UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission file number 0-24566
AVONDALE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3895923
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 North Clark Street, Chicago, Illinois 60602
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 782-6200
-------------------------------------------------------------------
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 $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES: XXX NO:
-------- ------
3,814,568 common shares of stock were outstanding as of August 12, 1996.
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
-----------------------------------------
FORM 10-Q
---------
JUNE 30, 1996
-------------
INDEX
- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at June 30, 1996,
December 31, 1995 and June 30, 1995........................... 2
Condensed consolidated statements of income for the three
months and six months ended June 30, 1996 and June 30, 1995... 3
Condensed consolidated statements of stockholders' equity for
the six months ended June 30, 1996 and June 30, 1995.......... 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 1996 and June 30, 1995.............. 5-6
Notes to condensed consolidated financial statements........... 7-8
Item 2. Management's discussion and analysis of financial
condition and results of operations..................... 9-16
PART II. OTHER INFORMATION
Calculation of earnings per share.............................. 17-18
Signatures..................................................... 19
1
PART I - FINANCIAL INFORMATION
AVONDALE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Jun 30,1996 Dec 31,1995 Jun 30,1995
----------- ----------- -----------
ASSETS (in thousands, except per share data)
Cash and due from banks $ 3,115 $ 5,275 $ 5,246
Interest-bearing deposits 2,383 1,067 1,595
----------------------------------------------
Total cash and cash equivalents 5,498 6,342 6,841
Securities available-for-sale-At fair value (amortized cost
Jun 30, 1996 - $47,952; Dec 31, 1995-$76,198; Jun 30, 1995 - $56,256) 47,783 77,879 57,917
Securities held-to-maturity-At amortized cost (fair value
Jun 30, 1996 - $6,802; Dec 31, 1995-$6,732; Jun 30, 1995 - $9,723) 6,890 6,880 9,870
Mortgage-backed securities
available-for-sale-At fair value (amortized cost
Jun 30, 1996 - $184,941; Dec 31, 1995-$218,643; Jun 30, 1995 -
$134,502) 183,695 219,121 134,109
Mortgage-backed securities
held-to-maturity-At amortized cost (fair value
Jun 30, 1995 - $63,062; Dec 31, 1995-$65,244; Jun 30, 1995 -
$162,092) 63,684 64,734 161,809
Loans 266,122 221,927 190,563
Less: Allowance for loan loss 4,326 3,460 3,156
----------------------------------------------
Loans, net 261,796 218,467 187,407
Federal Home Loan Bank stock - at cost 4,790 4,415 4,415
Office building and equipment, net 4,159 3,978 4,363
Other real estate owned, net 1,839 837 355
Accrued interest receivable 5,132 5,063 4,631
Prepaid expenses and other assets 4,109 516 962
Deferred income tax 3,396 2,305 2,474
Income taxes receivable - - 1,365
----------------------------------------------
Total assets $ 592,771 $ 610,537 $ 576,518
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 324,318 $ 335,861 $ 335,695
Advances from Federal Home Loan Bank 90,803 78,303 88,303
Securities sold under agreements to repurchase 70,777 76,792 57,978
Other borrowings 37,500 41,500 18,000
Advance payments by borrowers for taxes and insurance 923 1,455 2,088
Accrued interest payable 1,238 1,054 1,268
Income taxes payable 418 35 -
Other liabilities 7,952 8,622 9,364
----------------------------------------------
Total liabilities 533,929 543,622 512,696
----------------------------------------------
Commitments and Contingencies
Common stock ($.01 par: 10,000,000 shares authorized, 3,602,968 shares
issued and outstanding) 44 44 42
Capital surplus 43,018 43,018 40,528
Retained earnings 28,692 26,815 25,016
Treasury stock (580,000 shares at cost) (8,463) - -
Unrealized net gain (loss) on securities available-for-sale, net of
tax of ($673) at Jun 30, 1996; $832 at Dec 31, 1995; and $(297)
at Mar 31, 1995 (708) 1,313 775
Common Stock acquired by ESOP (2,116) (2,116) (2,539)
Unearned portion of restricted stock awards (1,625) (2,159) -
-----------------------------------------------
Total stockholders' equity 58,842 66,915 63,822
-----------------------------------------------
Total liabilities and stockholder's equity $ 592,771 $ 610,537 $ 576,518
===============================================
2
AVONDALE FINANCIAL CORP. FOR THE THREE MONTHS ENDED: FOR THE SIX MONTHS ENDED:
CONSOLIDATED STATEMENTS OF INCOME JUN. 30, 1996 JUN. 30, 1995 JUN. 30, 1996 JUN. 30, 1995
------------- ------------- ----------------- -----------------
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Loans $ 5,597 $ 4,244 $ 10,607 $ 8,310
Securities 936 1,258 2,506 2,163
Mortgage-backed securities 4,388 4,432 9,146 7,779
Other 126 154 253 336
-------- -------- -------- -------
Total interest income 11,047 10,088 22,512 18,588
INTEREST EXPENSE:
Deposits 3,575 3,854 7,335 7,610
Advances from the Federal Home Loan
Bank 1,346 1,141 2,543 2,037
Securities sold under agreements to
repurchase 899 774 2,006 924
Other borrowings 392 101 811 301
-------- -------- -------- -------
Total interest expense 6,212 5,870 12,695 10,872
NET INTEREST INCOME 4,835 4,218 9,817 7,716
Provision for loan losses 475 400 1,125 530
-------- -------- -------- -------
Net interest income after provision for
loan losses 4,360 3,818 8,692 7,186
NONINTEREST INCOME:
Net gains on trading activities - 20 - 218
Net security gains 500 560 1,096 444
Net gains on sales of loans - - 7 -
Loan servicing income 56 27 116 59
Fees for other customer services 83 73 171 135
Other operating income 208 126 329 262
-------- -------- -------- -------
Total noninterest income 847 806 1,719 1,118
NONINTEREST EXPENSE:
Salaries and employee benefits 1,891 1,404 3,855 3,090
Occupancy and equipment expenses, net 240 471 473 928
Federal deposit insurance premiums 192 203 388 405
Advertising and public relations 187 149 421 200
Data processing 369 236 607 423
Real estate owned (income) expense,
net (109) (5) (79) (20)
Legal and professional 156 108 271 202
Other operating expenses 800 549 1,599 988
-------- -------- -------- -------
Total noninterest expense 3,726 3,115 7,535 6,216
Income before income taxes 1,481 1,509 2,876 2,088
Income tax expense 544 531 999 708
-------- -------- -------- -------
NET INCOME $ 937 $ 978 $ 1,877 $ 1,380
======== ======== ======== =======
PER COMMON SHARE:
Earnings per common share $ 0.26 $ 0.25 $ 0.49 n/a
Weighted average common shares
outstanding 3,667 3,978 3,846 n/a
3
AVONDALE FINANCIAL CORP. FOR THE SIX MONTHS ENDED:
CONSOLIDATED STATEMENT OF CHANGES IN JUN. 30, 1996 JUN. 30, 1995
STOCKHOLDERS' EQUITY -------------- -------------
(UNAUDITED) (In Thousands)
COMMON STOCK
Beginning of Period $ 44 $ -
Issuance of Common Stock - 42
-----------------------------
End of Period 44 42
-----------------------------
CAPITAL SURPLUS
Beginning of period 43,018 -
Issuance of common stock - 40,528
-----------------------------
End of period 43,018 40,528
-----------------------------
RETAINED EARNINGS
Beginning of period 26,815 23,634
Net income 1,877 1,382
-----------------------------
End of period 28,692 25,016
-----------------------------
TREASURY STOCK
Beginning of period - -
Stock repurchased for treasury (8,463) -
-----------------------------
End of period (8,463) -
-----------------------------
UNREALIZED NET GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF TAX
Beginning of period 1,313 (1,613)
Change in unrealized gain (loss) on
securities available-for-sale, net of
tax (2,021) 2,388
-----------------------------
End of period (708) 775
-----------------------------
COMMON STOCK ACQUIRED BY ESOP
Beginning of period (2,116) -
Issuance of ESOP plan - (2,539)
repayment of principal - -
-----------------------------
End of period (2,116) (2,539)
-----------------------------
UNEARNED PORTION OF RESTRICTED STOCK
AWARDS
Beginning of period (2,159)
Net amortization of unearned portion of
restricted stock 534
-----------------------------
End of period (1,625) -
-----------------------------
TOTAL STOCKHOLDERS' EQUITY $58,842 $63,822
=============================
4
AVONDALE FINANCIAL CORP. FOR THE SIX MONTHS ENDED:
CONSOLIDATED STATEMENTS OF CASH FLOWS JUNE 30, 1996 JUNE 30, 1995
------------------ ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,877 $ (442)
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation 534 1,180
Amortization (accretion), net (2,705) 4,585
Provision for loan losses 1,125 1,010
Provision for deferred income taxes 193 (143)
Net gain (loss) on sales of
securities available-for-sale (1,096) 5,886
Net gains on sales of other real
estate owned (187) (172)
Net gains on sales of office
buildings and equipment - -
Net changes in:
Loans held for sale - -
Income taxes receivable - (1,365)
Prepaid expenses and other assets (3,549) 356
Accrued interest receivable (69) (1,912)
Income taxes payable 383 (269)
Accrued interest payable 184 369
Other liabilities (670) (807)
-------------------------------------
Net cash flows provided by (used in)
operating activities $(3,980) $ 8,276
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of
securities held-to-maturity - 9,500
Purchases of securities
held-to-maturity - (5,400)
Purchases of Federal Home Loan Bank
stock (375) (500)
Proceeds from maturities of
securities available-for-sale 19,700
Proceeds from sales of securities
available-for-sale
Proceeds from sales of 23,806 32,261
mortgage-backed securities
available-for-sale 94,384 112,920
Purchases of securities
available-for-sale (14,550) (90,500)
Purchases of mortgage-backed
securities available-for-sale (74,410) (144,140)
Purchases of mortgage-backed
securities held-to-maturity (3,199) (62,642)
Principal collected on
mortgage-backed securities
held-to-maturity 4,359 19,668
Principal collected on
mortgage-backed securities
available-for-sale 16,504 27,769
Principal collected on securities
available-for-sale 465 -
Net increase in loans (46,014) (6,159)
Proceeds from sales of other real
estate owned 745 1,199
Expenditures for office buildings and
equipment (715) (1,280)
--------------------------------------
Net cash flows provided by (used in)
investing activities $ 20,700 $(107,304)
-------------------------------------
5
AVONDALE FINANCIAL CORP. FOR THE SIX MONTHS ENDED:
CONSOLIDATED STATEMENTS OF CASH FLOWS JUNE 30, 1996 JUNE 30, 1995
-------------- --------------
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock conversion expenditures $ - $ (562)
Net decrease in deposits (11,543) (16,695)
Net decrease in advance payments by (532) 181
borrowers for taxes and insurance
Net increase (decrease) in securities (6,015) 48,680
sold under agreements to repurchase
Net increase (decrease) in other (4,000) 15,000
borrowings
Proceeds from Federal Home Loan Bank 62,500 30,000
advances
Repayment of Federal Home Loan Bank (50,000) (5,000)
advances
Common stock subscription liability - 70,332
Increase shares outstanding - -
Capital surplus - -
Unearned restricted stock 534 -
ESOP commited to be released - -
Purchase stock for treasury (8,508)
Refund on excess stock subscriptions - (40,758)
-----------------------------
Net cash flows provided by (used in) $(17,564) $101,178
financing activities
-----------------------------
INCREASE (DECREASE) IN CASH AND CASH (844) 2,150
EQUIVALENTS
CASH AND CASH EQUIVALENTS
Beginning of period 6,342 4,691
-----------------------------
Ending of period $ 5,498 $ 6,841
=============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 12,511 $ 23,334
Income taxes paid 650 1,440
NON CASH FINANCING ACTIVITIES
Transfer of deposits to equity $ 9,784
Transfer common stock subscription 29,574
liability to equity
Reduction of prepaid conversion costs (1,200)
and reduction of capital
Transfer of other liabilities to 12
capital
Increase in prepaid expenses and 423
increase in capital for ESOP
See accompanying notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Avondale
Financial Corp. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods have been made. The results of
operations for the three and six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes the disclosures are adequate
to make the information not misleading. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 1995 Annual Report.
Primary and fully diluted earnings per share are computed by dividing net income
by average shares of common stock and common stock equivalents outstanding. The
strike price of stock options outstanding is above the market price as of
June 30, 1996 and therefore do not represent a dilutive effect. These options
therefore are not included in the earnings per share calculation. As of June 30,
1995 there were no common stock equivalents outstanding.
NOTE 2 - REGULATORY CAPITAL
Pursuant to the Financial Institution Reform, Recovery and Enforcement Act of
1989 (FIRREA), savings institutions must meet three separate minimum capital-to-
assets requirements: (1) a risk-based capital requirement of 8% of risk-weighted
assets, (2) a core capital ratio of 3% core capital to adjusted total assets,
and (3) a tangible capital requirement of 1.5% tangible core capital to adjusted
total assets. The following table summarizes, as of June 30, 1996, Avondale
Federal Savings Bank's (the "Bank") capital requirements under FIRREA and its
actual capital ratios at that date:
Bank
Capital Actual
Requirement Capital
----------- ----------
Risk-based 8.00% 23.82%
Core 3.00% 9.86%
Tangible 1.50% 9.86%
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS - In March, 1995, FASB issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of", which is effective for
financial statements issued for the fiscal years beginning after December 15,
1995. SFAS 121 requires that long-lived assets and certain identifiable
intangibles that are used in operations be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
might not be recoverable. Management believes that the adoption of SFAS 121 does
not have a material effect on the Company's financial condition or results of
operations.
7
In May, 1995, FASB issued Statement of Financial Accounting Standards No. 122
("SFAS 122"), "Accounting for Mortgage Servicing Rights", which is effective for
fiscal years beginning after December 15, 1995. SFAS 122 provides guidance on
the accounting for mortgage servicing rights and the evaluation and recognition
of impairment of mortgage servicing rights. Management believes that the
provisions of SFAS 122 does not currently have a material impact on the
Company's financial condition or results of operations.
In October, 1995, FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-based Compensation". The accounting
method for stock-based compensation provided in the statement, in particular for
stock options, differs from APB Opinion No. 25, under which most of the
accounting requirements for stock-based compensation were previously contained.
The measurement and recognition provisions of the statement are effective in
1996. An entity that continues to apply Opinion 25 is required to provide pro
forma net income and earnings per share, as if the accounting method in SFAS No.
123 had been used for stock-based compensation costs. The Company has decided
not to adopt the measurement recognition provisions of SFAS No. 123.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
The Company was formed in June 1993 and became the holding company for
Avondale upon consummation of the Conversion to stock form on April 3, 1995. The
Company has conducted no business other than that directly related to the Bank.
The Company's results of operations are primarily dependent upon the Bank's net
interest income, which is the difference between interest income on its
interest-earning assets such as loans and mortgage-backed or other securities,
and interest paid on its interest-bearing liabilities, such as deposits and
other borrowed funds. Net interest income is directly affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on such amounts. The Company's results of
operations are also affected by the provision for loan losses and the level of
noninterest income and expenses. Noninterest income consists primarily of
service charges and other fees. In the three and six month periods ended
June 30, 1996, substantial additional income was derived from securities gains
in the continuing effort to manage the available-for-sale portfolio on a total
return basis. Noninterest expenses includes salaries and employee benefits, real
estate owned, occupancy of premises, federal deposit insurance premiums, data
processing expenses and other operating expenses.
The operating results of Avondale are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. Avondale's cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate loans, home equity lines of credit and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions affecting loan demand and the availability of funds for
lending activities.
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
GENERAL. Total assets decreased $17.8 million or 2.9% to $592.7 million as
of June 30, 1996 from $610.5 million as of December 31, 1995. This decrease was
primarily due to a $30.1 million decrease in securities available-for-sale and a
$35.4 million decrease in mortgage-backed securities available-for-sale. The
Company decided early in the year to reduce the security portfolios and the
borrowings which funded some securities within the available-for-sale
portfolios. The Company followed this strategy to reduce its risk of market loss
in a declining market. These decreases were partially offset by a substantial
$44.2 (20.0%) million increase in loans. Avondale continues to focus on the
origination of equity lines of credit. The Company utilizes a credit scoring
model, whereby the equity lines of credit are priced according to the credit
scores of the customer, as well as the loan to real estate value percentage. The
Company originated 1,847 home equity line of credit loans with lines of $55.9
million for the six months ended June 30, 1996. Total liabilities decreased $9.7
million from December 31, 1995 to June 30, 1996. Deposits decreased $11.5
million while other borrowings increased $2.5 million over this period of time.
The Company had initiated 2 stock buy-back programs in 1996. The Company had
repurchased 580,000 shares $8.5 million of stock the first half of the year. The
net unrealized gain (loss) on securities available-for-sale had decreased
$2,021,000 over the six month period ended June 30, 1996 reflecting the general
rise in interest rates. Therefore total stockholders' equity had decreased $8.1
million from December 31, 1996 to June 30, 1996 in spite of $1,877,000 in net
income for the six month period ended June 30, 1996.
9
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1995.
GENERAL. Net income decreased slightly by $41,000 or 4.0% to $937,000 for the
three months ended June 30, 1996 from $978,000 for the quarter ended June 30,
1995. The quarterly results were essentially the same as those achieved during
the first quarter of 1996. In spite of the decrease quarterly earnings compared
with the same quarter the previous year, earnings-per-share increased 4% to $.26
per share from $.25 per share, the result of the stock buy-back programs
initiated by the Company during the first half of 1996. The Company's return on
average assets increased to 0.64% for the quarter ended June 30, 1996 compared
with 0.71% for the three months ended June 30, 1995.
For the six months ended June 30, 1996, net income increased 36.0% to
$1,877,000, $.49 per share compared to $1,380,000 during the first half of 1995.
No per share data is available for the first six months of 1995 as the Company
became public in April 1995. The Company's return on average assets was 0.63%
for the six months ended June 30, 1996 compared with 0.54% for the comparable
period in 1995.
NET INTEREST INCOME.
Net interest income increased $617,000 or 14.7% to $4.8 million for the quarter
ended June 30, 1996 from $4.2 million for the three months ended June 30, 1995
primarily due to the increase in average loans outstanding which have interest
rates indexed with the prime lending rate and a like reduction in fixed-rate
investment securities.
Since December 31, 1995, loans outstanding have increased almost 20% and since
June 30, 1995, loans outstanding have increased 39.7 percent or $75.6 million.
The increase in loans which replaced lower yielding securities is the reason for
the increase in net interest income. The net interest margin for the quarter was
3.41% compared to 3.19% during the quarter ended June 30, 1995. On a year-to-
date basis, the net interest margin was 3.39% compared to 3.11% for the six
months ended June 30, 1995.
10
TABLE 1 AVERAGE BALANCES, INTEREST RATES AND YIELDS
(In Thousands)
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
and the resultant costs, expressed both in dollars and rates. No tax equivalent
adjustments were made. To the extent received, interest on non-accruing loans
has been included in the table.
For the three months ended June 30, 1996 For the three months ended June 30, 1995
-------------------------------------------- -----------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------------------------------------- -----------------------------------------------
Assets:
Interest-earning assets:
Loans receivable $ 248,736 $ 5,597 9.00 % $ 183,340 $ 4,244 9.26 %
Securities 60,687 1,062 7.00 75,965 1,412 7.44
Mortgage-backed securities 257,209 4,388 6.82 269,956 4,432 6.57
---------------------------- ---------------------------
Total interest-earning
assets 566,632 11,047 7.80 529,261 10,088 7.62
------------ ----------------
Non-interest-earning assets 16,572 19,158
--------------- ----------
$ 583,204 $ 548,419
=============== ==========
Liabilities and stockholders'
equity
Interest-bearing liabilities:
Deposits $ 317,091 $ 3,575 4.51 % $ 330,465 $ 3,854 4.66 %
FHLB advances 94,090 1,346 5.72 80,062 1,141 5.70
Securities sold under
repurchase agreement 64,511 899 5.57 50,913 774 6.08
Other borrowings 29,231 392 5.36 5,758 101 7.02
---------------------------- ----------
504,923 6,212 4.92 467,198 5,870 5.03
Non-interest bearing deposits 7,981 3,998
Other liabilities 10,719 15,805
--------------- ----------
Total liabilities 523,623 487,001
Stockholders' equity 59,581 61,418
--------------- ----------
Total liabilities and
stockholders' equity $ 583,204 $ 548,419
=============== ==========
Net interest income/Interest
rate spread 4,835 2.88 % 4,218 2.60 %
========================== ============================
Net interest-earning assets/
net interest margin 61,709 3.41 % 62,063 3.19 %
=============== ============== =============
Ratio of interest-earning
assets to interest-bearing
liabilities 112.00 % 113.00 %
=============== ==========
11
TABLE 2 - RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(In Thousands)
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (1) changes attributable to changes in volumes, (ii)
changes attributable to changes in rate, and (iii) net changes. The changes
attributable to the combined impact of volume and rate have been allocated to
the changes due to volume.
Three months ended:
June 30, 1996
Vs Three months ended:
June 30, 1995
------------------------------------
Increase (Decrease) Due to
------------------------------------
Volume Rate Net
------ ---- ---
Interest Income
Loans $1,475 $(122) $1,353
Securities (271) (79) (350)
Mortgage-backed securities (214) 170 (44)
------------------------------------
Total interest income 990 (31) 959
------------------------------------
Interest Expense
Deposits (153) (126) (279)
Advances from the Federal Home
Loan Bank 201 3 204
Securities sold under agreements to
repurchase 194 (69) 125
Other borrowings 320 (29) 291
------------------------------------
Total interest expense 562 (221) 341
------------------------------------
Net interest income $ 429 $ 189 $ 618
====================================
12
For the six months ended June 30, 1996 For the six months ended June 30, 1995
-------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
======================================== =============================================
Assets:
Interest-earning assets:
Loans receivable $ 238,390 $ 10,607 8.90 % $ 183,316 $ 8,309 9.07 %
Securities 71,229 2,759 7.75 68,907 2,502 7.25
Mortgage-backed securities 269,084 9,146 6.80 243,757 7,779 6.38
--------------------------- -----------------------------
Total interest-earning assets 578,703 22,512 7.78 495,980 18,590 7.50
------------- -----------------
Non-interest-earning assets 15,374 16,176
-------------- ------------
$ 594,077 $ 512,156
============== ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Deposits $ 322,651 $ 7,335 4.55 % $ 342,869 $ 7,611 4.44 %
FHLB advances 90,501 2,543 5.62 72,814 2,036 5.60
Securities sold under repurchase 70,953 2,006 5.65 30,323 924 6.09
agreement
Other borrowings 30,486 811 5.32 7,664 301 7.85
--------------------------- -----------------------------
514,591 12,695 4.93 453,670 10,872 4.79
Non-interest bearing deposits 6,306 3,215
Other liabilities 10,867 12,908
-------------- ------------
Total liabilities 531,764 469,793
Stockholders' equity 62,313 42,363
-------------- ------------
Total liabilities and
stockholders' equity $ 594,077 $ 512,156
============== =============
Net interest income/Interest rate
spread 9,817 2.85 % 7,718 2.70 %
=========================== =============================
Net interest-earning assets/net
interest margin 64,112 3.39 % 42,311 3.11 %
============== ============= ============= ============
Ratio of interest-earning assets to
interest-bearing liabilities 112.00 % 109.00 %
============== =============
13
TABLE 2 - RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(In Thousands)
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (1) changes attributable to changes in volumes, (ii)
changes attributable to changes in rate, and (iii) net changes. The changes
attributable to the combined impact of volume and rate have been allocated to
the changes due to volume.
Six months ended:
June 30, 1996
Vs Six months ended:
June 30, 1995
------------------------------------
Increase (Decrease) Due to
------------------------------------
Volume Rate Net
------ ------ ------
Interest Income
Loans $2,453 $(156) $2,297
Securities 86 174 260
Mortgage-backed securities 841 526 1,367
--------------------------------
Total interest income 3,380 544 3,924
--------------------------------
Interest Expense
Deposits (456) 181 (275)
Advances from the Federal Home
Loan Bank 497 9 506
Securities sold under agreements to
repurchase 1,153 (71) 1,082
Other borrowings 635 (125) 510
--------------------------------
Total interest expense 1,829 (6) 1,823
--------------------------------
Net interest income $1,551 $ 550 $2,101
================================
INTEREST INCOME: Interest income increased $959,000 to $11.0 million in the
three months ended June 30, 1996 from $10.0 million for the quarter ended June
30, 1995. This increase was the result of a $37.3 million increase in average
interest-earning assets outstanding to $566.6 million in the three months ended
June 30, 1996 from $529.3 million during the same period for the prior year. In
spite of a decline in the average prime lending rate, income on loans increased
$1.4 million, the result of the substantial increase in loan production. The
Company has emphasized the origination of home equity lines of credit utilizing
credit-scoring models using risk-based pricing, whereby the interest rate of the
loan is determined by both the borrower's credit score and the ratio of the loan
to the appraised value of the property. Interest on securities declined
$350,000 for the three months ended June 30, 1996 compared to the three months
ended June 30, 1995. The average securities portfolio and mortgage-backed
security portfolio declined as the Company replaced securities with loans. For
the six months ended June 30, 1996, interest income increased 21.1%, $3.9
million to $22.5 million when compared to the first half of 1995. Substantially
all of this increase is attributable to the increased level of loans
outstanding. Included in interest for the six months ended June 30, 1996 was
approximately $290,000 of accelerated accretion of discounts on callable
securities that were called during the year. For the six months ended June 30,
1996 interest expense increased $1.8 million all of which is attributed to the
increase in the level of borrowed funds.
14
INTEREST EXPENSE. Interest expense increased $342,000 from $5.8 million for the
three months ended June 30, 1995 to $6.2 million for the quarter ended June 30,
1996. This increase was attributable to both an average increase in interest-
bearing liabilities of $37.8 million from $467.2 million for the three months
ended June 30, 1995 to $504.9 million for the three months ended June 30, 1996;
offset by a slight decrease in the average cost of interest-bearing liabilities
of 0.11% from 5.03% for the three months ended June 30, 1995 to 4.92% for the
same period ended June 30, 1996. The increase in interest expense was the
result of increased borrowings used to support the increase in the loan
portfolio. The Company plans an asset securitization for the fourth quarter of
1996 and to further reduce its securities portfolio. Proceeds from these
transactions will be used to fund its continued loan growth to further reduce
other debt.
PROVISION FOR LOAN LOSS AND NON-PERFORMING ASSETS. The Company maintains its
allowance for loan losses at level which is considered by management to be
adequate to absorb loan losses on existing loans, based on an evaluation of the
collectibility of loans and prior loan loss experience. The evaluation takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problems, the value of
related collateral, the regulators' stringent view of adequate reserve levels
for the thrift industry and the current economic conditions that may affect the
borrower's ability to pay. Loans are evaluated and categorized into risk
categories. For each risk category, the methodology assigns a percentage of
principal amount of the category that should be maintained as a general
valuation allowance. To the extent that the amount of loans categorized into
the respective risk categories requires the general valuation allowance to be
increased, the provision for loan losses will be impacted accordingly.
Therefore, in the event Avondale is required to increase its allowance for loan
losses, operating results could be adversely affected. The allowance for loan
losses is established through a provision for loan losses charged to expense.
The Company continues to provide for loan losses at a rate consistent with loan
growth as opposed to actual losses. The provision for loan losses increased
$75,000 to $475,000 for the three months ended June 30, 1996 from $400,000 for
the quarter ended June 30, 1995. For the six months ended June 30, 1996, the
provision for loan losses increased over 100% to $1,125,000 compared with
$530,000 during the six months ended June 30, 1995. The allowance for loan
losses was $4.3 million as of June 30, 1996 compared to $3.2 million as of June
30, 1995, while non-performing loans were 0.99% of total loans as of June 30,
1996, as compared to 2.40% as of June 30, 1995. The allowance for loan loss as
a percentage of loans outstanding remained the same at 1.63% for both June 30,
1996 and 1995.
NON-INTEREST INCOME: Noninterest income increased $41,000 for the quarter
ended June 30, 1996 when compared to the previous year. On a year-to-date
basis, noninterest income increased $601,000 to $1,719,000 for the six months
ended June 30, 1996 from $1,118,000 for the same period a year ago, due to
substantial securities gains as a result of managing the available-for-sale
portfolios. The Company had $1,095,000 in securities gains for the six months
ended June 30, 1996, compared to net gains of $444,000 for the six months ended
June 30, 1995. During the year the Company took advantage of market conditions
to reduce its exposure in securities index to the Cost of Funds Index ("COFI")
and to increasing accelerated prepayments of ARM securities. The proceeds from
sales were used to reduce other borrowings and/or reinvested in loan product.
Other than the security transactions, the most significant change in other
income which increased $82,000 for the quarter and $67,000 for the six month
period, was the result of increased fees from the sale of annuity products by
the Bank's financial services subsidiary.
15
NON-INTEREST EXPENSE: Noninterest expenses increased $611,000 or 19.6% to
$3.7 million for the three months ended June 30, 1996 from $3.1 million for the
three months ended June 30, 1995. For the six months ended June 30, 1996,
noninterest expenses increased $1,319,000 to $7.5 million from $6.2 million for
the six months ended June 30, 1995. This increase was attributable to increased
salaries and employee benefits of $765,000, primarily the result of a $586,000
amortization of restricted stock awards granted in late 1995 and additional
staff necessary to service the increase in loan accounts, an increase of
$222,000 in advertising and public relations related to marketing the Company's
consumer lending products, an increase of $184,000 in data processing expense
connected with the conversion of the Company's data processing provider and
increases in other operating expenses due to the increase of non-deferred loan
origination costs relating to increased loan originations, and the expense of
costs pertaining to becoming a public corporation. For the six months ending
June 30, 1996, the Company's efficiency ratio was 65.3%.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $13,000
for the three month period ended June 30, 1996 from the same period ended June
30, 1995. The respective income tax expense represented effective tax rates of
36.7% for the quarter ended June 30, 1996 and 35.2% for the three months ended
June 30, 1995. For the six months ended June 30, 1996 income taxes increased
$290,000 to $998,000. The effective tax rate for the six month periods ending
June 30, 1996 and 1995 were 34.7% and 33.9% respectively. The increase in the
effective tax rates is the result of sales of securities which were exempt from
state income taxes, being replaced by other interest earning assets which are
taxable for state tax purposes.
16
PART 11 - OTHER INFORMATION
The calculation of the Registrant's primary and fully diluted earnings per share
required by 601(b)(11) of Regulation S-K is presented below (dollars in
thousands, except per share data):
For the Three Months Ended June 30, 1996:
Primary
--------------------------------------
Net income $ 937
Average common shares outstanding 3,667
Common stock equivalent -
--------
Average primary shares outstanding 3,667
Primary earning per share $ 0.26
Fully diluted earnings per share
--------------------------------------
Net income $ 937
Average common shares outstanding 3,667
Common stock equivalent -
--------
Average fully diluted shares outstanding 3,667
Fully diluted earning per share $ 0.26
17
For the Six Months Ended June 30, 1996:
Primary
----------------------------------------
Net income $ 1,877
Average common shares outstanding 3,845
Common stock equivalent -
-------
Average primary shares outstanding 3,845
Primary earning per share $ 0.49
Fully diluted earnings per share
----------------------------------------
Net income $ 1,877
Average common shares outstanding 3,845
Common stock equivalent -
-------
Average fully diluted shares outstanding 3,845
Fully diluted earning per share $ 0.49
18
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on this 12th day of August, 1996.
AVONDALE FINANCIAL CORP.
(Registrant)
Robert S. Engelman, Jr.
President and Chief Executive Officer
/s/ Robert S. Engelman, Jr. (Principal Executive Officer)
- ---------------------------------
Howard A. Jaffe,
Vice President
and Chief Financial Officer
(Principal Financial Officer and
/s/ Howard A. Jaffe (Principal Executive Officer)
- ---------------------------------
19