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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-24566
AVONDALE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
36-3895923
(I.R.S. EMPLOYER IDENTIFICATION NO.)
20 NORTH CLARK STREET, CHICAGO, ILLINOIS 60602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ^
The aggregate market value of the voting shares held by nonaffiliates of the
Registrant was $62,100,000, as of March 18, 1997. Solely for the purpose of
this computation, it has been assumed that executive officers and directors of
the Registrant are "affiliates".
There were issued and outstanding 3,700,831 common shares of the
Registrant's Common as of March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Part III is incorporated by reference from the Registrant's
Proxy Statement dated March 31, 1997 for the Annual Meeting of Stockholders to
be held May 9, 1997 pursuant to Regulation 14A.
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INDEX
PAGE NO.
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 10
Item 3 Legal Proceedings........................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......... 11
PART II
Market for Registrant's Common Stock and Related Stockholder
Item 5 Matters..................................................... 11
Item 6 Earnings Summary and Selected Financial Data................ 12
Management's Discussion and Analysis of Financial Condition
Item 7 and Results of Operations................................... 13
Item 8 Financial Statements and Supplementary Data................. 37
Changes in and Disagreements with Accountants on Accounting
Item 9 and Financial Disclosure.................................... 68
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 68
Item 11 Executive Compensation...................................... 68
Security Ownership of Certain Beneficial Owners and
Item 12 Management.................................................. 68
Item 13 Certain Relationships and Related Transactions.............. 68
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14 8-K......................................................... 68
Signatures.................................................. 71
2
PART I
ITEM 1. BUSINESS
General
Avondale Financial Corp. (the "Company"), a Delaware corporation, was
organized for the purpose of becoming the savings and loan holding company for
Avondale Federal Savings Bank ("Avondale" or the "Bank"). The Company owns all
of the outstanding stock of the Bank issued on April 3, 1995 in connection
with the completion of the Bank's conversion from the mutual to stock form of
organization (the "Conversion"). At December 31, 1996 the Company had
approximately 1,800 shareholders of record, 3,525,288 shares of common stock
outstanding and total consolidated assets of approximately $595.6 million.
Services
Avondale maintains three offices in the north and northwest areas in the
city of Chicago, as well as one in downtown Chicago. In addition, there is one
Chicago suburban office in Niles, Illinois. Avondale sold its Lake Forest
branch in late 1996. Avondale currently emphasizes providing its retail
deposit products and services to the neighborhoods surrounding offices. These
services include checking, savings, NOW and money market deposit accounts.
Automated Teller Machines (ATMs), which provide 24-hour banking services are
installed at branch locations. Customers are also able to access their
accounts at any time through Avondale's automated phone banking. Avondale has
also offered its customers a debit card, which can be used anywhere MasterCard
is accepted. The Bank established Avondale Community Development Corporation
(the "Community Development Subsidiary" or "CDC"), to engage in community
lending and equity investments to facilitate the construction and
rehabilitation of housing in low and moderate neighborhoods in the Bank's
market area. The Bank's lending products consist primarily of mortgages,
including equity lines of credit, on owner-occupied and non-owner occupied and
one to four family residences. The Bank has expanded its wholesale
distribution channels through third party brokers and other financial
institutions to offer equity lines of credit in thirty-two different states.
To a lesser extent, Avondale also originates multi-family, commercial real
estate, construction, development, and consumer loans, including mobile home
loans. In 1996 the Bank launched Private Label Credit Services, through this
business line the Bank provides private label credit cards to individual
customers of manufacturers, wholesalers and/or retailers who want to use a
proprietary credit card as a way to supplement their marketing efforts by
offering the consumer unique, promotional credit card programs. The Bank also
offers investment products and insurance through its wholly-owned subsidiary,
Avondale Financial Services, Inc. ("AFS"). Revenues are principally derived
from interest on loans, investment securities and fee income.
Lending Activities
General. The Company has emphasized the origination of ten year adjustable-
rate equity lines of credit primarily secured by first and second liens on
residential real estate. The Company has also focused on implementing a new
business line consisting of private label credit cards originated through
various manufacturers, wholesalers and/or retailers programs. Avondale had
expanded its mobile home loan portfolio in the year ended December 31, 1996,
however, expect the business to remain at current levels for the next year.
The Company continues to offer mortgage loans consisting of one to four family
residential fixed-rate mortgage and adjustable-rate mortgage ("ARM") loans
and, to a lesser extent, multi-family loans, commercial real estate loans,
construction or development loans and construction and other consumer loans.
Equity Lines of Credit. During 1996, the Company continued to emphasize the
origination of home equity lines of credit. Avondale primarily originates home
equity lines of credit using independent brokers. The Company is able to
utilize an automated delivery system in conjunction with credit scoring in
originating these loans. This process allows the Company to make quick
approval decisions in regions throughout the country. Avondale's client base
has expanded to thirty two states in the year ended December 31, 1996. In
November, 1996 the Company successfully completed its first securitization and
sale of approximately $74.7 million of Home Equity Lines of Credit. The
Company retained the servicing on the portfolio that was sold. As of December
31, 1996 equity lines of credit totaled $120.4 million or 36.9% of Avondale's
gross loan portfolio.
3
Including the loans that were sold and continue to be managed by the Company,
as of December 31, 1996 the home equity lines of credit under management
totaled $194 million, or 48.6% of the total loan portfolio under management
compared to $79.8 million or 36.3% as of December 31, 1995.
The Company's equity lines of credit consist primarily of first, second and
a few third mortgage liens on both owner-occupied and non-owner-occupied
properties, which generally had interest tied to the prime rate, maturities
between five to ten years and required interest-only monthly payments until
maturity when the outstanding amount is due in full. At December 31, 1996,
$90.9 million or 75.5%, of the Company's equity lines of credit were secured
by second mortgage liens, $20.4 million or 17.0% were secured by first
mortgage and $9.0 million or 7.5% were secured by third mortgages. In
addition, $4.9 million of the equity lines of credit were secured by non-
owner-occupied properties ($2.0 million by first mortgage liens and $652,000
by second mortgage liens). Prior to 1995 these equity lines of credit were
generally underwritten so that the total commitment amount (including any
unused portion of the equity line), when combined with the balance of the
first mortgage loan, if any, did not exceed 80% of the appraised value of the
property. Currently, these equity lines of credit are granted under 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. These equity lines of credit are written
so that the total commitment amount (including any unused portion of the
equity line), when combined with the balance of the first mortgage loan, if
any, can be granted up to 100% of the appraised value of the property. For the
year ended December 31, 1996 $191.4 million equity lines of credit were
originated, which was 49.3% of total loans originated for the period. As of
December 31, 1996, $58.4 million, or 49.5% of the equity lines of credit
outstanding, have loan-to-value ratios of over 80%.
One-to-Four Family Residential Real Estate Lending. The Company originates
permanent loans, both fixed and adjustable rate, and a limited number of
construction loans, secured by one-to-four family residences, which at
December 31, 1996 totaled $101.1 million, or 31.0% of the Company's gross
portfolio.
At December 31, 1996, approximately $20.5 million, or 6.3%, of the Company's
gross one-to-four family residential real estate loan portfolio, are ARMs tied
to the prime rate of interest and have rate adjustment limitations. These
loans have contractual maturities of 30 years, require interest-only payments
for the first five years, then amortize ratably over the last 25 years of the
loan.
The Company also originates one-to-four family residential ARMs, which are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on substantially all of the ARMs originated by the Company are
subject to adjustment at one year intervals. The Company's ARM products
generally carry interest rates which are reset to a stated margin over an
independent index. Increases or decreases in the interest rate of the
Company's ARMs are generally limited to 2% at any adjustment date and 6% over
the life of the loan. Certain ARMs are convertible into fixed rate loans
between the 13th and 60th months. The Company's ARMs do not contain prepayment
penalties or produce negative amortization. At December 31, 1996, the total
balance of one-to-four family one year ARMs was $34.6 million, or 10.6% of the
Company's gross one-to-four family residential loan portfolio.
The Company also originates a limited amount of fixed-rate residential
mortgage loans. These loans generally are underwritten under guidelines
allowing them to be sold in the secondary market.
The Company originates residential mortgage loans with loan-to-value ratios
up to 95%. On mortgage loans exceeding an 80% loan-to-value ratio at the time
of origination, however, the Company generally requires private mortgage
insurance in an amount intended to reduce the Company's exposure to 80% or
less of the appraised value of the underlying collateral.
Multi-Family and Commercial Real Estate Lending. The Company originates
permanent loans secured by multi-family and commercial real estate. At
December 31, 1996, the Company's multi-family and commercial real estate loan
portfolio totaled $23.8 million, or 7.3% of the Company's gross loan
portfolio. At December 31, 1996, there was no commercial real estate loan and
6 multi-family real estate loans with net book values above $500,000.
4
Avondale's permanent multi-family and commercial real estate loan portfolio
includes loans secured by apartments, retail and other business properties,
the majority of which are located within the north and northwest, Chicago
area. Multi-family properties are generally from 5 to 24 units. The Company
generally originates multi-family and commercial real estate loans with loan-
to-value ratios up to 80%.
Construction or Development Lending. The Company has made a limited number
of construction loans to individuals for the construction of their residences
as well as to builders and developers for the construction of one to four
family residences, the development of one to four family lots and commercial
real estate. Included in this category are loans for the construction of three
low and moderate income rental apartment buildings for senior citizens. Each
of these loans represent approximately 10% of the project's total cost with
the balance of the funds subsidized by various entities, including
governmental bodies. At December 31, 1996, the Company had 4 construction
loans outstanding with aggregate principal balance of $2.2 million,
representing 0.7% of the Company's gross loan portfolio.
Private Label Credit Services. During 1996 the Company implemented the
Private Label Credit Services line of business. Avondale was able to
capitalize on its ability to use credit scoring efficiently in giving third
party merchants the ability to offer various programs in which they could
offer a private label credit card through the Company with various rates based
on the customer's individual credit score. Avondale also allows the merchant
to run various marketing promotions whereby the customer may be allowed
specific time frames where interest is not charged. At December 31, 1996 the
Company had 26 different marketing plans based on deferred billing periods,
credit scores and merchant. As of December 31, 1996 the private label credit
services portfolio totaled $56.9 million or 17.5% of the Company's gross loan
portfolio. At December 31, 1996 there are 128,000 Private Label Credit
accounts open.
Consumer Lending. During the fiscal year ended December 31, 1996 the Company
continued originating mobile home loans through a third party broker. These
loans are secured by the mobile home and are written so that collections of
delinquent payments and loss risk are the responsibility of the broker.
Avondale maintains the reserves on these loans at the Bank. As of December 31,
1996 the Company had $21.4 million of outstanding mobile home loans with
reserves of $3.3 million. The Company originates a limited amount of consumer
loans secured by deposit accounts. At December 31, 1996 the Company had
$59,000 of outstanding consumer loans secured by deposit accounts.
Foreign Operations
The Company does not engage in any operations in foreign countries.
Employees
At December 31, 1996, the Company and its subsidiary had a total of 153
employees, including 14 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Competition
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks,
credit unions and mortgage bankers making loans secured by real estate. Other
savings institutions, commercial banks and credit unions provide vigorous
competition in consumer lending and deposit gathering. Avondale also competes
with money funds and other non-banking organizations for deposit funds.
Avondale's share of the deposit market in Cook and Lake Counties, Illinois is
less than 1%.
5
Supervision and Regulation
General. The Company is subject to broad federal regulation and oversight
extending to all its operations. Avondale is a member of the Federal Home Loan
Bank ("FHLB") of Chicago and is subject to certain limited regulation by the
Federal Reserve Board. The Bank is a member of the Savings Association
Insurance Fund (the "SAIF") and the deposits of Avondale are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Federal Regulation of Savings Association. The Office of Thrift Supervision
("OTS") has extensive authority over the operations of savings associations.
As part of this authority, Avondale is required to file periodic reports with
the OTS and is subject to periodic examinations by the OTS and the FDIC. The
last regular safety and soundness OTS examination of the Company and the Bank
was as of January 6, 1997. In addition, the OTS conducts examinations to
review compliance with the Community Reinvestment Act ("CRA").
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. In addition, the investment,
lending and branching authority of Avondale is prescribed by federal laws and
regulations, and it is prohibited from engaging in any activities not
permitted by such laws and regulations.
The Bank's legal lending limit for loans-to-one-borrower is equal to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At December 31,
1996, Avondale's lending limit under this restriction was $9.5 million. The
Bank is in compliance with its legal lending limit.
The OTS, as well as the other federal banking agencies, have adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. The OTS and other
federal banking agencies have also proposed additional guidelines on asset
quality and earnings standards. No assurance can be given as to the final form
of the proposed regulations and no prediction can be made as to the effect of
such regulations on the Bank.
Insurance of Accounts and Regulation by the FDIC. Avondale is a member of
the SAIF, which is administered by the FDIC. The FDIC may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are based upon a risk-based deposit
insurance assessment system. Under the system, all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation.
Institutions classified as well capitalized (i.e., a core capital ratio of at
least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1
risk-based capital") of at least 6% and a risk-based capital ratio of at least
10%) and considered healthy would pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core and Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern would pay the highest
premium. Risk classification of all insured institutions will be made by the
FDIC
6
for each semi-annual assessment period. The FDIC is authorized to increase
assessment rates, on a semiannual basis, if it determines that the reserve
ratio of the SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. The Bank is a Tier 1 organization.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
The FDIC Board of Directors voted in October, 1996 to issue a final rule
imposing a special assessment of approximately 65.7 basis points to the SAIF
insured institutions. In November, 1996 this assessment was imposed to
capitalize the SAIF at its target Designed Reserve Ratio (DRR) of 1.25% of
insured deposits. This assessment was applied against SAIF assessable deposits
held by institutions as of March 31, 1995. The assessment paid by the Company
amounted to $2.3 million. With the SAIF now capitalized at the target DRR by
the special assessment, the FDIC is currently required to set assessment rates
so as to maintain the target DRR. The SAIF rate schedule should lower overall
rates on assessments paid to SAIF, while simultaneously widening the spread
between the lowest and highest rates to improve the effectiveness of the
FDIC's risk-based premium system. The proposed rule should establish a SAIF
rate schedule of between 0 and 27 basis points. As of January, 1997 the
Financing Corporation charge on SAIF assessable deposits is estimated to be
approximately 6.4 basis points.
Regulatory Capital Requirements. Federally insured savings associations,
such as Avondale, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The capital regulations require tangible
capital of at least 1.5% of adjusted total assets (as defined by regulation).
At December 31, 1996, Avondale had tangible capital of $58.9 million, or 9.9%
of adjusted total assets, which is $50.0 million above the minimum leverage
ratio requirement of 1.5% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. At December 31, 1996, Avondale
had risk-based capital of $63.1 million and risk-weighted assets of $335.0
million; or capital of 19.0% of risk-weighted assets.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is based upon the present value of expected cash flows from balance
sheet assets, and liabilities and off-balance sheet contracts. The rule
provides for a two quarter lag between calculating interest rate risk and
recognizing any deduction from capital.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the association would be reduced below the amount required to be maintained
for the liquidation account established in connection with its mutual to stock
conversion.
7
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account.
Generally Tier 1 associations, such as Avondale, which are associations that
before and after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of the association's net income for the
most recent four quarter period. However, a Tier 1 association deemed to be in
need of more than normal supervision by the OTS may be downgraded to a Tier 2
or Tier 3 association as a result of such a determination. Avondale has not
been notified of a need for more than normal supervision.
Tier 1 associations proposing to make a capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. As a
subsidiary of the Company, the Bank is also required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). On
December 19, 1991, FDICIA was enacted into law. FDICIA contains, among other
things: (i) truth-in-savings legislation that requires financial institutions
to disclose terms, conditions, fees and yields on deposit accounts in a
uniform manner; (ii) provisions that impose audit requirements and expand the
role of the independent auditor; (iii) provisions that require regulatory
agencies to examine financial institutions more frequently than was required
in the past; (iv) provisions that require the expedited resolution of
undercapitalized financial institutions; (v) provisions that require
regulatory agencies to develop a method for financial institutions to provide
information concerning the estimated fair market value of assets and
liabilities as supplemental disclosures to the financial statements filed with
the regulatory agencies; (vi) provisions that require the regulatory agencies
to adopt regulations that facilitate cross-industry transactions, and provide
for the acquisition of banks by thrift institutions.
FDICIA provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized," or
"undercapitalized." Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: requiring
the submission of a capital restoration plan; placing limits on asset growth,
and restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate the
institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution.
Truth-In-Savings Act. FDICIA requires the Federal Reserve Board to adopt
regulations implementing the Truth-in-Savings regulations. The Federal Reserve
Board's Truth-in-Savings regulations took effect on June 21, 1993, and
contain, as key elements: (i) a requirement that institutions disclose yields,
fees, penalties and costs for all interest-bearing accounts; (ii) a
requirement that institutions use the term "annual percentage yield" in
advertisements; (iii) a requirement that institutions provide 30 days notice
prior to reducing rates on most accounts; and (iv) a requirement that interest
be paid on entire balances rather than investable funds.
Community Reinvestment. Under the CRA, as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the
8
CRA. The CRA requires the OTS to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. Federal law requires
public disclosure of an institution's CRA rating and that the OTS provide a
written evaluation of an institution's CRA performance utilizing a four-tiered
description rating system.
The CRA and implementing regulations require that the federal banking
regulators take into account a financial institution's record and performance
under the CRA in determining whether to grant approval of applications for,
among other things, branches and other deposit facilities, mergers and holding
company acquisitions. An applicant's performance under the CRA may be the
basis for the regulators to deny such applications.
Liquidity. All savings associations are required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g. cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, Avondale was in compliance with both
requirements, with an overall liquid asset ratio of 10.9%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must support its classification of and accounting
for loans and securities (i.e., whether held for investment, sale or trading)
with appropriate documentation. Avondale is in compliance with these amended
rules.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (which consists of total assets less intangibles,
properties used to conduct the savings association's business and liquid
assets not exceeding 20% of total assets) in qualified thrift investments on a
monthly average for nine out of every twelve months on a rolling basis. Such
investments primarily consist of residential housing related loans and
investments. At December 31, 1996, the Bank met the test and has always met
the test since its effectiveness.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of Avondale include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Bank's subsidiaries are not deemed affiliates; however, the
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
9
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Avondale or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
Federal Securities Law. The Common Stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1996, Avondale was in compliance with
these reserve requirements.
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations
to exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. Avondale is a member of the FHLB of Chicago,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB system.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing.
As a member of the FHLB of Chicago, Avondale is required to purchase and
maintain stock in the FHLB of Chicago. At December 31, 1996, the Bank had $4.8
million in FHLB stock which was in compliance with this requirement.
Government Monetary Policies and Economic Controls
The earnings and growth of the savings and loan industry are affected by the
credit policies of monetary authorities, including the Federal Reserve System.
An important function of the Federal Reserve System is to regulate the
national supply of financial institution credit in order to combat recession
and curb inflationary pressures. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are open market
operations in U.S. government securities, changes in reserve requirements
against member institutions deposits and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence
overall growth of loans, investments and deposits, and may also affect
interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on the operating
results of savings banks in the past and are expected to continue to have such
an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of credit policies by monetary and fiscal
authorities, including the Federal Reserve System, no prediction can be made
as to possible future changes in interest rates, deposit levels and loan
demand, or their effect on the business and earnings of the Company.
ITEM 2. PROPERTIES
The Company conducts its business at its main office and four other retail
branch locations in its primary market area. All of the branches have ATM's.
The Company also has a loan production and servicing office. The following
table sets forth information relating to each of the Company's offices as of
December 31, 1996. The total net book value of Avondale's premises and
equipment (including land, building and leasehold improvements and furniture,
fixtures and equipment) at December 31, 1996 was $3.9 million.
10
MAIN OFFICE:
- ------------
20 North Clark Street
Chicago, Illinois
BRANCH OFFICES:
- ---------------
2965 North Milwaukee Avenue 6033 N. Sheridan Road
Chicago, Illinois Chicago, Illinois
7557 West Oakton 8300 W. Belmont Avenue
Niles, Illinois Chicago, Illinois
LOAN PRODUCTION AND
SERVICING OFFICE:
- -------------------
800 Roosevelt Road
Glen Ellyn, Illinois
The Company has signed a contract to lease the office space at 900 Frontage
Road, Woodridge, Illinois as a loan servicing and production office.
The Company maintains the depositor and borrower customer records, as well
as the Company's general ledger, with an outside service bureau. The net book
value of the Company's data processing and computer equipment at December 31,
1996 was $1.2 million.
ITEM 3. LEGAL PROCEEDINGS
The Company, the Bank and its subsidiaries are involved from time to time as
plaintiff or defendant in various legal actions arising in the normal course
of their businesses. While the ultimate outcome of pending proceedings cannot
be predicted with certainty, it is the opinion of management, after
consultation with counsel representing the Company, the Bank or its
subsidiaries in the proceedings, that the resolution of these proceedings
should not have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"AVND." The approximate number of shareholders of record of Common Stock as of
December 31, 1996 was 1,400. Certain of the Company's shares are held in
"nominee" or "street" name and accordingly, the number of beneficial owners of
such shares is not known. As of December 31, 1996 there were 3,525,288 shares
of Common Stock outstanding.
MARKET INFORMATION
MARKET PRICE
RANGE
-------------
1996 DIVIDENDS PAID BOOK VALUE HIGH LOW
- ---- -------------- ---------- ------ ------
Quarter ended December 31.............. $ -- $17.22 $17.38 $14.25
Quarter ended September 30............. -- 16.31 14.63 12.50
Quarter ended June 30.................. -- 16.33 14.50 12.75
Quarter ended March 31................. -- 16.21 15.25 14.00
1995
- ----
Quarter ended December 31.............. -- 16.00 15.25 14.00
Quarter ended September 30............. -- 16.23 15.25 12.88
Quarter ended June 30.................. -- 16.04 13.13 11.25
11
ITEM 6. EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other data
of the Company at the dates and for the periods indicated (in thousands). The
information is derived in part from and should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
SELECTED FINANCIAL DATA
FOR THE NINE
FOR THE MONTHS ENDED FOR THE FOR THE FOR THE
YEAR ENDED DEC. 31, YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1996 1995 MAR. 31, 1995 MAR. 31, 1994 MAR. 31, 1993
------------- ------------ ------------- ------------- -------------
Income Statement Data:
Interest income......... $45,881 $32,238 $32,745 $32,802 $38,216
Interest expense........ 25,917 18,941 17,832 16,967 23,964
------- ------- ------- ------- -------
Net interest income... 19,964 13,297 14,913 15,835 14,252
Provision for loan
losses................. 4,293 1,150 610 1,200 932
------- ------- ------- ------- -------
Net interest income
after provision
for loan losses...... 15,671 12,147 14,303 14,635 13,320
Noninterest income...... 10,403 1,637 (5,176) 1,052 1,272
Noninterest expense..... 19,506 9,223 11,443 11,060 21,225
------- ------- ------- ------- -------
Income before income
taxes,
extraordinary item and
cumulative
effect of accounting
change................. 6,568 4,561 (2,316) 4,627 (6,633)
Provision (benefit) for
income taxes........... 2,352 1,784 (896) 1,840 (2,642)
Extraordinary item, net
of tax................. -- -- -- (242) --
Cumulative effect of
accounting change,
net of tax............. -- -- -- 162 --
------- ------- ------- ------- -------
Net income (loss)....... $ 4,216 $ 2,777 $(1,420) $ 2,707 $(3,991)
======= ======= ======= ======= =======
DEC. 31, 1996 DEC. 31, 1995 MAR. 31, 1995 MAR. 31, 1994 MAR. 31, 1993
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 9,074 $ 6,342 $ 35,642 $ 4,691 $ 7,297
Securities available-
for-sale............... 35,901 77,879 54,068 -- --
Securities held-to-
maturity............... 6,498 6,880 10,364 14,003 16,507
Mortgage-backed
securities available-
for sale............... 136,418 219,121 73,600 136,172 --
Mortgage-backed
securities
held-to-maturity....... 61,438 64,734 165,719 119,681 241,849
Loans, net.............. 317,300 218,467 181,349 183,399 235,657
Federal Home Loan Bank
stock.................. 4,790 4,415 3,915 3,915 3,531
All other assets........ 24,152 12,699 15,046 13,106 13,471
-------- -------- -------- -------- --------
Total assets............ $595,571 $610,537 $539,703 $474,967 $518,312
======== ======== ======== ======== ========
Deposits................ $330,655 $335,861 $347,096 $362,174 $414,197
FHLB advances........... 90,803 78,303 63,303 63,303 57,500
Securities sold under
repurchase
agreements............. 69,146 76,792 21,398 9,298 9,725
Other borrowings........ 32,000 41,500 -- 3,000 --
All other liabilities... 12,078 11,166 84,336 13,258 14,139
Stockholders' equity.... 60,889 66,915 23,570 23,934 22,751
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity... $595,571 $610,537 $539,703 $474,967 $518,312
======== ======== ======== ======== ========
12
AT OR FOR THE AT OR FOR THE AT OR FOR THE AT OR FOR THE AT OR FOR THE
YEAR NINE MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DEC. 31, 1996 DEC. 31, 1995 MAR. 31, 1995 MAR. 31, 1994 MAR. 31, 1993
------------- ------------- ------------- ------------- -------------
SELECTED FINANCIAL
RATIOS: (4)
Performance Ratios:
Return on average
assets (1),(2)....... 0.71% 0.65% (0.29)% 0.53% (0.72)%
Return on average
equity (1),(2)....... 6.87 5.86 (6.22) 1.18 (14.69)
Net interest rate
spread............... 3.00 2.62 2.99 3.02 2.48
Net interest margin... 3.48 3.19 3.20 3.23 2.66
Efficiency ratio (1),
(2).................. 64.24 61.76 117.52 65.49 136.72
Other expense to
average assets....... 3.27 2.15 2.36 2.18 3.84
Average interest-
earning assets to
average interest-
bearing liabilities.. 110.77 112.66 105.47 106.07 104.00
Net interest income to
other expense........ 102.35 144.17 130.32 143.17 67.15
Asset Quality Ratios:
Non-performing loans
to total loans....... 1.63% 1.98% 2.23% 2.59% 2.78%
Non-performing assets
to total assets...... 0.93 0.86 0.82 1.07 1.47
Allowance for loan
losses to total
loans................ 2.22 1.56 1.52 1.51 0.72
Allowance for loan
losses to non-
performing loans..... 136.15 78.85 67.93 57.95 25.77
Capital Ratios:
Average equity to
average assets....... 10.28% 11.02% 4.71% 4.78% 4.92%
Equity to total
assets............... 10.22 10.96 4.37 5.07 4.39
Tangible and Core
capital (3).......... 9.90 9.82 4.45 5.05 4.39
Risk-based capital
(3).................. 18.99 23.29 13.21 13.78 10.41
- --------
(1) The decrease in other income for the year ended March 31, 1995 was due
primarily to net losses on securities available for sale. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Comparison of Operating Results for the Fiscal Years Ended
December 31, 1995 and March 31, 1995--Noninterest Income."
(2) Noninterest expense for the fiscal year ended March 31, 1993 includes a
provision for restructuring costs in the amount of $8.5 million recorded
in the fourth quarter.
(3) Included effects of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" at
March 31, 1994. Effective November 28, 1994, the OTS no longer requires
savings associations to include unrealized gains and losses on available-
for-sale securities in regulatory capital.
(4) Performance ratios have been annualized for the nine month period ended
December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following is a discussion and analysis of the Avondale Financial Corp.'s
financial position and results of operations and should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report. The Company became the holding company for Avondale Federal Savings
Bank as of April 3, 1995. The conversion whereby the Bank converted from a
Federally chartered mutual savings bank to a Federally chartered stock savings
bank, and the establishment of the Holding Company (the "Conversion") were
accounted for in a manner similar to a pooling of interests, and as a result
the Company's financial statements
13
include the consolidated amounts of the Bank. 1996 marks the Company's first
full year as a public company. It is also a year where the Company continued
it's focus on growing the consumer loan portfolio driven by the use of
technology to efficiently obtain customers in conjunction with third party
partnerships.
The Company's results of operations are dependent upon its net interest
income, which is the difference between interest income on its interest-
earnings assets and interest expense on its interest-bearing liabilities. 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
has consisted primarily of service charges and other fees. In the year ending
1996 the Company had reached the volume of new loan origination that allowed
the Company to complete its first securitization and sale of loans, bringing
with it the additional noninterest income associated with this gain. The
Company also benefited from security gains as the Company continues to change
its mix of interest-earning assets from securities to higher yielding loans.
The Company further benefited from a gain on the sale of its branch in Lake
Forest, Illinois. The income from the sale of the Lake Forest branch was
partially offset by the expense of a one time FDIC assessment charged. Other
noninterest expense includes salaries and employee benefits, real estate
operations, occupancy of premises, federal deposit insurance premiums, data
processing expenses and other operating expenses.
The operating results of the Company 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 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.
On May 1, 1995, the Board of Directors of the Company resolved to change the
Company's fiscal year end to December 31 from March 31; therefore the period
ended December 31, 1995 is for nine months.
14
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 YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED:
31-DEC-96 31-DEC-95 31-MAR-95
------------------------- --------------------------- -------------------------
AVERAGE ANNUAL YIELD/ AVERAGE NINE MONTH YIELD/ AVERAGE ANNUAL YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- ---------- ------ -------- -------- ------
ASSETS:
Interest earning assets:
Loans.................. $265,803 $24,842 9.35% $196,077 $13,536 9.20% $179,909 $15,272 8.49%
Securities available-
for-sale.............. 48,376 3,522 7.28 63,033 3,839 8.12 17,758 1,212 6.83
Securities held-to-
maturity.............. 12,885 995 7.72 15,146 721 6.35 19,324 1,234 6.39
Mortgage-backed
securities available-
for-sale.............. 182,713 11,982 6.56 120,975 6,303 6.95 108,551 6,922 6.38
Mortgage-backed
securities held-to-
maturity.............. 63,208 4,540 7.18 160,375 7,839 6.52 141,135 8,105 5.74
-------- ------- -------- ------- -------- -------
Total interest-earning
assets............... 572,985 45,881 8.01 555,606 32,238 7.74 466,677 32,745 7.02
------- ------- -------
Non-interest-earning
assets................. 23,761 17,555 18,219
-------- -------- --------
Total assets.......... $596,746 $573,161 $484,896
======== ======== ========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Deposits:
NOW accounts........... $ 8,618 189 2.19 $ 10,090 142 1.88 $ 7,244 199 2.75
Money market accounts.. 65,769 2,554 3.88 80,303 2,713 4.50 89,933 3,454 3.84
Passbook and statement
savings............... 69,146 2,135 3.09 65,690 1,450 2.94 75,447 2,146 2.84
Certificate accounts... 173,398 9,717 5.60 177,595 7,576 5.69 175,447 7,461 4.25
-------- ------- -------- ------- -------- -------
Total deposits........ 316,931 14,595 4.61 333,678 11,881 4.75 348,071 13,260 3.81
Advances from Federal
Home Loan Bank........ 90,653 5,236 5.78 80,885 3,470 5.72 66,701 3,271 4.90
Securities sold under
repurchase
agreements............ 80,558 4,541 5.64 56,303 2,587 6.13 13,644 676 4.95
Other borrowings....... 29,131 1,545 5.30 22,301 1,003 6.00 14,057 625 4.45
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.......... 517,273 25,917 5.01 493,167 18,941 5.12 442,473 17,832 4.03
-------- ------- ------- -------
Non-interest bearing
deposits............... 6,545 4,224 6,845
Other liabilities....... 11,601 12,633 12,760
-------- -------- --------
Total liabilities..... 535,419 510,024 462,078
Stockholders' Equity.... 61,327 63,137 22,818
-------- -------- --------
Total liabilities and
stockholders' equity. $596,746 $573,161 $484,896
======== ======== ========
Net interest
income/Interest rate
spread................. $19,964 3.00% $13,297 2.62% $14,913 2.99%
======= ==== ======= ==== ======= ====
Net interest-earning
assets/net interest
margin................. $ 55,712 3.48% $ 62,439 3.19% $ 24,204 3.20%
======== ==== ======== ==== ======== ====
Ratio of interest-
earning assets to
interest bearing
liabilities............ 110.77% 112.66% 105.47%
======== ======== ========
15
Net Interest Income
Net Interest Income. Table 1 shows a comparison of net interest income and
average volumes, together with effective yields earned and rates paid on such
funds. Net interest income is the difference between interest income earned on
interest-earning assets, such as loans and investments, and interest expense
on average interest-bearing liabilities, such as deposits and other
borrowings. The results shown reflect the excess of interest earned on assets
over the interest paid for funds.
Net interest income is the primary source of revenue for the Company. It
comprised 71.4% of the Company's total revenues for the year ended December
31, 1996, 89.04% of the Company's total revenues in the nine month year ended
December 31, 1995 and 153.2% in the year ended March 31, 1995. The reason that
net interest income exceeded 100% of total revenues in the year ended March
31, 1995 was due to realizing a net loss on securities available-for-sale of
$6.5 million.
Net interest income increased $6.6 million from the nine months ended
December 31, 1995 to the year ended December 31, 1996. Taking out the effect
of the shortened year ended December 31, 1995 net interest income rose $2.2
million. The primary reason for the increase was due to a change in mix from
lower yielding securities to higher yielding loans. Overall securities had a
negative volume variance of $4.2 million while loans had a positive volume
variance of $6.5 million from the period ended December 31, 1995 to the year
ended December 31, 1996.
Several other factors affect net interest income. An important factor is the
average earning assets, compared to the average costing liabilities. For the
twelve months ended December 31, 1996 this ratio was 110.8%, compared to the
nine month period ended December 31, 1995 when this ratio was 112.7%, and
105.5% for the fiscal years ended March 31, 1995. The 1.9% decrease from the
period ended December 31 1995 to the year ended December 31, 1996 was mainly
due to Company stock repurchase programs, the 7.2% increase from the year
ended March 31, 1995 to the period ended December 31, 1995 was mainly due to
the influx of capital from the Conversion in April 1995. The net interest
income for the shortened fiscal year ended December 31, 1995 was $13.3
million. Annualized net interest income would be $17.7 million, compared to
$20.0 million for the 12 months ended December 31, 1996; or an annualized
increase of $2.2 million, or 12.6%.
Along with an increase in annualized net interest income of $2.2 million,
the net interest spread increased 38 basis points from 2.6% for the nine month
year ended December 31, 1995 to 3.0% for the year ended December 31, 1996. The
main reason for the increase in spread was a change in asset mix on the
balance sheet due to the Company's ability to originate consumer loans. In
April 1995 the Company initially used the funds received through the
Conversion to purchase securities. The Company has continued to change the
allocation mix since then. Although the Company securitized and sold $74.8
million in home equity lines of credit in November, 1996 the average loan
volume increased $69.7 million, loans increased as a percentage of total
interest earning assets from 35.3% of total interest earning assets for the
period ended December 31, 1995 to 46.4% for the year ended December 31, 1996.
This increase was partially offset as lower costing interest-bearing deposits
decreased $16.7 million from 67.7% of the interest-bearing liabilities for the
nine month period ended December 31, 1995, to 61.3% for the twelve month
period ended December 31, 1996. This decrease was mainly due to the sale of
$11.9 million of deposits from the Company's branch in Lake Forest, Illinois,
although a portion of the decrease could be attributable to persons looking
for other forms of investments for their savings. The majority of the decrease
was from money market accounts of $14.5 million. During this year the Company
had marketed their non-interest bearing checking accounts. For the year ended
December 31, 1996 the non-interest bearing checking accounts averaged $6.5
million which is a $2.3 million increase for the average balance outstanding
for the nine months ended December 31, 1995. While deposit accounts decreased,
average borrowings increased $40.8 million for the year ended December 31,
1996 from the nine month fiscal year ended December 31, 1995. This increase in
borrowings was partially due to the decrease in deposits and partially a
result of decreased stockholders equity due to stock repurchases by the
Company.
The Company has focused its loan origination efforts in closing higher
yielding home equity line of credit loans tied to the prime rate. Though
interest rates have decreased in general from the period ended December
16
31, 1995 to the year ended December 31, 1996 loan rates have increased. The
average prime rate for the year ended December 31, 1996 was 8.3% compared to
the nine month period ended December 31, 1995 when the average prime rate was
8.8%. The average outstanding loans receivable increased $69.7 million from
the nine month fiscal year ended December 1995 to the twelve month period
ended December 1996. The average yield on the outstanding loans increased 0.2%
over the same period of time. Conversely, the average balance of lower
yielding investments decreased $52.3 for the year ended December 31, 1996 from
the nine months ended December 31, 1995. The yield on investments decreased 10
basis points from 6.9% for the nine months ended December 31, 1995 to 6.8% for
the year ended December 31, 1996.
Average borrowings have increased significantly from $159.5 million the
shortened year ended December 31, 1995 to $200.3 million for the fiscal year
ended December 31, 1996; as the total average assets increased from $573.2
million to $596.7 million for the same time periods. In the decreasing rate
environment, rates on borrowings decreased from 5.9% for the nine month period
ended December 31, 1995 to 5.7% for the year ended December 31, 1996.
Net interest income decreased $1.6 million to $13.3 million in the nine
month fiscal year ended December 31, 1995 from $14.9 million in the fiscal
year ended March 31, 1995. Annualizing the shortened year income this would
have resulted in an increase of $2.8 million. Though there was an increase in
annualized net interest income of $2.8 million, the net interest spread
decreased 37 basis points from 2.0% for the year ended March 31, 1995 to 2.6%
for the year ended December 31, 1995. The main reason for the decrease in
spread was a change in mix on both sides of the balance sheet due to the
Conversion. Although average loan volume increased $16.2 million, loans
decreased as a percentage of total interest earning assets from 38.6% of total
interest earning assets for the period ended March 31, 1995 to 35.3% for the
nine months ended December 31, 1995. The reason for the change in mix was that
the initial funds received at the Conversion were invested in lower yielding
securities. This mix changes in the fiscal year ended 1996, as loans are
originated in excess of repayments, loans become a larger portion of the
interest earning assets. At the same time lower costing deposits decreased
from 78.7% of the interest-bearing liabilities for the twelve month period
ended March 31, 1995 to 67.7% for the nine month period ended December 31,
1995. Since the Company initially offered its stock to depositors of the Bank,
many such depositors used their funds on deposit to pay for their stock
purchases. The Company average interest-bearing deposits decreased by $14.4
million from the year ended March 31, 1995 to the nine months ended December
31, 1995. The majority of the decrease was from passbook and statement savings
accounts of $9.8 million and money market accounts of $9.6 million. Average
NOW accounts have increased over this period of time by $2.8 million, and
certificates of deposits increased $2.1 million. While deposit accounts
decreased, average borrowings increased $65.1 million for the nine month year
ended December 31, 1995 from the fiscal year ended March 31, 1995.
Many factors beyond Management's control can have a significant impact on
changes in net interest income from one period to another. Examples of such
factors are: (1) credit demands by customers; (2) fiscal and debt management
policy of federal and state governments; (3) monetary policy of the Federal
Reserve Board; and (4) changes in regulations.
Interest Income. Interest income increased $13.6 million to $45.9 million in
the twelve months ended December 31, 1996 from $32.2 million in the shortened
year ended December 31, 1995. The effect of a shortened year end was a
increase of $2.9 million. The increase in income was the effect of both
increases in volume and rate increases. Average interest-earning assets
increased $17.4 million from $555.6 million for the nine months ended December
31, 1995 to $573.0 million for the period ended December 31, 1996. The average
yield on interest-earning assets increased to 8.0% in the year ended December
31, 1996 from 7.7% in the shortened fiscal year ended 1995. Interest income
from loans receivable increased $11.3 million to $24.8 million in the period
ended December 1996 from $13.5 million in December 1995. Of this increase $4.5
million was the result of a shortened year. Average loans outstanding
increased $69.7 million as a result of loan originations exceeding loan
repayments. The average yield on loans outstanding increased from 9.20% in
fiscal year ended December 1995 to 9.4% in year ended December 31, 1996 due to
a change in the mix of loans to higher yielding equity lines of credit and
private label loans. Interest income from securities decreased $43,000 from
$4.6 million for the shortened year ended December 31, 1995 to $4.5 million
for the period ended December 31, 1996. Though there
17
was an increase of $1.5 million from the shortened year end, the average
securities outstanding decreased $16.9 million with a decrease in average
yield of 0.4%. Interest income from mortgage-backed securities increased $2.4
million in the year ended December 31, 1996 compared to shortened fiscal year
ended December 31, 1995, of which $4.7 million was due to a shortened year
end. While volumes decreased for the period, interest rates remained fairly
flat. There was a $35.4 million decrease in the average outstanding balance of
such mortgage-backed securities and an increased yield of 0.02% from the
shortened fiscal year ended December 1995 compared to fiscal year ended
December 31, 1996.
Interest income decreased $507,000 to $32.2 million in the nine months ended
December 31, 1995 from $32.7 million in the fiscal year ended March 31, 1995.
The effect of a shortened year end was a decrease of $10.7 million. The
decrease in income from the shortened year was offset by increases in both
volume and rate for the fiscal year ended December 31, 1995 from the period
ended March 31, 1995. Average interest-earning assets increased $88.9 million
from $466.7 million for the year ended March 31, 1995 to $555.6 million for
the period ended December 31, 1995. The average yield on interest-earning
assets increased to 7.7% in the nine months ended December 31, 1995 from 7.0%
in fiscal 1995. Interest income from loans receivable decreased $1.8 million
to $13.5 million in the period ended December 1995 from $15.3 million in
fiscal 1995. Of this decrease $4.5 million was the result of a shortened year.
Average loans outstanding increased $16.2 million as a result of loan
originations exceeding loan repayments. The average yield on loans outstanding
increased from 8.4% in fiscal year ended March 1995 to 9.2% in shortened year
ended December 31, 1995 due to a higher interest rate environment. Interest
income from securities increased $2.2 million from $2.4 million for the year
ended March 31, 1995 to $4.6 million for the period ended December 31, 1995.
Though there was a decrease of $1.5 million from the shortened year end, the
average securities outstanding increased $41.1 million with an increase in
average yield of 1.0%. Interest income from mortgage-backed securities
decreased $885,000 in the year ended December 31, 1995 compared to fiscal year
ended March 31, 1995, of which $4.7 million was due to a shortened year end.
Both volumes and rates increased for the period. There was a $31.7 million
increase in the average outstanding balance of such mortgage-backed securities
and an increased yield of 0.9% in shortened fiscal year ended December 1995
compared to fiscal year ended March 31, 1995.
Interest Expense. Interest expense increased $7.0 million to $25.9 million
in the year ended December 1996 from $18.9 million in nine month period ended
December 31, 1995. Interest expense on deposits increased $2.7 million to
$14.6 million in fiscal year ended December 1996 from $11.9 million in the
nine months ended December 1995. The increase was due to a shortened year end
which accounted for a $4.0 million increase in interest expense. This increase
was partially offset by a decrease in the average cost of deposits to 4.6% in
the twelve month period ended December 1996 from 4.8% in the nine month fiscal
year ended December 1995 as a result of a lower interest rate environment.
Along with a decrease from a higher average cost was a $16.7 million decrease
in the average deposits outstanding in fiscal year ended December 1996
compared to the period ended December 31, 1995. Interest expense on advances
from the federal home loan bank increased $1.8 million. Of this increase $1.2
million was attributable to the 1995 shortened year end, $45,000 was caused by
an increase in interest from 5.7% for the period ended December, 1995 compared
to 5.8% for the year ended December 31, 1996 and the remaining $565,000
increase was due to increased average borrowings of $9.8 million. Interest on
securities sold under agreements to repurchase increased $2.0 million from the
shortened year ended December 1995 to the fiscal year ended 1996. The rate on
these borrowings decreased 0.5%, which was offset by increased volume of $24.3
million. Interest on other borrowings increased from $1.0 million in the year
ended December, 1995 to $1.5 in period ended December 1996. The effect of the
shortened year ended 1995 accounted for a $334,000 increase. Though the
average other borrowings increased $6.8 million for the year ended December
1996, from the period ended December, 1995, rates on such borrowings decreased
0.7% partially offsetting the volume increase.
Interest expense increased $1.1 million to $18.9 million in the nine month
period ended December 1995 from $17.8 million in fiscal year ended March 31,
1995. Interest expense on deposits decreased $1.4 million to $11.9 million in
nine month period ended December 1995 from $13.3 million in fiscal year ended
March 1995. The decrease was mainly due to a shortened year end which
accounted for a $4.0 million decrease in interest expense. This decrease was
partially offset by an increase in the average cost of deposits to 4.8% in the
nine month period ended December 1995 from 3.8% in fiscal year ended March
1995 as a result of a higher interest
18
rate environment. This increase from a higher average cost was partially
offset by a $14.4 million decrease in the average outstanding deposits
outstanding in the nine month period ended December 1995 compared to the
period ended March 31, 1995. Interest expense on other borrowings increased
$378,000 from $625,000 in the year ended March 1995 to $1.0 million in period
ended December 1995 primarily due to an $8.2 million increase in the average
volume of such borrowings outstanding in nine month period ended December 1995
compared to fiscal year ended March 1995. Interest expense on securities sold
under agreements to repurchase increased $1.9 million from $676,000 in fiscal
year ended March 31, 1995 to $2.6 million in period ended December 31, 1995.
This increase was the result of an increase in the average cost to 6.1% in the
period ended December 31, 1995 compared to 5.0% for the year ended March 31,
1995, as well as an increase in average outstanding securities sold under
agreement to repurchase of $42.7 million from $13.6 million to $56.3 million
for the same period of time. The effect of the shortened year on the interest
on securities sold under agreement to repurchase was a decrease of $862,000.
Interest expense on FHLB advances increased from $3.3 million in fiscal year
ended March 31, 1995 to $3.5 million for the nine months ended December 31,
1995. The increase was caused by an increase of the average balance of
advances from $66.7 million to $80.9 million and an increase in the average
cost of such advances from 4.9% to 5.7%, which was partially offset by a
decrease in expense of $1.2 million due to shortened year end.
TABLE 2--RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
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 (i) changes attributable to changes in volumes, (ii)
changes attributable to changes in rate, (iii) changes attributable to the
comparison to a nine month period, compared to a twelve month period and (iv)
the net changes. The changes attributable to the combined impact of volume and
rate have been allocated to the changes due to volume.
YEAR ENDED DECEMBER 31, 1996 VS NINE MONTHS ENDED DECEMBER 31,
NINE MONTHS ENDED DECEMBER 31, 1995 VS YEAR ENDED MARCH 31,
1995 1995
---------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------- ---------------------------------
EFFECT OF EFFECT OF
SHORTENED SHORTENED
VOLUME RATE DEC 1995 NET VOLUME RATE DEC 1995 NET
------- ------ --------- ------- ------ ------ --------- -------
Interest Income:
Loans receivable................................... $ 6,517 $ 277 $4,512 $11,306 $1,488 $1,288 $(4,512) $(1,736)
Securities available-for-sale...................... (1,067) (530) 1,280 (317) 3,677 230 (1,280) 2,627
Securities held-to-maturity........................ (174) 208 240 274 (266) (7) (240) (513)
Mortgage-backed securities available-for-sale...... 4,049 (471) 2,101 5,679 863 619 (2,101) (619)
Mortgage-backed securities held-to-maturity........ (6,979) 1,067 2,613 (3,299) 1,254 1,093 (2,613) (266)
------- ------ ------ ------- ------ ------ ------- -------
Total interest income................................ 2,346 551 10,746 13,643 7,016 3,223 (10,746) (507)
------- ------ ------ ------- ------ ------ ------- -------
Interest Expense
Deposits........................................... (771) (475) 3,960 2,714 (684) 3,265 (3,960) (1,379)
Advances from the Federal Home Loan Bank........... 565 45 1,156 1,766 812 544 (1,157) 199
Securities sold under agreements to repurchase..... 1,367 (276) 863 1,954 2,613 160 (862) 1,911
Other borrowed money............................... 363 (155) 334 542 494 218 (334) 378
------- ------ ------ ------- ------ ------ ------- -------
Total interest expense............................... 1,524 (861) 6,313 6,976 3,235 4,187 (6,313) 1,109
------- ------ ------ ------- ------ ------ ------- -------
Net interest income.................................. $ 822 $1,412 $4,433 $ 6,667 $3,781 $ (964) $(4,433) $(1,616)
- --------------------------------------------------
======= ====== ====== ======= ====== ====== ======= =======
19
TABLE 3--SECURITIES BOOK VALUE
The following table sets forth certain information regarding amortized cost
and estimated fair value and percentage of total amortized costs of the
Company's securities (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
AMORTIZED % OF FAIR AMORTIZED % OF FAIR
COST TOTAL VALUE COST TOTAL VALUE
--------- ------ -------- --------- ------ --------
SECURITIES AVAILABLE-
FOR-SALE
- ----------------------------------
U.S. Government agency
securities: $ 36,037 100.00% $ 35,901 $ 76,198 100.00% $ 77,879
SECURITIES HELD-TO-
MATURITY
- ---------------------------------
U.S. Government agency
notes:
Federal Home Loan
Bank................. $ 6,498 100.00% $ 6,488 $ 6,880 100.00% $ 6,732
MORTGAGE-BACKED
SECURITIES
AVAILABLE-FOR SALE
- ----------------------------------
Collateralized Mortgage
Obligations (CMO)
Government and Agency. $ 6,357 4.67% $ 6,141 $ 21,814 9.98% $ 21,456
Private Issuer........ 21,105 15.49 20,613 74,495 34.07 74,535
GNMA Certificates....... 103,551 76.02 104,535 38,362 17.55 38,782
FHLMC Certificates...... 2,780 2.04 2,736 69,775 31.91 70,003
FNMA Certificates....... 2,421 1.78 2,393 14,197 6.49 14,345
-------- ------ -------- -------- ------ --------
Total............... $136,215 100.00% $136,418 $218,643 100.00% $219,121
======== ====== ======== ======== ====== ========
MORTGAGE-BACKED
SECURITIES
HELD-TO-MATURITY
- ----------------------------------
Private Issuer
Collateralized Mortgage
Obligations............ $ 41,606 67.72% $ 41,512 $ 37,090 57.30% $ 37,115
GNMA Certificates....... 3,007 4.89 3,117 3,651 5.64 3,752
FHLMC Certificates...... 1,036 1.69 1,058 1,336 2.06 1,364
FNMA Certificates....... 15,790 25.70 15,701 17,612 27.21 17,722
Other participation
certificates........... -- -- -- 5,045 7.79 5,291
-------- ------ -------- -------- ------ --------
Total............... $ 61,438 100.00% $ 61,388 $ 64,734 100.00% $ 65,244
======== ====== ======== ======== ====== ========
Securities
The Company must maintain minimum levels of securities and other assets that
qualify as liquid assets under OTS regulations. Historically, the Company has
maintained liquid assets at levels significantly above the minimum
requirements imposed by the OTS regulations and above levels believed adequate
to meet the requirements of normal operations, including potential deposit
outflows.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets. Generally, the investment policy of the
Company is to invest funds among categories of investments and maturities
based upon the Company's asset/liability management policies, concern for the
highest investment quality, liquidity needs and performance objectives.
In the last quarter of 1995 the Financial Accounting Standards Board allowed
a one time restructuring of the securities portfolio between held-to-maturity
and available-for-sale categories. At this time management took the
opportunity to review their guidelines for allocating securities. They
determined that the held-to-maturity decision must be made in the context of
the asset/liability and capital structure of the Company. The held-to-maturity
portfolio must make economic sense from a risk return perspective throughout
the expected life of the asset. While the held-to-maturity portfolio is not
subject to mark-to-market accounting, it is subject to interest rate risk. To
minimize this risk, the held-to-maturity portfolio must be funded by
liabilities whose costs are likely
20
to change in line with rates on the held-to-maturity assets. The Company's
held-to-maturity portfolio exists to produce current income, a yield to
maturity over our expected cost of deposit liabilities not used to fund loans.
In addition, the Company's liquidity needs can be satisfied through the
available-for-sale portfolio. The securities in the available-for-sale
portfolio are viewed as the residual balances from other operations,
temporarily using other sources of funds and flexible enough to meet any
contingent funding needs. In the normal course of allocation of new
securities, the preference will be to hold the security in the available-for-
sale portfolio. This stance will provide the Company maximum flexibility to
respond to changing economic and business conditions. As of December 31 1996,
71.7% of the Company's investments were in the available-for-sale category and
28.3% were held-to-maturity. The Company has no investments classified as
trading.
Average securities decreased $52.3 million from $359.5 million for the nine
month period ended December 31, 1995 to $307.2 million for the year ended
December 31, 1996, or 14.6%. The main reason for this decrease was the result
of the Company's loan origination efforts. As investments have paid down or
paid off, and as the Company's loan originations have increased, there has
been a change in the product mix from securities to higher yielding loans.
During the year ended December 31, 1996 and the nine months ended December
31, 1995 the Company sold securities available-for-sale with an amortized cost
of $404.9 million and $179.8 million respectively, realizing gains on such
securities of $2.5 and $1.0 million respectively. The Company sold the
securities as a result of managing the available-for-sale portfolio on a total
return basis. The Company was shifting major sections of the portfolio
depending on changing market spreads and funding availability. The changes
resulted in higher credit quality and a mix of more variable-rate securities.
The maturity distribution and average yields of the securities portfolio at
December 31, 1996 is shown in table 4.
TABLE 4--SECURITIES MATURITY SCHEDULE AND YIELDS
(IN THOUSANDS)
LESS THAN OR ONE TO OVER FIVE TO
EQUAL TO 1 YR. FIVE YEARS TEN YEARS OVER TEN 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
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
SECURITIES HELD-TO-
MATURITY:
U.S. Government
Agencies.............. $ -- -- % $21,665 6.61% $14,372 6.14% $ -- -- % $ 36,037 6.42%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
SECURITIES AVAILABLE-
FOR-SALE:
U.S. Government
Agencies.............. $5,498 4.30% $ 1,000 7.00% $ -- -- % $ -- -- % $ 6,498 4.72%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
LESS THAN OR ONE TO OVER FIVE TO
EQUAL TO 1 YR. FIVE YEARS TEN YEARS OVER TEN 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
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
MORTGAGE-BACKED
SECURITIES
HELD-TO-MATURITY
Private Issued
Collateralized
Mortgage Obligation
(CMO)................. $ -- -- % $ -- -- % $ -- -- % $ 6,357 5.83% $ 6,357 5.83%
GNMA certificates...... -- -- -- -- -- -- 21,105 6.63 21,105 6.63
FHLMC certificates..... -- -- -- -- -- -- 103,552 6.02 103,552 6.02
FNMA certificates...... -- -- 2,780 5.75 -- -- -- -- 2,780 5.75
Other participation
certificates.......... -- -- -- -- -- -- 2,421 6.15 2,421 6.15
------ ---- ------- ---- ------- ---- -------- ---- -------- ----
Total................. $ -- -- % $ 2,780 5.75% $ -- -- % $133,435 6.11% $136,215 6.10%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
MORTGAGE-BACKED
SECURITIES
AVAILABLE-FOR-SALE
Collateralized Mortgage
Obligation Private
Issuer................ $ -- -- % $ -- -- % $ -- -- % $ 41,605 6.97% $ 41,605 6.97%
GNMA certificates...... -- -- 176 7.96 2,678 7.79 154 7.96 3,008 7.81
FHLMC certificates..... -- -- -- -- 15 7.62 1,020 7.55 1,035 7.55
FNMA certificates...... -- -- 2,306 5.48 717 7.30 12,767 6.37 15,790 6.28
------ ---- ------- ---- ------- ---- -------- ---- -------- ----
Total................. $ -- -- % $ 2,482 5.66% $ 3,410 7.69% $ 55,546 6.85% $ 61,438 6.85%
====== ==== ======= ==== ======= ==== ======== ==== ======== ====
21
TABLE 5--LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts (in thousands) and percentages of the respective
portfolios at the dates indicated.
DECEMBER 31, DECEMBER 31,
1996 1995 MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1993
---------------- ----------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Mortgage loans:
Home Equity lines of
credit................. $120,371 36.94% $ 79,842 36.29% $ 66,058 35.77% $ 87,963 47.00% $135,974 57.05%
One-to-four family...... 101,066 31.03 107,294 48.76 86,247 46.70 73,774 39.41 77,727 32.61
Multi-family............ 23,765 7.29 28,556 12.98 28,994 15.70 22,666 12.11 23,321 9.78
Commercial real estate.. -- -- 307 0.14 337 0.18 735 0.39 1,236 0.52
Construction or
Development............ 2,191 0.67 2,737 1.24 2,979 1.61 1,962 1.05 -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Mortgage loans.... 247,393 75.93 218,736 99.41 184,615 99.96 187,100 99.96 238,258 99.96
Private label credit
card................... 56,942 17.47 -- -- -- -- -- -- -- --
Other consumer loans:... 21,492 6.60 1,296 0.59 75 0.04 74 0.04 95 0.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans............. 325,827 100.00% 220,032 100.00% 184,690 100.00% 187,174 100.00% 238,353 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Unearned discounts on
loans
purchased.............. 19 36 54 99 116
Deferred loan fees
(costs)................ 1,300 (1,931) 491 867 875
Allowance for possible
loan losses............ 7,208 3,460 2,796 2,809 1,705
-------- -------- -------- -------- --------
Loans, net.............. $317,300 $218,467 $181,349 $183,399 $235,657
======== ======== ======== ======== ========
The gross loan portfolio increased $105.8 million, or 48.1%, from December
31, 1995 to December 31, 1996. The Company has focused its efforts on
developing processes to efficiently originate consumer loans. Much of the
Company's focus has centered around equity lines of credit. The Company
utilizes a credit scoring model, whereby the equity lines of credit are priced
according to the credit worthiness of the customer, as well as the loan to
value percentage of the loan. These loans are priced according to the risks
associated with the credits. The Company will originate these loans up to 100%
equity in the property. Equity lines of credit have experienced a net increase
of $40.5 million, or 50.8% after securitizing and selling $74.8 million of
equity lines of credit in November, 1996. In many cases broker relationships
are used in originating these loans. In 1996 the Company originated equity
lines of credit in thirty-two different states. The Company is utilizing the
advances in technology, in both decreasing the time and cost to originate and
close loans, and opening opportunities to access customers throughout the
country.
The Company entered the private label credit services line of business
during the year ended December 31, 1996. The Company has established
relationships with several third party merchants and retailers in offering
this product. The merchant is then able to offer their own private label
credit card to its customers. Through the use of credit scoring, dependent on
the risk associated with the customer based on their credit score, and the
overall risk of the product being purchased, the merchant can immediately
offer a store credit card to its customer, which the customer can use to
purchase an item that same day. These credit cards have various rates
associated with them based on where the customer falls within the credit
scoring matrix. The merchant can also use the private label credit cards as a
marketing tool. The merchant can offer customized deferred billing programs to
their customers as a promotional tool. The merchant then pays the Company a
discount for the use of the funds over the promotional period. As of December
31, 1996 the Company had $56.9 million outstanding in its private label credit
services portfolio. Like the Company's equity lines of credit, the private
label credit cards are offered throughout the United States.
The Company's other mortgage loans have decreased $11.9 million from $138.9
million as of December 31, 1995 to $127.0 million as of December 31, 1996 or
8.5%. Though the Company continues to offer these traditional mortgage
products, they currently do not market these products.
Other consumer loans increased $20.2 million from December 31, 1995 to
December 31, 1996. This increase was because the Company has entered into an
agreement with a third party mobile home broker to originate mobile home
loans. Upon origination a loss reserve is set up equal to one percent of the
interest to be earned over the life of these loans. The Company monitors these
loans, and will send delinquent information to the third party broker. The
broker then takes on the responsibility for collection of any delinquent loan
payments. The Company expects no further growth in the mobile home loan
portfolio.
22
TABLE 6--LOAN MATURITY SCHEDULE
The following schedule sets forth the contractual maturities of the
Company's loan portfolio at December 31, 1996. This schedule does not reflect
the effects of possible prepayments or enforcements of due on sale clauses.
PERIOD WHICH LOANS ARE DUE TO MATURE:
------------------------------------------------------------------------------------------------------
OVER 1 TO 3 OVER 3 TO 5 OVER 5 TO 10 OVER 10 TO 20
LESS THAN 1 YEAR YEARS YEARS YEARS YEARS OVER 20 YEARS
---------------- ---------------- ---------------- ----------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- -------- ------- -------- ------- -------- -------- -------- ------- -------- ------- --------
Mortgage loans:
Equity lines of
credit.......... $ 5,003 9.40% $17,160 9.63% $ 6,861 9.83% $ 91,347 12.79% $ -- -- % $ -- -- %
One-to-four
family.......... 1,103 9.27 4,961 8.43 13,110 8.13 23,334 8.08 16,236 8.54 42,322 8.17
Multi family.... 506 9.65 514 8.97 2,295 9.02 4,888 8.73 8,246 8.48 7,316 8.37
Construction or
Development..... 1,479 9.83 712 9.50 -- -- -- -- -- -- -- --
Private Label
Credit.......... 13,666 9.83 27,332 9.50 15,944 -- -- -- -- -- -- --
Consumer Loans.. 59 20.95 9 21.00 51 20.96 269 8.51 21,063 8.24 41 8.19
------- ----- ------- ----- ------- ----- -------- ----- ------- ---- ------- ----
Total Loans..... $21,816 16.68% $50,688 15.63% $38,261 13.85% $119,838 11.70% $45,545 8.39% $49,679 8.20%
======= ===== ======= ===== ======= ===== ======== ===== ======= ==== ======= ====
PERIOD
WHICH LOANS
ARE DUE
TO MATURE:
----------------
TOTAL
----------------
WEIGHTED
AVERAGE
AMOUNT RATE
-------- -------
Mortgage loans:
Equity lines of $120,371 12.03%
credit..........
One-to-four 101,066 8.23
family.......... 23,765 8.59
Multi family....
Construction or 2,191 9.72
Development.....
Private Label 56,942 21.00
Credit.......... 21,492 8.24
Consumer Loans.. -------- -----
$325,827 11.90%
Total Loans..... ======== =====
23
Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate
owned. The Company's management has adopted the policy of placing all loans on
non-accrual status when the collection of principal and/or interest has become
more than 90 days past due or upon notice of bankruptcy of the borrower. As
shown in Table 7, the balance of non-accrual loans at December 31, 1996,
December 31, 1995 and March 31, 1995 was $5,294,000, $4,388,000 and
$4,115,000, respectively. Interest income which would have been recognized had
these loans been on an accrual basis throughout the period approximated
$264,000 for the year ended December 31, 1996, $265,000 for the nine month
period ended December 31, 1995, and $245,000 for the fiscal year ended March
31, 1995. The amount that was included in interest income on such loans for
the year ended December 31, 1996, the nine months ended December 31, 1995 and
year ended March 31, 1995 was $389,000, $90,000, and $173,000, respectively.
Other real estate owned includes assets acquired through loan foreclosure
and repossession. The carrying value of other real estate owned is reviewed by
management on a monthly basis to assure the reasonableness of its carrying
value, which is the lower of cost or fair value less estimated selling costs.
Non-performing loans as a percentage of total loans has continued to
decrease. This ratio was 1.98% as of December 31, 1995, and declined to 1.63%
as of December 31, 1996. The decrease is the result of the increasing size of
the loan portfolio. Though non-performing assets as a percentage of total
assets increased slightly from 0.86% to 0.93% over the same time period, as
total loans to total assets increased from 36.4% as of December 31, 1995 to
54.5% as of December 31, 1996. The Company expects the level of non-performing
loans will increase, as the Company continues to originate both higher risk
consumer home equity lines of credit and private label credit card loans.
With the implementation of its consumer lending programs, the Company
applies a process known as "credit cycle management" which establishes the
loan approval criterion and pricing, based upon the desired portfolio earnings
return, adjusted for projected delinquency and charge-off levels. The Company
can then monitor actual delinquency against these projections, and if the
results are significantly different from expectations, the approval models and
loan pricing can be adjusted immediately. This continuous monitoring process
allows the Company to always keep current with the portfolio's performance
compared with expectations.
While the non-performing loan level continues to rise, the portfolio is
monitored to ensure the program stays within the expected returns and
delinquency levels.
With the implementation of the private label credit card portfolio, the
Company is aware that during the start up phase of originating a credit card
operation, much of the losses inherent with the portfolio are quickly
identified during the growth phase. Many of the customers that become
delinquent, and eventually default on their loan, will never make a loan
payment. These accounts are quickly identified after any deferred payment
program concludes. The Company aggressively monitors, and provides for loan
losses for these loans. The Company will write-off any private label credit
card loan that becomes delinquent 180 days.
The Company also prices these consumer loan products taking into account
this increased risk. At December 31, 1996, the level of loan delinquencies is
in line with expectations and is priced accordingly in each time horizon.
Management is continuously diligent in its attempt to resolve the non-
performing loans, and will continue its emphasis on the collection of the
loans on non-accrual, including collection of unpaid interest.
Management continues to emphasize the early identification of loan related
problems. Management is not currently aware of any significant loan, groups of
loans, or segment of the loan portfolio not included in the discussion above
as to which there are serious doubts as to the ability of the borrower(s) to
comply with the present loan payment terms.
24
TABLE 7--NON-PERFORMING ASSETS
(IN THOUSANDS)
AT AT AT AT AT
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1996 1995 1995 1994 1993
------------ ------------ --------- --------- ---------
Non-accruing loans:
Equity lines of
credit............... $2,150 $2,505 $3,942 $3,585 $5,364
One-to-four-family
loans................ 1,523 1,495 173 1,149 597
Multi-family.......... 365 388 -- 113 --
Commercial real estate
loans................ -- -- -- -- 655
Consumer loans........ 1,256 -- -- -- --
------ ------ ------ ------ ------
Total............... 5,294 4,388 4,115 4,847 6,616
------ ------ ------ ------ ------
Accruing loans over 90
days:
Equity lines of
credit............... -- -- -- -- --
One-to-four-family
loans................ -- -- -- -- --
Commercial real estate
loans................ -- -- -- -- --
Consumer loans........ -- -- -- -- --
------ ------ ------ ------ ------
Total............... -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing
loans.................. $5,294 $4,388 $4,115 $4,847 $6,616
====== ====== ====== ====== ======
Total non-performing
loans to total loans... 1.63% 1.98% 2.23% 2.59% 2.78%
====== ====== ====== ====== ======
Real estate owned:
One-to-four-family
loans................ $ 270 $ 837 $ 316 $ 241 $ 997
Commercial real estate
loans................ -- -- -- -- --
Consumer loans........ -- -- -- -- --
Construction or
development.......... -- -- -- -- --
------ ------ ------ ------ ------
Total............... $ 270 $ 837 $ 316 $ 241 $ 997
====== ====== ====== ====== ======
Total non-performing
loans and real estate
owned to total assets.. 0.93% 0.86% 0.82% 1.07% 1.47%
====== ====== ====== ====== ======
Provision for Loan Losses
A provision is credited to an allowance for loan losses, which is maintained
at a level considered by management to be adequate to absorb inherent loan
losses. The adequacy of the loan loss allowance is analyzed on a monthly
basis. Factors considered in assessing the adequacy of the allowance include:
changes in the type and volume of the loan portfolio; review of specific
delinquent loans; historical loss experience; current economic trends and
conditions; loan growth; and other factors management deems appropriate.
Throughout the year, management determines the level of provision necessary
to maintain adequate allowance based upon current economic conditions and
outstanding loan volumes. During the fiscal year ended December 31, 1996 as
well as the nine months ended December 1995, the Company had made a
conscientious effort to build its allowance for loan losses through higher
provisions. In the year ended December 31, 1996 the provision for loan loss of
$4.3 million exceeded net charge-offs by $3.7 million. For the nine months
ended December 31, 1995 the loan loss provision of $1.2 million exceeded net
charged-off loans by $664,000. As a result, the allowance for loan losses as a
percentage of non-performing loans was 136.2% for the year ended December 31,
1996, compared to 78.9% and 67.9% as of December 31, 1995 and March 31, 1995,
respectively. The allowance for loan losses to total loans, despite the
increase in the loan portfolio, increased from 1.56% as of December 31, 1995
to 2.22% as of December 31, 1996. In addition the Company established a loss
reserve of approximately $2.1 million associated with the loans sold in the
securitization pool. This reserve is accounted for as a reduction in "excess
servicing assets."
25
The Company's level of non-performing loans has increased from $4.4 million
as of December 31, 1995 to $5.3 million as of December 31, 1996; however the
percentage of non-performing loans as a percentage of total loans decreased
from 1.98% to 1.63% for this same time period due to an increase of the gross
loans of 48.1%.
For the Company's consumer loan program, financial models are used to
establish loan approvals, loan pricing and estimated charge-offs levels in each
consumer loan portfolio. The Company provides for the projected loan losses on
a straight-line basis over half the loans estimated life of the loans. For home
equity loans, the projected loan loss is expensed over an eighteen month
period, while the private label credit card portfolio is expensed on average
over a eight month period.
Based upon management's analysis, the allowance for loan losses at December
31, 1996, is adequate to cover inherent loan losses.
Because management is not certain as to the full collectibility of the non-
performing loans, potential loss exposure has been provided in the Company's
allocation of the allowance for loan losses. While management allocates the
allowance for loan losses based on their expectations of loan losses, these
reserves are general in nature and can be reallocated to cover actual losses as
they occur. As illustrated in table 9, the unallocated portion of the
allowance, that portion of the allowance not specified to particular problem
credits or an amount allocated to pools of loans based upon historical levels
of net charge-offs, has averaged 52.4% of the total allowance over the past
five years. The December 31, 1996 level of unallocated allowance is 40.8%. The
allocation of the allowance for equity lines of credit has increased due to the
increase in loans originated.
26
TABLE 8--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
DEC. DEC.
31, 31, MAR. 31, MAR. 31, MAR. 31,
1996 1995 1995 1994 1993
------ ------ -------- -------- --------
Balance at beginning of period...... $3,460 $2,796 $2,809 $1,705 $1,210
Charge-offs:
Equity lines of credit............ (691) (290) (400) (101) (353)
One-to-four-family loans.......... -- -- (170) -- (77)
Multi-family...................... (63) (212) (56) -- --
Commercial real estate............ -- -- -- -- (12)
Consumer loans.................... -- -- -- -- (7)
------ ------ ------ ------ ------
(754) (502) (626) (101) (449)
------ ------ ------ ------ ------
Recoveries:
Equity lines of credit............ 209 -- -- -- --
Consumer loans.................... -- 16 3 5 12
------ ------ ------ ------ ------
Net charge-offs................... (545) (486) (623) (96) (437)
Provision for possible loan
losses........................... 4,293 1,150 610 1,200 932
------ ------ ------ ------ ------
Balance at end of period.......... $7,208 $3,460 $2,796 $2,809 $1,705
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period...... 0.20% 0.25% 0.35% 0.05% 0.16%
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average non-
performing assets during the
period............................. 12.14% 12.35% 12.15% 1.39% 5.75%
====== ====== ====== ====== ======
Ratio of allowance for loan losses
to non-performing loans............ 136.05% 78.85% 67.93% 57.95% 25.77%
====== ====== ====== ====== ======
TABLE 9--ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1996 1995 MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1993
--------------- --------------- --------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Mortgage loans:
One-to-four family..... $ 513 31.03% $ 301 48.76% $ 190 46.70% $ 150 39.41% $ 150 32.61%
Multi-family........... 179 7.29 150 12.98 21 15.70 20 12.11 20 9.78
Construction &
Development........... -- -- -- 1.24 -- 1.61 -- 1.05 -- --
Commercial............. -- 0.67 1 0.14 5 0.18 -- 0.39 -- 0.52
Home Equity Line of
Credit................ 2,539 36.94 1,125 36.29 1,063 35.77 1,000 47.00 600 57.05
Private Label Credit.... 838 17.47 -- -- -- -- -- -- -- --
Consumer................ 197 6.60 9 0.59 7 0.04 -- 0.04 -- 0.04
Unallocated............. 2,942 N/A 1,874 N/A 1,510 N/A 1,639 N/A 935 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $7,208 100.00% $3,460 100.00% $2,796 100.00% $2,809 100.00% $1,705 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
27
Noninterest Income
Noninterest income increased $8.8 million from $1.6 million for the
shortened year ended December 31, 1995 to $10.4 million for the fiscal year
ended December 31, 1996. There were several factors contributing to the
increase of noninterest income. Included in noninterest income in 1996
financial statements is a $2.9 million gain on the sale of the Company's Lake
Forest Branch, which was not in an area that Avondale considered its core
market. Avondale sold the branch with the belief that the redeployment of
resources and capital generated by this transaction will enable Avondale to
expand and improve its services in its core middle income banking markets.
This nonreccuring income was offset by a one time FDIC assessment of $2.3
million.
Securities gains increased $1.3 million from the shortened year ended
December 31, 1995 to the year ended December 31, 1996 as the Company continued
to take advantage of market opportunities in managing its securities portfolio
on a total return basis, while reducing the portfolio's size to accommodate
the rising loan portfolio. The Company was shifting major sections of the
portfolio depending on changing market spreads and funding availability. The
changes resulted in higher credit quality and a mix of more variable-rate
securities.
Avondale was also able to complete its first securitization and sale of its
equity line of credit portfolio. The Company securitized and sold $74.8
million of loans, netting a gain on the sale of $3.3 million. The Company
retained the servicing of this portfolio. As new volumes permit, it is
Avondale's plan to continue utilizing asset securitizations to support this
loan growth.
Mainly due to loan growth, loan servicing income rose $645,000 from the nine
months ended December 31, 1995 to the fiscal year ended December 31, 1996. Of
this increase, $127,000 was servicing income earned on the equity line of
credit securitization for November and December, 1996. Late fees, which are
recorded to income as paid by our customers increased $201,000 from the
shortened 1995 to the year ended December 1996. Annual fees increased $85,000
over this same time period. Fees associated with the private label credit
product increased servicing fee income $228,000.
Also included in other noninterest income was annuity income. This income
amounted to $524,000 for the year ended 1996 from $238,000 for the nine months
ended December 31, 1995, annualized annuity income increased 65.2%.
Noninterest income increased $6.8 million from a $5.2 million expense for
the year ended March 31, 1995 to $1.6 million income for the nine months ended
December 31, 1995. This net increase was primarily due to net security losses
for the year ended March 31, 1995 of $6.5 million, compared to $1.0 million of
securities gains for the nine months ended December 31, 1995.
During the fiscal year ended March 31, 1995, the Company sold securities
available-for-sale, realizing losses on such sales of $6.5 million in order to
reposition its portfolio, reducing the volatility of its capital, and
realizing certain tax benefits from the losses on the securities. During the
nine months ended December 31, 1995 the Company sold securities available-for-
sale with an amortized cost of $179.8 million, realizing a gain on such
securities of $1.0 million.
The increase in securities gains was partially offset by decreases in other
areas. In the year ended March 31, 1995 the Company received approximately
$200,000 of income from the termination of the merger agreement with Central
Resource Group, Inc. Also for the twelve months ended March 31, 1995 the
Company recorded $470,000 of fee income from annuity sales compared to the
nine month period ended December 31, 1995 when the Company recorded $238,000
of annuity fees.
Fees for loan servicing and other customer services was $327,000 for the
nine months ended December 31, 1995; annualized the income would be
approximately $436,000 compared to $407,000 for the year ended March 31, 1995,
or an increase of 7.1%. The Company has focused on offering customer
transaction accounts that generate fee income, and on collecting the
appropriate fees on services that are rendered.
Noninterest Expense
Noninterest expense for the year ended December 31, 1996 was $19.5 million
compared to $9.2 million for the nine month period ended December 31, 1995.
Annualized the non-interest expense for 1995 would have been $12.3 million.
28
Federal Deposit Insurance expense for the twelve months ended December 31,
1996 was $2.9 million, compared to $594,000 for the shortened year ended
December 31, 1995. This increase was primarily due to a one time assessment of
$2.3 million. As a result of this assessment, further federal deposit
insurance assessments will both be lower overall for all savings institutions,
and more in line with the rates paid by banks for insurance on their deposits.
This nonrecccuring expense was offset by a gain on the sale of the Company's
Lake Forest Branch which totaled $2.9 million.
Salaries and employee benefits increased from $4.1 million for the nine
months ended December 31, 1995 to $8.2 million for the year ended December 31,
1996. Annualizing the 1995 expense, the increase would be $2.8 million. This
increase was mainly attributed to increased staffing in order to gear up the
organization for the increased home equity line of credit volume, and to
implement the new private label credit services line of business. Full time
equivalent employees increased from 115 as of December 31, 1995 to 146 as of
December 31, 1996. On an annualized basis compensation increased $1.1 million
from 1995 to 1996. In October, 1995 the Company implemented a management
recognition and retention plan which authorized the Company to issue
restrictive stock awards. The annualized effect of this stock program was an
increased expense of $693,000 in 1996. The annualized effect of increased
management incentive compensation from the period ended 1995 to 1996 was
$201,000 as the Company added the management staff necessary to support the
loan activity. Commissions increased $444,000 on an annualized basis.
Commissions related to annuity sales income increased from $66,000 for the
nine months ended December 31, 1995 to $260,000 for the twelve months ended
December 31, 1996, as income on annuity sales increased $286,000 over the same
period of time.
Occupancy expenses increased from $1.3 million for the nine months ended
December 31, 1995 to $1.4 million for the year ended December 31, 1996. On an
annualized basis the occupancy expense decreased $321,000 mainly due to a
reversal of a lease restructuring charge recorded in the year ended March
1993, as the Company was able to sublet three floors of its office space at
its 20 N. Clark Street, Chicago, Illinois office.
Advertising and public relations expense increased from $305,000 for the
nine month period ended December 31, 1995 to $701,000 for the year ended
December 31, 1996 as the Company used various advertising methods to promote
both its loan origination programs and its deposit products.
The data processing expenses increased from $730,000 for the nine months
ended December 31, 1995 to $1.6 million for the year ended 1996. The Company
had gone through a system conversion in 1996 to better position Avondale to
offer the private label credit card product. A portion of the data processing
costs is also determined by the accounts that are serviced by the data
processing system. The number of private label credit services accounts is
more than seven times the amount of equity home loan product accounts
currently handled by our data processing system.
Other operating costs increased from $1.8 million for the nine months ended
December 31, 1995 to $4.1 million for the year ended December 1996. The
annualized increase would be approximately $1.7 million. Many of these costs
represent increased costs associated with both the overall increased loan
volume, and costs incurred to implement the new private label credit services
business line. Outside personnel services increased from $202,000 for the nine
months ended 1995 to $579,000 as the Company utilized temporary employees as
the volume increased. Several of these temporary employees have subsequently
become permanent employees with the Company. Employee expense increased from
$102,000 for the nine months ended December 1995 to $323,000 for the year
ended December 1996 both due to costs related to establishing broker and
merchant relationships and costs associated with the systems conversion.
Telephone expense increased from $110,000 to $459,000 for the years ended
December 1995 and 1996 respectively. This cost has grown with the increased
loan origination and loan servicing volume. Postage increased from $124,000 in
1995 to $286,000 in 1996 as volume increased. The cost incurred on those loan
applications that fall out of pipeline and never become a permanent loan
increased $558,000 from the nine months ended December 1995 to the year ended
December 1996. Annualized this increase was $497,000. These costs include
credit reports, appraisals and flood certificates on loan applications.
Noninterest expense for the nine month period ended December 31, 1995 was
$9.2 million; annualized this expense was approximately $12.3 million,
compared to $11.4 million, a 7.5% increase from the year ended March 31, 1995.
29
Salaries and employee benefits were $4.1 million for the nine months ended
December 31, 1995, compared to $5.3 million for the year ended March 31, 1995.
Annualized, December 31, 1995 salaries and employee benefits costs increased
1.4% from the year ended March 31, 1995. Annualized employee benefits
increased $168,000 from the period ended March 31, 1995 to December 1995. For
the year ended March 31, 1995, the Company had in place a bonus program, based
on the profits of the Company. The year ended March 31, 1995 was the final
year of the program, as it was replaced by the ESOP plan. The expense for the
bonus program was $170,000 for the year ended March 31, 1995. Also in this
year, the Company expensed the first distribution of the ESOP at the
Conversion price of $423,000. In the shortened year ended December 31, 1995,
the Company discontinued the above mentioned bonus program. However, the
second distribution of the ESOP plan was expensed at the average market value
of the stock over the nine month period. The expense for the ESOP plan for the
nine month period ended December 31, 1995 was $586,000. As of October, 1995,
the Company also implemented an equity based compensation plan, whereby
officers are granted the Company's stock to be vested over a five year period.
The cost of this plan for the year ended December 31, 1995 was $177,000.
Annualized compensation expense decreased $102,000 over this same time frame
due to the deferral of salary and commission expense directly related to the
new loan volume. These costs will be amortized over the life of the loans
originated as a yield adjustment.
Data processing expense increased $225,000 on an annualized basis from the
year ended March 31, 1995 to the year ended December 31, 1995. The Company
will continue to use advanced technologies in order to offer its products and
services more efficiently, and to broaden our customer base. Legal and
professional expenses also increased $176,000 on an annualized basis from the
year ended March 31, 1995, as the Company looked to outside consultants to
help in the implementation of the new technologies.
Other expenses were $1.8 million for the year ended December 31, 1995,
compared to $1.9 million for the year ended March 31, 1995. Included in the
year ended December 31, 1995 expenses were certain loan origination expenses
that related to the prior year. The loan related expenses for the nine months
ended December 31, 1995 totaled $184,000. Also in the nine months ended
December 31, 1995 the Company had incurred franchise taxes and other expenses
related to the Company that weren't incurred in prior years totaling
approximately $85,000.
Other real estate owned expense increased from a net income of $75,000 for
the year ended March 31, 1995 to a net expense of $24,000 for the shortened
year ended December 31, 1995. This fluctuation was due to gains on sale of
other real estate owned realized in the year ended March 31, 1995 greater than
for the shortened year ended December 31, 1995.
Occupancy expense was $1.3 million for the nine months ended December 31,
1995. On an annualized basis this expense was $1.8 million compared to $1.9
million for the year ended March 31, 1995. This decrease in occupancy expense
was from the sublet income received on space leased at the 20 North Clark,
Chicago, Illinois office. Federal deposit insurance premiums decreased on an
annualized basis $124,000 due to a decrease in the rate paid by the Company
and a decrease in the Company's deposit base.
Income Taxes
Income tax expense for the year ended December 31, 1996 was $2.4 million,
compared to $1.8 million for the nine months ended December 31, 1995 and a
benefit of $896,000 for the year ended March 31, 1995. The Company's effective
tax rate (income tax expense divided by income before taxes) was 35.8% for the
year ended December 31, 1996, 39.1% for the nine months ended December 31,
1995 and 38.7% for the year ended March 31, 1995.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the use of the liability method in accounting for
income taxes and eliminates, on a prospective basis, the former exception for
provision of deferred income taxes on savings institution bad debt reserves
and now requires a deferred tax liability to be recorded for increases in the
tax bad debt reserves since March 31, 1987, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction.
30
TABLE 10--MATURITY OR REPRICING OF ASSETS AND LIABILITIES
(IN THOUSANDS)
The following table sets forth the interest rate sensitivity of the Bank's
assets and liabilities at December 31, 1996 on the basis of the factors and
assumptions set forth above.
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------
MORE MORE MORE MORE
THAN THAN THAN THAN 10
3 MONTHS MORE THAN 3 YEARS 5 YEARS YEARS MORE
3 MONTHS TO 1 1 YEAR TO TO TO 10 TO 20 THAN 20
OR LESS YEAR 3 YEARS 5 YEARS YEARS YEARS YEARS TOTAL
-------- -------- --------- -------- -------- ------- ------- --------
Interest-earning assets
Loans Receivable:
Fixed Rate Loans....... $ 2,297 $ 742 $ 5,125 $ 14,475 $ 27,582 $42,124 $19,400 $111,745
Adjustable rate loans.. 186,872 22,800 4,410 -- -- -- -- 214,082
-------- -------- --------- -------- -------- ------- ------- --------
189,169 23,542 9,535 14,475 27,582 42,124 19,400 325,827
Mortgage backed
securities held-to-
maturity............... 48,134 326 -- 2,482 3,291 3,837 3,368 61,438
Mortgage backed
securities available
for sale............... 8,357 103,551 -- 2,779 -- 1,817 19,710 136,214
Investment securities
available for sale..... -- -- -- 21,665 14,372 -- -- 36,037
Investment securities
held to maturity....... 5,498 -- -- -- 1,000 -- -- 6,498
-------- -------- --------- -------- -------- ------- ------- --------
Total Investments...... 61,989 103,877 -- 26,926 18,663 5,654 23,078 240,187
Total Earning Assets.... 251,158 127,419 9,535 41,401 46,245 47,778 42,478 566,014
Interest-bearing
liabilities:
Passbook and statement
accounts.............. 3,372 9,224 19,134 12,474 15,832 10,951 3,112 74,099
NOW accounts........... 1,656 3,960 5,141 1,375 1,846 1,014 187 15,179
Money market accounts.. 16,287 23,542 5,547 2,640 2,024 366 10 50,416
Certificate accounts... 47,242 111,183 29,565 2,861 110 -- -- 190,961
Advances from the
Federal Home Loan
Bank.................. 30,000 5,000 55,000 -- 803 -- -- 90,803
Securities sold under
agreement to
repurchase............ 45,451 23,695 -- -- -- -- -- 69,146
Other borrowings....... 32,000 -- -- -- -- -- -- 32,000
-------- -------- --------- -------- -------- ------- ------- --------
Total interest-bearing
liabilities........... 176,008 176,604 114,387 19,350 20,615 12,331 3,309 522,604
Interest sensitivity gap
per period............. $ 75,150 $(49,185) $(104,852) $ 22,051 $ 25,630 $35,447 $39,169 $ 43,410
======== ======== ========= ======== ======== ======= ======= ========
Cumulative interest
sensitivity gap........ $ 75,150 $ 25,965 $ (78,887) $(56,836) $(31,206) $ 4,241 $43,410 $ 43,410
======== ======== ========= ======== ======== ======= ======= ========
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning
assets................. 13.28% 4.59% (13.94)% (10.04)% (5.51)% 0.75% 7.67% 15.34%
======== ======== ========= ======== ======== ======= ======= ========
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities............ 142.75% 107.36% 83.11% 88.31% 93.84% 100.82% 108.31% 108.31%
======== ======== ========= ======== ======== ======= ======= ========
Liquidity and Interest Rate Sensitivity Analysis
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive
earning assets and interest bearing liabilities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to result in an increase in
net interest income. During a period
31
of falling interest rates, a negative gap would tend to result in an increase
in net interest income while a positive gap would tend to adversely affect net
interest income.
The Company's gap position is illustrated in table 10. Loans that have
adjustable rates of interest are shown as being due in the period which the
rates are next subject to change. Fixed-rate loans and mortgage-backed
securities are shown using the assumption that there will be no prepayment for
maturities under five years, and those with maturities in excess of five years
will prepay at annual rates ranging from 13% to 37%, depending on the stated
rates. The Company has assumed that passbook accounts will be withdrawn
(decay) at annual rates of 17% of the cumulative declining balance for the
first three years, 16% for the fourth and fifth years and 14% thereafter. NOW
accounts will decay at an annual rate of 37% for the first year, 32% for the
second and third years and 17% thereafter. Money Market accounts will decay at
an annual rate of 79% for the first year and 31% thereafter. Certificates are
assumed to remain outstanding through maturity. The prepayment rates for loans
and mortgage-backed securities, along with the decay rates for passbook, NOW
and money market accounts are based on assumptions prepared by the OTS. Such
assumptions are reasonably indicative of the Company's experience over recent
periods.
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw funds or
borrowers knowing that sufficient funds will be available to meet their credit
needs.
All savings institutions are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one
year or less. This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending on economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is
5%. At December 31, 1996, Avondale was in compliance with the regulatory
liquidity requirement, with an overall liquid asset ratio of 10.85%.
In addition to cash and due from banks, marketable securities, particularly
those of shorter maturities, are a principal source of asset liquidity.
Securities that mature in one year or less amounted to $165.9 million or 69.1%
of the total securities portfolio as of December 31, 1996, compared to 72.5%
as of December 31, 1995.
Rate sensitivity varies with different types of interest earning assets and
interest bearing liabilities. Federal funds purchased on which the rate varies
daily and loans tied to the prime rate differ considerably from long-term
securities and fixed rate loans. Time deposits over $100,000 are more rate
sensitive than savings accounts. Table 11 illustrates the maturity schedule as
of December 31, 1996 of the time deposits $100,000 and over portfolio. As
shown 55.8% of the time deposits $100,000 and over mature within six months.
This percentage was 48.3% maturing within six months as of December 31, 1995.
During the year ended December 31, 1996 deposits maturing within one year
decreased $22.4 million from $238.9 million to $216.5 million, term borrowings
increased $19.7 million over this same time period, from $155.8 million to
$136.1 million.
With approximately 58.1% of the Company's loan portfolio floating with the
prime rate or repricing within three months, there is an immediate effect on
interest income when rates rise or fall, while interest expense changes more
slowly as certificates of deposits mature. In addition, the interest margin on
low cost money is increased in a period of rising rates with the increase of
the prime rate, or conversely the margin decreases with a decrease in the
prime rate.
As the gap table shows, the Company is asset sensitive through the one year
time horizon, with a cumulative one year sensitivity gap of 4.6% as a
percentage of total interest-earning assets. To the extent consistent with
interest rate objectives, the Company attempts to control its interest rate
risk by originating for its portfolio primarily adjustable-rate mortgage
loans, including equity lines of credit, emphasizing its private label credit
card and shorter term balloon mortgage product within the fixed rate
portfolio, purchasing adjustable rate and short term securities, matched with
the use of short term borrowings. The Company will continuously monitor, and
manage its interest rate sensitivity position.
32
TABLE 11--TIME DEPOSITS, $100,000 AND OVER MATURITY SCHEDULE
MATURITY PERIOD AMOUNT
--------------- --------------
(IN THOUSANDS)
Three months or less....................................... $ 4,065
More than three months through six months.................. 6,847
More than six months through twelve months................. 5,877
More than twelve months.................................... 2,763
-------
Total certificate accounts in excess of $100,000........... $19,552
=======
Borrowed Funds
The Company's borrowed funds include advances from the FHLB of Chicago,
securities sold under agreements to repurchase and other borrowings.
At December 31, 1996, the Company had FHLB advances of $35.0 million with an
average rate of 6.48% maturing within one year, advances of $55.0 million with
a weighted average rate of 5.64% maturing within two years and $803,000 with a
rate of 2.5% maturing in the year 2003. At this date the Company had
securities sold under agreement to repurchase of $45.5 million with a weighted
average rate of 5.43% maturing within thirty days, and $23.7 million with a
weighted average rate of 5.9% maturing within one year. The Company also had
federal funds purchased of $32,000 with a weighted average rate of 7.0% which
matured on January 2, 1997.
At December 31, 1995, the Company had FHLB advances of $42.5 million with an
average rate of 4.82% maturing within one year; advances of $25.0 million with
a weighted average rate of 6.5% maturing within two years and $803,000 with a
rate of 2.5% maturing in the year 2003. At this date the Company had
securities sold under agreement to repurchase of $56.8 million with a weighted
average rate of 5.9% due within thirty days, $5.0 million with a weighted
average rate of 5.7% due within sixty days, and $15.0 million with a weighted
average rate of 6.4% due within seventeen months. The Company also had other
borrowings consisting of federal funds purchased with a weighted average rate
of 5.9% which matured on January 2, 1996.
TABLE 12--BORROWED FUNDS
FOR THE FOR THE NINE FOR THE
YEAR ENDED MONTHS ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995 MAR. 31, 1995
------------- ------------- -------------
(THOUSANDS)
ADVANCES FROM THE FEDERAL HOME LOAN
BANK:
Average balance outstanding.......... $ 90,653 $ 72,322 $66,380
Maximum outstanding at any month-end
during the period................... 95,803 88,303 68,303
Balance outstanding at end of period. 90,803 78,303 63,303
Weighted average interest rate during
the period.......................... 5.78% 5.91% 4.93%
Weighted average interest rate at end
of period........................... 5.93% 5.55% 5.48%
SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Average balance outstanding.......... $ 80,558 $ 56,133 $13,796
Maximum outstanding at any month-end
during the period................... 116,447 76,792 29,082
Balance outstanding at end of period. 69,147 76,792 21,398
Weighted average interest rate during
the period.......................... 5.64% 6.06% 4.92%
Weighted average interest rate at end
of period........................... 5.59% 5.97% 6.10%
OTHER BORROWINGS:
Average balance outstanding.......... $ 29,131 $ 22,301 $13,417
Maximum outstanding at any month-end
during the period................... 40,000 41,500 23,000
Balance outstanding at end of period. 32,000 41,500 --
Weighted average interest rate during
the period.......................... 5.31% 5.96% 3.95%
Weighted average interest rate at end
of period........................... 7.00% 5.86% --
TOTAL BORROWINGS:
Average balance outstanding.......... $200,342 $150,756 $93,593
Maximum outstanding at any month-end
during the period................... 196,595 196,595 120,385
Balance outstanding at end of period. 191,950 196,595 84,701
Weighted average interest rate during
the period.......................... 5.66% 5.97% 4.79%
Weighted average interest rate at end
of period........................... 5.99% 5.87% 5.64%
33
Capital Resources
Federally insured savings associations, such as Avondale, are required to
maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The
capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). As shown in table 13, at December 31,
1996, Avondale had tangible capital of $58.9 million, or 9.9% of adjusted
total assets, which is $50.0 million above the minimum leverage ratio
requirement of 1.5% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. At December 31, 1996, Avondale
had risk-based capital of $63.1 million and risk-weighted assets of $335.0
million; or capital of 19.0% of risk-weighted assets.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is based upon the present value of expected cash flows from balance
sheet assets, and liabilities and off-balance sheet contracts. The rule
provides for a two quarter lag between calculating interest rate risk and
recognizing any deduction from capital.
OTS regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account.
Generally Tier 1 associations, such as Avondale, which are associations that
before and after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of the association's net income for the
most recent four quarter period. However, a Tier 1 association deemed to be in
need of more than normal supervision by the OTS may be downgraded to a Tier 2
or Tier 3 association as a result of such a determination. Avondale has not
been notified of a need for more than normal supervision.
Tier 1 associations proposing to make a capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. As a
subsidiary of the Company, the Bank is also required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
34
TABLE 13--CAPITAL STANDARDS
AT DECEMBER 31,
1996
------------------
AMOUNT PERCENTAGE
------- ----------
(IN THOUSANDS)
Tangible capital:
Capital level........................................ $58,897 9.90%
Requirement.......................................... 8,923 1.50
------- -----
Excess............................................... $49,974 8.40%
======= =====
Core capital:
Capital level........................................ $58,897 9.90%
Requirement.......................................... 17,846 3.00
------- -----
Excess............................................... $41,051 6.90%
======= =====
Risk-based capital:
Capital level........................................ $63,088 18.99%
Requirement.......................................... 26,581 8.00
------- -----
Excess............................................... $36,507 10.99%
======= =====
WELL ADEQUATELY UNDER
AVONDALE CAPITALIZED CAPITALIZED CAPITALIZED
-------- ------------------------------- ------------------------------- ----------------
Capital Ratios:
Core capital............. 9.90% (greater than or equal to) 5.0% (greater than or equal to) 4.0% (less than) 4.0%
Tier 1 capital........... 17.57 (greater than or equal to) 6.0 (greater than or equal to) 4.0 (less than) 4.0
Risk-based capital....... 18.99 (greater than or equal to) 10.0 (greater than or equal to) 8.0 (less than) 8.0
Cash Flows
In the year ended December 31, 1996 the Company experienced decreased
securities of $131.9 million in order to fund the increased loan volume over
the same period. Deposits decreased $5.2 million due to the sale of Avondale's
Lake Forest branch. Borrowings also decreased $4.6 million for the year. As
total assets decreased from $610.5 million for the year ended December 31,
1995 to $534.9 million for the year ended December 31, 1996. The Company also
had purchased treasury stock of $10.5 million. In the year ended December 31,
1996 the Company also had a special FDIC insurance assessment of $2.3 million
which negatively impacted cash flows. Other assets increased $9.9 million
primarily due to the set up of an excess servicing asset with a balance on
December 31, 1996 of $7.2 million for the excess servicing to be received from
the sale of equity home loans, and an increase of $4.5 million of prepaid
dealer fees paid on the mobile home loan portfolio.
The Company has experienced increased borrowings over the nine months ended
December 31, 1995, which has helped fund the increased loan volume and
investments over the same period of time. The Company has experienced a
decrease in the deposit base over the same period. The Company has the
liquidity in their short term securities, or can access additional borrowings
either through FHLB advances, securities sold under agreement to repurchase,
or federal funds purchased, to meet this funding need.
During the nine months ended December 31, 1995, the Company had refunded
$40.8 million excess stock subscriptions received in the year ended March 31,
1995. The Company also expended approximately $512,000 on office properties
and equipment. The Company expects to use approximately $1.8 million during
the year ended December 31, 1996 to renovate branch offices, and to implement
and upgrade data processing systems.
There are no planned capital outlays which would be a significant burden on
the Company's cash flows.
35
Recent Accounting Pronouncements and Regulatory Issues
In March, 1995, the Financial Accounting Standards Board ("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.
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
will be 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.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" is effective for transactions occurring after December 31,
1996. This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control is surrendered,
and derecognizes liabilities when extinguished. The Company believes that the
impact to the financial statements upon the adoption of SFAS 125 will not be
material.
There are no regulatory issues outstanding.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVONDALE FINANCIAL CORP.
1996 CONSOLIDATED FINANCIAL STATEMENTS
37
AVONDALE FINANCIAL CORP.
1996 FINANCIAL STATEMENTS
INDEX
PAGE
----
Independent Auditor's Report--Arthur Andersen LLP......................... 39
Statement of Management Responsibility.................................... 40
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995. 41
Consolidated Statements of Income for the Year Ended December 31, 1996,
the Nine Months Ended December 31, 1995 and Year Ended March 31, 1995 ... 42
Consolidated Statements of Changes in Stockholders' Equity for the Year
Ended December 31, 1996, the Nine Months Ended December 31, 1995 and Year
Ended March 31, 1995 .................................................... 43
Consolidated Statements of Cash Flows for the Year Ended December 31,
1996, the Nine Months Ended December 31, 1995 and Year Ended March 31,
1995..................................................................... 44
Notes to the Consolidated Financial Statements............................ 46
38
LOGO
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Avondale Financial Corp.:
We have audited the accompanying balance sheets of AVONDALE FINANCIAL CORP.
(the "Company") as of December 31, 1996, and December 31, 1995, and the
related statements of income, stockholders' equity and cash flows for the year
ended December 31, 1996, the nine months ended December 31, 1995, and the year
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avondale Financial Corp.
as of December 31, 1996 and December 31, 1995, and the results of its
operations and its cash flows, for the periods then ended, in conformity with
generally accepted accounting principles.
LOGO
Chicago, Illinois,
February 8, 1997
39
LOGO
STATEMENT OF MANAGEMENT RESPONSIBILITY
Avondale Financial Corp.'s management is responsible for the accompanying
consolidated financial statements which have been prepared in conformity with
generally accepted accounting principles. They are based on our best estimates
and judgments. Financial information elsewhere in this annual report is
consistent with the data presented in these statements.
We acknowledge the integrity and objectivity of published financial data. To
this end, we maintain an accounting system and related internal controls which
we believe sufficient in all material respects to provide reasonable assurance
that financial records are reliable for preparing financial statements and
that assets are safeguarded from loss or unauthorized use.
Our independent auditing firm, Arthur Andersen, LLP provides an objective
review as to management's discharge of its responsibilities insofar as they
relate to the fairness of reported operating results and the financial
condition of the Company. This firm obtains and maintains an understanding of
our accounting and financial controls and employs such testing and
verification procedures as it deems necessary to arrive at an opinion on the
fairness of the consolidated financial statements.
The Board of Directors pursues its responsibilities for the accompanying
consolidated financial statements through its Audit Committee. The Committee
meets periodically with Avondale Financial Corp.'s internal auditor and/or
independent auditors to review and approve the scope and timing of the
internal and external audits and the findings therefrom. The Committee
recommends to the Board of Directors the engagement of the independent
auditors and the auditors have direct access to the Audit Committee.
LOGO LOGO
Robert S. Engelman, Jr. Howard A. Jaffe
President and Vice President and
Chief Executive Officer Chief Financial Officer
40
AVONDALE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
ASSETS
Cash and due from banks................... $ 8,334 $ 5,275
Interest-bearing deposits................. 740 1,067
-------- --------
Total cash and cash equivalents....... 9,074 6,342
Securities available-for-sale--At fair
value (amortized cost Dec. 31, 1996--
$36,037; Dec. 31, 1995--$76,198)......... 35,901 77,879
Securities held-to-maturity--At amortized
cost (fair value Dec. 31, 1996--$6,488;
Dec. 31, 1995--$6,732)................... 6,498 6,880
Mortgage-backed securities available-for-
sale--At fair value (amortized cost Dec.
31, 1996--$136,214; Dec. 31, 1995--
$218,643)................................ 136,418 219,121
Mortgage-backed securities held-to-
maturity--At amortized cost (fair value
Dec. 31, 1996--$61,387; Dec. 31, 1995--
$65,244)................................. 61,438 64,734
Loans..................................... 324,508 221,927
Less: Allowance for loan losses........... (7,208) (3,460)
-------- --------
Loans, net............................ 317,300 218,467
Federal Home Loan Bank stock--at cost..... 4,790 4,415
Office buildings and equipment, net....... 3,875 3,978
Other real estate owned, net.............. 270 837
Accrued interest receivable............... 6,896 5,063
Prepaid expenses and other assets......... 4,547 516
Deferred income tax....................... 2,701 2,305
Excess servicing asset, net............... 5,863 --
-------- --------
Total assets.......................... $595,571 $610,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................. $330,655 $335,861
Advances from Federal Home Loan Bank...... 90,803 78,303
Securities sold under agreements to
repurchase............................... 69,146 76,792
Other borrowings.......................... 32,000 41,500
Advance payments by borrowers for taxes
and insurance............................ 931 1,455
Accrued interest payable.................. 2,212 1,054
Income taxes payable...................... 452 35
Other liabilities......................... 8,483 8,622
-------- --------
Total liabilities..................... 534,682 543,622
-------- --------
Stockholders' Equity
Common stock ($.01 par: 10,000,000 shares
authorized, 3,525,288 and 4,394,568
shares issued and outstanding, at Dec.
31, 1996 and 1995, respectively)......... 44 44
Capital surplus........................... 43,199 43,018
Retained earnings......................... 31,031 26,815
Treasury stock (700,000 shares at cost)... (10,496) --
Unrealized net gain on securities
available-for-sale, net of tax of $21 at
Dec. 31, 1996 and $832 at Dec. 31, 1995.. 33 1,313
Common stock acquired by ESOP............. (1,693) (2,116)
Unearned portion of restricted stock
awards................................... (1,229) (2,159)
-------- --------
Total stockholders' equity............ 60,889 66,915
-------- --------
Total liabilities and stockholders'
equity............................... $595,571 $610,537
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR YEAR FOR THE NINE FOR YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 MARCH 31, 1995
----------------- ----------------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Loans....................... $ 24,842 $ 13,536 $15,272
Securities.................. 3,965 4,193 1,976
Mortgage-backed securities.. 16,522 14,141 15,027
Other....................... 552 368 470
--------- --------- -------
Total interest income... 45,881 32,238 32,745
INTEREST EXPENSE:
Deposits.................... 14,595 11,881 13,260
Advances from the Federal
Home Loan Bank............. 5,236 3,470 3,271
Securities sold under
agreements to repurchase... 4,541 2,587 676
Other borrowings............ 1,545 1,003 625
--------- --------- -------
Total interest expense.. 25,917 18,941 17,832
Net interest income......... 19,964 13,297 14,913
Provision for loan losses... 4,293 1,150 610
--------- --------- -------
Net interest income after
provision for loan losses.. 15,671 12,147 14,303
NONINTEREST INCOME:
Net gains (losses) on
trading activities......... 216 27 143
Net security gains (losses). 2,313 1,012 (6,446)
Net gains on sales of loans. 3,314 9 6
Loan servicing income....... 751 106 147
Fees for other customer
services................... 361 221 260
Gain on sale of branch...... 2,922 -- --
Other operating income...... 526 262 714
--------- --------- -------
Total noninterest income
(expense).............. 10,403 1,637 (5,176)
NONINTEREST EXPENSE:
Salaries and employee
benefits................... 8,193 4,061 5,343
Occupancy and equipment
expenses, net.............. 1,448 1,327 1,930
Federal deposit insurance
premiums................... 2,886 594 916
Advertising and public
relations.................. 701 305 302
Data processing............. 1,615 730 748
Real estate owned (income)
expense, net............... 35 24 (75)
Legal and professional...... 531 404 362
Other operating expenses.... 4,097 1,778 1,917
--------- --------- -------
Total noninterest
expense................ 19,506 9,223 11,443
Income before income taxes.. 6,568 4,561 (2,316)
Provision (benefit) for
income taxes............... 2,352 1,784 (896)
--------- --------- -------
NET INCOME (LOSS)........... $ 4,216 $ 2,777 $(1,420)
========= ========= =======
PER COMMON SHARE:
Primary Earnings per common
share...................... $ 1.13 $ 0.69 n/a
Weighted average common
shares outstanding......... 3,719,272 4,019,024 n/a
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996; NINE MONTHS ENDED DECEMBER 31, 1995 AND YEAR
ENDED MARCH 31, 1995
UNREALIZED
NET GAIN
(LOSS) ON
SECURITIES COMMON UNEARNED
AVAILABLE- STOCK RESTRICTED TOTAL
COMMON CAPITAL RETAINED TREASURY FOR-SALE ACQUIRED STOCK STOCKHOLDERS'
STOCK SURPLUS EARNINGS STOCK NET OF TAX BY ESOP AWARDS EQUITY
------ ------- -------- -------- ---------- -------- ---------- -------------
(IN THOUSANDS)
BALANCE, MARCH 31, 1994. $-- $ -- $25,458 $ $(1,524) $ -- $ -- $ 23,934
Net Income (loss)....... (1,420) (1,420)
Change in unrealized net
gain on securities
available-for-sale, net
of tax of $669......... 1,056 1,056
---- ------- ------- -------- ------- ------- ------- --------
BALANCE, MARCH 31, 1995. -- -- 24,038 -- (468) -- -- 23,570
Net Income.............. 2,777 2,777
Issuance of 4,232,000
shares of Common stock. 42 40,528 40,570
Establishment of ESOP
plan................... (2,962) (2,962)
Commitment to release
84,640 ESOP shares..... 155 846 1,001
Issuance of 162,568
shares of restricted
common stock........... 2 2,335 (2,337) --
Net amortization of
unearned portion of
restricted stock....... 178 178
Change in unrealized net
gain on securities
available-for-sale, net
of tax of $1,129....... 1,781 1,781
---- ------- ------- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1995................... 44 43,018 26,815 -- 1,313 (2,116) (2,159) 66,915
Net Income.............. 4,216 4,216
Purchase of 700,000
shares of Treasury
Stock.................. (10,496) (10,496)
Commitment to release
42,320 ESOP shares..... 181 423 604
Net amortization of
unearned portion of
restricted stock....... 930 930
Change in unrealized net
gain on securities
available-for-sale, net
of tax of $(811)....... (1,280) (1,280)
---- ------- ------- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1996................... $ 44 $43,199 $31,031 $(10,496) $ 33 $(1,693) $(1,229) $ 60,889
==== ======= ======= ======== ======= ======= ======= ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
43
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)...................... $ 4,216 $ 2,777 $ (1,420)
Adjustments to reconcile net income to
net cash flows from operating
activities:
Depreciation.......................... 997 829 1,081
Amortization (accretion), net......... (3,060) 1,280 3,358
Unearned Restricted Stock............. 930 (2,159) --
Provision for loan losses............. 4,293 1,150 610
Provision for deferred income taxes... 415 (210) (93)
Net gain (loss) on sales of securities
available-for-sale................... (2,529) (1,039) 6,446
Net gains on sales of loans........... (3,314) -- --
Net gains on sales of other real
estate owned......................... (149) (21) (157)
Net gains on sales of branch.......... (2,922) -- --
Net changes in:
Income taxes receivable.............. -- 1,951 (1,951)
Prepaid expenses and other assets.... (4,033) 421 382
Accrued interest receivable.......... (1,464) (1,504) (840)
Income taxes payable................. 417 35 (269)
Accrued interest payable............. 1,158 328 (172)
Other liabilities.................... (543) (2,959) 1,397
-------- --------- --------
Net cash flows provided by (used in)
operating activities.................. $ (5,588) $ 879 $ 8,372
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
held-to-maturity...................... 400 4,500 9,000
Purchases of securities held-to-
maturity.............................. -- (1,000) (5,400)
Purchases of Federal Home Loan Bank
stock................................. (375) (500) --
Proceeds from maturities of securities
available-for-sale.................... 123,120 -- --
Proceeds from sales of securities
available-for-sale.................... 52,750 26,555 29,716
Proceeds from sales of mortgage-backed
securities available-for-sale......... 265,850 121,959 75,185
Purchases of securities available-for-
sale.................................. (134,970) (49,075) (85,500)
Purchases of mortgage-backed securities
available-for-sale.................... (207,222) (165,728) (42,839)
Purchases of mortgage-backed securities
held-to-maturity...................... (4,424) (29,207) (62,642)
Principal collected on mortgage-backed
securities held-to-maturity........... 7,893 16,499 15,710
Principal collected on mortgage-backed
securities available-for-sale......... 27,994 12,943 24,794
Principal collected on securities
available-for-sale.................... 465 360 --
Proceeds from securitization and sale
of loans.............................. 73,989 -- --
Net (increase) decrease in loans,
before securitization................. (181,454) (39,129) 411
Proceeds from sales of other real
estate owned.......................... 2,546 361 1,111
Proceeds from sales of office buildings
and equipment......................... 3,985 -- --
Expenditures for office buildings and
equipment............................. (2,163) (512) (1,113)
-------- --------- --------
Net cash flows provided by (used in)
investing activities.................. $ 28,384 $(101,974) $(41,567)
-------- --------- --------
44
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
FOR THE
FOR THE YEAR FOR NINE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock conversion expenditures.............. $ -- $ (562) $ --
Net decrease in deposits................... (5,002) (1,451) (15,078)
Net decrease in advance payments by
borrowers for taxes and insurance......... (524) (244) (208)
Net increase (decrease) in securities sold
under agreements to repurchase............ (7,646) 55,394 12,100
Net increase (decrease) in other
borrowings................................ (9,500) 41,500 (3,000)
Proceeds from Federal Home Loan Bank
advances.................................. 62,500 25,000 5,000
Repayment of Federal Home Loan Bank
advances.................................. (50,000) (10,000) (5,000)
Common stock subscription liability........ -- -- 70,332
Increase shares outstanding................ -- 2 --
Capital surplus............................ 181 2,491 --
ESOP committed to be released.............. 423 423 --
Purchase of treasury stock................. (10,496) -- --
Refund on excess stock subscriptions....... -- (40,758) --
-------- -------- -------
Net cash flows provided by (used in)
financing activities...................... $(20,064) $ 71,795 $64,146
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 2,732 (29,300) 30,951
CASH AND CASH EQUIVALENTS:
Beginning of period........................ 6,342 35,642 4,691
-------- -------- -------
End of period.............................. $ 9,074 $ 6,342 $35,642
======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................. $ 24,760 $ 18,614 $18,004
Income taxes paid.......................... 1,935 1,750 1,440
NON CASH INVESTING ACTIVITIES:
Transfer of mortgage-backed securities from
available-for-sale to held-to-maturity.... -- $ 11,882 --
Transfer of mortgage-backed securities from
held-to-maturity to available-for-sale.... -- $125,311 --
NON CASH FINANCING ACTIVITIES:
Transfer of deposits to equity............. -- $ 9,784 --
Transfer common stock subscription
liability to equity....................... -- 29,574 --
Reduction of prepaid conversion costs and
reduction of capital...................... -- (1,200) --
Transfer of other liabilities to capital... -- 12 --
Increase in prepaid expenses and increase
in capital for ESOP....................... -- 423 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
45
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 1996; NINE MONTHS ENDED DECEMBER 31, 1995 ANDYEAR
ENDED MARCH 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Avondale Financial Corp. (The
"Company") and its wholly-owned subsidiary; Avondale Federal Savings Bank (the
"Bank") conform with generally accepted accounting principles and to general
practice within the savings and loan industry. The following is a description
of the more significant policies which the Company follows in preparing and
presenting its consolidated financial statements.
NATURE OF OPERATIONS--The Company's lending products consist primarily of
first and second mortgages including equity lines of credit, on owner-occupied
and non-owner occupied and one to four family residences. The Company has
expanded its wholesale distribution channels through third party brokers and
other financial institutions to offer equity lines of credit in thirty-two
states. In 1996 Avondale entered the private label credit business, offering
credit cards through third party merchants. To a lesser extent, Avondale also
originates multi-family, commercial real estate, construction, development,
and consumer loans, including mobile home loans. The Company also offers
investment products and insurance through its wholly-owned subsidiary,
Avondale Financial Services, Inc. ("AFS"). Revenues are principally derived
from interest on loans, investment securities and fee income.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts and transactions of the Company, the Bank, and the Bank's wholly-
owned subsidiaries, Avondale Financial Services and Avondale Community
Development Corp. All material intercompany balances and transactions have
been eliminated in consolidation.
INVESTMENT AND MORTGAGE-BACKED SECURITIES--Effective March 31, 1994, the
Company adopted Statement of Financial Accounting Standard No. 115 ("SFAS
115")--"Accounting for Certain Investments in Debt and Equity Securities." As
required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity, and available-for-sale. The Company records the
purchase of investments at settlement date, as opposed to trade date in
accordance with industry practice. This has no material impact on the
Company's financial statements.
Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities. As in prior years,
trading account securities are reported at fair value with unrealized gains
and losses included in trading account activities. At December 31, 1996,
December 31, 1995 and March 31, 1995, none of the Company's debt securities
were held for trading purposes. Realized and unrealized gains and losses are
included in the trading activity results in the Statement of Income.
Securities that the Company has a positive intent and ability to hold to
maturity are classified as held-to-maturity. Held-to-maturity securities are
stated at cost, with premiums amortized and discounts accreted using the
level-yield method, adjusted for actual prepayments and changes in prepayment
assumptions.
All other securities not classified as trading or held-to-maturity are
classified as available-for-sale. Available-for-sale securities are reported
at fair value with unrealized gains and losses included, on an after-tax
basis, as a separate component of retained earnings.
Interest income on securities, including amortization of premiums and
discounts on a level-yield method adjusted for actual prepayments and changes
in prepayment assumptions, is included in income. Realized gains and losses as
a result of security sales, are included in securities gains and losses in the
Statement of Income, with the cost of securities sold determined on the
specific identification basis.
In the last quarter of 1995, the Financial Accounting Standards Board
allowed a one time restructuring of the securities portfolio between held-to-
maturity and available-for-sale categories. On December 31, 1995 the
46
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company moved securities with a book value and market value of $11.9 million
from available-for-sale classification to held-to-maturity. At the same time
the Company moved securities with a book value of $124.5 million and a market
value of $125.3 million from held-to-maturity to available-for-sale; net of
tax, equity increased $473,000 from this transfer.
INTEREST ON LOANS--Interest on loans is recorded as earned. The accrual of
interest income is generally discontinued on loans which are past due 90 or
more days as to principal or interest payments or when management deems the
loans or interest uncollectible in part or in full. When loans are placed on
non-accrual status, interest previously accrued is charged against interest
income. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the remaining
balance can be reasonably expected.
LOAN ORIGINATION FEES, SERVICING FEES, AND PREMIUMS AND DISCOUNTS--Mortgage
loan origination fees and certain related direct mortgage loan origination
costs are deferred and the net amount is recognized over the contractual life
of the loan as an adjustment to yield. Fees for servicing mortgage loan
portfolios are generally recorded on the accrual basis. Premiums and discounts
on mortgage loans purchased are amortized to income over the lives of the
loans using the level yield method.
ALLOWANCE FOR LOAN LOSSES--Provisions for loan losses are charged to
operations based on management's evaluation of the potential losses in its
loan portfolio. The major factors considered in evaluating potential losses
are historical charge-off experience, delinquency rates, local and national
economic conditions, the borrower's ability to repay, and the value of any
related collateral. Management's estimate of fair value of the collateral
considers the current and anticipated future real estate market conditions,
thereby causing these estimates to be particularly susceptible to changes that
could result in a material adjustment to results of operations in the future.
Recovery of the carrying value of such loans and related real estate is
dependent, to a great extent, on economic, operating and other conditions that
may be beyond the Company's control.
SECURITIZATION--Certain home equity lines of credit are securitized and sold
to investors with limited recourse. Upon sale the loans are removed from the
balance sheet and a gain is recognized for the difference between the carrying
value of the loans and the adjusted sales price. The adjusted sales price is
determined based on a present value estimate of future cash flows for each
loan pool sold. Future cash flows are based on the estimated future spread
between the yield of the underlying loans sold and the securities issued and
reflect estimates of prepayments, servicing fees, operating expenses and other
factors. The resulting gain is reduced by applicable securitization costs and
unamortized loan origination costs relating to the pool of loans sold. The
gain represents excess servicing due the Company and is a component of the
excess servicing asset. The gain is further reduced by establishing a reserve
for estimated probable losses under limited recourse provisions. This reserve
amount is netted against the excess servicing assets. The excess servicing
asset is amortized as cash flows are received. The realizability of the
expected future cash flows is evaluated periodically, and any impairment is
recognized in income immediately.
OTHER REAL ESTATE OWNED--Real estate owned represents real estate acquired
by foreclosure or by deed in lieu of foreclosure. At the date of acquisition,
such property is recorded at the lower of recorded value or fair value less
estimated costs to sell. Subsequent to the acquisition, the real estate is
adjusted to the lower of the net carrying value or the fair value less
estimated costs to sell. Provisions for estimated losses required on the basis
of later evaluations, gains or losses on sales, and net expenses incurred from
maintaining such properties are included in other expense. The amounts that
ultimately could be recovered from other real estate owned could differ
materially from the amounts used in determining the net carrying value of the
assets because of future market factors beyond the Company's control or
changes in the Company's strategy for recovering its investment.
47
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OFFICE BUILDINGS AND EQUIPMENT--Office buildings and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation is charged
to operations over the estimated useful lives of the assets using the
straight-line method. The cost of leasehold improvements is amortized using
the straight-line method over the term of the lease. Maintenance, repairs and
minor improvements are charged to operating expense as incurred.
ADVANCES FROM THE FEDERAL HOME LOAN BANK--Advances from the Federal Home
Loan Bank consist of both variable and fixed rate borrowings generally for
periods of two to three years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--The Company enters into
sales of securities under agreements to repurchase, generally for periods of
less than 90 days. Fixed coupon agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability in the
statements of financial condition. The cost of securities underlying the
agreements remain in the asset accounts.
OTHER BORROWINGS--Other borrowings consist primarily of Federal funds
purchased usually for periods of one to thirty days.
INCOME TAXES--The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of the
liability method in accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the expected tax effect of future taxable
income or deductions resulting from differences in the financial statement and
tax bases of assets and liabilities and the expected tax effect of
carryforwards for tax purposes.
CASH FLOW REPORTING--The Company uses the indirect method to report cash
flows from operating activities. Net reporting of cash transactions has been
used when the balance sheet items consist predominantly of maturities of three
months or less, or where otherwise permitted. Other items are reported on a
gross basis. Cash and cash equivalents consist of cash and due from banks,
whether interest bearing or not.
EARNINGS PER SHARE--Earnings per share are based upon the weighted average
shares outstanding during the year taking into account dilutive stock options.
In the years ended December 31, 1996 and December 31, 1995 the stock options
had an anti-dilutive effect, and therefore were not included in the earnings
per share calculation.
RECLASSIFICATIONS--Certain reclassifications were made to the prior years'
financial statements to make them consistent with the December, 1996
presentation.
CHANGE IN FISCAL YEAR--On May 1, 1995, the Board of Directors of the Company
resolved to change the Company's fiscal year end to December 31 from March 31.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS--The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements, as well as
the reported amounts of income and expenses during the reported periods.
Actual results could differ from those estimates.
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
48
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Balance Sheet or Statement of Income.
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 have a material
impact on the Company's Balance Sheet or Statement of Income.
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
will be 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. The pro forma disclosure is included
in footnote 18.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" is effective for transactions occurring after December 31,
1996. This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, and entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control is surrendered,
and derecognizes liabilities when extinguished. The Company believes that the
impact to the financial statements upon the adoption of SFAS 125 will not be
material.
2. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
securities are summarized as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
AVAILABLE-FOR-SALE
December 31, 1996
U.S. Government agency
securities:...................... $36,037 $ 90 $ 226 $35,901
======= ====== ===== =======
December 31, 1995
U.S. Government agency
securities:...................... $76,198 $1,681 $ -- $77,879
======= ====== ===== =======
HELD-TO-MATURITY
December 31, 1996
U.S. Government agency notes:
Federal Home Loan Bank........... $ 6,498 $ 1 $ (11) $ 6,488
======= ====== ===== =======
December 31, 1995
U.S. Government agency notes:
Federal Home Loan Bank........... $ 6,880 $ 1 $(149) $ 6,732
======= ====== ===== =======
49
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The maturities of securities are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
AVAILABLE-FOR-SALE
Term to Maturity
Due one year or less................... $ -- $ -- $ 5,477 $ 5,477
Due after one year through five years.. 21,665 21,654 61,736 63,379
Due after five years through ten years. 14,372 14,247 8,985 9,023
------- ------- ------- -------
Total................................. $36,037 $35,901 $76,198 $77,879
======= ======= ======= =======
HELD-TO-MATURITY
Term to Maturity
Due one year or less................... $ 5,498 $ 5,498 $ 394 $ 394
Due after one year through five years.. -- -- 6,486 6,338
Due after five years through ten years. 1,000 990
------- ------- ------- -------
Total................................. $ 6,498 $ 6,488 $ 6,880 $ 6,732
======= ======= ======= =======
Proceeds from the sales of securities available-for-sale were $52,750,000
for the year ended December 31, 1996 and resulted in gross realized gains of
$768,000 and gross realized losses of $8,000. Proceeds from the sales of
securities available-for-sale were $26,555,000 for the nine months ended
December 31, 1995 and resulted in gross realized gains of $55,000 and no gross
realized losses. Proceeds from the sales of securities available-for-sale were
$29,716,000 for the year ended March 31, 1995 and resulted in gross realized
gains of $21,000 and gross realized losses of $305,000. There were no sales of
securities held-to-maturity during the year ended December 31, 1996, nine
months ended December 31, 1995 or year ended March 31, 1995.
As of December 31, 1996 and December 31, 1995, the Company held structured
notes with an amortized cost of $20,870,000 and $42,643,000, respectively and
fair value of $20,735,000 and $43,547,000, respectively. These securities were
issued by the Federal Home Loan Bank (FHLB) and Student Loan Marketing
Association (SLMA). The structured notes are comprised primarily of securities
which have coupon interest rates which "step up" periodically during the term
to maturity.
At December 31, 1996, securities with an amortized cost of $15,372,000 and a
fair value of $15,236,000 were pledged to secure borrowings. At December 31,
1995, securities with an amortized cost of $27,945,000 and a fair value of
$28,426,000 were pledged to secure borrowings.
50
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
mortgage-backed securities are summarized as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
AVAILABLE-FOR SALE
December 31, 1996
Collateralized Mortgage Obligations
(CMO)
Government and Agency.............. $ 6,357 $ 6 $(222) $ 6,141
Private Issuer..................... 21,105 24 (516) 20,613
GNMA Certificates................... 103,551 984 -- 104,535
FHLMC Certificates.................. 2,780 -- (44) 2,736
FNMA Certificates................... 2,421 2 (30) 2,393
-------- ------ ----- --------
Total............................. $136,214 $1,016 $(812) $136,418
======== ====== ===== ========
December 31, 1995
Collateralized Mortgage Obligations
(CMO)
Government and Agency.............. $ 21,814 $ 54 $(412) $ 21,456
Private Issuer..................... 74,495 323 (283) 74,535
GNMA Certificates................... 38,362 420 -- 38,782
FHLMC Certificates.................. 69,775 473 (245) 70,003
FNMA Certificates................... 14,197 148 -- 14,345
-------- ------ ----- --------
Total............................. $218,643 $1,418 $(940) $219,121
======== ====== ===== ========
HELD-TO-MATURITY
December 31, 1996
Private Issuer Collateralized
Mortgage Obligations............... $ 41,605 $ 166 $(260) $ 41,511
GNMA Certificates................... 3,007 110 -- 3,117
FHLMC Certificates.................. 1,036 22 -- 1,058
FNMA Certificates................... 15,790 59 (148) 15,701
-------- ------ ----- --------
Total............................. $ 61,438 $ 357 $(408) $ 61,387
======== ====== ===== ========
December 31, 1995
Private Issuer Collateralized
Mortgage Obligations............... $ 37,090 $ 34 $ (9) $ 37,115
GNMA Certificates................... 3,651 101 -- 3,752
FHLMC Certificates.................. 1,336 28 -- 1,364
FNMA Certificates................... 17,612 169 (59) 17,722
Other participation certificates.... 5,045 246 -- 5,291
-------- ------ ----- --------
Total............................. $ 64,734 $ 578 $ (68) $ 65,244
======== ====== ===== ========
Proceeds from the sale of mortgage-backed securities available for sale were
$265,850,000 for the year ended December 31, 1996 and resulted in gross
realized gains of $2,151,000 and gross realized losses of $481,000. Proceeds
from the sale of mortgage-backed securities available for sale were
$121,959,000 for the nine months ended December 31, 1995 and resulted in gross
realized gains of $1,013,000 and gross realized losses of $29,000. Proceeds
from the sale of mortgage-backed securities available-for-sale were
$75,185,000 for the year ended March 31, 1995 and resulted in no gross gains
and gross realized losses of $6,161,000. There
51
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
were no sales of mortgage-backed securities held-to-maturity during the year
ended December 31, 1996, nine months ended December 31, 1995, and year ended
March 31, 1995.
At December 31, 1996 and December 31, 1995, mortgage-backed securities with
an amortized cost of $133,090,000 and $123,147,000, respectively, were pledged
to secure borrowings.
Mortgage-backed securities are composed of pass-through certificates
representing interests in pools of fixed and variable interest rate single
family mortgage loans originated for terms of 15, 30, or 40 years. However,
very few of these loans have historically remained outstanding for their
entire term and management anticipates similar repayments will occur in the
future. Generally scheduled repayments gradually reduce the outstanding
balance until the underlying property is sold and the loan paid off. CMOs
consist of AAA, AA, A and BBB rated instruments which are purchased with
initial expected maturities of three to seven years.
As of December 31, 1996, the Company had no commitments to purchase
mortgage-backed securities. As of December 31, 1995, the Company had
commitments to purchase $5,850,000 of mortgage-backed securities.
4. LOANS
Loans are summarized as follows (in thousands):
DECEMBER 31, PERCENTAGE DECEMBER 31, PERCENTAGE
1996 OF TOTAL 1995 OF TOTAL
------------ ---------- ------------ ----------
Mortgage loans:
One-to-four family........ $101,066 31.02% $107,294 48.76%
Multi-family.............. 23,765 7.29 28,556 12.98
Commercial real estate.... -- -- 307 0.14
Construction or
Development.............. 2,191 0.67 2,737 1.24
Equity lines of credit.... 120,371 36.94 79,842 36.29
-------- ------ -------- ------
Total mortgage loans........ 247,393 75.92 218,736 99.41
Private label credit loans.. 56,942 17.48 -- --
Consumer loans.............. 21,492 6.60 1,296 0.59
-------- ------ -------- ------
Gross loans................. 325,827 100.00% 220,032 100.00%
-------- ------ -------- ------
Less:
Unearned discounts on
loans purchased.......... 19 36
Deferred loan fees
(costs).................. 1,300 (1,931)
Allowance for loan losses. 7,208 3,460
-------- --------
Loans, net................ $317,300 $218,467
======== ========
Subject to favorable market conditions Avondale will continue to securitize
the home equity line of credit portfolio, and as such the Company considers
this home equity line of credit portfolio available for sale.
As of December 31, 1996, and December 31, 1995 one to four family mortgage
loans included $6,434,000 and $24,706,000, respectively, of loans secured by
non-owner occupied properties.
Equity lines of credit consist of first and second mortgage liens on both
owner occupied and non-owner occupied properties, which generally have
interest tied to the prime rate, maturities of 5 to 10 years and require
52
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest-only monthly payments until maturity. Outstanding equity lines of
credit, and unused equity lines of credit are summarized as follows (in
thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
First lien owner occupied.......................... $ 18,363 $19,872
First lien non-owner occupied...................... 2,062 3,339
-------- -------
Total First Lien............................... 20,425 23,211
-------- -------
Second lien owner occupied......................... 90,273 55,063
Second lien non-owner occupied..................... 652 1,568
-------- -------
Total Second Lien.............................. 90,925 56,631
-------- -------
Third lien owner occupied.......................... 9,021 --
Third lien non-owner occupied...................... -- --
-------- -------
Total Third Lien............................... 9,021 --
-------- -------
Total Equity Lines of Credit................... $120,371 $79,842
======== =======
Unused Lines Outstanding
First Lien........................................ $ 17,053 $13,402
Second Lien....................................... 51,081 39,384
Third Lien........................................ 2,527 --
-------- -------
Total Unused Lines of Credit................... $ 70,661 $52,786
======== =======
The Company has both adjustable and fixed rate loans. At December 31, 1996,
adjustable interest rate loans totaled $214,082,000 and fixed rate loans
totaled $111,755,000. At December 31, 1995, adjustable interest rate loans
totaled $158,631,000 and fixed rate loans totaled $61,401,000. The adjustable
interest rate loans all have terms to rate adjustment of one year or less. The
adjustable rate loans have interest adjustment caps and are generally indexed
based on the prime rate. Future market factors may affect the correlation of
the interest rate adjustment with the rates the Company pays on the short-term
deposits that have been primarily utilized to fund these loans.
There were no loans outstanding to directors, and executive officers at
December 31, 1996 or at December 31, 1995. Additionally, there were no unused
lines of credit to directors and executive officers at December 31, 1996 or
December 31, 1995. Such loans are made on substantially the same terms as
those for other customers.
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments
to extend credit and unused lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of financial condition. The Company's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Unused home equity lines of credit................ $ 70,661 $52,786
Unused private label credit lines................. 129,327 --
Commitments to originate mortgage loans........... 46,015 17,737
-------- -------
Total......................................... $246,003 $70,523
======== =======
53
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, commitments to originate mortgage loans included no
commitments to originate fixed rate mortgage loans.
As of December 31, 1995, commitments to originate mortgage loans included
$5,390,000 of commitments to originate fixed rate mortgage loans with interest
rates ranging from 7.50% to 9.63%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counter-party. Collateral held
varies but many include single and multi-family residential properties and
income-producing commercial real estate properties.
5. ALLOWANCES FOR LOAN LOSSES
Activity in the allowance for loan losses are summarized as follows (in
thousands):
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
Balance, beginning of period............. $3,460 $2,796 $2,809
Provision charged to operations.......... 4,293 1,150 610
Charge-off............................... (754) (502) (626)
Recoveries............................... 209 16 3
------ ------ ------
Balance, end of period................... $7,208 $3,460 $2,796
====== ====== ======
The balance of non-accrual loans at December 31, 1996, December 31, 1995 and
March 31, 1995 was approximately $5,294,000, $4,388,000, and $4,115,000,
respectively. The interest income that would have been recorded under the
original terms of such loans during the year ended December 31, 1996, nine
months ended December 31, 1995, and year ended March 31, 1995 was $264,000,
$265,000, and $245,000, respectively. During the year ended December 31, 1996,
nine months ended December 31, 1995, and year ended March 31, 1995 the amounts
that were included in interest income on such loans were $389,000, $90,000 and
$173,000, respectively.
As of April 1, 1995, the Company adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS No. 114 requires the Company to establish a valuation
allowance when it is probable that all the principal and interest under the
contractual terms of a loan will not be collected. The Company considers all
nonaccrual loans to be impaired.
Included in the total balance of impaired loans were $5,294,000 and
$4,388,000 of nonaccrual loans at December 31, 1996 and December 31, 1995,
respectively. All of these loans were measured based on the fair value of
collateral. There were no other impaired loans as of December 31, 1996 or
December 31, 1995.
6. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of consolidated financial condition. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing fees
from investors and certain charges collected from borrowers. At
54
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996, December 31, 1995 and March 31, 1995 the Company was
servicing loans for the benefit of others with aggregate unpaid principal
balances of $75,361,000, $759,000 and $983,000, respectively. The large
increase in loans serviced for others was the result of the securitization and
sale of approximately $74,699,000 of home equity lines of credit.
7. SECURITIZATION
In November, 1996 the Company securitized and sold $74,699,000 of its home
equity lines of credit to investors with limited recourse, retaining servicing
rights to these assets. The Company retained a participation interest in the
trust, reflecting the excess of the total amount of loans transferred to the
trust over the portion represented by certificates sold to investors. The
retained participation interest in the equity line of credit trust was
$1,526,000. This transaction was treated as sale in accordance with Statement
of Financial Accounting Standards No. 77 ("SFAS 77"), "Reporting by
Transferors for Transfers of Receivables with Recourse". In conjunction with
this transaction the Company recorded an excess servicing asset of $7.9
million, which represents the estimated present value of future cash flows due
the Company. This amount, reduced by the $2.0 million estimated over the life
recourse reserve is reflected in the balance sheet as "Excess servicing asset,
net." The Company also recorded a net gain of $3.3 million which represents
the difference between the present value of estimated future cash flows less
the over the life recourse reserve and other securitization related expenses.
The realizability of the expected future cash flows is evaluated periodically,
and any impairment is recognized in income immediately. Securitization income
along with fees paid to the Company to service the securitized loan pools, are
reported in the accompanying consolidated statements of income as a component
of loan servicing income. This amount totaled $127,000.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Land............................................... $ 607 $ 928
Buildings and improvements......................... 2,228 2,890
Leasehold improvements............................. 1,838 1,708
Furniture and equipment............................ 3,741 5,192
------ -------
8,414 10,718
Less allowances for depreciation & amortization.... 4,539 6,740
------ -------
Total............................................ $3,875 $ 3,978
====== =======
9. OTHER REAL ESTATE OWNED (OREO)
Other real estate owned is summarized as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Real estate acquired through foreclosure........... $270 $837
==== ====
No valuation allowances were established for other real estate owned during
the year ended December 31, 1996, the nine months ended December 31, 1995 or
the year ended March 31, 1995. Real estate owned consists
55
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
primarily of one to four family residences. Real Estate owned income (expense)
is summarized as follows (in thousands):
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
Gain on sales of OREO................... $256 $ 38 $176
Loss on sales of OREO................... (107) (2) (9)
Provision for losses on OREO............ -- -- --
Other REO expenses...................... (184) (60) (92)
---- ---- ----
Other Real estate owned income
(expense)-net........................ $(35) $(24) $ 75
==== ==== ====
10. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Loans.............................................. $4,852 $1,636
Securities available-for-sale...................... 473 1,294
Mortgage-backed securities available-for-sale...... 898 1,558
Securities held-to-maturity........................ 108 91
Mortgage-backed securities held-to-maturity........ 565 484
------ ------
Total............................................ $6,896 $5,063
====== ======
11. DEPOSITS
Deposit accounts are summarized as follows (dollars in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 MARCH 31, 1995
-------------------------------- -------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PERCENTAGE AVERAGE PERCENTAGE AVERAGE PERCENTAGE
NOMINAL RATE BALANCE OF TOTAL NOMINAL RATE BALANCE OF TOTAL NOMINAL RATE BALANCE OF TOTAL
------------ -------- ---------- ------------ -------- ---------- ------------ -------- ----------
Demand accounts:
Non-interest bearing
demand accounts.... 0.00% $ 5,876 1.78% 0.00% $ 4,373 1.30% 0.00% $ 3,670 1.06%
NOW accounts........ 1.98 9,303 2.81 1.94 10,042 2.99 1.93 9,651 2.78
Money market
accounts........... 3.95 50,416 15.25 4.04 77,900 23.19 4.90 86,968 25.06
---- -------- ------ ---- -------- ------ ---- -------- ------
Total Demand....... 3.32 65,595 19.84 3.59 92,315 27.48 4.44 100,289 28.89
Passbook and
statement accounts
of deposits......... 3.38 74,099 22.41 2.81 63,867 19.02 2.81 78,215 22.53
---- -------- ------ ---- -------- ------ ---- -------- ------
Certificate accounts:
Within one year:
7-91 day
certificates of
deposit............ 4.24 4,116 1.24 4.95 6,671 1.98 4.51 7,430 2.14
Six month
certificates of
deposit............ 5.17 46,527 14.07 5.44 66,620 19.84 5.32 60,290 17.37
Other............... 5.71 80,452 24.33 5.77 51,150 15.23 5.11 40,714 11.73
Certificates of
deposit maturing
after one year..... 6.12 45,226 13.68 6.25 46,011 13.70 6.04 45,686 13.16
One-and-one-half-
year to ten-year
IRA certificates of
deposit............ 5.59 14,640 4.43 5.57 9,227 2.75 4.86 10,335 2.98
---- -------- ------ ---- -------- ------ ---- -------- ------
Total certificates
of deposit........ 5.64 190,961 57.75 5.72 179,679 53.50 5.38 168,592 48.57
---- -------- ------ ---- -------- ------ ---- -------- ------
Total Deposits..... 4.67% $330,655 100.00% 4.60% $335,861 100.00% 4.53% $347,096 100.00%
==== ======== ====== ==== ======== ====== ==== ======== ======
Certificates of deposit in excess of $100,000 at December 31, 1996, December
31, 1995 and March 31, 1995 aggregated $19,552,000, $17,720,000 and
$11,394,000, respectively. Deposits in excess of $100,000 are not insured by
the F.D.I.C.
56
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of certificate accounts are summarized as follows (in thousands):
DECEMBER 31,
1996
------------
Maturing
Within 12 months.............................................. $158,425
Beyond 12 months but within 24 months......................... 28,620
Beyond 24 months but within 36 months......................... 945
Beyond 36 months.............................................. 2,971
--------
Total....................................................... $190,961
========
Interest expense on deposits consists of the following (in thousands):
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
NOW accounts............................. $ 189 $ 141 $ 199
Money market accounts.................... 2,554 2,802 3,617
Passbook accounts........................ 2,135 1,362 1,983
Certificate accounts..................... 9,717 7,576 7,461
------- ------- -------
Total.................................. $14,595 $11,881 $13,260
======= ======= =======
12. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago are summarized as
follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
WEIGHTED FISCAL WEIGHTED FISCAL
AVERAGE YEAR OF AVERAGE YEAR OF
BALANCE RATE MATURITY BALANCE RATE MATURITY
------- -------- -------- ------- -------- --------
Fixed Rate:............. 1996 $25,000 4.15% 1996
$25,000 6.79% 1997 25,000 6.79 1997
803 2.50 2003 803 2.50 2003
Variable Rate:.......... 17,500 5.77 1996
10,000 5.69 1997 10,000 5.78 1997
55,000 5.64 1998
------- ---- ------- ----
Total................. $90,803 5.93% $78,303 5.55%
======= ==== ======= ====
As collateral for the advances from Federal Home Loan Bank of Chicago, the
Company has pledged its stock in the Federal Home Loan Bank of Chicago and is
required to maintain certain qualifying first mortgage loans or mortgage-
backed securities in an amount equal to at least 170 percent of the
outstanding advances.
57
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows (in
thousands):
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
---------------------------
REPURCHASE
CARRYING FAIR LIABILITY
AMOUNT VALUE AMOUNT
-------- ------- ----------
December 31, 1996
-----------------------
Mortgage-backed securities...................... $65,097 $65,615 $60,451
Government agencies............................. 9,373 9,327 8,695
------- ------- -------
Total........................................ $74,470 $74,942 $69,146
======= ======= =======
December 31, 1995
-----------------------
Mortgage-backed securities...................... $60,032 $60,293 $56,351
Government agencies............................. 20,094 20,451 20,441
------- ------- -------
Total........................................ $80,126 $80,744 $76,792
======= ======= =======
14. OTHER BORROWINGS
Other borrowings, which consist of federal funds purchased, are summarized
as follows (in thousands):
December 31, 1996.................... $32,000
December 31, 1995.................... 41,500
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
ASSETS
Cash and due from depository
institutions........................... $ 8,334 $ 8,334 $ 5,275 $ 5,275
Interest-bearing deposits............... 740 740 1,067 1,067
Securities available-for-sale........... 35,901 35,901 77,879 77,879
Securities held-to-maturity............. 6,498 6,488 6,880 6,732
Mortgage-backed securities available-
for-sale............................... 136,418 136,418 219,121 219,121
Mortgage-backed securities held-to-
maturity............................... 61,438 61,387 64,734 65,244
Loans................................... 317,300 320,229 218,467 219,590
Federal Home Loan Bank stock............ 4,790 4,790 4,415 4,415
LIABILITIES:
Deposits................................ 330,655 331,378 335,861 336,815
Advances from the Federal Home Loan
Bank................................... 90,803 90,713 78,303 78,582
Securities sold under agreements to
repurchase............................. 69,146 69,101 76,792 76,993
Other borrowings........................ 32,000 32,000 41,500 41,500
OFF-BALANCE SHEET INSTRUMENTS:
Commitments to extend credit............ -- -- -- --
Commitments to purchase securities...... -- -- -- --
58
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND DUE FROM DEPOSITORY INSTITUTIONS, INTEREST-BEARING DEPOSITS AND
FHLB STOCK--For cash and due from depository institutions, interest-bearing
deposits and FHLB stock, the carrying amount is a reasonable estimate of fair
value.
SECURITIES AVAILABLE-FOR-SALE--For securities available-for-sale, fair
values are based on quoted market prices or dealer quotes. If a quoted price
is not available, fair value is estimated using quoted prices for similar
securities.
SECURITIES HELD-TO-MATURITY--For securities held-to-maturity, fair values
are based on quoted market prices or dealer quotes. If a quoted price is not
available, fair value is estimated using quoted prices for similar securities.
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE--For mortgage-backed
securities available-for-sale, fair values are based on quoted prices or
dealer quotes. If a quoted price is not available, fair value is estimated
using quoted prices for similar securities. For mortgage-backed securities
available-for-sale, fair value is based on similar securities with quoted
market prices and adjusted for any differences in credit ratings or
maturities.
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY--Estimated fair value of
mortgage-backed securities held-to-maturity is based on similar securities
with quoted market prices and adjusted for any differences in credit ratings
or maturities.
LOANS--For certain homogeneous categories of loans, such as fixed rate
residential mortgages, the fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
For adjustable rate mortgages the carrying amount less a reserve for
delinquencies approximates fair value.
DEPOSITS--The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposits is estimated
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK--The fair value of advances from
the Federal Home Loan Bank is based on similar remaining term borrowings.
OTHER BORROWINGS--The fair value of other borrowings is based on quoted
market prices for similar borrowings.
COMMON STOCK SUBSCRIPTION LIABILITY--For capital stock subscriptions, the
carrying amount is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT--The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparty. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates.
COMMITMENTS TO PURCHASE SECURITIES--The fair value of commitments to
purchase securities is based on quoted market prices for similar securities.
59
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
The Company leases office space used for branch offices. The future minimum
annual rental commitments for these noncancelable leases and subleases of such
space are as follows (in thousands):
GROSS SUBLEASE
RENTS RENTS NET
------ -------- ------
1997.................................................. $1,097 $ 366 $ 731
1998.................................................. 1,088 371 717
1999.................................................. 1,071 386 685
2000.................................................. 1,080 392 688
2001 and thereafter................................... 739 40 699
------ ------ ------
Total............................................. $5,075 $1,555 $3,520
====== ====== ======
Under the terms of these leases, the Company is required to pay its pro rata
share of the cost of maintenance and real estate taxes. Certain of these
leases also provide for increased rental payments based on increases in the
Consumer Price Index.
During the fiscal year ended March 31, 1993 the Company has recorded a
provision for the abandonment of most of its leased space in the amount of
$6,000,000. As of December 31, 1996, approximately 76% of the leased space to
be abandoned had been subleased. The future minimum annual rental commitments
under these subleases are shown above.
Gross rental expense for the year ended December 31, 1996, nine months ended
December 31, 1995, and year ended March 31, 1995, amounted to $1,641,000,
$1,088,000, and $1,463,000, respectively.
The Bank is required to maintain certain deposit balances in accordance with
Federal Reserve Bank requirements. The required balances at December 31, 1996
approximated $459,000.
In the normal course of the banking business, these are various commitments,
legal proceedings and contingencies which are not material to the accompanying
consolidated financial statements. Management believes its accruals for such
matters are adequate as of December 31, 1996.
17. CAPITAL STANDARDS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
60
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are presented in the table.
There was no deduction from capital for interest-rate risk.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ----- ------------ -----
As of December 31, 1996:
Total Capital.......... $63,088,000 18.99% $26,581,000 8.00% $ 33,226,000 10.00%
(to Risk Weighted
Assets)
Tier 1 Capital......... 58,897,000 17.57% 13,290,000 4.00% 19,936,000 6.00%
(to Risk Weighted
Assets)
Tier 1 Capital......... 58,897,000 9.89% 23,820,000 4.00% 29,777,000 5.00%
(to Average Assets)
As of December 31, 1995:
Total Capital.......... 62,558,000 23.29% 21,488,000 8.00% 26,860,000 10.00%
(to Risk Weighted
Assets)
Tier 1 Capital......... 59,254,000 22.06% 10,744,000 4.00% 16,116,000 6,00%
(to Risk Weighted
Assets)
Tier 1 Capital......... 59,254,000 14.10% 16,805,000 4.00% 21,006,000 5.00%
(to Average Assets)
18. EMPLOYEE BENEFIT PLANS
The Bank has a profit-sharing plan which covers substantially all of the
Bank's employees. Prior to January 1, 1995, the plan had provided for
contributions by the Bank in amounts as declared by the Board of Directors to
a maximum of 15 percent of the participant's compensation and, for voluntary
employee contributions, to a maximum of ten percent of each participant's
compensation. Effective January 1, 1995, the Board of Directors of the Bank
adopted a resolution to amend and restate the profit-sharing plan to
incorporate a 401-k feature, which includes an employer matching contribution.
For 1996 the employee match was 50% of the employee contributions up to 2% of
salary and 25% of the employee contributions for the next 4% of salary, with a
maximum match of $500.00. The match was made to employees and officers below
the rank of senior vice president. The Bank accrued as compensation expense
for the matching contribution $13,780 for the year ended December 31, 1996,
$17,000 for the nine months ending December 31, 1995 and no contribution for
the previous year ended March 31, 1995.
Effective February 1, 1995, the Board of Directors of the Bank adopted an
unfunded deferred compensation plan whereby directors and executive officers
may elect to defer receipt of fees and other compensation otherwise payable
for services as a director or executive officer in accordance with the
provisions of the plan. As of December 31, 1996 and 1995 and March 31, 1995,
there were $337,000, $167,000 and none, respectively of fees or compensation
deferred in this plan. In addition effective in 1996, Directors must elect to
receive a portion of their fee in shares of Avondale Financial Corp. common
stock. Stock received may also be deposited in the unfunded deferred
compensation plan. As of December 31, 1996, 4,800 shares of common stock were
deposited into the deferred plan.
61
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 STOCK OPTION AND INCENTIVE PLAN
On October 24, 1995, the stockholders approved the 1995 Stock Option and
Incentive Plan (the "Plan") which authorizes the issuance of up to 423,200
shares of the Company's common stock, including the granting of non-qualified
and qualified stock options, stock appreciation rights and limited stock
appreciation rights.
Subject to the terms and provisions of the Plan, stock options may be
granted to directors or employees at any time and from time to time as shall
be determined by the Compensation Policy Committee of the Board of Directors.
The Committee shall have discretion in determining the number of shares
subject to options granted to each recipient.
As of December 31, 1995 the Company had issued 159,812 nonqualified stock
options at $14.375. If not exercised, all outstanding nonqualified options
will expire on October 23, 2005. During 1996 the Company under the terms of
the 1995 Stock Option and Incentive Plan issued an additional 1,270
nonqualified stock options at $13.50. During 1996, no nonqualified stock
options were exercised, lapsed or canceled.
As of December 31, 1995 the Company issued 177,577 incentive stock options
at $14.375. If not exercised, all outstanding incentive stock options will
expire on October 23, 2005. All options will vest over a five year period,
therefore no options are exercisable as of December 31, 1995. During 1996, the
Company under the terms of the 1995 Stock Option and Incentive Plan issued an
additional 24,750 shares between $13.00 and $14.375, the market price at the
time of issuance. During 1996 no incentive stock options were exercised and
8,500 shares were canceled.
No compensation expense was recorded upon issuance of the stock options,
since the exercise option price was market value at the respective dates of
the grants.
The following table summarizes stock-based compensation options and their
related weighted average grant-date fair values for the year ended December
31, 1996 and the nine month period ended December 31, 1995 (rounded to the
nearest thousand except weighted average fair value data):
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------
WEIGHTED WEIGHTED
OPTION AVERAGE OPTION AVERAGE
SHARES FAIR VALUE SHARES FAIR VALUE
------- ---------- ------- ----------
Balance, beginning of period.......... 337,389 $7.000 -- $ --
Granted............................. 26,020 7.044 337,389 7.000
Exercised........................... -- -- -- --
Forfeited........................... (8,500) 7.039 -- --
------- ------ ------- ------
Balance, end of period................ 354,909 $7.002 337,389 $7.000
======= ====== ======= ======
Options Exercisable................... 66,078 $7.000 -- $ --
======= ====== ======= ======
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share after the
effect of income taxes would have been reduced to the following pro forma
amounts (rounded to the nearest thousand except per share data):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Net Income: As reported........................ $4,216 $2,777
Pro Forma...................................... $3,594 $2,662
Earning Per Share: As reported................. $ 1.13 $ 0.69
Pro Forma...................................... $ 0.97 $ 0.66
62
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk free interest
rates of 6.01, 6.67 and 7.01 percent for the 1996 Plan options and 6.66
percent for the 1995 Plan options; no dividends; expected lives of 10 years;
expected volatility of 19.48, 18.15, 18.90 and 17.29 percent.
RECOGNITION AND RETENTION PLAN
On October 24, 1995, the stockholders approved the Recognition and Retention
Plan (the "RRP") which authorizes the issuance of up to 169,280 shares of the
Company's common stock, as restricted stock.
Subject to the terms and provisions of the RRP, restricted stock may be
granted to employees at any time and from time to time as shall be determined
by the Compensation Policy Committee of the Board of Directors. The Committee
shall have discretion in determining the number of shares subject to options
granted to each recipient.
As of December 31, 1995, 162,568 restricted stock shares were awarded
without payment to the Company. Recipients have all of the rights of
stockholders, except that the shares cannot be disposed of until the
restrictions have lapsed. On the date of grant, the market price of the shares
was added to common stock and capital surplus and an equal amount was deducted
from stockholders' equity (unearned portion of restricted stock awards). The
unearned portion is being amortized to expense over the five-year vesting
period on the straight-line method.
During 1996, under the terms of the RRP Plan an additional 2,250 shares of
Company Stock were awarded. Additionally during the year 9,000 shares were
canceled under terms of the Plan.
Amortization of the restricted stock awards was approximately $930,000 for
the year ending December 31, 1996 and $177,000 for the nine months ending
December 31, 1995.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
On April 3, 1995, the Plan of Conversion (the "Plan"), converting the Bank
from a Federally chartered mutual savings bank to a Federally chartered stock
savings bank was completed resulting in the sale of 4,232,000 shares of the
Holding Company at a price of $10.00 per share ($.01 par value). In connection
with the Plan, the Bank established an Employee Stock Ownership Plan ("ESOP")
for eligible employees. The ESOP was established for all employees that are 21
or older and have completed one year of service with the Company. The ESOP
borrowed $2,962,000 from the Company and used the funds to purchase 296,240
shares of the common stock of the Company issued in the conversion. The loan
will be repaid principally from the Company's discretionary contributions to
the ESOP over a period of seven years. Collateral for the loan is the common
stock purchased for the ESOP. The loan obligation of the ESOP is considered
unearned compensation and, as such, recorded as a reduction of the Company's
stockholders' equity. Both the loan obligation and the unearned compensation
are reduced by the amount of loan repayments made by the ESOP. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. Contributions to the ESOP and shares
released from the suspense account are allocated among participants on the
basis of compensation in the year of allocation. Benefits vest over a five
year period.
Vesting is accelerated upon retirement, death, or disability of the
participant. Forfeitures are returned to the Company or reallocated to other
participants to reduce future funding costs. Benefits may be payable upon
retirement, death, disability, or separation from service. Since the Company's
annual contributions are discretionary, benefits payable under the ESOP cannot
be estimated. The Company recorded $603,800, $585,500 and $423,200 of
compensation expense under the ESOP for the year ended December 31, 1996, the
nine months ended December 31, 1995 and the year ended March 31, 1995,
respectively.
63
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. PROVISION FOR RESTRUCTURING
During the fiscal year ended March 31, 1993, the Company performed a
comprehensive analysis of its operating performance. As a result of this
analysis, the Company commenced a major business restructuring which
necessitated a charge of $8,500,000 to the March 31, 1993 financial statements.
This restructuring focused on three major areas. First, the restructuring of
personnel levels at a cost of approximately $1,300,000 was completed during the
fiscal year ended March 31, 1994. Second, the Company restructured the employee
compensation and benefits programs; including a curtailment loss from the
termination of the Company's pension plan of approximately $700,000 which was
paid out during the fiscal year ended March 31, 1994. Third, it was determined
that the Company had significant excess occupancy space. Consequently, the
Company plans to relocate all business functions from its 20 North Clark
Street, Chicago, Illinois location with the exception of the first floor retail
banking space to other facilities. Approximately $6,500,000 of the above
restructuring charge represented the cost of this relocation, including
$6,000,000 write-off of the estimated value of the leased space to be
abandoned, and $500,000 write-off of leasehold improvements, which will not
result in any significant cash expenditures beyond the Company's current lease
commitments. The Company has been relocating business functions as office space
becomes subleased. As of December 31, 1996, approximately 76% of the available
space had been subleased.
As of December 31, 1996, December 31, 1995, and March 31, 1995, $4,702,000,
$3,217,000, and $2,788,000, respectively, of actual costs have been charged to
the restructuring accrual.
20. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
FOR NINE
FOR YEAR MONTHS FOR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
Current.................................... $1,937 $1,574 $(803)
Deferred................................... 415 210 (93)
------ ------ -----
Provision (benefit) for income taxes before
extraordinary item and cumulative effect
of accounting change...................... 2,352 1,784 (896)
Current tax benefit on extraordinary item.. -- -- --
Current tax expense on cumulative effect of
accounting change......................... -- -- --
------ ------ -----
Total income tax provision (benefit)... $2,352 $1,784 $(896)
------ ------ -----
The differences between recorded income taxes and the amount computed at the
statutory Federal income tax rates are as follows:
FOR YEAR FOR NINE MONTHS FOR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ --------------- ---------
Statutory rate.......................... 34.00% 34.00% (34.00)%
State income taxes...................... 1.94 0.60 (6.90)
Other................................... (0.13) 4.50 2.20
----- ----- ------
Effective income tax rate 35.81% 39.10% (38.70)%
===== ===== ======
64
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes, and (b) net operating loss and
tax credit carryforwards. The tax effects of items comprising the Company's
deferred tax assets and deferred tax liabilities are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Deferred tax assets:
Allowance for loan losses....................... $2,623 $1,129
Restructuring................................... 1,610 2,200
Depreciation.................................... 247 190
Other........................................... 695 992
------ ------
Subtotal........................................ 5,175 4,511
Less: valuation allowance....................... (464) (464)
------ ------
Total deferred tax assets..................... 4,711 4,047
------ ------
Deferred tax liabilities:.........................
Gain on securitization of loans................. (1,290) --
FHLB stock...................................... (196) (196)
Accretion on securities......................... (482) (582)
Unrealized gains on securities available--for
sale........................................... (21) (832)
Other........................................... (21) (132)
------ ------
Total deferred tax liabilities................ (2,010) (1,742)
------ ------
Net deferred tax assets....................... $2,701 $2,305
====== ======
The valuation reserve of $464,000 relates primarily to the potential
inability of the Company to fully utilize the reversal of certain of the
temporary differences for state income tax purposes. Although the Company
expects to have taxable income in future years, it is not certain the Company
will have sufficient taxable income for state purposes for the tax benefit of
those temporary differences to be fully utilized.
The Company is permitted under the Internal Revenue Code (the "Code") to
deduct from taxable income a provision for bad debts which differs from the
provisions for such losses recognized in the consolidated statements of
operations. Accordingly, retained earnings at December 31, 1996 included
approximately $5,097,000 for which no provision for deferred income taxes have
been provided. If, in the future, this portion of retained earnings is used for
any purpose other than to absorb bad debt losses, Federal income taxes will be
imposed at the then applicable rates.
65
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. PARENT COMPANY STATEMENTS
Presented below are the condensed balance sheets and condensed statements of
income and cash flows for Avondale Financial Corp.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
Cash and Due from Banks.................... $ 1,047 $ 693
Investment in Subsidiary................... 58,860 60,271
Securities available-for-sale.............. -- 5,477
Income Taxes Receivable.................... 371 --
Prepaid Expense & Other Assets............. 431 630
------- -------
Total Assets............................. $60,709 $67,071
======= =======
Other Liabilities.......................... $ 1 $ 156
Stockholders Equity........................ 60,708 66,915
------- -------
Total Liabilities and Equity............. $60,709 $67,071
======= =======
CONDENSED STATEMENTS OF INCOME
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
Dividends from Bank subsidiary............. $ 5,034 $ 5,500
Interest Income............................ 202 74
------- -------
Total Operating Income................... 5,236 5,574
Operating Expenses......................... 1,262 359
Income Tax (benefit)....................... (371) --
------- -------
Income before equity in undistributed
earnings of subsidiaries.................. 4,345 5,215
Equity in undistributed earnings of
subsidiaries.............................. (129) (2,438)
------- -------
Net Income............................... $ 4,216 $ 2,777
======= =======
66
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................ $ 4,216 $ 2,777
Adjustments to reconcile net income to net
cash flows from operating activities:
Accrued Expenses......................... (155) 157
Prepaid Expenses and Other Assets........ (388) --
Due from Avondale Savings Bank........... 587 (630)
Change in Taxes Receivable............... (371) --
Accretion................................ (23) --
-------- --------
Net cash flows provided by operating
activities............................... $ 3,866 $ 2,304
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available-for-sale....................... -- (5,478)
Proceeds from maturities of securities.... 5,500 --
Investment in Avondale Federal Savings
Bank..................................... -- (57,135)
Dividends from Avondale Federal Savings
Bank..................................... 5,034 --
Change in Equity in Avondale Federal
Savings Bank............................. (4,903) (3,136)
-------- --------
Net cash flows provided by investing
activities............................... $ 5,631 $(65,749)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
ESOP committed to be released............. $ 423 $ --
Unearned restricted stock................. 930 --
Proceeds from Initial Public Offering..... -- 64,138
Purchase of Treasury Stock................ (10,496) --
-------- --------
Net cash flows used in financing
activities............................... $ (9,143) $ 64,138
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS..... 354 693
Cash and Cash Equivalents:
Beginning of period....................... 693 --
-------- --------
End of period............................. $ 1,047 $ 693
======== ========
67
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
DIRECTORS--The information with respect to Directors of the Registrant, set
forth under the caption "Directors and Executive Management" on pages 3
through 4 of the Registrant's Proxy Statement, dated March 31, 1997, relating
to the May 9, 1997 Annual Meeting of Stockholders, is incorporated herein by
reference.
EXECUTIVE OFFICERS--The information with respect to "Executive Officers of
the Registrant" set forth under the caption "Executive Officers" on page 4 of
the Registrant's Proxy Statement, dated March 31, 1997, relating to the May 9,
1997 Annual Meeting of stockholders, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" and
"Summary Compensation Table" on page 6 of the Registrant's Proxy Statement,
dated March 31, 1997, relating to the May 9, 1996 Annual Meeting of
Stockholders, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on page 2 through 3 of the Registrant's
Proxy Statement, dated March 31, 1997, relating to the May 9, 1997 Annual
Meeting of Stockholders, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" on page
11 of the Registrant's Proxy Statement, dated March 31, 1997, relating to the
May 9, 1997 Annual Meeting of Stockholders (filed as Exhibit 99), is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
See "Part II--Item 8. Financial Statements and Supplementary Data
(a) (1) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
REFERENCE TO SEQUENTIAL PAGE
PRIOR FILING NUMBER WHERE
REGULATION OR EXHIBIT ATTACHED EXHIBITS
S-K EXHIBIT NUMBER ARE LOCATED IN THIS
NUMBER DOCUMENT ATTACHED HERETO FORM 10-K REPORT
------------ -------- --------------- -------------------
2 Plan of acquisition, reorganization, None Not applicable
arrangement,
liquidation or succession
3(i) Articles of Incorporation of the Company ****** Not applicable
3(ii) Bylaws of the Company ****** Not applicable
4 Instruments defining the rights of security * Not applicable
holders,
including indentures
68
REFERENCE TO SEQUENTIAL PAGE
PRIOR FILING NUMBER WHERE
REGULATION OR EXHIBIT ATTACHED EXHIBITS
S-K EXHIBIT NUMBER ARE LOCATED IN THIS
NUMBER DOCUMENT ATTACHED HERETO FORM 10-K REPORT
------------ -------- --------------- ----------------------
9 Voting trust agreement None Not applicable
10 Material contracts:
(a) Employment Agreement with Robert S. ** Not applicable
Engelman, Jr.
(b) Severance Pay Agreement with Anthony ** Not applicable
Pallante II
(d) Severance Pay Agreement with Howard A. ****** Not applicable
Jaffe
(f) 1995 Stock Option and Incentive Plan *** Not applicable
(g) Recognition and Retention Plan **** Not applicable
(h) Unfunded Deferred Compensation Plan for ****** Not applicable
Directors and Executive Officers
(i) Omnibus Plan 10.1 Page 10-1-1 to 10-1-13
(j) Supplemental Executive Retirement Plan 10.2 Page 10-2-1 to 10-2-12
Agreement
(k) Employment Agreement with Robert S. 10.3 Page 10-3-1 to 10-3-9
Engelman, Jr., as amended
11 Statement re computation of per share See Item 8. Financial Statements and
earnings Supplementary Data Footnote 1
12 Statements re computation of ratios Not required Not applicable
13 Annual Report to security holders None Not applicable
16 Letter re change in certifying accountant ***** Not applicable
19 Previously unfiled documents None Not applicable
21 Subsidiaries of the registrant 21
22 Published report regarding matters None Not applicable
submitted to vote
of security holders
23 Consents of experts and counsel 23
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27
28 Information from reports furnished to state Not required Not applicable
insurance
regulatory authorities
99 Additional Exhibits: None Not applicable
- --------
* Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act"),
filed with the Securities and Exchange Commission (the "SEC") on June 27,
1994 (Registration No. 33-80774), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Form 10-K for the fiscal year ended
March 31, 1995, under the Securities Exchange Act of 1934, filed with the
SEC on June 29, 1995, and incorporated herein by reference in accordance
with Item 601 of Regulation S-K.
*** Filed as exhibit to the Company's Registration Statement on Form S-8
under the Securities Act, filed with the SEC on November 11, 1995
(Registration No. 33-98860), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
69
**** Filed as exhibit to the Company's Registration statement on Form S-8
under the Securities Act, filed with the SEC on November 11, 1995
(Registration No. 33-98862), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
***** Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on January 26, 1995, as amended.
******Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996, under the Securities Exchange Act of 1934, filed
with the SEC on March xx, 1996, and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended December 31, 1996.
70
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 HEREUNTO DULY AUTHORIZED, ON THIS 25TH DAY OF
MARCH 1997.
Avondale Financial Corp.
(registrant)
/s/ Robert S. Engelman, Jr.
By: _________________________________
ROBERT S. ENGELMAN, JR. PRESIDENT
AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ Howard A. Jaffe
By: _________________________________
HOWARD A. JAFFE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH DIRECTOR OF
THE REGISTRANT, WHOSE SIGNATURE APPEARS BELOW, HEREBY APPOINTS ROBERT S.
ENGELMAN, JR. AND HOWARD A. JAFFE AND EACH OF THEM SEVERALLY, AS HIS ATTORNEY-
IN-FACT, TO SIGN IN HIS NAME AND ON HIS BEHALF, AS A DIRECTOR OF THE
REGISTRANT, AND TO FILE WITH THE COMMISSION ANY AND ALL AMENDMENTS TO THIS
REPORT ON FORM 10-K, ON THIS THE 25TH DAY OF MARCH 1997.
SIGNATURE TITLE
/s/ R. Thomas Eiff Director
- -------------------------------------
R. THOMAS EIFF
/s/ Robert S. Engelman, Jr. Director
- -------------------------------------
ROBERT S. ENGELMAN, JR.
/s/ Arthur L. Knight, Jr. Director
- -------------------------------------
ARTHUR L. KNIGHT, JR.
/s/ Jameson A. Baxter Director
- -------------------------------------
JAMESON A. BAXTER
/s/ Sandra P. Guthman Director
- -------------------------------------
SANDRA P. GUTHMAN
/s/ Peter G. Krivkovich Director
- -------------------------------------
PETER G. KRIVKOVICH
/s/ Hipolito Roldan Director
- -------------------------------------
HIPOLITO ROLDAN
/s/ Robert A. Wislow Director
- -------------------------------------
ROBERT A. WISLOW
71
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
EXHIBITS PAGE(S)
-------- -----------------
10.1 Omnibus Plan 10-1-1 to 10-1-13
10.2 Supplemental Executive Retirement Plan Agreement 10-2-1 to 10-2-12
Employment Agreement with Robert S. Engelman, 10-3-1 to 10-3-9
10.3 Jr., as amended
21 Subsidiaries of the Registrant --
23 Consents of experts and counsel --
27 Financial Data Schedule --
72