UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
------------- -------------
Commission file number 0-24566
AVONDALE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3895923
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 North Clark Street, Chicago, Illinois 60602
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 782-6200
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
--- ---
3,494,545 common shares of stock were outstanding as of August 13, 1997.
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
-----------------------------------------
FORM 10-Q
---------
JUNE 30, 1997
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INDEX
- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at
June 30, 1997, December 31, 1996
and June 30, 1996.......................... 2
Condensed consolidated statements of
income for the three and six months ended
June 30, 1997 and June 30, 1996............ 3
Condensed consolidated statements of cash
flows for the six months ended
June 30, 1997 and June 30, 1996............ 4 - 5
Notes to condensed consolidated financial 6 - 7
statements.................................
Item 2. Management's discussion and analysis of financial
condition and results of operations.............. 8 -17
PART II. OTHER INFORMATION
Calculation of earnings per share.......... 18 -19
Signatures................................. 20
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED- June 30)
June 30, 1997 Dec. 31,1996 June 30, 1996
------------- ------------ -------------
(in thousands except per share data)
ASSETS
Cash and due from banks $ 7,739 $ 8,334 $ 3,115
Interest-bearing deposits 11,179 740 2,383
-------- -------- --------
Total cash and cash equivalents 18,918 9,074 5,498
Securities available for sale - At fair value 33,544 35,901 47,783
(amortized cost June 30, 1997 - $33,670;
Dec 31, 1996 - $36,037 and June 30, 1996 - $47,952)
Securities held-to-maturity - At amortized cost 1,000 6,498 6,890
(fair value June 30, 1997 - $995; Dec 31, 1996 -
$6,488 and June 30, 1996 - $6,802)
Mortgage-backed securities available-for-sale
- At fair value 124,840 136,418 183,695
(amortized cost June 30, 1997 - $124,202;
Dec 31, 1996 - $136,214 and June 30, 1996 - $184,941)
Mortgage-backed securities held-to-maturity
- At amortized cost 57,952 61,438 63,684
(fair value June 30, 1997 - $57,657;
Dec 31, 1996 - $61,387 and June 30, 1996 - $63,062)
Loans 347,925 324,508 266,122
Less: Allowance for loan loss 18,555 7,208 4,326
-------- -------- --------
Loans, net 329,370 317,300 261,796
Federal Home Loan Bank stock - at cost 4,540 4,790 4,790
Office buildings and equipment, net 4,453 3,875 4,159
Other real estate owned, net 1,516 270 1,839
Accrued interest receivable 6,350 6,896 5,132
Prepaid expenses and other assets 17,500 10,410 4,109
Deferred income tax 7,290 2,701 3,396
-------- -------- --------
Total assets $607,273 $595,571 $592,771
======== ======== ========
Deposits $382,119 $330,655 $324,318
Advances from Federal Home Loan Bank 90,803 90,803 90,803
Securities sold under agreements to repurchase 61,873 69,146 70,777
Other borrowings - 32,000 37,500
Advance payments by borrowers for taxes and insurance 724 931 923
Accrued interest payable 2,339 2,212 1,238
Income taxes payable 2,021 452 418
Other liabilities 11,996 8,483 7,952
-------- -------- --------
Total liabilities 551,875 534,682 533,929
-------- -------- --------
Common stock ($.01 par: 10,000,000 shares authorized,
3,494,545, 3,525,288 and 3,599,868 issued and
outstanding, at June 30, 1997, Dec. 31, 1996 and
June 30, 1996, respectively) 44 44 44
Capital surplus 43,108 43,199 43,018
Retained earnings 25,737 31,031 28,692
Treasury stock (11,045) (10,496) (8,463)
Unrealized net gain (loss) on securities
available-for-sale, net of tax of $198 at
June 30, 1997, $21 at Dec. 31, 1996 and ($473)
at June 30, 1996 304 33 (708)
Common Stock acquired by ESOP (1,693) (1,693) (2,116)
Unearned portion of restricted stock awards (1,057) (1,229) (1,625)
-------- -------- --------
Total stockholders' equity 55,398 60,889 58,842
-------- -------- --------
Total liabilities and stockholders' equity $607,273 $595,571 $592,771
======== ======== ========
See accompanying notes to Condensed Consolidated Financial Statements
2
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED- June 30)
For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
INTEREST INCOME:
Loans $ 11,003 $ 5,597 $ 20,744 $ 10,607
Securities 580 936 1,180 2,506
Mortgage-backed securities 3,084 4,388 6,212 9,146
Other 216 126 431 253
---------- ---------- ---------- ----------
Total interest income 14,883 11,047 28,567 22,512
INTEREST EXPENSE:
Deposits 4,593 3,576 8,706 7,335
Advances from the Federal Home Loan Bank 1,326 1,345 2,637 2,543
Securities sold under agreements to repurchase 1,144 899 2,132 2,006
Other borrowings 302 392 747 810
---------- ---------- ---------- ----------
Total interest expense 7,365 6,212 14,222 12,694
NET INTEREST INCOME 7,518 4,835 14,345 9,817
Provision for loan losses 3,545 475 18,059 1,125
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,973 4,360 (3,714) 8,692
NONINTEREST INCOME:
Net security gains (losses) 64 500 75 1,096
Net gains on sales of loans 4,122 - 4,122 7
Loan servicing income 1,661 56 2,875 116
Fees for other customer services 103 83 381 172
Other operating income 153 208 268 329
---------- ---------- ---------- ----------
Total noninterest income (expense) 6,103 847 7,721 1,720
NONINTEREST EXPENSE:
Salaries and employee benefits 2,938 1,891 5,121 3,855
Occupancy and equipment expenses, net 602 240 1,106 473
Federal deposit insurance premiums 56 193 123 389
Advertising and public relations 124 187 318 422
Data processing 721 369 1,489 607
Real estate owned expense, net 42 (109) 47 (79)
Legal and professional 559 156 762 271
Other operating expenses 1,511 799 3,364 1,598
---------- ---------- ---------- ----------
Total noninterest expense 6,553 3,726 12,330 7,536
Income before income taxes 3,523 1,481 (8,323) 2,876
Provision (benefit) for income taxes 1,238 544 (3,029) 999
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 2,285 $ 937 $ (5,294) $ 1,877
========== ========== ========== ==========
PER COMMON SHARE:
Earnings per common share 0.65 0.26 (1.51) 0.49
Weighted average common shares outstanding 3,503,734 3,667,000 3,516,438 3,846,000
See accompanying notes to Condensed Consolidated Financial Statements
3
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED- June 30)
For the Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (5,294) $ 1,877
Adjustments to reconcile net income
to net cash flows from operating activities
Depreciation 577 534
Amortization (accretion), net (162) (2,705)
Provision for loan losses 18,059 1,125
Provision/(Benefit) for deferred income taxes (4,766) 193
Net gain(loss) on sales of
securities available-for-sale
and mortgage-backed securities (75) (1,096)
Net Gain on the sale of loans (4,122)
Net gains on sales of real estate owned (22) (187)
Net changes in:
Income taxes receivable - -
Prepaid expenses and other assets (1,115) (3,549)
Accrued interest receivable 940 (69)
Income taxes payable 1,569 383
Accrued interest payable (209) 184
Other liabilities 3,331 (670)
--------- --------
Net cash flows provided by (used in)
operating activities $ 8,711 $ (3,980)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of
investment securities
held-to-maturity $ 5,500 -
Sale of Federal Home Loan Bank stock 250
Purchases of Federal Home Loan Bank stock - (375)
Proceeds from maturities of
securities available-for-sale - 19,700
Proceeds from sales securities
available-for-sale 2,000 23,806
Proceeds from sales of
mortgage-backed securities
available-for-sale 5,085 94,384
Purchases of securities
available-for-sale - (14,550)
Purchases of mortgage-backed
securities available-for-sale (67) (74,410)
Purchases of mortgage-backed
securities held-to-maturity - (3,199)
Principal collected on
mortgage-backed securities
held-to-maturity 3,580 4,359
Principal collected on
mortgage-backed securities
available-for-sale 7,075 16,504
Principal collected on securities
available-for-sale 431 465
Proceeds from Securitization of Loans 79,568
Net increase in loans (113,003) (46,014)
Proceeds from sales of real estate owned 172 745
Expenditures for office properties
and equipment (1,155) (715)
--------- --------
Net cash flows provided by (used in)
investing activities $ (10,564) $ 20,700
--------- --------
4
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOLLOWING PERIODS (In thousands):
For the Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/ (decrease) in deposits $ 51,465 $(11,543)
Net decrease in advance payments
by borrowers for taxes and insurance (207) (532)
Net increase in securities sold under
agreement to repurchase (7,274) (6,015)
Net decrease in other borrowings (32,000) (4,000)
Proceeds from Federal Home Loan Bank advances 5,000 62,500
Repayment of Federal Home Loan Bank advances (5,000) (50,000)
Additional Paid-in-Capital 90
Unearned Restricted Stock 172 534
Purchase of Treasury Stock (549) (8,508)
-------- --------
Net cash flows provided by (used in)
financing activities $ 11,697 $(17,564)
-------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,844 (844)
CASH AND CASH EQUIVALENTS - Beginning of year 9,074 6,342
-------- --------
CASH AND CASH EQUIVALENTS - End of year $ 18,918 $ 5,498
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14,095 $ 12,511
Income taxes paid 425 650
See accompanying notes to Condensed Consolidated Financial Statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Avondale
Financial Corp. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods have been made. The results of
operations for the three and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes the disclosures are adequate
to make the information not misleading. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 1996 Annual Report.
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.
Primary and fully diluted earnings per share are computed by dividing net income
by average shares of common stock and common stock equivalents outstanding. The
strike price of stock options outstanding is above the market price as of June
30, 1997 and therefore do not represent a dilutive effect. These options
therefore are not included in the earnings per share calculation. As of June 30,
1997 there are no stock equivalents outstanding.
NOTE 2 - REGULATORY CAPITAL
Pursuant to the Financial Institution Reform, Recovery and Enforcement Act of
1989 (FIRREA), savings institutions must meet three separate minimum capital-to-
assets requirements: (1) a risk-based capital requirement of 8% of risk-weighted
assets, (2) a core capital ratio of 3% core capital to adjusted total assets,
and (3) a tangible capital requirement of 1.5% tangible core capital to adjusted
total assets. The following table summarizes, as of June 30, 1997, Avondale
Federal Savings Bank's (the "Bank") capital requirements under FIRREA and its
actual capital ratios at that date:
Bank
Capital Actual
Requirement Capital
----------- -------
Risk-based 8.00% 16.27%
Core 3.00% 8.90%
Tangible 1.50% 8.90%
6
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements - In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" and
Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of Information
about Capital Structure". SFAS 128 establishes standards for computing and
presenting earnings per share. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. These statements are effective
for financial statements issued for periods ending after December 15, 1997.
Management does not expect the adoption of these statements to have a
significant impact on the financial position and results of operations of the
Company.
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 were effective in
1996. An entity that continues to apply Opinion 25 is required to provide pro
forma net income and earnings per share, as if the accounting method in SFAS No.
123 had been used for stock-based compensation costs. The Company has not
adopted 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 Extinguisment 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 has adopted SFAS 125 and
the impact to the financial statement is not material.
There are no regulatory issues outstanding.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
General
The Company was formed in June 1993 and became the holding company for
Avondale upon consummation of the Conversion to stock form on April 3, 1995. The
Company has conducted no business other than that directly related to the Bank.
The Company's results of operations are primarily dependent upon the Bank's net
interest income, which is the difference between interest income on its
interest-earning assets such as loans and mortgage-backed or other securities,
and interest paid on its interest-bearing liabilities, such as deposits and
other borrowed funds. Net interest income is directly affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on such amounts. The Company's results of
operations are also affected by the provision for loan losses and the level of
noninterest income and expenses. Noninterest income consists primarily of
service charges and other fees. Noninterest expense includes salaries and
employee benefits, real estate owned, occupancy of premises, federal deposit
insurance premiums, data processing expenses and other operating expenses.
The operating results of Avondale are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. Avondale's cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate loans and other types of loans, which is in turn affected by the
interest rates at which such loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
Comparison of Financial Condition as of June 30, 1997 and December 31, 1996
General. Total assets increased $12 million or 1.96% to $607 million as of
June 30, 1997 from $595 million as of December 31, 1996. The loan portfolio grew
by $23 million or 7.22%. This increase was concentrated in the home equity lines
of credit, which grew $22 million in the first half. In May, 1997 the Company
successfully completed its second securitization and sale of approximately $82
million of Home Equity Lines of Credit. The Company retained the servicing on
the portfolio and as of June 30, 1997 has $153 million of loans sold which are
serviced by the Company. The increase in assets was offset by a $23 million
decrease in securities portfolio. Avondale continues to focus on the origination
of equity lines of credit. The Company has implemented 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. The Company originated
4,421 home equity line of credit loans with lines of $137 million for the six
months ended June 30, 1997. As a result of the growth and potential
opportunities in the Bank's home equity lending business, and in recognition of
the amount of time it will take for the private label credit card services
("PLCS") business to achieve acceptable levels of profitability, the Bank has
decided to refocus its resources entirely to home equity and other types of
mortgage-related lending and exit the PLCS business. There have been no new
credit card clients added to the portfolio during the past quarter and all PLCS
marketing activities have ceased. We anticipate that it will take several
quarters to discontinue the operation. The Bank will not record a restructuring
charge as a result of this decision, as the employees and systems will be
redeployed elsewhere in the organization. The Bank continues to explore the
possible sale of all or parts of the credit card portfolio, but has nothing to
report at this time.
Total liabilities increased $17 million from December 31, 1996 to June 30,
1997, to $552 million. Total deposits increased $51 million and borrowings
decreased $39 million over this period of time. Total stockholders' equity
decreased by $5.5 million from December 31, 1996 to June 30, 1997, to $55.4
million. The decrease is attributed to current year operating loss of $5.3
million and stock repurchase of $550,000. The securities available-for-sale
portfolio had a net unrealized gain of $271,000 as of June 30, 1997.
8
Comparison of Operating Results for the Three and Six Months Ended June 30, 1997
and 1996.
General. Net income was $2.3 million for the three months ended June 30, 1997,
compared to $937,000 net income for the quarter ended June 30, 1996. Second
quarter earnings benefited from a pretax gain of $4.1 million from the sale of
loans connected with the Bank's second home equity loan securitization. The
Company also showed significant improvement in net interest income, the result
of increasing loan portfolio, and significant increase in noninterest income,
primarily due to loan servicing fees. Earnings per share for the quarter was
$.65 compared with $.26 for the quarter a year ago. The Company's return on
average assets was 1.44% for the period ended June 30, 1997 and 0.64% for the
three months ended June 30, 1996.
For the six months ended June 30, 1997, Avondale had a net loss of $5.3 million
or -$1.51 per share compared to net income of $1.9 million or $.49 per share
during the first half of 1996. The loss was a result of a $13 million provision
for loan losses during the first quarter. The provision was due to a higher than
expected delinquency rates in one of the Bank's private label credit card
programs. Outside of the special loan loss provision, the Company made
significant progress in net interest income, the result of increasing loan
portfolio, and significant increase in noninterest income. The Company's return
on average assets was -1.69% for the six months ended June 30, 1997 and 0.63%
for the six months ended June 30, 1996.
Net Interest Income. Net interest income increased $2.7 million to $7.5 million
for the quarter ended June 30, 1997 from $4.9 million for the three months ended
June 30, 1996. The increase is a result of continued loan growth, the average
loan balance increasing $132 million from a year-ago period while investment and
mortgage-backed securities declined $89 million. Average interest earning assets
were $610 million for the current period compared to $567 million for the three
months ended June 30, 1996. The net interest margin for the quarter was 4.93%
compared to 3.41% for the same period ended June 30, 1996.
For the six months ended June 30, 1997, net interest income increased $4.5
million to $14.3 million from $9.8 million for the six months ended June 30,
1996. The average loan balance increasing $130 million from a year-ago period
while investment and mortgage-backed securities declined $109 million. Average
interest earning assets were $599 million for the current period compared to
$579 million for the six months ended June 30, 1996. The net interest margin for
the first half was 4.79% compared to 3.39% for the same period ended June 30,
1996.
9
TABLE 1. AVERAGE BALANCES, INTEREST RATES AND YIELDS
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 Quarter Ended: For the Quarter Ended:
--------------------------------- --------------------------------
30-Jun-97 30-Jun-96
--------------------------------- --------------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
------- --------- ------ -------- --------- ------
Assets:
Interest earning assets:
Loans receivable $380,876 $11,003 11.56% $248,736 $ 5,597 9.00%
Investment securities 42,195 796 7.55 60,687 1,062 7.00
-------- -------
Mortgage-backed securities 186,985 3,084 6.60 257,209 4,388 6.82
-------- ------- -------- -------
Total interest-earning assets 610,056 14,883 9.76 566,632 11,047 7.80
------- -------
Non interest-earning assets 26,624 16,572
-------- --------
Total assets $636,680 $583,204
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $367,740 $ 4,593 5.00% $317,091 $ 3,575 4.51%
Advances from Federal Home Loan Bank 90,803 1,326 5.84 94,090 1,346 5.72
Securities sold under repurchase agreements 81,858 1,144 5.59 64,511 899 5.57
Other borrowings 21,808 302 5.54 29,231 392 5.36
-------- ------- -------- -------
Total interest bearing liabilities 562,209 7,365 5.24 504,923 6,212 4.92
Non-interest bearing deposits 5,732 ------- 7,981 -------
Other liabilities 13,860 10,719
-------- --------
Total liabilities 581,801 523,623
Equity 54,879 59,581
-------- --------
Total liabilities and equity $636,680 $583,204
Net interest income/Interest rate spread 7,518 4.52% $ 4,835 2.88%
======= ===== ======= ====
Net interest-earning assets/net interest margin $ 47,847 4.93% $ 61,709 3.41%
======== ===== -------- ====
Ratio of interest-earning assets to interest bearing
labilities 108.51% 112.22%
======== ========
10
TABLE 2 - RATE/VOLUME ANALYSIS OF NET
INTEREST INCOME
(In Thousands)
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (1) changes attributable to changes in volumes, (ii)
changes attributable to changes in rate, and (iii) net changes. The changes
attributable to the combined impact of volume and rate have been allocated to
the changes due to volume.
Three Months ended June 30, 1997
vs. Three Months ended June 30, 1996
Increase (Decrease) Due to
------------------------------------
Volume Rate Net
------- ------ -------
Interest Income:
Loans receivable $ 3,817 $1,589 $ 5,406
Investment securities (349) 84 (265)
Mortgage-backed securities (1,158) (146) (1,304)
------- ------ -------
Total interest income 2,310 1,527 3,837
------- ------ -------
Interest Expense
Deposits 633 385 1,018
Advances from the Federal
Home Loan Bank (48) 28 (20)
Other borrowed money (103) 13 (90)
Securities sold under
agreements to repurchase 242 3 245
------- ------ -------
Total interest expense 724 429 1,153
------- ------ -------
Net interest income $ 1,586 $1,098 $ 2,684
======= ====== =======
11
For the six months ended For the six months ended
------------------------------------ --------------------------------
30-Jun-97 30-Jun-96
------------------------------------ --------------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Assets:
Interest earning assets:
Loans receivable $367,748 $20,744 11.28% $238,390 $10,607 8.90%
Investment securities 40,375 1,612 7.99 71,229 2,759 7.75
Mortgage-backed securities 190,988 6,211 6.50 269,084 9,146 6.80
-------- ------- -------- -------
Total interest-earning assets 599,111 28,567 9.54 578,703 22,512 7.78
------- -------
Non interest-earning assets 27,620 15,374
-------- --------
Total assets 626,731 $594,077
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $355,128 $ 8,706 4.90% $322,651 $ 7,335 4.55%
Advances from Federal Home Loan Bank 90,306 2,637 5.84 90,501 2,543 5.62
Securities sold under repurchase 76,587 2,132 5.57 70,953 2,006 5.65
agreements
Other borrowings 27,497 747 5.43 30,486 811 5.32
-------- ------- -------- -------
Total interest-bearing liabilities 549,518 14,222 5.18 514,591 12,695 4.93
------- -------
Non-interest bearing deposits 5,984 6,306
Other liabilities 12,748 10,867
-------- --------
Total liabilities 568,250 531,764
Equity 58,481 62,313
-------- --------
Total liabilities and equity $626,731 $594,077
-------- --------
Net interest income/Interest rate spread 14,345 4.36% $ 9,817 2.85%
======= ====== ======= =====
Net interest-earning assets/net $ 49,594 4.79% $ 64,112 3.39%
interest margin -------- ====== -------- =====
Ratio of interest-earning assets to
interest bearing liabilities 109.02% 112.46%
======== ========
12
Six Months ended June 30, 1997
vs. Six Months ended June 30, 1996
Increase (Decrease) Due to
-----------------------------------
Volume Rate Net
----------- -------- ------------
Interest Income:
Loans receivable $ 7,297 $2,840 $10,137
Investment securities (1,232) 86 (1,146)
Mortgage-backed securities (2,540) (395) (2,935)
------- ------ -------
Total interest income 3,525 2,531 6,056
------- ------ -------
Interest Expense
Deposits 796 575 1,371
Advances from the Federal
Home Loan Bank (6) 100 94
Other borrowed money (81) 17 (64)
Securities sold under
agreements to repurchase 157 (31) 126
------- ------ -------
Total interest expense 866 661 1,527
------- ------ -------
Net interest income $ 2,659 $1,870 $ 4,529
======= ====== =======
13
Interest Income: Interest income increased $3.9 million to $14.9 million in the
three months ended June 30, 1997 from $11.0 million for the quarter ended June
30, 1996. The primary reason for the increase was due to a change in earning
assets mix, from lower yielding securities to higher yielding loans. Overall
securities had a negative volume variance of $1.5 million while loans had a
positive variance of $3.8 million for the three months period ended June 30,
1997 compared to the three months ended June 30, 1996. Average interest-earning
assets increased $43 million to $610 million in the three months ended June 30,
1997, from $567 million during the same period for the prior year. The yield on
loans increased 2.56%, to 11.56%. The Company has emphasized the origination of
equity lines of credit utilizing credit-scoring models using risk-based pricing,
whereby the interest rate of the loan is determined by both the borrower's
credit score and the ratio of the loan to the appraised value of the property.
Interest on securities decreased $266,000 for the three months ended June 30,
1997 to $796,000, from $1.1 million for the quarter ended June 30, 1996. The
average securities outstanding decreased 30.47% from $61 million for the quarter
ended June 30, 1996 to $42 million for the same period ended June 30, 1997. The
yield on securities increased to 7.55% from 7.00% respectively for the same time
periods. Interest on mortgage-backed securities decreased $1.3 million from $4.4
million to $3.1 million. The average mortgage-backed securities outstanding
decreased $70 million to $187 million for the quarter ended June 30, 1997 from
$257 million for the three months ended June 30, 1996. Yields on mortgage-backed
securities decreased .22% over the same period, to 6.60%.
For the six months ended June 30, 1997, Interest income increased $6.1 million
to $28.6 million from $22.5 million for the six months ended June 30, 1996.
Average interest-earning assets increased $20 million to $599 million in the six
months ended June 30, 1997, from $579 million during the same period for the
prior year. Average loans outstanding were $368 million compared to $238 for the
same period year-ago. The yield on loans increased 2.38%, to 11.28%. Interest on
securities decreased $1.2 million for the six months ended June 30, 1997 to $1.6
million, from $2.8 million for the six months ended June 30, 1996. The average
securities outstanding were $40 million decreased from $71 million for the six
months ended June 30, 1996. The yield on securities increased to 7.99%, from
7.75% respectively for the same time periods. Interest on mortgage-backed
securities was $6.2 million, a decrease from $9.1 million for the same period
year-ago. The average mortgage-backed securities outstanding decreased $78
million to $191 million for the six months ended June 30, 1997 from $269 million
for the six months ended June 30, 1997. Yields on mortgage-backed securities
decreased .30% over the same period, to 6.50%.
Interest Expense. Interest expense increased $1.2 million to $7.4 million for
the three months ended June 30, 1997 from $6.2 million for the quarter ended
June 30, 1996. This increase was attributable to both an average increase in
interest-bearing liabilities of $57 million, from $505 million for the three
months ended June 30, 1996 to $562 million for the three months ended June 30,
1997, as well as an increase in the average cost of interest-bearing liabilities
of 0.32%, from 4.92% for the three months ended June 30, 1996 to 5.24% for the
same period ended June 30, 1997. The average balance on deposits Increased $51
million, to $367 million, as the Bank aggressively pursues certificates of
deposits products, and the cost of interest-bearing deposits increased from
4.51% for the quarter ended June 30, 1996 to 5.00% for the three months ended
June 30, 1997. During the same period of time, non-interest-bearing deposits
decreased from an average of $8 million for the three months ended June 30, 1996
to $5.8 million for the three months ended June 30, 1997. Interest on Federal
Home Loan Bank advances decreased $20,000 from the three months ended June 30,
1996 compared to the same period ended June 30, 1997. This decrease was
attributable to a decrease in average Federal Home Loan Bank advances
outstanding of $3.3 million, from $94.1 million for the three months ended June
30, 1996 to $90.8 million for the three months ended June 30, 1997. The decrease
in Average balance outstanding was partially offset by an increase in the
average cost of borrowing of 0.12%, from 5.72% for the three months ended June
30, 1996 to 5.84% for the same period ended June 30, 1997. Interest on
securities sold under agreement to repurchase and other borrowings increased by
$155,000, from $1.3 million for the three months ended June 30, 1996 to $1.4
million for the three months ended June 30, 1997. The average balance of
securities sold under agreement to repurchase and other borrowings increased $10
million from the three months ended June 30, 1996 to the same period ended June
30, 1997. The average rate on these borrowings was 5.51% and 5.57% for the
quarters ended June 30, 1996 and June 30, 1997, respectively.
14
For the Six months ended June 30, 1997 interest expense was $14.2 million, a
$1.5 million increase over the same period in the prior year. This increase was
attributable to both an average increase in interest-bearing liabilities of $35
million, from $515 million for the six months ended June 30, 1996 to $550
million for the six months ended June 30, 1997; as well as an increase in the
average cost of interest-bearing liabilities of 0.25%, from 4.93% for the six
months ended June 30, 1996 to 5.18% for the same period ended June 30, 1997. The
average balance on deposits increased $32 million, to $355 million, and the cost
of interest-bearing deposits increased from 4.55% for the six months ended June
30, 1996 to 4.90% for the six months ended June 30, 1997. During the same time
period, non-interest-bearing deposits decreased from an average of $6.3 million
for the six months ended June 30, 1996 to $6 million for the six months ended
June 30, 1997. Interest on Federal Home Loan Bank advances increased $94,000
from the six months ended June 30, 1996 compared to the same period ended June
30, 1997. This increase was attributable to an increase average cost of
borrowing of 0.22%, from 5.62% for the six months ended June 30, 1996 to 5.84%
for the same period ended June 30, 1997. Interest on securities sold under
agreement to repurchase and other borrowings increased by $62,000 to $2.9
million for the six months ended June 30, 1997. The average balance of
securities sold under agreement to repurchase and other borrowings increased
$2.6 million from the six months ended June 30, 1996 compared to the same period
ended June 30, 1997. The average rate on these borrowings was 5.64% and 5.72%
for the six months ended June 30, 1996 and June 30, 1997, respectively.
Provision for Loan Loss. The Company maintains its allowance for loan losses at
level which is considered by management to be adequate to absorb possible loan
losses on existing loans, based on an evaluation of the collectibility of loans
and prior loan loss experience. The evaluation takes into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problems, the value of related collateral,
the regulators' stringent view of adequate reserve levels for the thrift
industry and the current economic conditions that may affect the borrower's
ability to pay. Loans are evaluated and categorized into risk categories. For
each risk category, the methodology assigns a percentage of principal amount of
the category that should be maintained as a general valuation allowance. To the
extent that the amount of loans categorized into the respective risk categories
requires the general valuation allowance to be increased, the provision for loan
losses will be impacted accordingly. Therefore, in the event Avondale is
required to increase its allowance for loan losses, operating results could be
adversely affected. The allowance for loan losses is established through a
provision for loan losses charged to expense.
Analysis of Allowance for Loan Losses
- ----------------------------------------
A reconciliation of the activity in Avondale's allowance for possible loan
losses is as follows:
For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Balance at January 1 $ 20,501 $ 4,043 $ 7,208 $ 3,460
Provision for possible loan losses 3,545 475 18,059 1,125
Charge-offs (5,523) (192) (6,795) (259)
Recoveries 32 - 83 -
------------- ------------------------------ -------------
Balance at June 30 18,555 4,326 18,556 4,326
============= ============================== =============
Loans at June 30 347,925 266,122 347,925 266,122
============= ============================== =============
Ratio of allowance of loans 5.33% 1.63% 5.33% 1.63%
============= ============================== =============
The provision for loan losses increased $3.1 million to $3.5 million for
the three months ended June 30, 1997 from $475,000 for the quarter ended June
30, 1996. For the six months ended June 30, 1996 the provision was $18 million
compared to $1.1 million for the same period last year. The increase was a
result of
15
a $13 million provision for loan loss during the first quarter. This provision
is the outgrowth of higher than expected delinquency rate and the resulting
potential for subsequent loan losses in one of the Bank's private label credit
card programs and the continued growth in the overall loan portfolio. The
private label credit card portfolio has a balance of $50 million, which
represents approximately 14.29% of the Bank's loans outstanding. The allowance
for loan losses was $18.6 million as of June 30, 1997, $7.2 million as of
December 31, 1996 and $4.3 million as of June 30, 1996.
NON-PERFORMING ASSETS
- ---------------------
(In thousands)
At At At
June 30, December 31, June 30,
1997 1996 1996
---------- -------------- ----------
Non-accruing loans:
Equity lines of credit $ 3,229 $2,150 $1,517
One to four family loans 783 1,523 951
Multi-family 251 365 117
Consumer loans 13,511 1,256 48
---------- -------------- ----------
Total non-performing loans 17,774 5,294 2,633
---------- -------------- ----------
Total non-performing loans to
total loans 5.11% 1.63% 1.63%
========== ============== ==========
Other real estate owned $ 1,516 $ 270 $1,839
========== ============== ==========
Total non-performing loans and
Real estate owned to total 3.18% 0.93% 0.77%
assets
========== ============== ==========
Non-Performing Assets: Non-performing loans at June 30, 1997 were $17.8
million, increasing from $5.3 million at December 31, 1996 and $2.6 million at
June 30, 1996. The increase is due to the Bank's private label credit card
portfolio which had non-performing balances at June 30, 1997 of $12.7 million,
compared to $651,000 at December 31, 1996. The Bank took a special $13 million
provision in the first quarter to cover estimated probable losses for this
portfolio. The delinquency on the rest of the Bank's loan portfolio is in line
with expectations and is priced accordingly. With the exception of the one
private label credit card portfolio, the non-performing loans were 1.70% of
total loans at June 30, 1997 compared to 1.43% at December 31, 1996 and .99% at
June 30, 1996. The sixty-day and thirty-day delinquency as of June 30, 1997 were
1.12% and 3.03%, compared to 1.40% and 5.00% as of December 31, 1996.
The non-performing loans on the private label portfolio were 25.4% of the
portfolio as of June 30, 1997. The sixty-day and thirty-day delinquency for this
portfolio as of June 30, 1997 was 6.2% and 7.1%, respectively. Management
believes the special loan loss provision expensed in the first quarter and the
regular accrual attributable to this program is adequate.
Net charge-offs for the second quarter totaled $5.5 million, of which $4.8
million was related to the private label credit card portfolio. For the first
half of 1997, net charge-offs were $6.7 million, of which $5.1 million was
related to the private credit card portfolio.
Non-Interest Income: Non-interest income was $6.1 million for the quarter, an
increase of $5.3 million from the year-ago quarter. This increase was primarily
due to securitization gains of $4.1 million and loan servicing and late fees,
which increased by $1.6 million over the year-ago period, to $1.7 million.
Security gains were $64,000, down for $500,000 a year-ago reflecting the decline
in the size of the investment portfolio, to provide funding for the increasing
loan business.
The securitization gains of $4.1 million 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,
16
are reported in the accompanying consolidated statement of income as a component
of loan servicing income. This amount totaled $511,000 for the six months ended
June 30, 1997.
For the first half non-interest income was $7.7 million, an increase of $6
million from the first six months of 1996. The increase was due to the
securitization gain of $4.1 million and loan servicing income, which increased
$2.8 million to $2.9 million. Security gains were $75,000, down from $1.1
million in the year-ago period.
Non-Interest Expense: Non-interest expenses were $6.6 million, an increase of
$2.9 million from the year-ago quarter. The increase was primarily due to
additional personnel, technology and occupancy costs needed to support the
growth in the Bank's lending activity. The Company had 214 full-time equivalent
employees at June 30, 1997, up from 129 at June 30, 1996. The occupancy expenses
increased $362,000, to $602,000 for the quarter due to the relocation of the
loan operations center to a larger office space. Legal and professional expenses
increased $403,000, to $559,000 due to outsourcing of certain loan collection
services. Data processing expenses also increased $352,000 to $720,000 for the
quarter, reflecting the higher number of loans outstanding.
For the first half non-interest expenses were $12.3 million compared to $7.5
million in the same period last year. Compensation expenses increased $1.3
million to $5.1 million. Occupancy expenses increased $633,000, to $1.1 million
for the first half of 1997. Data processing expenses increased $882,000 to $1.5
million. Legal and professional expenses increased $491,000 to $762,000 in the
first half of 1997. All these increases were to support the Bank's increasing
lending business. The Bank's operating efficiency ratio was 55.88% compared with
65.32% in the year-ago period.
Provision for Income Taxes. The provision for income taxes was $1.2 million for
the three months ended June 30, 1997. The provision was $544,000 in the same
period ended June 30, 1996. The respective income tax expense represented
effective tax rates of 35.14% for the quarter ended June 30, 1997 and 36.73% for
the three months ended June 30, 1996.
For the six months ended June 30, 1997, the provision for income taxes was a
credit of $3 million due to the loss in the first quarter. The provision was $1
million in the same period ended June 30, 1996. The respective income tax
expense represented effective tax rates of 36.40% for the quarter ended June 30,
1997 and 34.70% for the six months ended June 30, 1996.
17
PART 11 - OTHER INFORMATION
The calculation of the Registrant's primary and fully diluted earnings per share
required by 601(b)(11) of Regulation S-K is presented below (dollars in
thousands, except per share data):
For the three Months Ended June 30, 1997:
Primary
------------------------------------------
Net income $ 2,285
Average common shares outstanding 3,504
Common stock equivalent -
----------
Average primary shares outstanding 3,504
Primary earning per share $ .65
Fully diluted earnings per share
------------------------------------------
Net income $ 2,285
Average common shares outstanding 3,504
Common stock equivalent -
----------
Average fully diluted shares outstanding 3,504
Fully diluted earning per share $ .65
18
For the six Months Ended June 30, 1997:
Primary
Net income $ (5,294)
Average common shares outstanding 3,516
Common stock equivalent -
Average primary shares outstanding 3,516
Primary earning per share $ (1.51)
Fully diluted earnings per share
Net income $ (5,294)
Average common shares outstanding 3,516
Common stock equivalent -
Average fully diluted shares outstanding 3,516
Fully diluted earning per share $ (1.51)
19
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on this 13th day of August, 1997.
AVONDALE FINANCIAL CORP.
(Registrant)
Robert S. Engelman, Jr.
President and Chief Executive Officer
/s/ Robert S. Engelman, Jr. (Principal Executive Officer)
- -----------------------------
Howard A. Jaffe,
Vice President
and Chief Financial Officer
(Principal Financial Officer and
/s/ Howard A. Jaffe Principal Accounting Officer)
- -----------------------------
20