UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 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: XXX NO:
--- ---
3,494,545 common shares of stock were outstanding as of November 12, 1997.
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
-----------------------------------------
FORM 10-Q
---------
SEPTEMBER 30, 1997
------------------
INDEX
- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1997, December 31, 1996
and September 30, 1996............................................................ 2
Condensed consolidated statements of income for the three and nine months ended
September 30, 1997 and September 30, 1996......................................... 3
Condensed consolidated statements of cash flows for the nine months ended
September 30, 1997 and September 30, 1996......................................... 4 - 5
Notes to condensed consolidated financial statements.............................. 6 - 7
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 - September 30) Sept. 30, 1997 Dec. 31, 1996 Sept. 30, 1996
-------------- ------------ --------------
ASSETS (in thousands except per share data)
Cash and due from banks $ 12,754 $ 8,334 $ 5,990
Interest-bearing deposits 628 740 1,108
-------- -------- --------
Total cash and cash equivalents 13,382 9,074 7,098
Securities available for sale - At fair value
(amortized cost Sept. 30, 1997 - $43,092; Dec. 31, 1996
- $36,037 and Sept. 30, 1996 - $37,212) 43,115 35,901 37,113
Securities held-to-maturity - At amortized cost
(fair value Sept. 30, 1997 - $1,000; Dec. 31, 1996
- $6,488 and Sept. 30, 1996 - $6,852) 1,000 6,498 6,895
Mortgage-backed securities available-for-sale - At fair value
(amortized cost Sept. 30, 1997 - $92,619; Dec. 31, 1996
- $136,214 and Sept. 30, 1996 - $169,640) 92,984 136,418 170,626
Mortgage-backed securities held-to-maturity - At amortized cost
(fair value Sept. 30, 1997 - $55,320; Dec. 31, 1996 - $61,387
and Sept. 30, 1996 - $61,383) 55,793 61,438 61,813
Loans 348,215 324,508 308,749
Less: Allowance for loan loss 5,729 7,208 4,516
-------- -------- --------
Loans, net 342,486 317,300 304,233
Federal Home Loan Bank stock - at cost 4,540 4,790 4,790
Office buildings and equipment, net 4,814 3,875 4,296
Other real estate owned, net 465 270 502
Accrued interest receivable 6,445 6,896 4,868
Prepaid expenses and other assets 18,997 10,410 7,030
Deferred income tax 12,897 2,702 3,536
-------- -------- --------
Total assets $596,918 $595,572 $612,800
======== ======== ========
Deposits $396,445 $330,655 $313,979
Advances from Federal Home Loan Bank 90,803 90,803 90,803
Securities sold under agreements to repurchase 32,453 69,147 102,025
Other borrowings 18,000 32,000 29,000
Advance payments by borrowers for taxes and insurance 77 931 283
Accrued interest payable 1,258 2,212 1,153
Income taxes payable 2,260 452 67
Other liabilities 9,552 8,664 16,716
-------- -------- --------
Total liabilities 550,848 534,864 554,026
-------- -------- --------
Common stock ($.01 par: 10,000,000 shares authorized, 3,494,545,
3,525,288 and 3,418,568 issued and outstanding, at Sept. 30, 1997,
Dec. 31, 1996 and Sept. 30, 1996, respectively) 44 44 44
Capital surplus 43,108 43,018 43,018
Retained earnings 16,419 31,031 28,199
Treasury stock (11,045) (10,496) (8,462)
Unrealized net gain (loss) on securities available-for-sale,
net of tax of $141 at Sept. 30, 1997, $21 at Dec. 31, 1996
and ($349) at Sept. 30, 1996 208 33 (550)
Common Stock acquired by ESOP (1,693) (1,693) (2,116)
Unearned portion of restricted stock awards (971) (1,229) (1,359)
-------- -------- --------
Total stockholders' equity 46,070 60,708 58,774
-------- -------- --------
Total liabilities and stockholders' equity $596,918 595,572 $612,800
======== ======== ========
See accompanying notes to Condensed Consolidated Financial Statements
2
AVONDALE FINANCIAL CORP. For the Three Months Ended For the Nine Months Ended
CONSOLIDATED STATEMENTS OF INCOME Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
(UNAUDITED) -------------- -------------- -------------- --------------
INTEREST INCOME:
Loans $ 9,969 $ 6,263 $ 30,713 $ 16,870
Securities 552 791 1,732 3,297
Mortgage-backed securities 2,855 3,966 9,066 13,111
Other 146 131 577 384
---------- ---------- ---------- ----------
Total interest income 13,522 11,151 42,088 33,662
INTEREST EXPENSE:
Deposits 5,007 3,528 13,713 10,863
Advances from the Federal Home Loan Bank 1,312 1,349 3,949 3,891
Securities sold under agreements to repurchase 488 1,156 2,620 3,162
Other borrowings 352 447 1,099 1,258
---------- ---------- ---------- ----------
Total interest expense 7,159 6,480 21,381 19,174
NET INTEREST INCOME 6,363 4,671 20,707 14,488
Provision for loan losses 6,523 555 24,582 1,680
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses (160) 4,116 (3,875) 12,808
NONINTEREST INCOME:
Net gains (losses) on trading activities - 69 - 69
Net security gains (losses) 1,133 871 1,208 1,967
Net gain on loan securitizations - - 4,122 -
Net gain (loss) on sales of loans (11,755) - (11,755) 7
Loan servicing income 1,717 129 4,593 245
Fees for other customer services 103 90 484 262
Other operating income 167 110 434 439
---------- ---------- ---------- ----------
Total noninterest income (8,635) 1,269 (914) 2,989
NONINTEREST EXPENSE:
Salaries and employee benefits 2,498 1,853 7,619 5,708
Occupancy and equipment expenses, net 611 401 1,717 874
Federal deposit insurance premiums 57 2,457 180 2,845
Advertising and public relations 66 96 384 518
Data processing 699 345 2,189 952
Real estate owned expense, net (190) 57 (144) (22)
Legal and professional 725 118 1,486 390
Other operating expenses 1,399 842 4,762 2,439
---------- ---------- ---------- ----------
Total noninterest expense 5,865 6,169 18,193 13,704
Income before income taxes (14,660) (784) (22,982) 2,093
Provision (benefit) for income taxes (5,342) (290) (8,371) 709
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (9,318) $ (494) $ (14,611) $ 1,384
========== ========== ========== ==========
PER COMMON SHARE:
Earnings per common share $ (2.67) $ (0.14) $ (4.16) $ 0.37
========== ========== ========== ==========
Weighted average common shares outstanding 3,494,545 3,602,968 3,509,060 3,764,519
See accompanying notes to Condensed Consolidated Financial Statements
3
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE FOLLOWING PERIODS (In thousands):
For the Nine Months Ended September 30
1997 1996
------------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (14,611) $ 1,384
Adjustments to reconcile net income to net cash flows from operating activities
Depreciation 912 738
Amortization (accretion), net (645) (3,321)
Provision for loan losses 24,582 1,680
Provision for deferred income taxes (10,346) (49)
Net gain on sales of securities available-for-sale (1,208) (2,036)
Net Gain on the Securitization of loans (4,122) -
Net gains on sales of real estate owned (284) (202)
Net changes in:
Prepaid expenses and other assets (2,613) (6,515)
Accrued interest receivable 845 195
Income taxes payable 1,807 32
Accrued interest payable (954) 99
Other liabilities 550 8,095
--------- ---------
Net cash flows provided by (used in) operating activities (6,087) 100
--------- ---------
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 7,000 42,750
Proceeds from sales of mortgage-backed securities available-for-sale 47,424 176,440
Purchases of securities available-for-sale (14,545) (22,550)
Purchases of mortgage-backed securities available-for-sale (14,914) (148,960)
Purchases of mortgage-backed securities held-to-maturity - (3,199)
Principal collected on mortgage-backed securities held-to-maturity 5,695 6,282
Principal collected on mortgage-backed securities available-for-sale 12,716 23,550
Principal collected on securities available-for-sale 665 465
Proceeds Securitization of Loans 79,568 -
Net increase in loans (132,980) (89,006)
Proceeds from sales of real estate owned 1,823 2,097
Expenditures for office properties and equipment (1,851) (1,056)
--------- ---------
Net cash flows provided by (used in) investing activities (3,649) 6,138
--------- ---------
4
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOLLOWING PERIODS (In thousands):
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (decrease) in deposits $ 65,791 $(21,842)
Net decrease in advance payments by borrowers for taxes and insurance (854) (1,171)
Net increase (decrease) in securities sold under agreement to repurchase (36,693) 25,233
Net decrease in other borrowings (14,000) (12,500)
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 259 800
Purchase of Treasury Stock (549) (8,463)
-------- --------
Net cash flows provided by (used in) financing activities 14,044 (5,443)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,308 $ 795
CASH AND CASH EQUIVALENTS - Beginning of year 9,074 6,342
-------- --------
CASH AND CASH EQUIVALENTS - End of year $ 13,382 $ 7,137
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 22,335 $ 19,075
Income taxes paid 425 677
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 nine months ended September 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 and
industry reporting practice 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.
NOTE 2 - REGULATORY CAPITAL
Pursuant to the Financial Institution Reform, Recovery and Enforcement Act of
1989 (FIRREA), savings institutions must meet three separate minimum
capital-to-assets requirements: (1) a risk-based capital requirement of 8% of
risk-weighted assets, (2) a core capital ratio of 3% core capital to adjusted
total assets, and (3) a tangible capital requirement of 1.5% tangible core
capital to adjusted total assets. The following table summarizes, as of
September 30, 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% 13.18%
Core 3.00% 7.55%
Tangible 1.50% 7.55%
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.
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 has adopted SFAS 125 and
the impact to the financial statement is not material.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which is effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The adoption of this standard is not expected to have an impact on
the Company's financial position or results of operations.
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 the
Bank 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 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. The Company'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 September 30, 1997 and December 31, 1996
General. Total assets increased $2 million, to $597 million as of September
30, 1997 from $595 million as of December 31, 1996. The loan portfolio grew by
$24 million or 7.31%. This increase was concentrated in the home equity lines of
credit, which grew $35 million in the first nine months of current period. 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 September 30, 1997 has $138
million of loans sold which are serviced by the Company. The increase in loans
was offset by a $47 million decrease in the 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
underwritten and priced according to the credit worthiness of the customer, as
well as the loan to value percentage. The Company originated 1,531 home equity
line of credit loans with lines of $48 million for the three months ended
September 30, 1997 and 6,048 home equity line of credit loans with lines of $187
million for the nine months ended September 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 would 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. During the current
quarter, the Bank committed to sell the substantially all of the private label
credit card portfolio and recorded a loss of $16.5 million in connection with
the sale. This loss was comprised of an $11.8 million writedown to the sales
price of the portfolio and $4.7 million in additional charge-offs of
non-performing loans. At September 30, 1997 the Company had $15 million in loan
held for sale, net of the $11.8 million market value loss adjustment, which are
included on loans on the balance sheet.
Total liabilities increased $16 million from December 31, 1996 to September 30,
1997, to $551 million. Total deposits increased $66 million and borrowings
decreased $52 million over this period of time. Total stockholders' equity
decreased by $15 million from December 31, 1996 to September 30, 1997, to $46
million. The decrease is attributed to the current year operating loss of $14.6
million and a stock repurchase of $550,000. The securities available-for-sale
portfolio had a net unrealized gain of $388,000 as of September 30, 1997.
8
Comparison of Operating Results for the Three and Nine Months Ended September
30, 1997 and 1996.
General. The Company incurred a net loss of $9.3 million for the three months
ended September 30, 1997, compared to $494,000 net loss for the quarter ended
September 30, 1996. The loss during the current period was a result of the $16.5
million loss in connection with the sale of the Bank's private label credit
portfolio. As announced during the first quarter of 1997, the Company decided to
exit the private label credit card business and market the portfolio for sale.
The loss during the year-ago period was the result of the one-time $2.3 million
SAIF recapitalization charge. The Company continues to make progress in net
interest income, the result of the growing home equity loan portfolio, and in
noninterest income, primarily due to loan fees and gains on securitization of
home equity loans. Loss per share for the quarter was $2.67 compared with a $.14
loss for the quarter a year ago. The Company's return on average assets was
(6.08)% for the period ended September 30, 1997 and (0.33)% for the three months
ended September 30, 1996.
For the nine months ended September 30, 1997, Avondale reported a net loss of
$14.6 million or $4.16 per share compared to net income of $1.4 million or $.37
per share during the first nine months of 1996. The loss was a result of a $13
million provision for loan losses during the first quarter due to a higher than
expected delinquency rates in one of the Bank's private label credit card
programs, and the $16.5 million loss connected with the disposition of the
Bank's private label credit card portfolio in the current quarter. The Company's
return on average assets was (1.69%) for the nine months ended September 30,
1997 and 0.63% for the nine months ended September 30, 1996.
Net Interest Income. Net interest income increased $1.7 million to $6.4 million
for the quarter ended September 30, 1997 from $4.7 million for the three months
ended September 30, 1996. The increase is a result of continued loan growth, the
average loan balance increasing $79 million from a year-ago period, offset by a
declines in investment and mortgage-backed securities of $69 million. Average
interest earning assets were $575 million for the current period compared to
$565 million for the three months ended September 30, 1996. The net interest
margin for the quarter was 4.43% compared to 3.31% for the same period ended
September 30, 1996.
For the nine months ended September 30, 1997, net interest income increased $6.2
million to $20.7 million from $14.5 million for the nine months ended September
30, 1996. The average loan balance increased $115 million from a year-ago period
while investment and mortgage-backed securities declined $96 million. Average
interest earning assets were $591 million for the current period compared to
$571 million for the nine months ended September 30, 1996. The net interest
margin for the first nine months of 1997 was 4.67% compared to 3.38% for the
same period ended September 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-Sep-97 30-Sep-96
---------------------------------- ------------------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
------- --------- ------ -------- --------- ------
Assets:
Interest earning assets:
Loans $ 358,260 9,969 11.13 % $ 279,336 6,263 8.97%
Investment securities 38,405 697 7.26 52,147 922 7.07
Mortgage-backed securities 177,983 2,856 6.42 233,215 3,965 6.80
----------- --------- ---------- ------------
Total interest-earning assets 574,648 13,522 9.41 564,698 11,150 7.90
Non interest-earning assets 38,762 --------- 30,391 ------------
----------- ----------
Total assets 613,410 $ 595,089
=========== ==========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $ 385,986 5,007 5.19 % $310,521 3,528 4.54%
Advances from Federal Home Loan Bank 90,803 1,312 5.78 90,803 1,348 5.94
Securities sold under repurchase agreements 34,171 488 5.71 82,292 1,156 5.62
Other borrowings 25,145 352 5.60 33,363 447 5.36
-------- ---------- -------- -----
Total interest-bearing liabilities 536,105 7,159 5.34 516,979 6,479 5.01
---------- -----
Non-interest bearing deposits 6,037 6,900
Other liabilities 14,188 11,627
-------- --------
Total liabilities 556,330 535,506
Equity 57,080 59,583
----------- ----------
Total liabilities and equity 613,410 595,089
=========== ==========
Net interest income/Interest rate spread 6,363 4.07% $ 4,671 2.89%
========== ====== =========== ======
Net interest-earning assets/net interest margin 38,543 4.43% $ 47,719 3.31%
=========== ====== ========== ======
Ratio of interest-earning assets to
interest bearing liabilities 107.19% 109.23%
=========== ==========
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 Sept. 30, 1997
vs. Three Months ended Sept. 30, 1996
Increase (Decrease) Due to
-------------------------------------
Volume Rate Total
--------- --------- ----------
Interest Income:
Loans $ 2,196 $ 1,510 $ 3,706
Investment securities (249) 24 (225)
Mortgage-backed securities (886) (223) (1,109)
--------- --------- ---------
Total interest income 1,061 1,311 2,372
--------- --------- ---------
Interest Expense
Deposits 979 500 1,479
Advances from the Federal
Home Loan Bank - (36) (36)
Other borrowed money (115) 20 (95)
Securities sold under
agreements to repurchase (687) 19 (668)
--------- --------- ---------
Total interest expense 177 503 680
--------- --------- ---------
Net interest income $ 884 $ 808 $ 1,692
========= ========= =========
11
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 Nine Months ended For the Nine Months ended
---------------------------------- ---------------------------------
30-Sep-97 30-Sep-96
---------------------------------- ---------------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
------------ ----------- -------- ----------- ------------ -------
Assets:
Interest earning assets:
Loans $ 364,528 30,713 11.23% $ 249,505 16,870 9.02%
Investment securities 39,708 2,309 7.75 64,840 3,681 7.57
Mortgage-backed securities 186,627 9,066 6.48 257,059 13,111 6.80
----------- ---------- ---------- -----------
Total interest-earning assets 590,863 42,088 9.50 571,404 33,662 7.85
---------- -----------
Non interest-earning assets 31,361 22,992
----------- ----------
Total assets 622,224 7.753% 594,396
=========== ==========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $ 365,509 13,713 5.00% $ 318,969 10,863 4.54%
Advances from Federal Home Loan Bank 90,474 3,949 5.82 90,603 3,891 5.73
Securities sold under repurchase agreements 62,312 2,620 5.61 74,735 3,162 5.64
Other borrowings 26,681 1,099 5.49 31,456 1,258 5.33
----------- ---------- ---------- -----------
Total interest-bearing liabilities 544,976 21,381 5.23 515,763 19,174 4.96
---------- -----------
Non-interest bearing deposits 6,002 6,124
Other liabilities 13,237 11,114
----------- ----------
Total liabilities 564,215 533,001
Equity 58,009 61,395
----------- ----------
Total liabilities and equity 622,224 594,396
=========== ==========
Net interest income/Interest rate spread 20,707 4.27% 14,488 2.89%
---------- ---- ----------- ----
Net interest-earning assets/net interest margin 45,887 4.67% 55,641 3.38%
=========== ---- ========== ----
Ratio of interest-earning assets to
interest bearing liabilities 108.42% 110.79%
=========== ==========
12
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 Sept. 30, 1997
vs. Three Months ended Sept. 30, 1996
Increase (Decrease) Due to
---------------------------------------
Volume Rate Net
---------- ------------ ------------
Interest Income:
Loans $ 2,196 $ 1,510 $ 3,706
Investment securities (249) 24 (225)
Mortgage-backed securities (886) (223) (1,109)
---------- ------------ ------------
Total interest income 1,061 1,311 2,372
---------- ------------ ------------
Interest Expense
Deposits 979 500 1,479
Advances from the Federal
Home Loan Bank - (36) (36)
Other borrowed money (115) 20 (95)
Securities sold under
Agreements to repurchase (687) 19 (668)
---------- ------------ ------------
Total interest expense 177 503 680
---------- ------------ ------------
Net interest income $ 884 $ 808 $ 1,692
========== ============ ============
Interest Income: Interest income increased $2.4 million to $13.5 million in the
three months ended September 30, 1997 from $11.1 million for the quarter ended
September 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 $1.1 million and negative
rate variance of $199,000. Loans had a positive volume variance of $2.2 million
and positive rate variance of $1.5 million for the three months period ended
September 30, 1997, compared to the three months ended September 30, 1996.
Average interest-earning assets increased $10 million to $575 million in the
three months ended September 30, 1997, from $565 million during the same period
for the prior year. The yield on loans increased 2.16%, to 11.13%. 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
$225,000 for the three months ended September 30, 1997 to $697,000, from
$922,000 for the quarter ended September 30, 1996. The average securities
outstanding decreased 26.35% from $52 million for the quarter ended September
30, 1996 to $38 million for the same period ended September 30, 1997. The yield
on securities increased to 7.26% from 7.07% respectively for the same time
periods. Interest on mortgage-backed securities decreased $1.1 million from $4.0
million to $2.9 million. The average mortgage-backed securities outstanding
decreased $55 million to $178 million for the quarter ended September 30, 1997
from $233 million for the three months ended September 30, 1996. Yields on
mortgage-backed securities decreased .38% over the same period, to 6.42%.
13
For the nine months ended September 30, 1997, Interest income increased $8.4
million to $42.1 million from $33.7 million for the nine months ended September
30, 1996. Average interest-earning assets increased $20 million to $591 million
in the nine months ended September 30, 1997, from $571 million during the same
period for the prior year. Average loans outstanding were $365 million compared
to $250 for the same period year-ago. The yield on loans increased 2.21%, to
11.23%. Interest on securities decreased $1.4 million for the nine months ended
September 30, 1997 to $2.3 million, from $3.7 million for the nine months ended
September 30, 1996. The average securities outstanding were $40 million a
decreased from $65 million for the nine months ended September 30, 1996. The
yield on securities increased to 7.75%, from 7.57% respectively for the same
time periods. Interest on mortgage-backed securities was $9.1 million, a
decrease from $13.1 million for the same period year-ago. The average
mortgage-backed securities outstanding decreased $70 million to $187 million for
the nine months ended September 30, 1997 from $257 million for the nine months
ended September 30, 1997. Yields on mortgage-backed securities decreased .32%
over the same period, to 6.48%.
Interest Expense. Interest expense increased $680,000 to $7.2 million for the
three months ended September 30, 1997 from $6.5 million for the quarter ended
September 30, 1996. This increase was attributable to both an average increase
in interest-bearing liabilities of $19 million, from $517 million for the three
months ended September 30, 1996 to $536 million for the three months ended
September 30, 1997, as well as an increase in the average cost of
interest-bearing liabilities of 0.33%, from 5.01% for the three months ended
September 30, 1996 to 5.34% for the same period ended September 30, 1997. The
average balance on deposits increased $75 million, to $386 million, as the Bank
pursued new deposits products. As a result certificates of deposit increasing to
64% of total deposits, compared to 52% in the year-ago period, and the cost of
interest-bearing deposits increased from 4.54% for the quarter ended September
30, 1996 to 5.19% for the three months ended September 30, 1997. During the same
period of time, non-interest-bearing deposits decreased from an average of $7
million for the three months ended September 30, 1996 to $6 million for the
three months ended September 30, 1997. Interest on Federal Home Loan Bank
advances decreased $36,000 from the three months ended September 30, 1996
compared to the same period ended September 30, 1997. This decrease was
attributable to a decrease in the average cost of borrowing of 0.16%, from 5.94%
for the three months ended September 30, 1996 to 5.78% for the same period ended
September 30, 1997. Interest on securities sold under agreement to repurchase
and other borrowings decreased by $763,000, from $1.6 million for the three
months ended September 30, 1996 to $840,000 for the three months ended September
30, 1997. The average balance of securities sold under agreement to repurchase
and other borrowings decreased by $56 million from the three months ended
September 30, 1996 to the same period ended September 30, 1997. The average rate
on these borrowings was 5.66% and 5.54% for the quarters ended September 30,
1996 and September 30, 1997, respectively.
For the nine months ended September 30, 1997 interest expense was $21.4 million,
a $2.2 million increase over the same period in the prior year. This increase
was attributable to both an average increase in interest-bearing liabilities of
$29 million, from $516 million for the nine months ended September 30, 1996 to
$545 million for the nine months ended September 30, 1997; as well as an
increase in the average cost of interest-bearing liabilities of 0.27%, from
4.96% for the nine months ended September 30, 1996 to 5.23% for the same period
ended September 30, 1997. The average balance on deposits increased $47 million,
to $366 million, and the cost of interest-bearing deposits increased from 4.54%
for the nine months ended September 30, 1996 to 5.00% for the nine months ended
September 30, 1997. During the same time period, non-interest-bearing deposits
decreased from an average of $6.1 million for the nine months ended September
30, 1996 to $6 million for the nine months ended September 30, 1997. Interest on
Federal Home Loan Bank advances increased $58,000 from the nine months ended
September 30, 1996 compared to the same period ended September 30, 1997. This
increase was attributable to an increase average cost of borrowing of 0.09%,
from 5.73% for the nine months ended September 30, 1996 to 5.82% for the same
period ended September 30, 1997. Interest on securities sold under agreement to
repurchase and other borrowings decreased by $701,000 to $3.7 million for the
nine months ended September 30, 1997. The average balance of securities sold
under agreement to repurchase and other borrowings decreased $17 million from
the nine months ended September 30, 1996 compared to the same period ended
September 30, 1997. The average rate on these borrowings was 5.55% and 5.57% for
the nine months ended September 30, 1996 and September 30, 1997, respectively.
14
Provision for Loan Loss. The Company maintains its allowance for loan losses at
a level that is considered by management to be adequate to absorb probable 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 loan losses is as
follows:
Three Months Ended September 30 Nine Months Ended September 30
1997 1996 1997 1996
------------------- ---------------- ------------------ ---------------
Balance at Beginning of Period $ 18,555 $4,326 $ 7,200 $ 3,460
Provision for loan losses 6,523 555 24,582 1,680
Charge-offs (20,483) (365) (27,277) (624)
Recoveries 1,545 - 1,627 -
Reclassification (411) - (411) -
=================== ================ ================== ===============
Balance at September 30 $ 5,729 $4,516 $ 5,729 $ 4,516
=================== ================ ================== ===============
Loans at September 30 $348,215 $308,749
================== ===============
Ratio of allowance of loans 1.65% 1.46%
================== ===============
The provision for loan losses increased $6 million to $6.5 million for the
three months ended September 30, 1997 from $555,000 for the quarter ended
September 30, 1996. For the nine months ended September 30, 1996 the provision
was $24.6 million compared to $1.7 million for the same period last year. The
increase was a result of a $13 million provision for loan loss during the first
quarter and $4.7 million during the current quarter relating to the sale of the
private label credit card portfolio. These provisions are the outgrowth of
higher than expected delinquency rate and the resulting loan losses in one of
the Bank's private label credit card programs and the continued growth in the
remaining loan portfolio. The Bank committed to sell the private label credit
card loan portfolio during the current quarter. During the current quarter the
Bank reclassified $411,000 in reserve for loan losses to other liabilities to
establish a reserve for possible losses in connection with the merchant dealers
who participated in the private label credit programs. The allowance for loan
losses was $5.7 million as of September 30, 1997, $7.2 million as of December
31, 1996 and $4.5 million as of September 30, 1996.
15
NON-PERFORMING ASSETS
(In thousands)
At At At
September 30, December 31, September 30,
1997 1996 1996
---------------- --------------- ----------------
Non-accruing loans:
Equity lines of credit $4,122 $2,150 $1,810
One to four family loans 664 1,523 1,541
Multi-family 111 365 360
Consumer loans 1,240 1,256 111
---------------- --------------- ----------------
Total non-performing loans $6,137 $5,294 $3,822
================ =============== ================
Total non-performing loans to total loans 1.76% 1.63% 1.24%
================ =============== ================
Real estate owned $ 465 $ 270 $ 502
Total non-performing loans and
real estate owned to total assets 1.11% 0.93% 0.71%
================ =============== ================
Non-Performing Assets: Non-performing loans at September 30, 1997 were $6.1
million, increasing from $5.3 million at December 31, 1996 and $3.8 million at
September 30, 1996. The increase is consistent with the increase in loan volume
and the seasoning of the loan portfolio. The non-performing loans were 1.76% of
total loans at September 30, 1997 compared to 1.63% at December 31, 1996 and
1.24% at September 30, 1996. The sixty-day and thirty-day delinquency as of
September 30, 1997 were 1.26% and 3.58%, compared to 1.40% and 5.00% as of
December 31, 1996.
The non-performing loans on the remaining private label portfolio were 2.05% of
the portfolio as of September 30, 1997, as most of the 90 days delinquent loans
were charged-off in connection with the pending sale of the portfolio. The Bank
recorded the private label portfolio at fair market value, recognizing an
additional loss of $11.8 million. The sixty-day and thirty-day delinquency for
this portfolio as of September 30, 1997 was 1.45% and 1.90%, respectively.
Net Charge-offs for the third quarter totaled $18.9 million, of which $18.3
million was related to the private label credit card portfolio. Recoveries for
the third quarter were $1.5 million, of which $1.4 million was recovered from
sale proceeds received for charged-off private label credit card loans. For the
first nine months of 1997, net charge-offs were $25.7 million, of which $24.0
million was attributed to the private credit card portfolio.
Non-Interest Income: Non-interest income was $8.6 million loss for the quarter,
compared to $1.3 million in the year-ago quarter. The decrease is due to the
market down to the sales price of the private label credit card portfolio of
$11.8 million, part of the total $16.5 million loss on the disposition.
Excluding the effect of the sale of the private credit card portfolio,
non-interest income would have been $3.1 million, an increase of $1.9 million
from the year-ago quarter. This increase is primarily due to loan servicing fees
and late charges, which increased by $1.6 million over the year-ago period, to
$1.7 million. Security gains were $1.1 million, an increase of $193,000 over the
year-ago period, as the investment portfolio continues to decline in size to
provide funding for the increasing loan business.
For the first nine months non-interest income was a loss $914,000. Without the
loss on the sale of loans, non-interest income would have been $10.8 million, an
increase of $7.9 million from the first nine months of 1996. The increase was
due to a securitization gain of $4.1 million and loan servicing income, which
increased $4.3 million to $4.6 million. Net security gains for the nine months
were $1.2 million, down from $2.0 million in the year-ago period
16
Non-Interest Expense: Non-interest expense was $5.9 million for the third
quarter, compared with $6.2 million for the year-ago quarter, which included a
one-time $2.3 million SAIF charge. The Company had 205 full-time equivalent
employees at September 30, 1997, up from 137 at September 30, 1996. Salaries and
employee benefits were $2.5 million, compared to $1.9 million for the year-ago
period. Occupancy expenses increased $210,000, to $611,000 for the quarter due
to the relocation of the loan operations center to larger office space. Legal
and professional expenses increased $607,000, to $725,000 due to outsourcing of
loan collection services relating to the private label credit card portfolio.
Data processing expenses also increased $354,000 to $699,000 for the quarter,
reflecting the higher number of loans outstanding.
For the first nine months non-interest expenses were $18.2 million compared to
$13.7 million in the same period last year. Compensation expenses increased $1.9
million to $7.6 million. Occupancy expenses increased $843,000, to $1.7 million
for the first nine months of 1997. Data processing expenses increased $1.2
million to $2.2 million. Legal and professional expenses increased $1.1 million
to $1.5 million in the first nine months of 1997. All these increases were to
support the Bank's increasing lending business. The Bank's operating efficiency
ratio was 57.67% compared with 78.4% in the year-ago period; the efficiency
ratio would have been 65.4% without the SAIF charge for the year-ago period.
Provision for Income Taxes. The provision for income taxes was a credit of $5.3
million for the three months ended September 30, 1997, due to the loss in the
current quarter. The provision was a credit of $290,000 in the same period ended
September 30, 1996. The respective income tax expense represented effective tax
rates of 36.4% for the quarter ended September 30, 1997 and 37.0% for the three
months ended September 30, 1996.
For the nine months ended September 30, 1997, the provision for income taxes was
a credit of $8.4 million due to the operating loss in the current year. The
provision was $709,000 in the same period ended September 30, 1996. The
respective income tax expense represented effective tax rates of 36.40% for the
nine months ended September 30, 1997 and 33.9% for the nine months ended
September 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 September 30, 1997:
Primary
-----------------------------------------
Net loss $ ( 9,318)
Average common shares outstanding 3,495
Common stock equivalent -
--------------
Average primary shares outstanding 3,495
Primary loss per share $ (2.67)
Fully diluted earnings per share
-----------------------------------------
Net income $ ( 9,318)
Average common shares outstanding 3,495
Common stock equivalent -
--------------
Average fully diluted shares outstanding 3,495
Fully diluted earning per share $ (2.67)
18
For the nine months Ended September 30, 1997:
Primary
Net income $(14,611)
Average common shares outstanding 3,509
Common stock equivalent -
Average primary shares outstanding 3,509
Primary earning per share $ (4.16)
Fully diluted earnings per share
Net income $(14,611)
Average common shares outstanding 3,509
Common stock equivalent -
Average fully diluted shares outstanding 3,509
Fully diluted earning per share $ (4.16)
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 12th day of November 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