted Loans - - 8,858
Other loans 8,414 12,750 -
------------ ------------ ------------
Total loans purchased 41,537 92,373 48,379
------------ ------------ ------------
Total loans originated and purchased $ 129,694 $ 175,020 $ 123,167
============ ============ ============
Loans sold:
Mortgage loans receivable (1) $ 12,675 $ 37,401 $ 48,466
Discounted Loans (2) 2,162 11,893 20,711
Other loans - 1,067 -
------------ ------------ ------------
Total loans sold $ 14,837 $ 50,361 $ 69,177
============ ============ ============
(1) Originations and sales exclude $103.0, $90.1 million, and $38.0 million for
the years ended December 31, 1999, 1998, and 1997 of loans originated and
immediately sold directly to third party investors.
(2) Gains related to these sales were $188,000, $695,000, and $279,000 for the
years ended December 31, 1999, 1998, and 1997.
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Loan Maturity and Repricing. The following table shows the remaining maturities
or period to repricing of Argo Savings' loan portfolio at December 31, 1999.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. 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, 1999, 1998, and 1997.
LOANS
-----
COMMERCIAL
ONE- TO REAL
FOUR-FAMILY MULTI-FAMILY ESTATE OTHER (1) TOTAL
----------- ------------ ------ --------- -----
AMOUNTS DUE:
Within one year $ 141,249 $ 750 $ 101 $ 14,785 $ 156,885
After one year:
One to three years 32,512 485 896 103 33,996
Three to five years 4,853 - - 402 5,255
Five to ten years 10,047 5 - 8,375 18,427
Ten to twenty years 18,016 237 - 4,679 22,932
Over 20 years 42,865 62 - - 42,927
---------- ------- --------- ---------- ---------
Total due after one year 108,293 789 896 13,559 123,537
---------- ------- --------- ---------- ---------
Total amounts due 249,542 1,539 997 28,344 280,422
Less:
Unearned discounts, premiums
and deferred loan fees, net 1,411 - - - 1,411
Allowance for loan losses 1,298 14 216 23 1,551
---------- ------- --------- ---------- ---------
Loans receivable, net $ 246,833 $ 1,525 $ 781 $ 28,321 $ 277,460
========== ======= ========= ========== =========
(1) Consists primarily of home equity loans secured by one- to four-family
properties in the amount of $11.0 million and $4.8 million of construction
loans.
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The following table sets forth at December 31, 1999, the dollar amount of all
loans due after December 31, 2000, and whether such loans have fixed or
adjustable interest rates.
AT DECEMBER 31, 1999
--------------------
FIXED ADJUSTABLE
RATES RATES TOTAL
----- ----- -----
(IN THOUSANDS)
Mortgage loans:
One- to four-family $ 84,703 $ 23,590 $ 108,293
Multi-family 789 - 789
Commercial real estate 896 - 896
Other loans 13,559 - 13,559
------------ ------------ ------------
Total $ 99,947 $ 23,590 $ 123,537
============ ============ ============
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. 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 discounted loans. Discounted loans are
purchased 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.
The Savings Bank continues to purchase performing seasoned
one-to-four-family mortgage loans. For the year ended December 31, 1999, $33.1
million of such loans were purchased by the Savings Bank. In addition, prior to
1998, the Savings Bank purchased discounted loans for which the borrowers may
not be current as to principal and interest payments. For the year ended
December 31, 1997, the Savings Bank purchased $8.9 million of Discounted Loans.
The Company is reducing its emphasis on the purchase of Discounted Loans. Argo
Savings discontinued additional investments in Discounted Loans in 1998.
One-to-Four-Family Residential Loans. Argo Savings originates,
purchases, and sells fixed-rate and adjustable-rate mortgage loans secured by
one-to-four-family residences. At December 31, 1999, Argo Savings'
one-to-four-family loan portfolio totaled $249.5 million, or 88.99% 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 Portfolio Loans are adjustable rate and, to a lesser extent, fixed
rate mortgage loans 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
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Savings Bank has made strategic sales of such loans. Argo Savings 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 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.
Since September 1996, Argo Savings has enlarged its product offerings
to include the origination of 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.
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. 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,
1999, Argo Savings had gross loans secured by multi-family properties in the
amount of $1.5 million, or 0.55% 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 $1.0 million or 0.35% of
the total gross loan portfolio at December 31, 1999.
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
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guarantees through an investigation of the borrower's personal finances.
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 years, while mobile home loans have
terms of up to fifteen years. At December 31, 1999, Argo Savings' consumer loan
portfolio totaled $28.3 million, or 10.11%, of Argo Savings' total loan
portfolio, which included $11.0 million of home equity loans and $4.8 million in
single family 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. 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 request for a real estate secured loan, 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.
Upon completion of the loan application processing activities, all 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. 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 loan applicant is required to pay all costs incurred, 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 in connection with the origination of real estate loans conform to
standards imposed by the Agencies, as well as third party investor guidelines
and 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
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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 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.
Loan Origination and Other Fees. In addition to interest earned on
loans and commitments 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, 1999, Argo Savings had $1.4
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 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 with weaknesses and
characteristics considered "uncollectable" 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. 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
the asset so classified, or to charge-off such amount.
At December 31, 1999, Argo Savings had $6.1 million of loans classified
as Substandard or Doubtful and $2.3 million of REO. At December 31, 1999, Argo
Savings had no assets classified as Loss. Excluded from the loans information is
the $1.7 million of discounted loans ninety 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.
Management evaluates collectibility of the Discounted Loans receivable on an
aggregate pool basis.
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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 secured loans remain 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 managed by Argo Savings
through its in-house personnel.
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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)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Non-performing loans (1)(2) $ 6,039 $ 6,518 $ 5,525 $ 3,942 $ 1,987
Foreclosed real estate, net (3) 2,280 3,875 4,251 3,913 1,473
--------- --------- --------- --------- --------
Total non-performing assets $ 8,319 $ 10,393 $ 9,776 $ 7,855 $ 3,460
========= ========= ========= ========= ========
Allowance for loan losses as a
percentage of net loans receivable (1) .51% .40% .53% .53% .45%
========= ========= ========= ========= ========
Allowance for loan losses to non-performing
loans (1) 25.68% 14.42% 14.73% 16.87% 29.54%
========= ========= ========= ========= ========
Non-performing loans as a percentage of
loans receivable (1) 2.25% 2.80% 3.57% 3.12% 1.54%
========= ========= ========= ========= ========
Non-performing assets as a percentage of
total assets (4) 2.12 3.45 4.25 3.53 1.91
========= ========= ========= ========= ========
(1) All non-performing loan totals exclude Discounted Loans receivable ninety
days or more past due which at December 31, 1999, 1998, 1997, 1996, and
1995 amounted to $1.7 million, $3.0 million, $6.2 million, $15.5 million,
and $8.4 million. All gross loan totals exclude Discounted Loans receivable
which at December 31, 1999, 1998, 1997, 1996, and 1995 amounted to $9.1
million, $12.4 million, $30.6 million, $47.7 million, and $13.5 million.
(2) At December 31, 1999, $1.2 million or 20.2% of the $6.0 million in
non-performing loans represent loans originated by the Savings Bank. The
remaining loans represent loans purchased by the Savings Bank.
(3) Includes $746,000 of foreclosed real estate related to the Discounted Loans
receivable portfolio at December 31, 1999. (4) Restated to reflect impact
reduction in total assets for assets of discontinued operations.
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The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- ------------------------ ----------------------
LOANS LOANS LOANS LOANS
NUMBER RECEIVABLE, NUMBER RECEIVABLE, NUMBER RECEIVABLE, NUMBER RECEIVABLE,
OF LOANS NET OF LOANS NET OF LOANS NET OF LOANS NET
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
One- to four-family....... 78 $ 3,364 86 $ 6,039 114 $6,042 100 $ 6,128
Multi-family.............. - - - - 1 112 2 225
---- ------- --- ------- ---- ------- ---- -------
Total mortgage loans...... 78 3,364 86 6,039 115 6,154 102 6,353
Other loans.................. - - - - 7 273 3 165
---- ------- --- ------- ---- ------- ---- -------
Total................. 78 $ 3,364 86 $ 6,039 122 $ 6,427 105 $ 6,518
==== ======= === ======= ==== ======= ==== =======
Delinquent loans to total
loans receivable (1)...... 1.25% 2.25% 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
----- ------- ---- -------
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%
======= =======
- ----------------------
(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, 1999, the Savings
Bank experienced a decrease in the percentage of net loans 90 days or more
delinquent from 2.80% of total loans receivable and loans held for sale
(excluding Discounted Loans) at December 31, 1998 to 2.25% of total loans
receivable and loans held for sale (excluding Discounted Loans) at December 31,
1999. 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,
1999, represents specific reserves currently in place on 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 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
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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.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(IN THOUSANDS)
Balance at beginning of year:
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
Provision for loan losses:
Mortgage loans:
One- to four-family....................... 965 355 210 248 96
Multi-family.............................. - - - - -
Commercial loans............................ - - - - -
Other loans................................. - - - - (41)
------- ------- -------- -------- --------
Total..................................... 965 355 210 248 55
Purchased allowance on one-to-four-family loans - 30 - - -
Transfer to allowance for losses on foreclosed
real estate............................... (270) (240) (50) (77) (45)
Charge-offs:
Mortgage loans:
One- to four-family....................... (84) (19) (11) (89) (36)
Multi-family.............................. - - - - -
Commercial loans............................ - - - - -
Other loans................................. - - - (4) -
Total..................................... (84) (19) (11) (93) (36)
------- ------- -------- -------- --------
Balance at end of year:
Mortgage loans:
One-to-four-family........................ 1,298 687 561 412 330
Multi-family.............................. 14 14 14 14 14
Commercial loans............................ 216 216 216 216 216
Other loans................................. 23 23 23 23 27
------- ------- -------- -------- --------
Total..................................... $ 1,551 $ 940 $ 814 $ 665 $ 587
======= ======= ======== ======== ========
Ratio of net charge-offs during the period to
loans outstanding, excluding Discounted Loans .03% .01% .01% .08% .03%
======= ======= ======== ======== ========
Ratio of allowance for loan losses to net loans
receivable, excluding Discounted Loans...... .58% .40% .53% .53% .45%
======= ======= ======== ======== ========
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PURCHASED MORTGAGE SERVICING RIGHTS
Purchased Mortgage Servicing Rights ("PMSRs" or "MSRs") 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 PMSRs, 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. Thus, the PMSRs act as a
natural hedge against the mortgage loans in Argo Savings' portfolio in a
changing interest rate environment.
Argo Savings' principal investment in mortgage servicing rights
("MSRs") is through a $3.3 million equity interest in a limited partnership
whose business activities are to purchase MSRs and a $1.2 investment in
subordinated debentures of the partnership. There are several unaffiliated
equity investors in the limited partnership. The purchase of the servicing
rights is then leveraged, allowing
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the limited partnership to purchase MSRs 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 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 MSRs 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 MSRs. The task of finding and acquiring the PMSRs controlled by the
limited partnership as well as all associated administrative duties, is assigned
to DMI. DMI also sub-services the PMSRs in the partnership. The limited
partnership is audited annually by an independent auditor and an independent
third party valuation of the partnership's 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 MSRs on refinancings. The
loans may be refinanced at lower rates, for longer terms, and, from time to
time, with higher balances with the MSRs on such loans retained by the limited
partnership.
Argo Savings accounts for the investment in the three 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 appraised value lower than the current book value. The general
partner recorded a valuation allowance. Argo Savings' proportionate share of the
writedown was $1.4 which Argo Savings recorded based upon information received
from DMI. During 1999, a portion of Argo's investment was converted to
subordinated debentures which yield interest at 30%. In addition, the value of
the servicing revenue remained stable and the Bank did not receive an additional
write-down.
In addition to its investment in the limited partnerships, at December
31, 1999, the Savings Bank had a $464,000 investment in a PMSR portfolio that it
owns directly. At December 31, 1999, this directly owned PMSR portfolio
consisted of 2,365 mortgage loans having an outstanding principal balance of
$35.7 million.
A secondary benefit derived from the PMSRs is the associated 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, 1999, were $6.0 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, 1999, the Savings Bank's liquidity ratio (liquid
assets as a percentage of deposits and borrowings payable in one year or less)
was 15.0%.
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23
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 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 of government sponsored entities and federal agency obligations, and
other issues that are rated investment grade. At December 31, 1999, the Company
had $15.7 million of securities available-for-sale with an aggregate fair value
of $14.4 million and $25.9 million of securities held-to-maturity with an
aggregate fair value of $24.1 million.
The Company maintains a portfolio of marketable equity securities and
trust preferred securities, generally comprised of the 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 believe, after analysis of market pricing, business practices, and
earnings potential, were under-valued and represent an opportunity for profit
from sales of such securities. At December 31, 1999, the Company and the Savings
Bank had $6.8 million in these securities, which are included in the
available-for-sale totals above.
In addition, the Company has been actively trading various marketable
equity securities, primarily FNMA and FHLMC stock. These securities are
classified as trading and totaled $688,000 at December 31, 1999, with market
value approximately equal to cost.
The Company owned as of December 31, 1999 $4.6 million of Series B
preferred stock issued by GFS Holdings Company in connection with the
acquisition of On-Line by GFS. The preferred stock bears interest at 7.625% per
annum payable semi-annually .
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The following table sets forth the composition of the Company's
available-for-sale portfolio in dollar amounts and percentages at the dates
indicated.
AT DECEMBER 31,
---------------
1999 1998 1997
---- ---- ----
FAIR % OF FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
----- ----- ----- ----- ----- -----
Debt securities:
U.S. Government agency obligations $ 5,157 35.90% $ 2,088 28.97% $ - -%
Municipal bonds 378 2.63 380 5.27 380 7.64
Corporate bonds 393 2.74 - - - -
--------- ------- ------- ------- ------- ------
Total debt securities 5,928 41.27 2,468 34.24 380 7.64
Equity securities 3,163 22.02 2,441 33.87 1,667 33.51
Trust preferred securities 3,591 25.00 368 5.10 - -
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 87 0.61 109 1.51 124 2.50
Federal National Mortgage
Association Fannie Mae 1,620 11.28 1,797 24.93 2,799 56.27
--------- ------- ------- ------- ------- ------
Total mortgage-backed securities 1,707 11.89 1,906 26.44 2,923 58.77
Net premium (discount) 28 0.19 32 .44 39 .78
Unrealized loss on securities
available-for-sale (53) (0.37) (7) (0.09) (35) (0.70)
--------- ------- ------- ------- ------- ------
Net mortgage-backed securities 1,682 11.71 1,931 26.79 2,927 58.85
--------- ------- ------- ------- ------- ------
Total securities available-for-sale $ 14,364 100.00% $ 7,208 100.00% $ 4,974 100.00%
========= ======= ======= ======= ======= ======
FHLB of Chicago stock $ 2,303 100.00% $ 1,911 100.00% $ 3,271 100.00%
========= ======= ======= ======= ======= ======
The following table sets forth the composition of the Company's
held-to-maturity securities portfolio in dollar amounts and percentages at
December 31, 1999. The Company held no held-to-maturity securities at December
31, 1998 or 1997.
Amortized % of
Cost Total
---- -----
Corporate bonds $ 726 2.81%
U.S. agency securities 24,157 93.42
Collateralized mortgage obligations 976 3.77
---------- ------
Total securities held-to-maturity $ 25,859 100.00%
========== ======
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The following table sets forth the amortized cost and fair values of
the Company's available-for-sale and held-to-maturity securities at the dates
indicated.
AT DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- -------- --------- -------- ---------- ----------
Securities available-for-sale:
U.S. Government agency
obligations $ 5,500 $ 5,157 $ 2,091 $ 2,088 $ - $ -
Municipal bonds 370 378 370 380 370 380
Corporate bonds 411 393 - - - -
Equity securities 3,761 3,163 2,828 2,441 1,695 1,667
Trust preferred securities 3,960 3,591 367 368 - -
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation Freddie Mac 88 85 110 109 125 124
Federal National Mortgage
Association Fannie Mae 1,647 1,597 1,827 1,822 2,837 2,803
-------- -------- -------- -------- --------- --------
Total mortgage-backed securities 1,735 1,682 1,937 1,931 2,962 2,927
-------- -------- -------- -------- --------- --------
Total securities available-for-sale $ 15,737 $ 14,364 $ 7,593 $ 7,208 $ 5,027 $ 4,974
======== ======== ======== ======== ========= ========
FHLB of Chicago stock $ 2,303 $ 2,303 $ 1,911 $ 1,911 $ 3,271 $ 3,271
======== ======== ======== ======== ========= ========
Securities held-to-maturity:
Corporate bonds $ 726 $ 561 $ - $ - $ - $ -
U.S. agency securities 24,157 22,545 - - - -
Collateralized mortgage obligations 976 976 - - - -
-------- -------- -------- -------- --------- --------
Total securities held-to-maturity $ 25,859 $ 24,082 $ - $ - $ - $ -
======== ======== ======== ======== ========= ========
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The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of securities as of December
31, 1999.
MORE THAN ONE YEAR MORE THAN FIVE YEARS MORE THAN TEN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS YEARS TOTAL
----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---------- -------- ---------- --------- ---------- --------- ---------- --------- ---------- --------
AVAILABLE-FOR-SALE:
U.S. Government and
agency obligations $ - -% $ - -% $1,500 7.05% $ 4,000 7.01% $ 5,500 7.02%
Municipal bonds - - - - 370 9.50 - - 370 9.50
Corporate bonds - - - - 411 8.00 - - 411 8.00
Equity securities (1) 3,761 - - - - - - - 3,761 -
Trust preferred
securities 3,960 7.56 - - - - - - 3,960 7.56
Mortgage-backed
securities
Federal Home Loan
Mortgage Corporation
Freddie Mac 88 5.87 - - - - - - 88 5.87
Federal National
Mortgage Association
Fannie Mae 1,647 6.02 - - - - - - 1,647 6.02
------- ------ ------ -------- --------
Total mortgage-
backed securities 1,735 6.01 - - - - - - 1,937 6.01
------- ------ ------ -------- --------
Total available-
for-sale $ 9,456 7.04% $ - -% $2,281 7.60% $ 4,000 7.01% $15,737 7.11%
======= ====== ====== ======== =======
HELD-TO-MATURITY:
Corporate bonds $ - -% $ - -% $ - -% $ 726 7.61% $ 726 7.61%
U.S. agency securities - - 3,000 7.02 4,000 7.26 17,157 7.09 24,157 7.12
Collateralized mortgage
obligations 976 7.00 - - - - - - 976 7.00
------- ------ ------ -------- -------
Total held-to-
maturity $ 976 7.00% $3,000 7.02% $4,000 7.26% $ 17,883 7.11% $25,859 7.12%
======= ====== ====== ======== =======
- --------------
(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 associated with PMSRs. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and market conditions.
Additionally, the Company's sources of funds include borrowed money, which
includes advances from the Federal Home Loan Bank of Chicago ("FHLB"), a note
payable, a margin account and federal funds purchased. In addition, the Company
has issued junior subordinated debentures. 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.
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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 $38.2
million in brokered deposits at December 31, 1999. Argo Savings has
traditionally priced its deposit products at or near market rates in its primary
markets.
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Deposit Flow. The following table sets forth the composition of and the
change in dollar amount of deposit accounts offered by Argo Savings between the
dates indicated.
AMOUNT AT PERCENT AMOUNT AT PERCENT AMOUNT AT
DECEMBER 31, OF TOTAL INCREASE DECEMBER 31, OF TOTAL INCREASE DECEMBER 31,
1999 DEPOSITS (DECREASE) 1998 DEPOSITS (DECREASE) 1997
-------------- --------- ---------- ------------ --------- ---------- ------------
(DOLLARS IN THOUSANDS)
Non-interest bearing accounts $ 6,072 2.0% $ (12,172) $ 18,244 7.8% $ 13,748 $ 4,496
Passbook accounts 19,873 6.6 (1,434) 21,307 9.1 3,700 17,607
NOW accounts 10,612 3.5 1,567 9,045 3.9 316 13,225
Money market accounts 4,426 1.5 (280) 4,706 2.0 (1,517) 6,223
--------- ------ --------- ---------- ------ -------- ----------
Total 40,983 13.6 (12,319) 53,302 22.8 16,247 37,055
--------- ------ --------- ---------- ------ -------- ----------
Certificate accounts:
3.99% or less - - - - - (10) 10
4.00% to 4.99% 47,892 15.9 19,401 28,491 12.2 27,617 874
5.00% to 5.99% 118,805 39.4 (20,234) 139,039 59.7 76,104 62,935
6.00% to 6.99% 93,542 31.0 81,877 11,665 5.0 (58,297) 69,962
7.00% to 7.99% 443 .1 (32) 475 0.3 (1,038) 1,513
8.00% to 8.99% 8 - - 8 - (112) 120
--------- ------ --------- ---------- ------ -------- ----------
Total 260,690 86.4 81,012 179,678 77.2 44,264 135,414
--------- ------ --------- ---------- ------ -------- ----------
Total deposits $ 301,673 100.0% $ 68,693 $ 232,980 100.0% $ 60,511 $ 172,469
========= ====== ========= ========== ====== ======== ==========
Weighted average rate 5.16% 4.60% 5.12%
========= ========== ==========
PERCENT
OF TOTAL INCREASE
DEPOSITS (DECREASE)
--------- ----------
Non-interest bearing accounts 2.6% $ 885
Passbook accounts 10.2 (742)
NOW accounts 5.1 (86)
Money market accounts 3.6 1,266
------ --------
Total 21.5 1,323
------ --------
Certificate accounts:
3.99% or less - (42)
4.00% to 4.99% .5 105
5.00% to 5.99% 36.5 (8,234)
6.00% to 6.99% 40.5 30,768
7.00% to 7.99% 0.9 (2,099)
8.00% to 8.99% 0.1 21
------ --------
Total 78.5 114,895
------ --------
Total deposits 100.0% $150,627
====== ========
Weighted average rate
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29
Certificate Accounts. The following table presents the amount of
certificate accounts outstanding at December 31, 1999, and the periods to
maturity or repricing.
WEIGHTED
AMOUNT AVERAGE
(IN THOUSANDS) RATE
------------ ----
Within one year (1) $ 183,289 5.34%
One to three years 71,779 5.78
Thereafter 5,622 6.08
---------- ----
Total $ 260,690 5.62%
========== ====
(1) Includes a $13 million certificate that matured on February 22, 2000 and was
renewed at that time for an additional 90 days.
At December 31, 1999, 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 WEIGHTED
(IN THOUSANDS) AVERAGE RATE
-------------- ------------
Three months or less $ 22,023 4.63%
Over three through six months 11,892 5.44
Over six through 12 months 25,820 5.90
Over 12 months 15,399 5.88
---------- ----
Total $ 75,134 5.45%
========== ====
Argo Savings had pledged securities with principal balances totaling
approximately $3.3 million and $6.4 million at December 31, 1999 and 1998, as
collateral to secure certain public deposits. In addition to securities pledged
at December 31, 1999 and 1998, the Savings Bank also had letters of credit
totaling $14.3 million and $13.3 million as collateral to secure several State
of Illinois certificates. The total State of Illinois certificates secured by
letters of credit and securities totaled approximately $15.5 million and $15.1
million in at December 31, 1999 and 1998.
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the years indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Deposits in excess of withdrawals $56,151 $64,346 $ 13,262
Interest credited 12,542 9,414 8,580
------- ------- --------
Net increase in
deposits $68,693 $73,760 $ 21,842
======= ======= ========
Substantially all of Argo Savings' depositors are residents of the
States of Illinois and Indiana.
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30
Borrowings. The Company's borrowings at December 31, 1999 include
margin accounts, FHLB advances, and junior subordinated debentures.
During 1998, the Company issued 11% junior subordinated debentures
aggregating $17,784,000 to Argo Capital Trust. Argo Capital 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 at Argo Savings 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 Argo Capital Trust and the capital securities in the event of
the occurrence of an event of default, as defined. Debt issuance costs totaling
$1,913,000, including $244,000 paid in 1999, were capitalized related to the
debenture offering, and are being amortized over the 30-year life of the junior
subordinated debentures.
Although savings deposits are the primary source of funds for Argo
Savings' lending and investment activities and for its general business
purposes, Argo Savings can also borrow funds from the FHLB to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
functions as a central reserve bank providing credit for 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 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, 1999, Argo Savings had $17.8 million of fixed rate advances and
$17.1 million of adjustable-rate advances from the FHLB with interest rates
ranging from 4.74% to 8.43%.
The margin account loans are from third-party securities brokers. The
rate of interest on the loans is negotiated with the brokers. The margin account
loans were secured at December 31, 1999 by securities held by the brokers having
market values of $24.4 million.
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31
The following table sets forth information regarding borrowings by the
Company on a consolidated basis at the end of and during the year indicated. The
borrowings at and during the year consisted of FHLB advances, junior
subordinated debt, promissory notes, federal funds purchased, capital lease
obligations. The weighted average was computed on a monthly average basis.
AT DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Weighted average interest rate at end of year on:
FHLB advances 5.66% 6.10% 6.22%
Junior subordinated debt 11.00 11.00 -
Other borrowings 7.79 7.71 8.63
Maximum amount of borrowings outstanding at any month end:
FHLB advances $ 34,932 $ 20,132 $ 49,587
Junior subordinated debt 17,784 17,784 -
Other borrowings 5,404 14,658 11,542
Average borrowings outstanding with respect to:
FHLB advances $ 34,432 $ 18,987 $ 30,191
Junior subordinated debt. 17,784 2,680 -
Other borrowings 3,388 12,624 10,621
-------- -------- --------
Total $ 55,604 $ 34,291 $ 40,812
======== ======== ========
Weighted average interest rate during the year paid on:
FHLB advances 5.35% 5.69% 5.98%
Junior subordinated debt 11.00 11.00 -
Other borrowings 8.67 8.60 8.43
Total Weighted Average 7.35 7.18 6.60
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SUBSIDIARIES
Argo Savings has a wholly-owned subsidiary, Dolton-Riverdale Savings
Service Corp. ("Dolton-Riverdale"). At December 31, 1998, Argo Savings had an
equity investment in Dolton-Riverdale of $159,000.
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, reflected by a relatively high core deposit
base.
PERSONNEL
Effective October 1, 1999 the Company entered into a Client Services
Agreement with Synergy, a professional employer organization. Under the Client
Services Agreement all employees of the Company were transferred to Synergy with
Synergy assigning employees to the Company as the work place employer. At
December 31, 1999, 79 employees of Synergy were assigned to the Company.
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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
33
34
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire 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
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risk exposure exceeds 2% must deduct an amount equal to one-half 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, 1999, Argo Savings met each of its capital
requirements.
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The following table presents Argo Savings' capital position, amounts
and ratios at December 31, 1999:
(DOLLARS IN THOUSANDS)
Actual Required Excess Actual Required
Amount Amount Amount Percent Percent
------ ------ ------ ------- -------
Tangible . . . . . . . . . $21,853 $5,553 $16,300 5.9% 1.5%
Risk-based:
Tier I (core) . . . . . 21,853 14,809 7,044 5.9 4.0
Total . . . . . . . . . 23,404 15,191 8,213 12.3 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.
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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 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 January 1, 2000.
The Argo Savings' assessment rate for the year ended December 31, 1999
was 6.1 basis points and the premium paid for this period was $146,000, 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.
New Legislation.
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, 1999, Argo Savings' limit on loans to one borrower was $3.3
million. At December 31, 1999, the Argo Savings' largest aggregate outstanding
balance of loans to one borrower was $4.2 million. The Savings Bank's authority
to approve loans in excess of the regulatory Loan to One Borrower limitation was
approved by the OTS under Section 563.93(d)(3) of OTS Regulations for Insured
Institutions, relating to loans provided for the construction of housing units.
All other borrowers have aggregate balances below the savings bank's limit to
one borrower.
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,
1999, Argo Savings maintained 88% 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
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greater of (i) 100% of its net earnings to date during 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, 1999, the Bank was classified as a Tier 1 Bank.
Effective April 1, 1999, the Office of Thrift Supervision's capital
distribution regulation changed. Under the new regulation, an application to and
the prior approval of the Office of Thrift Supervision is required before any
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under Office of Thrift Supervision regulations
(generally, compliance with all capital requirements and examination ratings in
one of two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with office of Thrift Supervision. If an application is
not required, the institution must still give advance notice to office of Thrift
Supervision 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, 1999 was 12.42%, 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, 1999 totaled $66,000.
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
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circumstances, including credit standards, that are substantially the same or at
least 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
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Companies have not been audited by the IRS during the last ten (10) years. For
federal income tax purposes Argo 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
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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, 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, beginning in January 1, 2001, 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 other than any transfer of
securities that management elects from held-to-maturity to available-for-sale.
Management has not decided whether to adopt Statement No. 133 early.
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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.
During 1999, the Company sold five banking facilities to an unrelated third
party for $5,850,000. The facilities are being leased back from the purchaser
over a period of 170 months. The leases are accounted for as operating leases.
The gain of $2,400,000 was deferred and is being recognized into income over the
life of the leases, with $86,000 recognized during the year ended December 31,
1999. The leases contain renewal options for three additional periods of ten,
five and five years each.
The Company believes that the Argo Savings' 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, 1999,
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 the caption "Shareholder Information"
in the Registrant's 1999 Annual Report to Stockholders on pages 62 through 64
and is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data appears under the caption
"Selected Consolidated Financial Condition and other Data of the Corporation" in
the Registrant's 1999 Annual Report to Stockholders on pages 4 and 5 and is
incorporated herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1999 Annual Report to Stockholders on pages 6 through 22 and is
incorporated herein by reference.
ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The above-captioned information appears under the caption "Quantitative
and Qualitative Disclosures about Market Risk" of the 1999 Annual Report to
Stockholders on pages 20 through 22 and is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1999 and 1998, together with the report thereon
by Crowe, Chizek and Company LLP, appears in the Registrant's 1999 Annual Report
to Stockholders, on pages 23 through 61 and is incorporated herein by reference.
The Consolidated Financial Statements of Argo Bancorp, Inc. and its
subsidiaries as of December 31, 1997 appears in the Registrant's 1999 Annual
Report to Stockholders on pages 23 through 61 and is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 May 2, 2000 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 May 2, 2000 under "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 May 2, 2000
under "Security Ownership of Certain Beneficial Owners" and "Information with
respect to the Nominee, Continuing Directors and Certain Executive Officers."
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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 May 2, 2000 under
"Indebtedness of Management and Transactions with Certain Related Persons."
PART IV.
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 Report of Independent Auditors,
appearing in the 1999 Annual Report to Stockholders are incorporated
herein by reference.
Report of Independent Auditors.
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
Notes to the Consolidated Financial Statements.
The remaining information appearing in the 1999 Annual Report to
Stockholders 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 Bylaws.
3.1 Certificate of Incorporation of Argo Bancorp, Inc.**
3.2 By-Laws of Argo Bancorp, Inc.**
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Exhibit No. 4.
4.1 Stock Certificate of Argo Bancorp, Inc.**
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. *
10.6 Employment Agreement between Argo Bancorp, Inc. and Colleen A.
Kitch
Exhibit No. 11.
11.1 Computation of earnings per share (included in Note 18 to
the Company's audited financial statements).
Exhibit No. 13.
13.1 Portions of the 1999 Annual Report to Stockholders.
Exhibit No. 21.
21.1 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.
27.1 Financial Data Schedule (filed herewith)
-----------------
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on July 20,
1998 and any amendments, Registration No. 333-59435.
(a)(4) REPORTS ON FORM 8-K
None.
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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 31, 2000 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 31, 2000 By: /s/ John G. Yedinak
----------------------------
John G. Yedinak, Chief
Executive Officer and Director
(Principle executive officer)
Date: March 31, 2000 By: /s/ Sergio Martinucci
----------------------------
Sergio Martinucci, Vice
President and Director
Date: March 31, 2000 By: /s/ Arthur Byrnes
---------------------------
Arthur Byrnes, Director
Date: March 31, 2000 By: /s/ Donald G. Wittmer
---------------------------
Donald G. Wittmer, Director
Date: March 31, 2000 By: /s/ Frances M. Pitts
---------------------------
Frances M. Pitts, Secretary
and Director
Date: March 31, 2000 By: /s/ Dominic M. Fejer
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Dominic M. Fejer
(principal accounting and
financial officer)
46