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 September 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 Identification No.)
incorporation or organization)
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 November 12, 1996.
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
-----------------------------------------
FORM 10-Q
---------
SEPTEMBER 30, 1996
------------------
INDEX
- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1996,
December 31, 1995 and September 30, 1995..................... 2
Condensed consolidated statements of income for the three
months and nine months ended September 30, 1996 and
September 30, 1995............................................ 3
Condensed consolidated statements of stockholders' equity for
the nine months ended September 30, 1996 and
September 30 , 1995........................................... 4
Condensed consolidated statements of cash flows for the nine
months ended September 30, 1996 and September 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) SEP 30, 1996 DEC 31, 1995 SEP 30, 1995
------------ ------------ ------------
ASSETS (in thousands except per share data)
Cash and due from banks $ 6,029 $ 5,275 $ 4,489
Interest-bearing deposits 1,108 1,067 1,040
----------------------------------------
Total cash and cash equivalents 7,137 6,342 5,529
Securities available-for-sale- At fair value (amortized cost
Sep 30, 1996 - $37,212; Dec 31, 1995-$76,198; Sep 30, 1995 - $54,452) 37,113 77,879 56,012
Securities held-to-maturity -At amortized cost (fair value
Sep 30, 1996 - $6,852; Dec 31, 1995-$6,732; Sep 30, 1995 - $8,642) 6,895 6,880 8,875
Mortgage-backed securities available-for-sale-At fair value (amortized cost
Sep 30, 1996 - $169,640; Dec 31, 1995-$218,643; Sep 30, 1995 - $121,625) 170,626 219,121 121,112
Mortgage-backed securities held-to-maturity -At amortized cost (fair value
Sep 30, 1996 - $61,383; Dec 31, 1995-$65,244; Sep 30, 1995 - $157,026) 61,813 64,734 156,560
Loans 308,749 221,927 207,486
Less: Allowance for loan loss 4,516 3,460 3,456
----------------------------------------
Loans, net 304,233 218,467 204,030
Federal Home Loan Bank stock - at cost 4,790 4,415 4,415
Office buildings and equipment, net 4,296 3,978 4,143
Other real estate owned, net 502 837 785
Accrued interest receivable 4,868 5,063 4,429
Prepaid expenses and other assets 7,031 516 522
Deferred income tax 3,536 2,305 2,616
Income taxes receivable - - 735
----------------------------------------
Total assets $612,840 $610,537 $569,763
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $314,018 $335,861 $341,215
Advances from Federal Home Loan Bank 90,804 78,303 78,303
Securities sold under agreements to repurchase 102,025 76,792 52,880
Other borrowings 29,000 41,500 20,000
Advance payments by borrowers for taxes and insurance 283 1,455 2,404
Accrued interest payable 1,153 1,054 1,075
Income taxes payable 67 35 -
Other liabilities 16,717 8,622 9,306
----------------------------------------
Total liabilities 554,067 543,622 505,183
----------------------------------------
Commitments and Contingencies
Common stock ($.01 par: 10,000,000 shares authorized, 3,814,568 shares
issued and outstanding) 44 44 42
Capital surplus 43,018 43,018 40,528
Retained earnings 28,199 26,815 25,908
Treasury stock (580,000 shares at cost) (8,463) - -
Unrealized net gain (loss) on securities available-for-sale, net of tax of
($349) at Sep 30, 1996; $832 at Dec 31, 1995; and $406 at Sep 30, 1995 (550) 1,313 641
Common Stock acquired by ESOP (2,116) (2,116) (2,539)
Unearned portion of restricted stock awards (1,359) (2,159) -
----------------------------------------
Total stockholders' equity 58,773 66,915 64,580
----------------------------------------
Total liabilities and stockholders' equity $612,840 $610,537 $569,763
========================================
2
AVONDALE FINANCIAL CORP. FOR THE THREE MONTHS ENDED: FOR THE NINE MONTHS ENDED:
CONSOLIDATED STATEMENTS OF INCOME SEP 30, 1996 SEP 30, 1995 SEP 30, 1996 SEP 30, 1995
------------ ------------ ------------ ------------
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Loans $ 6,263 $ 4,520 $16,870 $12,830
Securities 791 1,418 3,297 3,581
Mortgage-backed securities 3,965 4,949 13,111 12,728
Other 131 108 384 444
------- ------- ------- -------
Total interest income 11,150 10,995 33,662 29,583
INTEREST EXPENSE:
Deposits 3,528 4,033 10,863 11,643
Advances from the Federal Home Loan Bank 1,348 1,213 3,891 3,250
Securities sold under agreements to repurchase 1,156 849 3,162 1,773
Other borrowings 447 432 1,258 733
------- ------- ------- -------
Total interest expense 6,479 6,527 19,174 17,399
NET INTEREST INCOME 4,671 4,468 14,488 12,184
Provision for loan losses 555 350 1,680 880
------- ------- ------- -------
Net interest income after provision for loan losses 4,116 4,118 12,808 11,304
NONINTEREST INCOME:
Net gains on trading activities 69 7 69 225
Net security gains 872 261 1,967 705
Net gains on sales of loans - 3 7 3
Loan servicing income 129 37 245 96
Fees for other customer services 90 70 262 205
Other operating income 110 69 439 331
------- ------- ------- -------
Total noninterest income 1,270 447 2,989 1,565
NONINTEREST EXPENSE:
Salaries and employee benefits 1,853 1,342 5,708 4,432
Occupancy and equipment expenses, net 401 464 874 1,392
Federal deposit insurance premiums 2,457 199 2,845 604
Advertising and public relations 96 91 518 291
Data processing 345 240 952 663
Real estate owned (income) expense, net 57 11 (22) (9)
Legal and professional 119 90 390 292
Other operating expenses 841 663 2,439 1,651
------- ------- ------- -------
Total noninterest expense 6,169 3,100 13,704 9,316
Income before income taxes (783) 1,465 2,093 3,553
Income tax expense (290) 573 709 1,281
------- ------- ------- -------
NET INCOME $ (493) $ 892 $ 1,384 $ 2,272
======= ======= ======= =======
PER COMMON SHARE:
Earnings per common share $ (0.14) $ 0.22 $ 0.37 n/a
Weighted average common shares outstanding 3,602,968 3,978,080 3,764,519 n/a
3
AVONDALE FINANCIAL CORP. FOR THE NINE MONTHS ENDED:
CONSOLIDATED STATEMENT OF CHANGES IN SEP 30, 1996 SEP 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 1,384 2,272
---------------------------
End of period 28,199 25,906
---------------------------
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 (1,863) 2,254
securities available-for-sale, net of
tax
---------------------------
End of period (550) 641
---------------------------
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 800
restricted stock
---------------------------
End of period (1,359) -
---------------------------
TOTAL STOCKHOLDERS' EQUITY $ 58,773 $ 64,578
===========================
4
AVONDALE FINANCIAL CORP. FOR THE NINE MONTHS ENDED:
CONSOLIDATED STATEMENTS OF CASH FLOWS SEP 30, 1996 SEP 30, 1995
------------- -------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,384 $ 2,272
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation 738 769
Amortization (accretion), net (3,321) 3,585
Provision for loan losses 1,680 880
Provision for deferred income taxes (49) (208)
Net gain (loss) on sales of securities available-for-sale (2,036) (766)
Net gains on sales of other real estate owned (202) (61)
Net changes in:
Income taxes receivable - 1,493
Prepaid expenses and other assets (6,515) 3,325
Accrued interest receivable 195 (1,446)
Income taxes payable 32 -
Accrued interest payable 99 (178)
Other liabilities 8,095 65,632
--------------------------
Net cash flows provided by operating activities $ 100 $ 75,297
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held-to-maturity - 600
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 42,750 31,554
Proceeds from sales of mortgage-backed securities available-for-sale 176,440 81,243
Purchases of securities available-for-sale (22,550) (71,750)
Purchases of mortgage-backed securities available-for-sale (148,960) (146,479)
Purchases of mortgage-backed securities held-to-maturity (3,199) (20,435)
Principal collected on mortgage-backed securities held-to-maturity 6,282 12,560
Principal collected on mortgage-backed securities available-for-sale 23,550 11,073
Principal collected on securities available-for-sale 465 -
Net increase in loans (89,006) (26,070)
Proceeds from sales of other real estate owned 2,097 502
Expenditures for office buildings and equipment (1,056) (563)
--------------------------
Net cash flows provided by (used in) investing activities $ 6,138 $(128,265)
--------------------------
5
AVONDALE FINANCIAL CORP. FOR THE NINE MONTHS ENDED:
CONSOLIDATED STATEMENTS OF CASH FLOWS SEP 30, 1996 SEP 30, 1995
------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock conversion expenditures $ - $ (562)
Net decrease in deposits (21,842) (1,455)
Net increase (decrease) in advance (1,171) 384
payments by borrowers for taxes and
insurance
Net increase in securities sold 25,233 52,880
under agreements to repurchase
Net increase (decrease) in other (12,500) 20,000
borrowings
Proceeds from Federal Home Loan Bank 62,500 25,000
advances
Repayment of Federal Home Loan Bank (50,000) (15,000)
advances
Unearned restricted stock 800 -
Purchase stock for treasury (8,463)
Refund on excess stock subscriptions - (40,758)
---------------------------
Net cash flows provided by (used in)
financing activities $ (5,443) $ 40,489
---------------------------
INCREASE (DECREASE) IN CASH AND CASH 795 (12,479)
EQUIVALENTS
CASH AND CASH EQUIVALENTS
Beginning of period 6,342 18,008
---------------------------
Ending of period $ 7,137 $ 5,529
===========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 19,075 $ 17,578
Income taxes paid 677 -
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 nine months ended September 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
September 30, 1996 and therefore do not represent a dilutive effect. These
options therefore are not included in the earnings per share calculation. As of
September 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 September 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% 17.89%
Core 3.00% 9.50%
Tangible 1.50% 9.50%
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
7
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.
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 nine month periods ended
September 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 polices 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 SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
GENERAL. Total assets increased $2.3 million or 0.4% to $612.8 million as
of September 30, 1996 from $610.5 million as of December 31, 1995. Although the
balance sheet did not experience any material growth, there was a significant
change in the mix of the Company's earning assets. Loans increased $86.8
million. These increases were offset by a $40.8 million decrease in securities
available-for-sale and a $48.5 million decrease in mortgage-backed securities
available-for-sale. The securities portfolio was substantially reduced in size
to accommodate the growing loan portfolio. At the same time the Company was
increasing both the credit quality and the liquidity of the investment
portfolio. The Company 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 3,889 home equity
line of credit loans with lines of $116.6 million for the nine months ended
September 30, 1996. It is the Company's intent to securitize and sell a
significant portion of its home equity consumer loan portfolio during the fourth
quarter of 1996. The Company had also originated a mobile home loan portfolio
and private label credit card portfolio which totaled $21.5 million and $11.3
million, respectively, as of September 30, 1996. It is expected that the private
label credit portfolio will continue to increase significantly during the next
twelve-month period. Other assets grew $6.5 million from December 31, 1995 to
September 30, 1996. This growth was primarily due to the receipt of prepaid
dealer fees on the mobile home loan portfolio. These prepaid fees totaled $4.8
million as of September 30, 1996. Total liabilities increased $10.4 million from
December 31, 1995 to September 30, 1996. Deposits decreased $21.8 million while
other borrowings increased $25.2 million over this period of time. Approximately
40% of the deposit decline can be attributed to the Company's previous
announcement of its intent to sell its Lake Forest Branch. Deposits at this
branch have decreased $8.5 million from December 31, 1995, to September 30,
1996. 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 nine months of
the year. The Company announced during
9
the quarter its intent to repurchase an additional 10% of the Company stock in
the open market during the next twelve months. The net unrealized gain (loss) on
securities available-for-sale had decreased $1.2 million over the nine month
period ended September 30, 1996 reflecting the general rise in interest rates.
Therefore total stockholders' equity had decreased $8.1 million from December
31, 1995 to September 30, 1996 in spite of $1.4 million in net income for the
nine month period ended September 30, 1996. As of September 30, 1996, book value
per share was $16.31, an increase from December 31, 1995, book value of $15.23.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995.
GENERAL. The Company experienced a net loss of $493,000 for the quarter ended
September 30, 1996, compared to a net income of $892,000 for the quarter ended
September 30, 1995. The net loss for the third quarter ended September 30, 1996
is attributed to the one-time special assessment to recapitalize the federal
depository insurance fund. This assessment totaled approximately $2.3 million or
approximately $0.40 per share after-tax. The net loss per share for the quarter
ended September 30, 1996 was $0.14, and the resulting year-to-date earnings per
share of $0.37 for the nine month period ended September 30, 1996. Without the
one-time assessment, quarterly and nine month after-tax earnings would have
increased approximately 5.3% and 23.9%, respectively, from the previous year's
comparable period. Net income for the quarter and nine month period would have
been $0.26 and $0.75 per share, respectively, without the assessment. No per
share comparison can be made as the Company became public in April, 1995. The
Company's return on average assets was to (0.33)% for the quarter ended
September 30, 1996 compared with 0.61% for the three months ended September 30,
1995. Without the one-time assessment, the Company's return on average assets
would have been 0.63% for the quarter ended September 30, 1996.
For the nine months ended September 30, 1996, net income was $1.4 million
compared to $2.3 million during the first three quarters of 1995. The Company's
return on average assets was 0.31% for the nine months ended September 30, 1996
compared with 0.56% for the comparable period in 1995. Without the one-time
special assessment the Company's return on average assets would have been 0.63%
for the nine months ended September 30, 1996.
NET INTEREST INCOME.
Net interest income increased $203,000 or 4.5% to $4.7 million for the quarter
ended September 30, 1996 from $4.5 million for the three months ended September
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 39.1% and since
September 30, 1995, loans outstanding have increased 48.8 percent or $101.3
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 3.31% compared to 3.15% during the quarter ended September 30, 1995.
On a year-to-date basis, the net interest margin was 3.38% compared to 3.13% for
the nine months ended September 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 Sep 30, 1996 For the three months ended Sep 30, 1995
-----------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
========================================= ===================================
Assets:
Interest-earning assets:
Loans receivable $ 279,336 $ 6,263 8.97 % $ 195,480 $ 4,520 9.25 %
Securities 52,147 922 7.07 76,525 1,526 7.98
Mortgage-backed securities 233,215 3,965 6.80 294,715 4,949 6.72
--------------------------- ------------------------
Total interest-earning assets 564,698 11,150 7.90 566,720 10,995 7.76
----------- -----------
Non-interest-earning assets 30,391 17,038
--------------- ----------
$ 595,089 $ 583,758
=============== ==========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Deposits $ 310,521 $ 3,528 4.54 % $ 335,373 $ 4,033 4.81 %
FHLB advances 90,803 1,348 5.94 84,217 1,213 5.76
Securities sold under repurchase
agreement 82,292 1,156 5.62 54,277 849 6.28
Other borrowings 33,363 447 5.36 29,417 432 5.87
--------------------------- ----------
516,979 6,479 5.01 503,284 6,527 5.19
Non-interest bearing deposits 6,900 4,136
Other liabilities 11,627 12,510
--------------- ----------
Total liabilities 535,506 519,930
Stockholders' equity 59,583 63,828
--------------- ----------
total liabilities and $595,089 $ 583,758
stockholders' equity
=============== ==========
Net interest income/Interest rate spread 4,671 2.89 % 4,468 2.57 %
========================= ======================
Net interest-earning assets/net
interest margin 47,719 3.31 % 63,436 3.15 %
=============== ============ =========
Ratio of interest-earning assets to
interest-bearing liabilities 109.23% 112.60%
=============== ==========
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:
Sep 30, 1996
Vs Three months ended:
Sep 30, 1995
----------------------------------------
Increase (Decrease) Due to
----------------------------------------
Volume Rate Net
------ ---- ---
Interest Income
Loans $ 1,880 $ (137) $ 1,743
Securities (431) (173) (604)
Mortgage-backed securities (1,046) 62 (984)
----------------------------------------
Total interest income 403 (248) 155
----------------------------------------
Interest Expense
Deposits (282) (223) (505)
Advances from the Federal Home
Loan Bank 98 37 135
Securities sold under agreements to
repurchase 394 (87) 307
Other borrowings 53 (38) 15
----------------------------------------
Total interest expense 263 (311) (48)
----------------------------------------
Net interest income $ 140 $ 63 $ 203
========================================
12
For the nine months ended Sep 30, 1996 For the nine months ended Sep 30, 1995
-------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
==================================== ======================================
Assets:
Interest-earning assets:
Loans receivable $ 249,505 $16,870 9.02 % $ 186,459 $ 12,830 9.17 %
Securities 64,840 3,681 7.57 71,449 4,025 7.51
Mortgage-backed securities 257,059 13,111 6.80 260,739 12,728 6.51
--------------------------- -------------------------
Total interest-earning assets 571,404 33,662 7.85 518,647 29,583 7.61
------------- ---------------
Non-interest-earning assets 22,992 17,966
-------------- ----------
$ 594,396 $ 536,613
============== ==========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Deposits $ 318,969 $10,863 4.54 % $ 342,551 $ 11,643 4.53 %
FHLB advances 90,603 3,891 5.73 76,584 3,250 5.66
Securities sold under repurchase 74,735 3,162 5.64 38,279 1,773 6.18
agreement
Other borrowings 31,456 1,258 5.33 14,934 733 6.54
--------------------------- -------------------------
515,763 19,174 4.96 472,348 17,399 4.91
Non-interest bearing deposits 6,124 4,052
Other liabilities 11,114 10,911
-------------- ----------
Total liabilities $ 533,001 487,311
Stockholders' equity 61,395 49,302
-------------- ----------
total liabilities and $594,396 $ 536,613
stockholders' equity
============== ==========
Net interest income/Interest rate spread 14,488 2.89 % 12,184 2.69 %
===================== ===========================
Net interest-earning assets/net 55,641 3.38 % 46,299 3.13 %
interest margin
============== ======= ========== ============
Ratio of interest-earning assets to
interest-bearing liabilities 110.79% 109.80%
============== ==========
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.
Nine months ended:
Sep 30, 1996
Vs Nine months ended:
Sep 30, 1995
-----------------------------------------
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
--------- ---------- ------------
Interest Income
Loans $ 4,263 $ (223) $ 4,040
Securities (375) 31 (344)
Mortgage-backed securities (188) 571 383
-----------------------------------------
Total interest income 3,700 379 4,079
-----------------------------------------
Interest Expense
Deposits (803) 23 (780)
Advances from the Federal Home
Loan Bank 602 39 641
Securities sold under agreements to
repurchase 1,542 (153) 1,389
Other borrowings 661 (136) 525
-----------------------------------------
Total interest expense 2,002 (227) 1,775
-----------------------------------------
Net interest income $ 1,698 $ 606 $ 2,304
=========================================
Interest Income: Interest income increased $155,000 to $11.2 million in the
three months ended September 30, 1996 from $11.0 million for the quarter ended
September 30, 1995. This increase was primarily due to the change in the mix of
interest-bearing assets. In spite of a decline in the average prime lending
rate, income on loans increased $1.7 million, the result of the substantial
increase in loan production. At the same time interest on securities decreased
$604,000 and interest on mortgage-backed securities decreased $984,000. 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. The average securities portfolio and
mortgage-backed security portfolio declined as the Company replaced securities
with loans. For the nine months ended September 30, 1996, interest income
increased 13.8% or $4.1 million to $33.7 million from $29.6 million when
compared to the first nine months of 1995. Substantially all of this increase is
attributable to the increased level of loans outstanding. Included in interest
for the nine months ended September 30, 1996 was approximately $290,000 of
accelerated accretion of discounts on callable securities that were called early
in the year.
14
INTEREST EXPENSE. Interest expense decreased $48,000 for the three months ended
September 30, 1996 as compared to the quarter ended September 30, 1996. Though
the average interest bearing liabilities increased $13.7 million from $503.3
million for the three months ended September 30, 1995 to $517.0 million for the
three months ended September 30, 1996; the volume increase was offset by a
decrease in the average cost of interest-bearing liabilities of 0.18% from 5.19%
for the three months ended September 30, 1995 to 5.01% for the same period ended
September 30, 1996. 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. Interest expense increased $1.8 million for the nine months
ended September 30, 1996 as compared to the same period ended September 30,
1995. This increase is primarily due to an increase in average interest-bearing
liabilities of $43.5 million from $472.3 million for the nine months ended
September 30, 1995 to $515.8 million for the nine months ended September 30,
1996 as well as a slight increase in the cost of the Company's interest-bearing
liabilities of 0.05% from the period ended September 30, 1995 to the nine months
ended September 30, 1996. The Company utilized increased borrowings for the nine
months ended September 30, 1996, as compared to the same period a year prior.
Average borrowings increased $67.0 million from $129.8 million for the year-to-
date period ended September 30, 1995 to $196.8 million for the nine months ended
September 30, 1996. The increase was response to a decrease in the average
deposits outstanding of $23.6 from $342.6 million for the period ended September
30, 1995 to $319.0 for the period ended September 30, 1996 and as a source to
fund the significant loan growth.
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
$205,000 to $555,000 for the three months ended September 30, 1996 from $350,000
for the quarter ended September 30, 1995. For the nine months ended September
30, 1996, the provision for loan losses increased 90.9% to $1.7 million compared
with $880,000 during the nine months ended September 30, 1995. The allowance for
loan losses was $4.5 million as of September 30, 1996 compared to $3.5 million
as of September 30, 1995, while non-performing loans were 1.24% of total loans
as of September 30, 1996, as compared to 1.91% as of September 30, 1995. The
allowance for loan loss as a percentage of loans outstanding decreased 0.21%
from 1.67% as of September 30, 1995 to 1.46% as of September 30, 1996.
NON-INTEREST INCOME: Noninterest income increased $823,000 for the quarter ended
September 30, 1996 when compared to the previous year. On a year-to-date basis,
noninterest income increased $1.4 million to $3.0 million for the nine months
ended September 30, 1996 from $1.6 million 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 $2.0 million in securities gains for the nine months
ended September 30, 1996, compared to net gains of $705,000 for the nine months
ended September 30, 1995. Avondale manages its securities portfolio on a total
return basis. The available-for-sale security portfolio of the Bank underwent
significant change over the first nine months of 1996. As planned the securities
portfolio was substantially reduced in size to accommodate the growing loan
portfolio. At the same time the Company was increasing both the credit quality
and the liquidity of the securities portfolio. Securities
15
available-for-sale has decreased $40.8 million and mortgage-backed securities
available-for-sale have decreased $48.5 million since December 31, 1995.
Secondly, the composition of the portfolio changed to take advantage of
favorable movements in certain sectors of the mortgage market and to position
the portfolio for anticipated moves in interest rates. Given the total return
objective, during the first nine months of the year, the total return of the
available-for-sale portfolio was 6.4% compared with a benchmark return of a mix
of one to three year corporate and government securities of 4.1%. Other than the
security transactions, the most significant change in non-interest income was
loan servicing income which increased $92,000 or 248.6% for the quarter and
$149,000 or 155.2% for the nine month period, which was the result of the
Company's focus on its consumer loan programs.
NON-INTEREST EXPENSE: Noninterest expenses increased $3.1 million or 99.0% to
$6.2 million for the three months ended September 30, 1996 from $3.1 million for
the three months ended September 30, 1995. For the nine months ended September
30, 1996, noninterest expenses increased $4.4 million to $13.7 million from $9.3
million for the nine months ended September 30, 1995. A large portion of the
increase was related to a special assessment of the federal deposit insurance
fund of $2.3 million. Salaries and employee benefits increased $1.3 million on a
year-to-date basis and $511,000 for the quarter ended September 30, 1996
compared to the quarter ended September 30, 1995, primarily the result of a
$800,000 year-to-date and $267,000 quarterly amortization of restricted stock
awards granted in late 1995 and additional staff necessary to service the
increase in loan accounts, a year-to-date increase of $289,000 and a quarterly
increase of $105,000 in data processing expense connected with the conversion of
the Company's data processing provider and ongoing data processing costs
associated with servicing the private label credit services line of business,
and increases in other operating expenses due to the increase of non-deferred
loan origination costs relating to increased loan originations, including
temporary personnel costs utilized during the conversion and period of rapid
loan growth. For the nine months ending September 30, 1996, the Company's
efficiency ratio was 78.4%. Without the effect of the special assessment of the
federal deposit insurance fund the efficiency ratio would be 65.4% for the nine
months ended September 30, 1996, compared to 67.8% for the nine months ended
September 30, 1995.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased $863,000
for the three month period ended September 30, 1996 from the same period ended
September 30, 1995. The respective income tax expense represented effective tax
rates of 37.0% for the quarter ended September 30, 1996 and 39.11% for the three
months ended September 30, 1995. For the nine months ended September 30, 1996
income taxes decreased $572,000 to $709,000. The effective tax rate for the nine
month periods ending September 30, 1996 and 1995 were 33.9% and 36.1%
respectively. The decrease in the effective tax rates is the result of the
reduction of income from the special FDIC assessment which offsets 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 Sept 30,1996:
Primary
---------------------------------------
Net loss $ (493)
Average common shares outstanding 3,603
Common stock equivalent -
-------
Average primary shares outstanding 3,603
Primary earning per share $(0.14)
Fully diluted earnings per share
---------------------------------------
Net income $ (493)
Average common shares outstanding 3,603
Common stock equivalent -
------
Average fully diluted shares outstanding 3,603
Fully diluted earning per share $(0.14)
17
For the Nine Months Ended Sept 30, 1996:
Primary
---------------------------------------
Net income $1,384
Average common shares outstanding 3,765
Common stock equivalent -
------
Average primary shares outstanding 3,765
Primary earning per share $ 0.37
Fully diluted earnings per share
---------------------------------------
Net income $1,384
Average common shares outstanding 3,765
Common stock equivalent -
------
Average fully diluted shares outstanding 3,765
Fully diluted earning per share $ 0.37
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 November, 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