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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-24566
AVONDALE FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
36-3895923
(I.R.S. EMPLOYER IDENTIFICATION NO.)
20 NORTH CLARK STREET, CHICAGO, ILLINOIS 60602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 782-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting shares held by nonaffiliates of the
Registrant was $48,050,000 as of March 13, 1998. Solely for the purpose of
this computation, it has been assumed that executive officers and directors of
the Registrant are "affiliates".
There were issued and outstanding 3,323,566 common shares of the
Registrant's Common as of March 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Part III is incorporated by reference from the Registrant's
Proxy Statement dated March 13, 1998 for the Annual Meeting of Stockholders to
be held May 12, 1998 pursuant to Regulation 14A.
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INDEX
PAGE NO.
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PART I
Item 1 Business................................................. 3
Item 2 Properties............................................... 9
Item 3 Legal Proceedings........................................ 10
Item 4 Submission of Matters to a Vote of Security Holders...... 10
PART II
Market for Registrant's Common Stock and Related
Item 5 Stockholder Matters...................................... 11
Item 6 Earnings Summary and Selected Financial Data............. 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 14
Item 8 Financial Statements and Supplementary Data.............. 34
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 64
PART III
Item 10 Directors and Executive Officers of the Registrant....... 64
Item 11 Executive Compensation................................... 64
Security Ownership of Certain Beneficial Owners and
Item 12 Management............................................... 64
Item 13 Certain Relationships and Related Transactions........... 64
PART IV
Exhibits, Financial Statement Schedules and Reports on
Item 14 Form 8-K................................................. 64
Signatures............................................... 67
2
PART I
ITEM 1. BUSINESS
General
Avondale Financial Corp. (the "Company"), a Delaware corporation, was
organized for the purpose of becoming the savings and loan holding company for
Avondale Federal Savings Bank ("Avondale" or the "Bank"). The Company owns all
of the outstanding stock of the Bank issued on April 3, 1995 in connection
with the completion of the Bank's conversion from the mutual to stock form of
organization (the "Conversion"). At December 31, 1997 the Company had
approximately 1,330 shareholders of record, 3,323,566 shares of common stock
outstanding and total consolidated assets of approximately $541.5 million.
Services
Avondale maintains three offices in the north and northwest areas in the
city of Chicago, as well as one in downtown Chicago. In addition, there is one
Chicago suburban office in Niles, Illinois. Avondale currently emphasizes
providing its retail deposit products and services to the neighborhoods
surrounding its offices. These services include checking, savings, NOW and
money market deposit accounts. Automated Teller Machines (ATMs), which provide
24-hour banking services, are installed at each branch location. Customers are
also able to access their accounts at any time through Avondale's automated
phone banking. Avondale also offers its customers a debit card, which can be
used anywhere MasterCard is accepted. The Bank established Avondale Community
Development Corporation (the "Community Development Subsidiary" or "CDC"), to
engage in community lending and equity investments to facilitate the
construction and rehabilitation of housing in low and moderate neighborhoods
in the Bank's market area. The Bank's lending products consist primarily of
mortgages, including home equity lines of credit, on owner-occupied and non-
owner occupied and one to four family residences. The Bank has expanded its
wholesale distribution channels through third party brokers and other
financial institutions to offer equity lines of credit in thirty-two different
states. To a lesser extent, Avondale also originates multi-family,
construction, development and consumer loans. The Bank also offers investment
products and insurance through its wholly-owned subsidiary, Avondale Financial
Services, Inc. ("AFS"). Revenues are principally derived from interest on
loans, gains on sale resulting from securitizations of home equity loans,
income from investment securities and fee income.
Lending Activities
General. The Company has emphasized the origination of revolving,
adjustable-rate equity lines of credit primarily secured by first and second
liens on residential real estate. The Company also offers mortgages consisting
of one to four family residential fixed-rate and adjustable-rate ("ARM") loans
and, to a lesser extent, multi-family, construction and other consumer loans.
During 1997 the Company exited its private label credit card business and
liquidated this portfolio.
Equity Lines of Credit. During 1997, the Company continued to originate home
equity lines of credit. Avondale primarily originates home equity lines of
credit using independent mortgage brokers. The Company is able to utilize an
automated delivery system in conjunction with credit scoring in originating
these loans. This process allows the Company to make quick approval decisions
in regions throughout the country. During 1997 the Company successfully
completed two securitizations and sales of approximately $170.3 million of
home equity lines of credit in order to fund continued growth in this
portfolio. The Company retained the servicing on the loans that were sold. As
of December 31, 1997 equity lines of credit included in the Company's
statement of financial condition totaled $116.6 million or 47.1% of Avondale's
gross loan portfolio. At December 31, 1997 the home equity lines of credit
under management totaled $341.3 million, or 72.3% of the total loan portfolio
under management compared to $194 million or 48.6% as of December 31, 1996.
The Company's equity lines of credit consist primarily of first, second and
a few third mortgage liens on both owner-occupied and non-owner-occupied
properties. The lines generally have interest tied to the prime rate,
3
mature between five to ten years and require interest-only monthly payments
until maturity when the outstanding amount is due in full. At December 31,
1997, $94.0 million or 80.6%, of the Company's equity lines of credit were
secured by second mortgage liens, $16.4 million or 14.1% were secured by first
mortgages and $6.2 million or 5.3% were secured by third mortgages. In
addition, $1.5 million of the equity lines of credit were secured by non-
owner-occupied properties ($1.0 million by first mortgage liens and $.5
million by second mortgage liens). The equity lines of credit are granted
under credit scoring models using risk-based pricing, whereby the interest
rate of the loan is determined by both the borrower's credit score and the
ratio of all outstanding loans to the appraised value of the property. These
equity lines of credit are written so that the total commitment amount
(including any unused portion of the equity line), when combined with the
balance of the first mortgage loan, if any, can be granted up to 100% of the
appraised value of the property. For the year ended December 31, 1997, $228.9
million equity lines of credit were originated, which was 84.0% of total loans
originated for the period.
One-to-Four Family Residential Real Estate Lending. The Company originates
permanent loans, both fixed and adjustable rate, and a limited number of
construction loans, secured by one-to-four family residences, which at
December 31, 1997 totaled $82.6 million, or 33.4% of the Company's gross
portfolio.
At December 31, 1997, approximately $14.8 million, or 17.9% of the Company's
one-to-four family residential real estate loan portfolio, are ARMs tied to
the prime rate of interest and have rate adjustment limitations. These loans
have contractual maturities of 30 years, require interest-only payments for
the first five years, then amortize ratably over the last 25 years of the
loan.
The Company also originates one-to-four family residential ARMs, which are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on substantially all of the ARMs originated by the Company
adjust annually. The Company's ARM products generally carry interest rates
that reset to a stated margin over an independent index. Increases or
decreases in the interest rate of the Company's ARMs are generally limited to
2% at any adjustment date and 6% over the life of the loan. Certain ARMs are
convertible into fixed rate loans between the 13th and 60th months. The
Company's ARMs are not subject to prepayment penalties. Additionally, the
Company does not have any negative amortization ARMs. At December 31, 1997,
the total balance of one-to-four family one-year ARMs was $21.8 million, or
26.4% of the Company's total one-to-four family residential loan portfolio.
The Company originates residential first mortgage loans with loan-to-value
ratios up to 95%. On mortgage loans exceeding an 80% loan-to-value ratio at
the time of origination, the Company generally requires private mortgage
insurance that reduces the Company's exposure to 80% or less of the appraised
value of the underlying collateral. The Company also originates a limited
amount of fixed-rate residential mortgage loans. These loans generally are
underwritten under guidelines allowing them to be sold in the secondary
market.
Multi-Family Real Estate Lending. The Company also originates permanent
loans secured by multi-family real estate. At December 31, 1997, the Company's
multi-family and commercial real estate loan portfolio totaled $22.7 million,
or 9.2% of the Company's gross loan portfolio. At December 31, 1997, there
were 9 multi-family real estate loans with net book values above $500,000.
Avondale's multi-family real estate loan portfolio includes loans secured by
apartments, the majority of which are located within the north and northwest
Chicago area. Multi-family properties generally consist of 5 to 24 units. The
Company primarily originates multi-family real estate loans with loan-to-value
ratios up to 80%.
Construction and Development Lending. The Company has made a limited number
of construction loans to individuals for the construction of their residences
as well as to builders and developers for the construction of one to four
family residences, the development of one to four family lots and commercial
real estate. Included in this category are loans for the construction of low
and moderate income rental apartment buildings for senior citizens. Each of
these loans represents approximately 10% of the project's total cost with the
balance of the funds subsidized by various entities, including governmental
agencies. At December 31, 1997, the Company had construction loans outstanding
with aggregate principal balance of $1.1 million, representing .4% of the
Company's gross loan portfolio.
4
Consumer Lending. During the year ended December 31, 1996 the Company
originated mobile home loans through a third party broker. These loans are
secured by the mobile home and are written so that collection of delinquent
payments and risk of loss are the responsibility of the broker. The third
party broker maintains cash reserve accounts for these loans at the Bank. As
of December 31, 1997 the Company had $19.3 million of outstanding mobile home
loans with reserves of $2.4 million. The Company originates a limited amount
of consumer loans secured by deposit accounts. As a result of the growth and
opportunities in the Company's home equity lending business, during 1997 the
Company decided to refocus its resources entirely to home equity and other
types of mortgage-related lending and to exit the Private Label Credit
Services business. During 1997, the Company's originations of new private
label credit card receivables were insignificant.
Foreign Operations
The Company does not engage in any operations in foreign countries.
Employees
At December 31, 1997, the Company and its subsidiary had approximately 200
employees. The Company's employees are not represented by any collective
bargaining group. Management considers its relations with its employees to be
good.
Competition
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks,
credit unions, other consumer finance companies and mortgage bankers making
loans secured by real estate. Other savings institutions, commercial banks and
credit unions compete to originate consumer loans and for customer deposits.
Avondale also competes with money funds and other non-banking organizations
for deposit funds. Avondale's share of the deposit market in Cook County,
Illinois is less than 1%.
Supervision and Regulation
General. The Company is subject to broad federal regulation and oversight
extending to all its operations. Avondale is a member of the Federal Home Loan
Bank ("FHLB") of Chicago and is subject to certain limited regulation by the
Federal Reserve Board. The Bank is a member of the Savings Association
Insurance Fund (the "SAIF") and the deposits of Avondale are insured by the
Federal Deposit Insurance Corporation ("FDIC"). As a result, the FDIC has
certain regulatory and examination authority over the Bank.
Federal Regulation of Savings Association. The Office of Thrift Supervision
("OTS") has extensive authority over the operations of savings associations.
As part of this authority, Avondale is required to file periodic reports with
the OTS and is subject to periodic examinations by the OTS and the FDIC. The
last regular safety and soundness OTS examination of the Company and the Bank
was as of January 5, 1998. In addition, the OTS conducts examinations to
review compliance with the Community Reinvestment Act ("CRA"). The OTS has
established a fee assessment schedule for all savings associations to fund the
operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies. This enforcement authority includes,
among other things, the ability to assess civil monetary penalties, to issue
cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. In addition, federal laws and
regulations govern Avondale's investment, lending and branch expansion
activity.
The Bank's legal lending limit for loans-to-one-borrower is equal to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At December 31,
1997, Avondale's lending limit under this restriction was $7.2 million. The
Bank is in compliance with its legal lending limit.
5
The OTS and other federal banking agencies have adopted guidelines
establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
compliance plan. The failure to submit a plan or to comply with an approved
plan will subject the institution to further enforcement action. The OTS and
other federal banking agencies have also proposed additional guidelines on
asset quality and earnings standards. No assurance can be given as to the
final form of the proposed regulations and no prediction can be made as to the
effect of such regulations on the Bank.
Insurance of Accounts and Regulation by the FDIC. Avondale is a member of
the SAIF, which is administered by the FDIC. The FDIC may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are based upon a risk-based deposit
insurance assessment system. Under the system, all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation.
Institutions classified as well capitalized (i.e., a core capital ratio of at
least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1
risk-based capital") of at least 6% and a risk-based capital ratio of at least
10%) and considered healthy would pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core and Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern would pay the highest
premium. Risk classification of all insured institutions will be made by the
FDIC for each semi-annual assessment period. The Bank is a Tier 1
organization.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC. During 1997, the FDIC insurance charge on SAIF
assessable deposits was approximately 6.3 basis points.
Regulatory Capital Requirements. Federally insured savings associations,
such as Avondale, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The capital regulations require tangible
capital of at least 1.5% of adjusted total assets (as defined by regulation).
At December 31, 1997, Avondale had tangible capital of $45.1 million, or 8.31%
of adjusted total assets, which is $36.9 million above the minimum leverage
ratio requirement of 1.5% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. At December 31, 1997, Avondale
had risk-based capital of $48.8 million and risk-weighted assets of
approximately $295 million; or capital of 16.9% of risk-weighted assets.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is based upon the present value of expected cash flows from balance
sheet assets, liabilities and off-balance sheet contracts. The rule provides
for a two quarter lag between calculating interest rate risk and recognizing
any deduction from capital.
6
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the association would be reduced below the amount required to be maintained
for the liquidation account established in connection with its mutual to stock
conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account.
Generally, Tier 1 associations such as Avondale, which are associations that
before and after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its capital requirement for such capital component, as measured at the
beginning of the calendar year, or 75% of the association's net income for the
most recent four quarter period.
Tier 1 associations proposing to make a capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. As a
subsidiary of the Company, the Bank is also required to give the OTS 30 days
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). On
December 19, 1991, FDICIA was enacted into law. FDICIA contains, among other
things: (I) truth-in-savings legislation that requires financial institutions
to disclose terms, conditions, fees and yields on deposit accounts in a
uniform manner; (ii) provisions that impose audit requirements and expand the
role of the independent auditor; (iii) provisions that require regulatory
agencies to examine financial institutions more frequently than was required
in the past; (iv) provisions that require the expedited resolution of
undercapitalized financial institutions; (vi) provisions that require
regulatory agencies to develop a method for financial institutions to provide
information concerning the estimated fair market value of assets and
liabilities as supplemental disclosures to the financial statements filed with
the regulatory agencies; (vii) provisions that require the regulatory agencies
to adopt regulations that facilitate cross-industry transactions, and provide
for the acquisition of banks by thrift institutions.
FDICIA provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized," or
"undercapitalized." Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include: requiring
the submission of a capital restoration plan; placing limits on asset growth
and restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate the
institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution.
Truth-In-Savings Act. FDICIA requires the Federal Reserve Board to adopt
regulations implementing the Truth-in-Savings regulations. The Federal Reserve
Board's Truth-in-Savings regulations took effect on June 21, 1993, and
contain, as key elements: (i) a requirement that institutions disclose yields,
fees, penalties and costs for all interest-bearing accounts; (ii) a
requirement that institutions use the term "annual percentage yield" in
advertisements; (iii) a requirement that institutions provide 30 days notice
prior to reducing rates on most accounts; and (iv) a requirement that interest
be paid on entire balances rather than investable funds.
7
Community Reinvestment. Under the CRA, as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in determining whether to grant approval of applications for,
among other things, branches and other deposit facilities, mergers and holding
company acquisitions. An applicant's performance under the CRA may be the
basis for the regulators to deny such applications. Federal law requires
public disclosure of an institution's CRA rating and that the OTS provide a
written evaluation of an institution's CRA performance utilizing a four-tiered
description rating system.
Liquidity. All savings associations are required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%. In addition, short-term liquid assets (e.g. cash,
certain time deposits, certain bankers acceptances and short-term United
States Treasury obligations) currently must constitute at least 1% of the
association's average daily balance of net withdrawable deposit accounts and
current borrowings. Penalties may be imposed upon associations for violations
of either liquid asset ratio requirement. At December 31, 1997, Avondale was
in compliance with both requirements.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
polices and strategies, and must support its classification of and accounting
for loans and securities (i.e., whether held for investment, sale or trading)
with appropriate documentation. Avondale is in compliance with these amended
rules.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (which consists of total assets less intangibles,
properties used to conduct the savings association's business and liquid
assets not exceeding 20% of total assets) in qualified thrift investments on a
monthly average for nine out of every twelve months on a rolling basis. Such
investments primarily consist of residential housing related loans and
investments. At December 31, 1997, the Bank was in compliance with this test.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of Avondale include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Bank's subsidiaries are not deemed affiliates; however, the
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
8
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than Avondale or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
Federal Securities Law. The Common Stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1997, Avondale was in compliance with
these reserve requirements.
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations
to exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. Avondale is a member of the FHLB of Chicago,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB system.
It makes loans to members (i.e. advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing.
As a member of the FHLB of Chicago, Avondale is required to purchase and
maintain stock in the FHLB of Chicago. At December 31, 1997, the Bank owned
$4.5 million in FHLB stock and was in compliance with this requirement.
Government Monetary Policies and Economic Controls
The earnings and growth of the savings and loan industry are affected by the
credit policies of monetary authorities, including the Federal Reserve System.
An important function of the Federal Reserve System is to regulate the
national supply of financial institution credit in order to combat recession
and curb inflationary pressures. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are open market
operations in U.S. government securities, changes in reserve requirements
against member institutions deposits and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence
overall growth of loans, investments and deposits, and may also affect
interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on the operating
results of savings banks in the past and are expected to continue to have such
an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of credit policies by monetary and fiscal
authorities, including the Federal Reserve System, no prediction can be made
as to possible future changes in interest rates, deposit levels and loan
demand, or their effect on the business and earnings of the Company.
ITEM 2. PROPERTIES
The Company conducts its business at its corporate office and four other
retail branch locations in its primary market area. All of the branches have
ATM's. The Company also has a loan production and servicing
9
office and two loan sales offices. The following table sets forth information
relating to each of the Company's offices as of December 31, 1997. The total
net book value of Avondale's premises and equipment (including land, building
and leasehold improvements and furniture, fixtures and equipment) at December
31, 1997 was $5.3 million.
CORPORATE OFFICE:
20 North Clark Street
Chicago, Illinois
BRANCH OFFICES:
20 North Clark Street 6443 N. Sheridan Road
Chicago, Illinois Chicago, Illinois
2965 North Milwaukee Avenue 8300 W. Belmont
Chicago, Illinois Avenue
Chicago, Illinois
7557 West Oakton
Niles, Illinois
LOAN PRODUCTION AND SERVICING OFFICE: LOAN SALES OFFICE:
900 Frontage Road 23422 Mill Creek Drive
Woodridge, Illinois Laguna Hills, California
The Company maintains the depositor and borrower customer records, as well
as the Company's general ledger, with two outside service bureaus. The net
book value of the Company's data processing and computer equipment included in
fixed assets at December 31, 1997 was $2.1 million.
ITEM 3. LEGAL PROCEEDINGS
The Company, the Bank and its subsidiaries are involved from time to time as
plaintiff or defendant in various legal actions arising in the normal course
of their businesses. While the ultimate outcome of pending proceedings cannot
be predicted with certainty, it is the opinion of management, after
consultation with counsel representing the Company, the Bank or its
subsidiaries in the proceedings, that the resolution of these proceedings
should not have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "AVND." The approximate number of shareholders of record of Common
Stock as of December 31, 1997 was 1,330. Certain of the Company's shares are
held in "nominee" or "street" name and accordingly, the number of beneficial
owners of such shares are not known or included in the foregoing number. Such
shares are not separated to count actual beneficial owners. As of December 31,
1997 there were 3,323,566 common shares outstanding.
MARKET INFORMATION
MARKET PRICE
RANGE
DIVIDENDS BOOK -------------
PAID VALUE HIGH LOW
--------- ------ ------ ------
1997
Quarter ended December 31............... -- $13.83 $18.88 $15.63
Quarter ended September 30.............. -- 13.18 17.56 13.63
Quarter ended June 30................... -- 15.85 17.50 12.75
Quarter ended March 31.................. -- 14.88 18.50 16.00
1996
Quarter ended December 31............... -- $17.22 $17.38 $14.25
Quarter ended September 30.............. -- 16.31 14.63 12.50
Quarter ended June 30................... -- 16.33 14.50 12.75
Quarter ended March 31.................. -- 16.21 15.25 14.00
11
ITEM 6. EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other data
of the Company at the dates and for the periods indicated (in thousands). The
information is derived in part from and should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
SELECTED FINANCIAL DATA
FOR THE
FOR THE FOR THE NINE MONTHS FOR THE FOR THE
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31, MAR. 31, MAR. 31,
1997 1996 1995 1995 1994
---------- ---------- ----------- ---------- ----------
INCOME STATEMENT DATA:
Interest income......... $ 54,008 $ 45,881 $ 32,238 $ 32,745 $ 32,802
Interest expense........ 28,327 25,917 18,941 17,832 16,967
-------- -------- -------- -------- --------
Net interest income. 25,681 19,964 13,297 14,913 15,835
Provision for loan
losses................. 26,527 4,293 1,150 610 1,200
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........ (846) 15,671 12,147 14,303 14,635
Noninterest income...... 3,908 10,403 1,637 (5,176) 1,052
Noninterest expense..... 22,739 19,506 9,223 11,443 11,060
-------- -------- -------- -------- --------
Income before income
taxes, Extraordinary
item and cumulative
effect of accounting
change................. (19,677) 6,568 4,561 (2,316) 4,627
Provision (benefit) for
income taxes........... (7,195) 2,352 1,784 (896) 1,840
Extraordinary item, net
of tax................. -- -- -- -- (242)
Cumulative effect of
accounting change,
net of tax............. -- -- -- -- 162
-------- -------- -------- -------- --------
Net income (loss)... $(12,482) $ 4,216 $ 2,777 $ (1,420) $ 2,707
======== ======== ======== ======== ========
AT AT AT AT
DEC. 31, DEC. 31, AT DEC. 31, MAR. 31, MAR. 31,
1997 1996 1995 1995 1994
---------- ---------- ----------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 67,521 $ 9,074 $ 6,342 $ 35,642 $ 4,691
Securities available-
for-sale............... 46,373 35,901 77,879 54,068 --
Securities held-to-
maturity............... -- 6,498 6,880 10,364 14,003
Mortgage-backed
securities available-
for sale............... 80,621 136,418 219,121 73,600 136,172
Mortgage-backed
securities held-to-
maturity............... 53,719 61,438 64,734 165,719 119,681
Loans, net.............. 239,942 317,300 218,467 181,349 183,399
Federal Home Loan Bank
stock.................. 4,540 4,790 4,415 3,915 3,915
All other assets........ 48,742 24,152 12,699 15,046 13,106
-------- -------- -------- -------- --------
Total assets........ $541,458 $595,571 $610,537 $539,703 $474,967
======== ======== ======== ======== ========
Deposits................ $397,110 $330,655 $335,861 $347,096 $362,174
FHLB advances........... 90,803 90,803 78,303 63,303 63,303
Securities sold under
repurchase agreements.. -- 69,146 76,792 21,398 9,298
Other borrowings........ -- 32,000 41,500 -- 3,000
All other liabilities... 7,582 12,078 11,166 84,336 13,258
Stockholders' equity.... 45,963 60,889 66,915 23,570 23,934
-------- -------- -------- -------- --------
Total liabilities
and stockholders'
equity............. $541,458 $595,571 $610,537 $539,703 $474,967
======== ======== ======== ======== ========
12
AT OR AT OR AT OR AT OR
FOR THE FOR THE AT OR FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED NINE MONTHS YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, ENDED MAR. 31, MAR. 31,
1997 1996 DEC. 31, 1995 1995 1994
---------- ---------- ------------- ---------- ----------
SELECTED FINANCIAL
RATIOS: (2)
Performance Ratios:
Return on average
assets............... (2.03)% 0.71% 0.65% (0.29)% 0.53%
Return on average
equity............... (22.60) 6.87 5.86 (6.22) 1.18
Net interest rate
spread............... 4.22 3.00 2.62 2.99 3.02
Net interest margin... 4.50 3.48 3.19 3.20 3.23
Other expense to
average assets....... 3.71 3.27 2.15 2.36 2.18
Average interest-
earning assets to
average interest-
bearing liabilities.. 105.80 110.77 112.66 105.47 106.07
Net interest income to
other expense........ 112.10 102.35 144.17 130.32 143.17
Asset Quality Ratios:
Non-performing loans
to total loans....... 2.50% 1.63% 1.98% 2.23% 2.59%
Non-performing assets
to total assets...... 1.35 0.93 0.86 0.82 1.07
Allowance for loan
losses to total
Loans................ 2.56 2.22 1.56 1.52 1.51
Allowance for loan
losses to non-
performing loans..... 101.74 136.15 78.85 67.93 57.95
Capital Ratios:
Average equity to
average assets....... 9.01% 10.28% 11.02% 4.71% 4.78%
Equity to total
assets............... 8.49 10.22 10.96 4.37 5.07
Tangible and Core
capital (1).......... 8.33 9.90 9.82 4.45 5.05
Risk-based capital
(1).................. 16.89 18.99 23.29 13.21 13.78
- --------
(1) Includes the effect of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities at March
31, 1994. Effective November 28, 1994, the OTS no longer requires savings
associations to include unrealized gains and losses on available-for-sale
securities in regulatory capital.
(2) Performance ratios have been annualized for the nine month period ended
December 31, 1995.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997-THREE MONTHS ENDED 1996-THREE MONTHS ENDED
-------------------------------- --------------------------------
DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income......... $11,919 $13,522 $14,883 $13,684 $12,219 $11,151 $11,047 $11,464
Interest expense........ 6,946 7,159 7,365 6,857 6,742 6,480 6,212 6,483
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 4,973 6,363 7,518 6,827 5,477 4,671 4,835 4,981
Provision for loan
losses................. 1,945 6,523 3,545 14,514 2,613 555 475 650
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 3,028 (160) 3,973 (7,687) 2,864 4,116 4,360 4,331
Noninterest income...... 4,824 (8,635) 6,103 1,616 7,415 1,269 847 872
Noninterest expense..... 4,545 5,865 6,553 5,776 5,802 6,169 3,726 3,809
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 3,307 (14,660) 3,523 (11,847) 4,477 (784) 1,481 1,394
Provision (benefit) for
income taxes........... 1,177 (5,342) 1,238 (4,268) 1,644 (290) 544 454
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 2,130 $(9,318) $ 2,285 $(7,579) $ 2,833 $ (494) $ 937 $ 940
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per
share.................. $ 0.62 $ (2.67) $ 0.65 $ (2.15) $ 0.79 $ (0.14) $ 0.26 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following is a discussion and analysis of Avondale Financial Corp.'s
financial position and results of operations and should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report. The Company became the holding company for Avondale Federal Savings
Bank as of April 3, 1995. The conversion, whereby the Bank converted from a
Federally chartered mutual savings bank to a Federally chartered stock savings
bank, and the establishment of the Holding Company (the "Conversion") were
accounted for in a manner similar to a pooling of interests, and, as a result,
the Company's financial statements include the consolidated amounts of the
Bank. 1996 was the Company's first full year as a public company.
The Company's results of operations are dependent upon its net interest
income, which is the difference between interest income on its interest-
earnings assets and interest expense on its interest-bearing liabilities. The
Company's results of operations are also affected by the provision for loan
losses and the level of noninterest income and expense. Noninterest income had
historically consisted primarily of service charges and other fees. Beginning
in 1996 the Company began securitizing and selling loans, thereby increasing
noninterest income as a result of gains on sales and servicing the securitized
loans. The Company also realized gains on sales of securities as the Company
continues to change its mix of interest-earning assets from securities to
higher yielding loans. Noninterest expense includes salaries and employee
benefits, foreclosed real estate expenses, occupancy of premises, federal
deposit insurance premiums, data processing expenses and other operating
expenses.
The operating results of the Company are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. Avondale's cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate loans and other types of loans, which is in turn affected by the
interest rates at which such loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
On May 1, 1995, the Board of Directors of the Company resolved to change the
Company's fiscal year end to December 31 from March 31; therefore the period
ended December 31, 1995 is for nine months.
14
TABLE 1--AVERAGE BALANCES, INTEREST RATES AND YIELDS
(IN THOUSANDS)
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, and the resultant costs, expressed both in dollars and rates. No
tax equivalent adjustments were made. To the extent received, interest on non-
accruing loans has been included in the table.
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ------------------------- ---------------------------
AVERAGE ANNUAL YIELD/ AVERAGE ANNUAL YIELD/ AVERAGE NINE MONTH YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- -------- ------ -------- ---------- ------
ASSETS:
Interest earning assets:
Loans.................. $344,706 $39,234 11.38% $265,803 $24,842 9.35% $196,077 $ 13,536 9.20%
Securities available-
for-sale.............. 39,758 2,582 6.49 48,376 3,522 7.28 63,033 3,839 8.12
Securities held-to-
maturity.............. 10,959 933 8.51 12,885 995 7.72 15,146 721 6.35
Mortgage-backed
securities available-
for-sale.............. 117,127 7,354 6.28 182,713 11,982 6.56 120,975 6,303 6.95
Mortgage-backed
securities held-to-
maturity.............. 57,837 3,905 6.75 63,208 4,540 7.18 160,375 7,839 6.52
-------- ------- -------- ------- -------- --------
Total interest-
earning assets.... 570,387 54,008 9.47 572,985 45,881 8.01 555,606 32,238 7.74
------- ------- --------
Non interest-earning
assets................. 43,012 23,761 17,555
-------- -------- --------
Total assets....... $613,399 $596,746 $573,161
======== ======== ========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Deposits:
NOW accounts......... $ 9,376 184 1.96 $ 8,618 189 2.19 $ 10,090 142 1.88
Money market
accounts............ 47,516 1,948 4.10 65,769 2,554 3.88 80,303 2,713 4.50
Passbook and
statement savings... 77,097 2,813 3.65 69,146 2,135 3.09 65,690 1,450 2.94
Certificate accounts. 237,507 13,831 5.82 173,398 9,717 5.60 177,595 7,576 5.69
-------- ------- -------- ------- -------- --------
Total deposits..... 371,496 18,776 5.05 316,931 14,595 4.61 333,678 11,881 4.75
Advances from Federal
Home Loan Bank...... 90,557 5,269 5.82 90,653 5,236 5.78 80,885 3,470 5.72
Securities sold under
repurchase
agreements.......... 51,553 2,880 5.59 80,558 4,541 5.64 56,303 2,587 6.13
Other borrowings..... 25,512 1,402 5.50 29,131 1,545 5.30 22,301 1,003 6.00
-------- ------- -------- ------- -------- --------
Total interest-
bearing
liabilities....... 539,118 28,327 5.25 517,273 25,917 5.01 493,167 18,941 5.12
------- ------- --------
Non-interest bearing
deposits............... 6,144 6,545 4,224
Other liabilities....... 12,896 11,601 12,633
-------- -------- --------
Total liabilities.. 558,158 535,419 510,024
Stockholders' equity.... 55,241 61,327 63,137
-------- -------- --------
Total liabilities
and stockholders'
equity............ $613,399 $596,746 $573,161
======== ======== ========
Net interest
income/interest rate
spread................. $25,681 4.22% $19,964 3.00% $ 13,297 2.62%
======= ===== ======= ==== ======== ====
Net interest-earning
assets/net interest
margin................. $ 31,269 4.50% $ 55,712 3.48% $ 62,439 3.19%
======== ===== ======== ==== ======== ====
Ratio of interest-
earning assets to
interest bearing
liabilities............ 105.80% 110.77% 112.66%
======== ======== ========
15
Net Interest Income
Table 1 presents a comparison of net interest income and average volumes,
together with effective yields earned and rates paid on such funds. Net
interest income is the difference between interest income earned on interest-
earning assets, such as loans and investments, and interest expense on average
interest-bearing liabilities, such as deposits and other borrowings. The
results shown reflect the excess of interest earned on assets over the
interest paid for funds.
Net interest income is the primary source of revenue for the Company. It
comprised 86.8% of the Company's total revenues for the year ended December
31, 1997, 65.7% of the Company's total revenues for the year ended December
31, 1996 and 89.0% for the nine months ended December 31, 1995.
For the year ended December 31, 1997, net interest income increased 28.6%,
to $25.7 million. The increase resulted from increased levels of higher
earning loans and higher interest rates in 1997 compared to 1996. Average loan
balances were $344.7 million with an average yield of 11.38% compared to
$265.8 million and 9.35%, respectively, for the year-ago period. Average
earnings assets were $570.4 million in 1997 compared to $573.0 million for the
year-ago period. The net interest margin for 1997 was 4.50%, versus 3.48% for
1996.
Net interest income increased $6.6 million from the nine months ended
December 31, 1995 to the year ended December 31, 1996. Annualizing the results
of the nine months ended December 31, 1995, net interest income rose $2.2
million. The primary reason for the increase was due to a change in mix from
lower yielding securities to higher yielding loans. Overall securities had a
negative volume variance of $4.2 million while loans had a positive volume
variance of $6.5 million from the period ended December 31, 1995 to the year
ended December 31, 1996, reflecting the change in mix.
Several other factors affect net interest income including average earning
assets compared to average costing liabilities. The ratio of average earning
assets to average costing liabilities was 105.8% in 1997. For the twelve
months ended December 31, 1996 this ratio was 110.8%, compared to the nine
month period ended December 31, 1995 when this ratio was 112.7%. The decrease
from 1996 to 1997 was primarily the result of an increase in average deposit
balances and Company stock repurchases, somewhat mitigated by lower average
repurchase agreement borrowings. The 1.9% decrease from the period ended
December 31, 1995 to the year ended December 31, 1996 was mainly due to
Company stock repurchase programs. The net interest income for the shortened
year ended December 31, 1995 was $13.3 million. Annualized net interest income
would have been $17.7 million, compared to $20.0 million for the 12 months
ended December 31, 1996; or an annualized increase of $2.3 million, or 12.6%.
The net interest spread increased from 3.0% for the year ended December 31,
1996 to 4.2% for the year ended December 31, 1997. Net interest spread
increased 38 basis points from 2.6% for the nine month period ended December
31, 1995 to 3.0% for the year ended December 31, 1996. The main reason for the
increase in net interest spread in both years was a continuing change in the
asset mix due to the Company's ability to originate consumer loans. In
addition, net interest spread in both years benefited from higher yielding
consumer loans. In April 1995, the Company initially used the funds received
through the Conversion to purchase securities. The Company has changed the
asset mix to higher yielding loans since then. Although the Company
securitized and sold $170.3 and $74.8 million in home equity lines of credit
in 1997 and 1996, respectively, the average loan balances increased $78.9
million in 1997 and $69.7 million in 1996. As a percentage of total interest
earning assets, loans increased to 60.4% of total interest earning assets in
1997 from 46.4% for the year ended December 31, 1996. The resultant interest
income increase was partially offset by higher costing interest-bearing
deposits due primarily to the change in the mix of the deposit portfolio.
Average interest bearing borrowings were $167.6 and $200.3 million in 1997 and
1996, respectively. Average interest bearing borrowings were $159.5 million
for the nine month period ended December 31, 1995. The 1997 decrease was due
mainly to the funding provided by loan securitizations while the 1996 increase
was due to the sale of the Company's Lake Forest, Illinois branch which had
$11.9 million in deposits at the time of sale. In addition, both 1997 and 1996
borrowings were higher due to stock repurchases by the Company.
16
The Company has focused its loan origination efforts to higher yielding home
equity line of credit loans tied to the prime rate. Interest rates have
increased slightly during 1997 compared to 1996 and decreased from the period
ended December 1995 to the year ended December 1996. The average prime rate
for the year ended December 31, 1997 was 8.4% while the average prime rate was
8.3% in 1996 compared to the nine month period ended December 31, 1995 when
the average prime rate was 8.8%. The average yield on loans increased 2.0% and
0.2%, respectively, for 1997 and 1996. The average balance of lower yielding
investments decreased $81.5 million from the year ended December 31, 1996 to
the year ended December 31, 1997 and $52.3 million for the year ended December
31, 1996 from the nine months ended December 31, 1995. The yield on
investments decreased 30 basis points from 6.8% for the year ended December
31, 1996 to 6.5% for the year ended December 31, 1997. The yield on
investments decreased 10 basis points from 6.9% for the nine months ended
December 31, 1995 to 6.8% for the year ended December 31, 1996.
During 1997, average borrowings decreased $32.7 million from 1996 due
primarily to the funding provided by securitizations completed during the
year. Average borrowings increased from $159.5 million for the period ended
December 31, 1995 to $200.3 million for the year ended December 31, 1996.
Total average assets increased from $573.2 million in 1995 to $596.7 million
in 1996 and to $613.4 million in 1997. Rates on borrowings decreased from 5.9%
for the nine month period ended December 31, 1995 to 5.7% for the years ended
December 31, 1996 and 1997.
Many factors beyond Management's control can have a significant impact on
changes in net interest income from one period to another. Such factors
include: (1) credit demands by customers; (2) fiscal and debt management
policy of federal and state governments; (3) monetary policy of the Federal
Reserve Board; and (4) changes in regulations.
17
TABLE 2--RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (i) changes attributable to changes in volume, (ii)
changes attributable to changes in rate, (iii) changes attributable to the
comparison between the nine and twelve month periods (for 1995 vs. 1996 only)
and (iv) the total changes. The changes attributable to the combined impact of
volume and rate have been allocated to the changes due to volume.
YEAR ENDED
DECEMBER 31, 1997 YEAR ENDED
VS YEAR ENDED DECEMBER 31, 1996
DECEMBER 31, 1996 VS NINE MONTHS ENDED
INCREASE (DECREASE) DECEMBER 31, 1995
DUE TO INCREASE (DECREASE) DUE TO
------------------------ ------------------------------------
EFFECT OF
VOLUME RATE NET VOLUME RATE ANNUALIZING NET
------- ------ ------- ------- ------ ----------- -------
Interest Income:
Loans receivable....... $ 8,982 $5,410 $14,392 $ 6,517 $ 277 $4,512 $11,306
Securities available-
for-sale.............. (560) (380) (940) (1,067) (530) 1,280 (317)
Securities held-to-
maturity.............. (164) 102 (62) (174) 208 240 274
Mortgage-backed
securities-available-
for-sale.............. (4,118) (510) (4,628) 4,049 (471) 2,101 5,679
Mortgage-backed
securities held-To
maturity.............. (363) 272 (635) (6,979) 1,067 2,613 (3,299)
------- ------ ------- ------- ------ ------ -------
Total interest
income.............. 3,777 4,350 8,127 2,346 551 10,746 13,643
------- ------ ------- ------- ------ ------ -------
Interest Expense:
Deposits............... (2,758) 1,424 4,181 (771) (475) 3,960 2,714
Advances from the
Federal Home.......... (5) 38 33 565 45 1,156 1,766
Securities sold under
agreements To
repurchase............ (1,620) (41) (1,661) 1,367 (276) 863 1,954
Other borrowed money... (199) 56 (143) 363 (155) 334 542
------- ------ ------- ------- ------ ------ -------
Total interest
expense............. 934 1,477 2,410 1,524 (861) 6,313 6,976
------- ------ ------- ------- ------ ------ -------
Net interest income.. $ 2,844 $2,873 $ 5,717 $ 822 $1,412 $4,433 $ 6,667
======= ====== ======= ======= ====== ====== =======
18
TABLE 3--INVESTMENT SECURITIES
The following table sets forth information regarding amortized cost and
estimated fair value of the Company's securities (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- --------------------------
AMORTIZED % OF FAIR AMORTIZED % OF FAIR
COST TOTAL VALUE COST TOTAL VALUE
--------- ------ ------- --------- ------ --------
SECURITIES AVAILABLE-FOR-
SALE:
U.S. Government agency
securities............. $46,251 100.00% $46,373 $ 36,037 100.00% $ 35,901
SECURITIES HELD-TO-
MATURITY:
U.S. Government agency
notes:
Federal Home Loan
Bank................. $ -- -- $ -- $ 6,498 100.00% $ 6,488
MORTGAGE-BACKED SECURITIES
AVAILABLE-FOR SALE:
Collateralized Mortgage
Obligations (CMO)
Government and Agency. $ 5,546 6.89% $ 5,459 $ 6,357 4.67% $ 6,141
Private Issuer........ 17,951 22.31 17,836 21,105 15.49 20,613
GNMA Certificates....... 51,874 64.45 52,334 103,551 76.02 104,535
FHLMC Certificates...... 2,960 3.68 2,859 2,780 2.04 2,736
FNMA Certificates....... 2,150 2.67 2,133 2,421 1.78 2,393
------- ------ ------- -------- ------ --------
Total............... $80,481 100.00% $80,621 $136,215 100.00% $136,418
======= ====== ======= ======== ====== ========
MORTGAGE-BACKED SECURITIES
HELD-TO-MATURITY:
Private Issuer
Collateralized Mortgage
Obligations............ $36,313 67.60% $35,945 $ 41,606 67.72% $ 41,512
GNMA Certificates....... 2,393 4.45 2,506 3,007 4.89 3,117
FHLMC Certificates...... 835 1.56 855 1,036 1.69 1,058
FNMA Certificates....... 14,178 26.39 14,153 15,790 25.70 15,701
------- ------ ------- -------- ------ --------
Total............... $53,719 100.00% $53,459 $ 61,438 100.00% $ 61,388
======= ====== ======= ======== ====== ========
Securities
The Company must maintain minimum levels of securities and other assets that
qualify as liquid assets under OTS regulations. Historically, the Company has
maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations. Federally chartered savings institutions have the
authority to invest in various types of liquid assets. Generally, the
investment policy of the Company is to invest funds among categories of
investments and maturities based upon the Company's asset/liability management
policies, investment quality, liquidity needs and performance objectives.
The determination to classify a security as held-to-maturity is made in
consideration of the asset/liability and capital structure of the Company. The
held-to-maturity portfolio must make economic sense from a risk return
perspective throughout the expected life of the asset. While the held-to-
maturity portfolio is not subject to mark-to-market accounting, it is subject
to interest rate risk. To minimize this risk, the held-to-maturity portfolio
must be funded by liabilities whose changes in costs are likely to correlate
with changes in rates on the held-to-maturity assets. The Company's held-to-
maturity portfolio exists to produce current income based upon a yield to
maturity over expected costs of deposit liabilities not used to fund loans.
The Company's liquidity needs are partially satisfied through the available-
for-sale portfolio. The securities in the available-for-sale portfolio are
viewed as residual balances from other operations, temporarily using other
sources of funds while being flexible enough to meet any contingent funding
needs. Generally, new securities are purchased to be held in the available-
for-sale portfolio. This classification allows the Company maximum flexibility
to respond to changing economic
19
and business conditions. At December 31, 1997, 70.3% of the Company's
investments were classified as available-for-sale and 29.7% was classified as
held-to-maturity. As of December 31, 1996, 71.7% of the Company's investments
were available-for-sale and 28.3% were held-to-maturity. The Company has no
investments classified as trading at either December 31, 1997 or 1996.
As investments have paid down or paid off and as the Company's loan
originations have increased, there has been a change in the Company's asset
mix from securities to higher yielding loans. For the year ended December 31,
1997, average securities decreased to $225.7 million from $307.2 million at
December 31, 1996.
During the year ended 1997, the company sold $80.6 million of its available-
for-sale securities. Net gains on these securities sales totaled $1.2 million.
During the year ended December 31, 1996, the Company sold available-for-sale
securities with an amortized cost of $318.6 million, realizing gains on such
sales of $2.5 million. The Company sells securities to maximize the total
return of the available-for-sale portfolio and in response to changing market
spreads and funding availability. The sales and purchases of securities
resulted in higher credit quality and a higher percentage of variable-rate
securities.
TABLE 4--INVESTMENT SECURITIES MATURITY SCHEDULE AND YIELDS
(IN THOUSANDS)
The following table presents the maturity distribution and average yields of
the securities portfolio at December 31, 1997.
OVER FIVE TO
ONE TO FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- -------- --------- -------- --------- -------- --------- --------
SECURITIES AVAILABLE-
FOR-SALE:
U.S. Government
Agencies.............. $36,262 6.31% $9,989 7.07% $ -- -- % $46,251 6.47%
======= ==== ====== ==== ======= ==== ======= ====
MORTGAGE-BACKED
SECURITIES HELD-TO-
MATURITY:
Privately Issued
Collateralized
Mortgage Obligation
(CMO)................. -- -- -- -- 5,546 5.72 5,546 5.72
GNMA certificates...... -- -- -- -- 17,951 6.59 17,951 6.59
FHLMC certificates..... -- -- -- -- 51,874 6.56 51,874 6.56
FNMA certificates...... 2,960 5.46 -- -- -- -- 2,960 5.46
Other participation
certificates.......... -- -- -- -- 2,150 6.13 2,150 6.13
------- ---- ------ ---- ------- ---- ------- ----
Total................ $ 2,960 5.46% $ -- -- % $77,521 6.50% $80,481 6.46%
======= ==== ====== ==== ======= ==== ======= ====
MORTGAGE-BACKED
SECURITIES AVAILABLE-
FOR-SALE:
Collateralized
Mortgage Obligation
Private Issuer........ -- -- $1,382 7.00 34,931 7.05 36,313 7.04
GNMA certificates...... 123 7.96 2,270 7.80 -- -- 2,393 7.81
FHLMC certificates..... -- -- 12 7.56 823 7.56 835 7.56
FNMA certificates...... 2,108 5.48 2,245 7.62 9,825 6.17 14,178 6.30
------- ---- ------ ---- ------- ---- ------- ----
Total................ $ 2,231 5.62% $5,909 7.54% $45,579 6.87% $53,719 6.89%
======= ==== ====== ==== ======= ==== ======= ====
20
Loans
TABLE 5--LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts (in thousands) and percentages of the respective
portfolios at the dates indicated.
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1994
----------------- ----------------- ------------------ ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Mortgage loans:
Home Equity lines of
credit................ $116,587 47.10% $120,371 36.94% $ 79,842 36.29% $ 66,058 35.77% $ 87,963 47.00%
One-to-four family..... 82,610 33.37 101,066 31.03 107,294 48.76 86,247 46.70 73,774 39.41
Multi-family........... 22,709 9.17 23,765 7.29 28,556 12.98 28,994 15.70 22,666 12.11
Commercial real
estate................ -- -- -- -- 307 0.14 337 0.18 735 0.39
Construction or
development........... 1,076 0.43 2,191 0.67 2,737 1.24 2,979 1.61 1,962 1.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Mortgage loans. 222,982 90.07 247,393 75.93 218,736 99.41 184,615 99.96 187,100 99.96
Consumer loans.......... 25,546 9.93 78,434 24.07 1,296 0.59 75 0.04 74 0.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans............. $247,528 100.00% 325,827 100.00% 220,032 100.00% 184,690 100.00% 187,174 100.00%
====== ====== ====== ====== ======
Unearned discounts on
loans Purchased........ 9 19 36 54 99
Deferred loan fees
(costs)................ 1,274 1,300 (1,931) 491 867
Allowance for possible
loan losses............ 6,303 7,208 3,460 2,796 2,809
-------- -------- -------- -------- --------
Loans, net........... $239,942 $317,300 $218,467 $181,349 $183,399
======== ======== ======== ======== ========
During 1997 and 1996, the Company has focused its efforts on originating
consumer loans. Much of the Company's focus has centered around equity lines
of credit. The Company utilizes a credit scoring model whereby the equity
lines of credit are priced according to the credit worthiness of the customer
as well as the loan to value ratio of the loan. As a result, these loans are
priced relative to the risks associated with the credits. The Company
originates these loans up to 100% equity in the property. In most cases broker
relationships are used to originate loans. The Company originates equity lines
of credit in thirty-two states. The Company is utilizing its advances in
technology to reduce the time and cost to originate and close loans and to
gain access to customers throughout the country.
Between 1996 and 1997 the gross loan portfolio decreased $78.3 million to
$247.5 million at December 31, 1997 due primarily to the securitization of
$170.3 million of home equity lines of credit and the disposition of the
Company's private label credit card portfolio. These decreases were partially
offset by increased home equity line of credit originations.
The Company's other mortgage loans have decreased to $106.4 million at
December 31, 1997 from $127.0 million at December 31, 1996. The Company
continues to offer these traditional mortgage products, however, it was not
aggressively marketing these products during 1997 and 1996. The Company plans
on increasing marketing efforts for first mortgage products during the second
half of 1998. Other consumer loans were $25.5 million at December 31, 1997
compared to $78.4 million at December 31, 1996. The decrease of $52.9 million
is due to runoff in the mobile home loan portfolio and the sale of the
Company's private label credit card portfolio. The Company had entered into an
agreement with a third party mobile home broker to originate mobile home loans
during 1996. The Company does not expect further growth in the mobile home
loan portfolio. The Company entered the private label credit services line of
business during the year ended December 31, 1996. In addition, 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 have taken for the
private label credit card services ("PLCS") business to achieve acceptable
levels of profitability, during 1997 the Bank decided to refocus its resources
to home equity and other types of mortgage-related lending and exit the PLCS
business. As a result, the Company sold $52.5 million of this portfolio during
1997 and recognized a loss of $11.9 million on the sale.
21
TABLE 6--LOAN MATURITY SCHEDULE
(IN THOUSANDS)
The following schedule sets forth the contractual maturities of the
Company's loan portfolio at December 31, 1997. This schedule does not reflect
the effects of possible prepayments or enforcement of due on sale clauses.
PERIOD WHICH LOANS ARE DUE TO MATURE:
-----------------------------------------------------------------------------------------------------
OVER 1 TO 3 OVER 3 TO 5 OVER 5 TO 10 OVER 10 TO 20
LESS THAN 1 YEAR YEARS YEARS YEARS YEARS OVER 20 YEARS
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
Mortgage loans:
Equity lines of
credit........... $ 5,220 9.57% $13,955 10.02% $24,968 13.47% $72,329 13.64% $ 88 11.52% $ 27 14.25%
One-to-four
family........... 295 8.76 1,525 8.04 2,877 8.04% 8,518 8.40 36,042 8.31 33,353 8.26
Multi-family...... 1,975 10.49 20 9.00 1,239 8.02% 2,976 9.15 11,051 8.78 5,448 8.26
Construction or
Development...... 1,046 10.00 -- -- -- -- -- -- -- -- -- --
Consumer Loans.... 4,193 15.88 1,098 15.88 -- -- 216 10.23 19,000 10.04 39 9.99
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Loans..... $12,759 16.68% $16,598 10.22% $29,084 12.70% $84,039 12.94% $66,181 8.89% $38,867 8.27%
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
TOTAL
-----------------
WEIGHTED
AVERAGE
AMOUNT RATE
-------- --------
Mortgage loans:
Equity lines of
credit........... $116,587 12.92%
One-to-four
family........... 82,610 8.29
Multi-family...... 22,709 8.81
Construction or
Development...... 1,076 10.00
Consumer Loans.... 24,546 11.34
-------- --------
Total Loans..... $247,528 10.82%
======== ========
Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate
owned. The Company's management policy is to place all loans on non-accrual
status when the collection of principal and/or interest has become more than
90 days past due or upon bankruptcy of the borrower. As shown in Table 7, the
balance of non-accrual loans at December 31, 1997 and 1996 was $6.2 and $5.3
million, respectively. Interest income which would have been recognized had
these loans been current throughout the period approximated $617, $264 and
$265 thousand for the years ended December 31, 1997 and 1996 and for the nine
months ended December 31, 1995, respectively. The amount that was included in
interest income on such loans for the years ended December 31, 1997 and 1996
and for the nine months ended December 31, 1995, was $242, $389 and $90
thousand, respectively.
Other real estate owned includes assets acquired through loan foreclosure
and repossession. The carrying value of other real estate owned is reviewed by
management on a monthly basis to ensure the recoverability of its carrying
value, which is the lower of cost or fair value less estimated selling costs.
Non-performing loans as a percentage of gross loans was 2.50% as of December
31, 1997 and 1.63% as of December 31, 1996. The year to year increase is a
result of the Company's approach to credit cycle management and was in line
with management's expectations as the Company continues to originate higher
risk equity lines of credit. The Company's pricing policies for these products
takes into account this increased risk. Management is diligent in its attempts
to resolve non-performing loans, and will continue its emphasis on the
collection of the loans on non-accrual, including collection of unpaid
interest.
Management continues to emphasize the early identification of loan related
problems. Management is not currently aware of any significant loan, groups of
loans, or segment of the loan portfolio as to which there are serious doubts
as to the ability of the borrower(s) to comply with the present loan payment
terms.
22
TABLE 7--NON-PERFORMING ASSETS
(IN THOUSANDS)
AT AT AT AT AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1996 1995 1995 1994
------------ ------------ ------------ --------- ---------
Non-accruing loans:
Equity lines of
credit............... $5,159 $2,150 $2,505 $3,942 $3,585
One to four family
loans................ 207 1,523 1,495 173 1,149
Multi-family.......... 47 365 388 -- 113
Consumer loans........ 782 1,256 -- -- --
------ ------ ------ ------ ------
Total non-performing
loans.............. $6,195 $5,294 $4,388 $4,115 $4,847
====== ====== ====== ====== ======
Total non-performing
loans to total
loans.............. 2.50% 1.63% 1.98% 2.23% 2.59%
====== ====== ====== ====== ======
Real estate owned:
One to four family
loans................ $ 545 $ 270 $ 837 $ 316 $ 241
Consumer loans........ 560 -- -- -- --
------ ------ ------ ------ ------
Total............... $1,105 $ 270 $ 837 $ 316 $ 241
====== ====== ====== ====== ======
Total non-performing
loans and real
estate owned to
total assets....... 1.35% 0.93% 0.86% 0.82% 1.07%
====== ====== ====== ====== ======
Provision for Loan Losses
The provision for loan losses includes current period loan losses and an
amount which, in the judgment of management, is sufficient to maintain
reserves for loan losses at a level that reflects known and inherent losses in
the portfolio. The adequacy of the loan loss allowance is analyzed on a
monthly basis. Factors considered in assessing the adequacy of the allowance
include: changes in the type and volume of the loan portfolio; review of
specific delinquent loans; historical loss experience; current economic trends
and conditions; loan growth and other factors management deems appropriate.
During the years ended December 31, 1997 and 1996, the Company made a
conscientious effort to build its allowance for loan losses due to the higher
inherent risks in home equity lines of credit. For the year ended December 31,
1997 the loan loss provision was $26.5 million. The $22.2 million increase
from the year ended December 31, 1996 provision for loan losses of $4.3
million was due to increased loan volume and increased delinquency in the
private label credit card portfolio, which has since been sold. The provision
for loan losses for the nine months ended December 31, 1995 was $1.2 million.
The allowance for loan losses as a percentage of non-performing loans was
101.7% for the year ended December 31, 1997, compared to 136.2% as of December
31, 1996. The allowance for loan losses as a percentage of gross loans
increased from 2.21% as of December 31, 1996 to 2.55% as of December 31, 1997.
The increase in non-performing loans from $5.3 million as of December 31,
1996 to $6.2 million as of December 31, 1997 was in line with management's
expectations and was primarily the result of the Company's credit cycle
management policies whereby the Company originates loans with higher credit
risk in exchange for higher interest rates.
Because management is not certain as to the full collectibility of non-
performing loans, potential loss exposure has been provided for in the
Company's allocation of the allowance for loan losses. The allocation of the
allowance to equity lines of credit has increased due to the increase in loans
originated.
Management believes the allowance for loan losses at December 31, 1997 is
adequate to cover known and inherent loan losses in the loan portfolio.
23
TABLE 8--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
AT DEC. 31, AT DEC. 31, AT DEC. 31, AT MAR. 31, AT MAR. 31,
1997 1996 1995 1995 1994
----------- ----------- ----------- ----------- -----------
Balance at beginning of
period................. $ 7,208 $ 3,460 $2,796 $2,809 $1,705
Charge-offs:
Equity lines of
credit............... (2,768) (691) (290) (400) (101)
One-to-four-family
loans................ (397) -- -- (170) --
Multi-family.......... -- (63) (212) (56) --
Consumer loans........ (24,781) -- -- -- --
------- ------- ------ ------ ------
(27,946) (754) (502) 626) (101)
------- ------- ------ ------ ------
Recoveries:
Equity lines of
credit............... 312 209 -- -- --
Consumer loans........ 1,387 -- 16 3 5
------- ------- ------ ------ ------
Net charge-offs....... (26,247) (545) (486) (623) (96)
Provision for loan
losses............... 26,527 4,293 1,150 610 1,200
------- ------- ------ ------ ------
Reserves on loans
sold................. (774) -- -- -- --
Other, net............ (411) -- -- -- --
------- ------- ------ ------ ------
Balance at end of
period............... $ 6,303 $ 7,208 $3,460 $2,796 $2,809
======= ======= ====== ====== ======
Ratio of net charge-offs
during the period to
average loans
outstanding during the
period (1)............. 0.98% 0.20% 0.25% 0.35% 0.05%
======= ======= ====== ====== ======
Ratio of net charge-offs
during the period to
average non-performing
assets during the
period (1)............. 55.65% 12.14% 12.35% 12.15% 1.39%
======= ======= ====== ====== ======
Ratio of allowance for
loan losses to non-
performing loans....... 101.74% 136.05% 78.85% 67.93% 57.95%
======= ======= ====== ====== ======
- --------
(1) Excludes charge-offs related to the private label credit card portfolio in
1997. Including these charge-offs, the 1997 ratios would be 7.61% and
230.83% for net charge-offs to average loans outstanding and for net
charge-offs to average non-performing assets during the period,
respectively.
TABLE 9--ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1997 1996 1995 AT MARCH 31, 1995 AT MARCH 31, 1994
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Mortgage loans:
One-to-four family..... $ 212 33.37% $ 513 31.03% $ 301 48.76% $ 190 46.70% $ 150 39.41%
Multi-family........... 82 9.17 179 7.29 150 12.98 21 15.70 20 12.11
Construction &
development........... -- 0.43 -- -- -- 1.24 -- 1.61 -- 1.05
Commercial............. -- -- -- 0.67 1 0.14 5 0.18 -- 0.39
Home equity line of
credit................ 4,830 47.10 2,539 36.94 1,125 36.29 1,063 35.77 1,000 47.00
Consumer................ 486 9.93 1,035 24.07 9 0.59 7 0.04 -- 0.04
Unallocated............. 693 N/A 2,942 N/A 1,874 N/A 1,510 N/A 1,639 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................ $6,303 100.00% $7,208 100.00% $3,460 100.00% $2,796 100.00% $2,809 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Noninterest Income
Noninterest income was $3.9, $10.4 and $1.6 million for the years ended
December 31, 1997 and 1996 and for the nine months ended December 31, 1995,
respectively. The decrease in 1997 from 1996 was primarily due
24
to the loss on the sale and disposition of the private label credit card
portfolio, somewhat mitigated by increased gains on the securitization and
sale of loans and increased loan fees. Additionally, noninterest income in
1996 included a $2.9 million gain on the sale of the Company's Lake Forest
Branch. The increase from 1995 to 1996 was due to the Lake Forest Branch sale
gain, a gain on the Company's 1996 loan securitization and increased gains on
the sale of securities.
Securities gains were $1.2, $2.3 and $1.0 million for the years ended
December 31, 1997 and 1996 and for the nine months ended December 31, 1995,
respectively. The Company continued to take advantage of market opportunities
in managing its securities portfolio on a total return basis while reducing
the portfolio's size to accommodate the rising loan portfolio. The Company
adjusts the portfolio depending on changing market spreads and funding
availability. The changes result in higher credit quality and a greater
emphasis on variable-rate securities.
Securitization income increased to $8.8 million in 1997 from $3.3 million in
1996. In 1997, Avondale continued to utilize loan securitizations as a source
for funding loan growth. During 1997 the Company completed two home equity
loan securitizations totaling $170.3 million resulting in net gains on sale of
$7.9 million. In addition to the initial net gain on sale, securitization
income includes loan servicing fees and any fair value adjustment of the I/O
strip recorded as a result of the securitization of loans. During 1997 the
Company recorded a $500 thousand write-down of the value of the I/O strip that
resulted from the 1996 securitization. Management reviews the value of the I/O
strips quarterly to determine if the fair value of the assets has been reduced
by excess prepayments, loan losses or any changes in market interest rates. In
1996 the Company securitized and sold $74.8 million of loans with a net gain
on the sale of $3.3 million. The Company retained the servicing of these
portfolios. Avondale intends to continue using asset securitizations to
support loan growth and to provide an efficient funding source.
The $11.9 million loss on the sale of loans during 1997 was the result of
the sale and disposition of substantially all of the Company's private label
credit card portfolio. As previously mentioned, the Company decided to exit
this line of business during 1997.
Primarily as a result of continued loan growth, loan fees and other income
rose to $4.7 million in the year ended December 31, 1997 from $751 thousand in
the year ended December 31, 1996 and from $106 thousand for the nine months
ended December 31, 1995. Late fees, which are recorded to income when
received, were $2.0 million, $276 thousand and $75 thousand for the years
ended December 31, 1997 and 1996 and for the nine months ended December 31,
1995, respectively. During 1997, other fees recorded in this caption also
include interim subservicing fees for one private label credit card portfolio
of $329 thousand and annual fees of $183 thousand. Additionally, $1.1 million
of home equity line of credit fees and $1.0 million of merchant fees from the
exited PLCS business were recorded in 1997.
Other noninterest income of $596 and $526 thousand for the years ended
December 31, 1997 and 1996, respectively, and $262 thousand for the nine
months ended December 31, 1995, consists primarily of commissions on annuity
sales. These commissions totaled $550, $524 and $238 thousand for the years
ended December 31, 1997 and 1996 and for nine months ended December 31, 1995,
respectively.
Noninterest Expense
Noninterest expense was $22.7, $19.5 and $9.2 million for the years ended
December 31, 1997 and 1996 and for the nine months ended December 31, 1995,
respectively. Annualized, noninterest expense for 1995 would have been $12.3
million.
Salaries and employee benefits increased to $9.4 million for the year ended
December 31, 1997 from $8.2 million for the year ended December 31, 1996 and
from $4.1 million for the nine months ended December 31, 1995. Salaries and
benefits expense for 1995 on an annualized basis is $5.4 million. The increase
from 1996 to 1997 and from 1995 to 1996 was primarily due to increased
staffing in order to service higher levels of home
25
equity line of credit and consumer loan volume. Also contributing to the
increase from 1995 to 1996 was the implementation of a management recognition
and retention plan during 1995 whereby the Company issues restricted stock
awards. This program increased salaries and employee benefits expense by $693
thousand in 1996. Additionally, management incentive compensation increased
$201 thousand in 1996 from 1995 on an annualized basis as the Company added
additional management required to support greater loan activity. Also, loan
origination and annuity sale commissions increased $616 thousand on an
annualized basis in 1996 compared to 1995.
Occupancy expense was $2.1 and $1.4 million for the years ended December 31,
1997 and 1996, respectively. On an annualized basis, occupancy expense of $1.3
million for the nine months ended December 31, 1995 would have been $1.7
million. The increase in occupancy expense during 1997 was primarily due to
larger space requirements needed to support additional loan-related business.
On an annualized basis, occupancy expense decreased $400 thousand in 1996 from
1995 mainly due to the reversal of a prior year's lease restructuring charge.
The Company reversed the lease reserve due to its ability to sublease a
portion of its Clark Street office in Chicago, Illinois.
Federal Deposit Insurance expense for the twelve months ended December 31,
1997 and 1996 was $238 thousand and $2.9 million, respectively. For the nine
months ended December 31, 1995, this expense was $594 thousand or $792
thousand annualized. The decrease in 1997 from 1996 was partially the result
of a premium reduction to approximately 6.3 cents per $100 of deposits in 1997
from 23 cents per $100 dollars of deposits during 1996. In addition, the 1996
expense includes a one time assessment of $2.3 million to recapitalize the
Savings Association Insurance Fund. The increase from 1995 to 1996 was also
primarily due to the nonrecurring assessment.
Advertising and public relations expense was $519 thousand during the year
ended December 31, 1997 compared to $701 thousand in the year ended December
31, 1996 and $305 thousand for the nine month period ended December 31, 1995.
This expense varies from period to period based upon the number and extent of
advertising campaigns undertaken to promote the Company's deposit and lending
products.
Data processing expense increased to $2.9 million for the year ended
December 31, 1997 from $1.6 million for the year ended December 31, 1996 and
from $730 thousand for the nine months ended December 31, 1995. On an
annualized basis, 1995 expense would be $973 thousand. The increase in 1997
from 1996 was partially the result of higher charges from the Company's
outside service bureau, which was due to an increase in the number of loan
accounts. Additionally, higher depreciation of the Company's data processing
equipment as well as programming enhancements contributed to the increase. The
increase in 1996 from 1995 was due to a 1996 system conversion and an increase
in the number of private label credit card accounts maintained on loan
servicing systems.
Legal and professional fees were $1.9 million, $531 thousand and $404
thousand for the years ended December 31, 1997 and 1996 and the nine months
ended December 31, 1995, respectively. Annualized, 1995 legal and professional
fees would be $539 thousand. The increase in 1997 from 1996 was primarily due
to increased collection agency and legal fees related to the private label
credit card portfolio. The increase from 1995 to 1996 was also primarily
attributable to the private label credit card portfolio.
Other operating costs were $6.0, $4.1 and $1.8 million for the years ended
December 31, 1997 and 1996 and for the nine months ended December 31, 1995,
respectively. Annualized, the 1995 expense would be $2.4 million. The increase
in 1997 from 1996 was primarily the result of increased loan-related expenses
associated with higher home equity line of credit volume and the exited
private label credit card business. These costs include postage, supplies,
telephone and temporary help expenses. The increase from 1995 to 1996 can be
attributed mainly to costs associated with both the overall increased loan
volume and costs incurred to implement the private label credit card line.
Contributing to the 1996 annualized increase of $1.7 million, outside
personnel services increased from $202 thousand for the nine months ended 1995
to $579 thousand in 1996 as the Company utilized temporary employees as volume
increased. Also, telephone expense increased from $110
26
thousand for the nine months ended December 31, 1995 to $459 thousand for the
year ended December 1996. In addition, postage, supplies and outside services
increased as well from 1995 to 1996.
Income Taxes
The Company realized an income tax benefit of $7.2 million for the year
ended December 31, 1997. Income tax expense for the year ended December 31,
1996 was $2.4 million and was $1.8 million for the nine months ended December
31, 1995. The Company's effective tax rate (income tax expense/benefit divided
by income before taxes) was 36.6% for the year ended December 31, 1997, 35.8%
for the year ended December 31, 1996 and 39.1% for the nine months ended
December 31, 1995.
Liquidity and Interest Rate Sensitivity Analysis
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest earning
assets and interest bearing liabilities. The matching of assets and
liabilities is accomplished by analyzing the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is the difference
between the amount of interest earning assets maturing or repricing within a
specific time period and the amount of interest bearing liabilities maturing
or repricing within the same time period. A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets.
During a period of rising rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while
a positive gap would tend to adversely affect net interest income.
The Company's gap position is illustrated in table 10. Loans that have
adjustable rates of interest are shown as being due in the period which the
rates are next subject to change. Fixed-rate loans and mortgage-backed
securities are shown using the assumption that there will be no prepayment for
maturities under five years, and those with maturities in excess of five years
will prepay at annual rates ranging from 13% to 37%, depending on the stated
rates of the underlying assets. The Company has assumed that passbook accounts
will be withdrawn (decay) at annual rates of 17% of the cumulative declining
balance for the first three years, 16% for the fourth and fifth years and 14%
thereafter. NOW accounts will decay at an annual rate of 37% for the first
year, 32% for the second and third years and 17% thereafter. Money Market
accounts will decay at an annual rate of 79% for the first year and 31%
thereafter. Certificates are assumed to remain outstanding through maturity.
The prepayment rates for loans and mortgage-backed securities, along with the
decay rates for passbook, NOW and money market accounts are based on
assumptions prepared by the OTS. Such assumptions are reasonably indicative of
the Company's experience over recent periods.
Liquidity management involves the ability to meet the cash flow requirements
of depositors wanting to withdraw funds or borrowers seeking funds to meet
their credit needs. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. At the present time, the minimum liquid asset
ratio is 5%. At December 31, 1997, Avondale was in compliance with the
regulatory liquidity requirement, with an overall liquid asset ratio of
24.12%.
In addition to cash and due from banks, marketable securities, particularly
those with shorter maturities, are periodically used as a source of asset
liquidity. At December 31, 1997, the Company held no securities that mature in
one year or less. At December 31, 1996 the Company had securities totaling
$5.5 million, or 2.3% of the total securities portfolio, with maturities of
one year or less.
27
Rate sensitivity varies for different types of interest earning assets and
interest bearing liabilities. For example, rate sensitivity for Federal Funds
purchased with varying daily rates or for loans indexed to the prime rate
differs considerably from sensitivity for long-term securities or fixed rate
loans. Time deposits over $100,000 exhibit more rate sensitivity than savings
accounts. Table 11 illustrates the maturity schedule as of December 31, 1997
of time deposits $100,000 and greater. As indicated in the table, 40.1% of the
deposits mature within six months. This percentage was 55.8% as of December
31, 1996.
At December 31, 1997, deposits maturing within one year increased $47.8
million to $264.3 million from $216.5 million at December 31, 1996. Term
borrowings decreased $46.1 million over this same time period, to $90.0
million at December 31, 1997 from $136.1 million at December 31, 1996.
With approximately 53.6% of the Company's loan portfolio maturing or
repricing within three months at December 31, 1997, there is an immediate
effect on interest income when rates rise or fall. In a changing interest rate
environment, interest expense changes more slowly primarily due to the longer-
term maturities of certificates of deposits. As a result, the net interest
margin on lower cost funding increases in a period of rising rates or,
conversely, the net interest margin decreases in a falling rate environment.
As illustrated in table 10, the Company is asset sensitive through the three
month time horizon, with a cumulative three month sensitivity gap of 25.0% of
total interest-earning assets. The Company attempts to control its interest
rate risk by originating primarily adjustable-rate mortgage loans, including
equity lines of credit, for its portfolio. The Company also controls interest
rate risk with purchases of adjustable rate and short term securities and
through the use of short term borrowings. The Company continuously monitors
and manages its interest rate sensitivity position.
28
TABLE 10-MATURITY OR REPRICING OF ASSETS AND LIABILITIES
(IN THOUSANDS)
The following table sets forth the interest rate sensitivity of the Bank's
assets and liabilities at December 31, 1997 on the basis of the factors and
assumptions set forth above.
AT DECEMBER 31, 1997
------------------------------------------------------------------------------------
MORE MORE MORE MORE
MORE THAN THAN THAN THAN THAN
3 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS MORE
3 MONTHS TO TO TO TO TO THAN
OR LESS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL
-------- --------- -------- -------- -------- -------- -------- --------
Interest-earning assets:
Loans receivable:
Fixed rate loans..... $ 1,219 $ 209 $ 1,437 $ 3,912 $ 11,106 $ 61,291 $16,466 $ 95,640
Adjustable rate
loans............... 131,511 16,308 4,069 -- -- -- -- 131,511
-------- --------- -------- -------- -------- -------- ------- --------
Total loans
receivable........ 132,730 16,517 5,506 3,912 11,106 61,291 16,466 247,528
Mortgage backed
securities held-to-
maturity............... 43,239 -- 2,126 105 5,203 579 2,467 53,719
Mortgage backed
securities available
for sale............... -- 60,202 2,285 -- -- 1,620 16,514 80,621
Investment securities
available for sale..... -- -- -- 36,363 10,009 -- -- 46,372
Interest bearing
deposits and Federal
Funds sold............. 65,431 -- -- -- -- -- -- 65,431
-------- --------- -------- -------- -------- -------- ------- --------
Total investments.. 108,670 60,202 4,411 36,468 15,212 2,199 18,981 246,143
-------- --------- -------- -------- -------- -------- ------- --------
Total earning
assets............ 241,400 76,719 9,917 40,380 26,318 63,490 35,447 493,671
Interest-bearing
liabilities:
Passbook and statement
accounts.............. 3,756 10,274 21,312 13,894 17,634 12,197 3,467 82,534
NOW accounts........... 1,805 4,316 5,603 1,499 2,012 1,105 203 16,543
Money market accounts.. 14,081 20,353 4,796 2,283 1,750 316 8 43,587
Certificate accounts... 38,509 171,208 30,690 14,039 -- -- -- 254,446
Advances from the
Federal Home Loan
Bank.................. 60,000 30,000 -- -- 803 -- -- 90,803
-------- --------- -------- -------- -------- -------- ------- --------
Total interest-
bearing
liabilities....... 118,151 236,151 62,401 31,715 22,199 13,618 3,678 487,913
-------- --------- -------- -------- -------- -------- ------- --------
Interest sensitivity gap
per period............. $123,249 $(159,432) $(52,484) $ 8,665 $ 4,119 $ 49,872 $31,769 $ 5,788
======== ========= ======== ======== ======== ======== ======= ========
Cumulative interest
sensitivity gap........ $123,249 $ (36,183) $(88,667) $(80,002) $(75,883) $(26,011) $ 5,758 $ 5,758
======== ========= ======== ======== ======== ======== ======= ========
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning
assets................. 24.97% (7.33)% (17.96)% (16.21)% (15.38)% (5.27)% 1.17% 1.17%
======== ========= ======== ======== ======== ======== ======= ========
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities............ 204.32% 89.79% 78.72% 82.16% 83.88% 94.63% 101.18% 101.18%
======== ========= ======== ======== ======== ======== ======= ========
TABLE 11--TIME DEPOSITS $100,000 AND OVER MATURITY SCHEDULE
MATURITY PERIOD AMOUNT
--------------- --------------
(IN THOUSANDS)
Three months or less....................................... $ 3,483
More than three months through six months.................. 9,457
More than six months through twelve months................. 14,751
More than twelve months.................................... 4,206
-------
Total certificate accounts in excess of $100,000........... $31,897
=======
Borrowed Funds
The Company has historically borrowed funds in the form of advances from the
FHLB of Chicago, securities sold under agreements to repurchase and other term
borrowings.
29
At December 31, 1997, the Company had outstanding FHLB advances of $90.0
million with an average rate of 5.84% maturing within one year and advances of
$.8 million with a weighted average rate of 2.5% maturing in the year 2003.
These advances were the Company's only borrowings as of December 31, 1997.
At December 31, 1996, the Company had outstanding FHLB advances of $35.0
million with an average rate of 6.48% maturing within one year, advances of
$55.0 million with a weighted average rate of 5.64% maturing within two years
and $.8 million of advances with a rate of 2.5% maturing in the year 2003.
Also at December 31, 1996, the Company had securities sold under agreements to
repurchase of $45.5 million with a weighted-average rate of 5.43% maturing
within thirty days and $23.7 million with a weighted-average rate of 5.90%
maturing within one year. Additionally at December 31, 1996, the Company had
Federal Funds purchased of $32.0 million with a weighted-average rate of 7.00%
that matured on January 2, 1997.
TABLE 12--BORROWED FUNDS
FOR THE FOR THE FOR THE NINE
YEAR ENDED YEAR ENDED MONTHS ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
------------- ------------- -------------
(IN THOUSANDS)
ADVANCES FROM THE FEDERAL HOME LOAN
BANK:
Average balance outstanding........ $ 90,557 $ 90,653 $ 72,322
Maximum outstanding at any month-
end during the period............. 90,803 95,803 88,303
Balance outstanding at end of
period............................ 90,803 90,803 78,303
Weighted average interest rate
during the period................. 5.82% 5.78% 5.91%
Weighted average interest rate at
end of period..................... 5.81% 5.93% 5.55%
SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Average balance outstanding........ $ 51,553 $ 80,558 $ 56,133
Maximum outstanding at any month-
end during the period............. 96,311 116,447 76,792
Balance outstanding at end of
period............................ -- 69,147 76,792
Weighted average interest rate
during the period................. 5.59% 5.64% 6.06%
Weighted average interest rate at
end of period..................... -- 5.59% 5.97%
OTHER BORROWINGS:
Average balance outstanding........ $ 25,512 $ 29,131 $ 22,301
Maximum outstanding at any month-
end during the period............. 36,500 40,000 41,500
Balance outstanding at end of
period............................ -- 32,000 41,500
Weighted average interest rate
during the period................. 5.50% 5.31% 5.96%
Weighted average interest rate at
end of period..................... -- 7.00% 5.86%
TOTAL BORROWINGS:
Average balance outstanding........ $167,622 $200,342 $150,756
Maximum outstanding at any month-
end during the period............. 217,114 196,595 196,595
Balance outstanding at end of
period............................ 90,803 191,950 196,595
Weighted average interest rate
during the period................. 5.70% 5.66% 5.97%
Weighted average interest rate at
end of period..................... 5.81% 5.99% 5.87%
Capital Resources
Federally insured savings associations, such as Avondale, are required to
maintain minimum levels of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. See Item 1. Business, Supervision and Regulation--
Regulatory Capital Requirements and Limitations on Dividends and Other Capital
Distributions for additional information. The capital regulations require
tangible capital of at least 1.5% of adjusted total assets (as defined by
regulation). As shown in table 13, at December 31, 1997, Avondale had tangible
capital of $45.1 million, or 8.3% of adjusted total assets, which is $37.0
million above the minimum leverage ratio requirement of 1.5% in effect on that
date.
30
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. At December 31, 1997, Avondale
had risk-based capital of $48.8 million and risk-weighted assets of
approximately $295 million; or capital of 16.9% of risk-weighted assets.
TABLE 13--CAPITAL STANDARDS
AT DECEMBER 31,
1997
AMOUNT PERCENTAGE
------- ----------
(IN THOUSANDS)
Tangible capital:
Capital level........................................ $45,078 8.33%
Requirement.......................................... 8,115 1.50
------- -----
Excess............................................. $36,963 6.83%
======= =====
Core capital:
Capital level........................................ $45,078 8.33%
Requirement.......................................... 16,230 3.00
------- -----
Excess............................................. $28,848 5.33%
======= =====
Risk-based capital:
Capital level........................................ $48,767 16.89%
Requirement.......................................... 23,104 8.00
------- -----
Excess............................................. $25,663 8.89%
======= =====
CAPITAL RATIOS
WELL ADEQUATELY UNDER-
AVONDALE CAPITALIZED CAPITALIZED CAPITALIZED
-------- ----------- ----------- -----------
Core capital................. 8.33% > = 5.0% > = 4.0% < 4.0%
Tier 1 capital............... 15.28 > = 6.0 > = 4.0 < 4.0
Risk-based capital........... 16.89 > = 10.0 > = 8.0 < 8.0
Cash Flows
During the year ended December 31, 1997, the Company continued to utilize
loan securitizations as an efficient source of funding its loan growth. Two
securitizations totaling $170.3 million were completed during 1997. As a
result of the securitizations, the Company's gross loans included in its
statement of financial condition decreased from $324.5 million at December 31,
1996 to $246.2 million at December 31, 1997. The Company manages an additional
$224.7 million of securitized home equity lines of credit which are not
included in its statement of financial condition. Total assets decreased to
$541.5 million at December 31, 1997 from $595.6 million at December 31, 1996.
In addition to the loan securitizations, sales of securities reduced the
Company's total assets and provided cash and liquidity. The increase in
deposit liabilities of $66.4 million from December 31, 1996 to December 31,
1997 provided additional funds, while the repayment of $101.1 million of
repurchase agreements and other borrowings during 1997 used the Company's
funds.
During the year ended December 31, 1996, the Company funded its growth in
loan volume with its first securitization and sale of home equity lines of
credit and by selling lower yielding investment securities. As a result of the
change in the asset mix and the loan securitization, total assets decreased to
$595.6 million at December 31, 1996 from $610.5 million at December 31, 1995.
Accordingly, lower levels of funding were required. Deposits decreased $5.2
million due primarily to the sale of Avondale's Lake Forest branch while
borrowings decreased $4.6 million for the year. In addition, the Company also
purchased $10.5 million of
31
treasury stock. During 1996 the Company was required to pay a special,
industry-wide FDIC insurance assessment of $2.3 million which negatively
impacted cash flows.
The Company does not anticipate any significant capital expenditure that
would require funding outside of the Company's normal operations.
Recent Accounting Pronouncements and Regulatory Issues
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities became effective January 1, 1997. 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,
subsequent to a transfer of financial assets, and entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control is surrendered, and
derecognizes liabilities when extinguished. The Company's adoption of SFAS 125
during 1997 did not have a material effect on the Company's financial
statements.
In February 1997, the FASB adopted Statement of Financial Accounting
Standard No. 128 ("SFAS 128"), Earnings Per Share. This statement establishes
standards for computing and presenting earnings per share ("EPS") and
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion No. 15 ("APB 15"), Earnings Per Share.
SFAS 128 supersedes APB 15 and its interpretations and supersedes or amends
other accounting pronouncements related to current computations of EPS. SFAS
128 replaced the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS for income from
continuing operations and for net income on the face of the statement of
income for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The
provisions of SFAS 128 are effective for financial statements for both interim
and annual periods ending after December 15, 1997, with all prior period EPS
data restated to conform with SFAS 128. The adoption of this statement did not
result in any significant disclosures in addition to those already contained
in the Company's financial statements.
In February 1997, the FASB adopted Statement of Financial Accounting
Standard No. 129 ("SFAS 129"), Disclosure of Information about Capital
Structure. This Statement established standards for disclosing information
about an entity's capital structure. This Statement requires an entity to
disclose in its financial statements the pertinent rights and privileges of
the various securities outstanding and the number of shares upon conversion,
exercise, or satisfaction of required conditions during at least the most
recent annual fiscal period and any subsequent interim period presented. This
Statement also requires disclosure relative to liquidation preference of
preferred stock and redeemable stock. The provisions of SFAS 129 are effective
for periods ending after December 15, 1997. Management believes that the
adoption of this Statement will not result in any significant disclosures in
addition to those already contained in the Company's financial statements.
In June 1997, the FASB adopted Statement of Financial Accounting Standard
No. 130 ("SFAS 130"), Reporting Comprehensive Income. This Statement
establishes standards for reporting and disclosure of comprehensive income and
its components in a full set of financial statements. SFAS 130 requires that
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements with the aggregate
amount of comprehensive income reported in that same financial statement. SFAS
130 permits the statement of changes in stockholders' equity to be used to
meet this requirement. Companies are encouraged, but not required, to display
the components of other comprehensive income below the total for net income in
the statement of operations or in a separate statement of comprehensive
income. Companies are also required to display the cumulative total of other
comprehensive income for the period as a separate component of equity in the
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Companies are also required to report comparative totals for comprehensive
income in interim reports. The Company will adopt the provisions of this
Statement, which are only of a disclosure nature, effective January 1, 1998.
32
In June 1997, the FASB adopted Statement of Financial Accounting Standard
No. 131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related
Information. This Statement supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, and utilizes the "management approach" for
segment reporting. The management approach is based on the way that the chief
operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based
on any manner in which management disaggregates its company such as by
products and services, geography, legal structure and management structure.
SFAS 131 requires disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and more specific and detailed geographic disclosures. This
Statement also requires descriptive information about the way the operating
segments were determined. The provisions of SFAS 131 are effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
SFAS 131 does not need to be applied to interim statements in the initial year
of application but such comparative information will be required in interim
statements for the second year. Comparative information for earlier years must
be restated in the initial year of application. The Company will adopt the
provisions of this Statement, which are only of a disclosure nature, effective
January 1, 1998.
There are no regulatory issues outstanding.
Year 2000 Compliance
A significant issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. The financial impact
to the Company to ensure year 2000 compliance is not anticipated by management
to be material to the financial position, results of operations or cash flow
of the Company.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVONDALE FINANCIAL CORP.
1997 CONSOLIDATED FINANCIAL STATEMENTS
34
AVONDALE FINANCIAL CORP.
1997 FINANCIAL STATEMENTS
INDEX
PAGE
----
Independent Auditor's Report--Arthur Andersen LLP......................... 36
Statement of Management Responsibility.................................... 37
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. 38
Consolidated Statements of Income for the Years Ended December 31, 1997
and 1996 and for the Nine Months Ended December 31, 1995................. 39
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 and for the Nine Months Ended December
31, 1995................................................................. 40
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996 and for the Nine Months Ended December 31, 1995............ 41
Notes to the Consolidated Financial Statements............................ 43
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Avondale Financial Corp.:
We have audited the accompanying balance sheets of AVONDALE FINANCIAL CORP.
("the Company") as of December 31, 1997 and 1996, and the related statements
on income, stockholders' equity and cash flows for the years ended December
31, 1997 and 1996 and the nine month period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avondale Financial Corp.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows, for the years ended December 31, 1997 and 1996, and the nine month
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
February 5, 1998
36
STATEMENT OF MANAGEMENT RESPONSIBILITY
Avondale Financial Corp.'s management is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based
on judgments and estimates made by management. Management also prepared other
information included in the annual report and is responsible for its accuracy
and consistency with the financial statements.
The consolidated financial statements have been audited by an independent
accounting firm, Arthur Andersen LLP, which has been given unrestricted access
to all financial records and related data, including minutes of all meetings
of shareholders, the Board of Directors and committees of the Board.
Management believes that representations made to the independent auditors
during their audit were valid and appropriate.
Management maintains a system of internal controls over the preparation of
its published financial statements, which is intended to provide reasonable
assurance to the Company's Board of Directors and officers regarding
preparation of financial statements presented fairly in conformity with
generally accepted accounting principles.
Management has long recognized its responsibility for conducting the
Company's affairs in a manner, which is responsive to the interest of
employees, shareholders, investors and society in general. This responsibility
is included in the statement of policy on ethical standards which provides
that the Company will fully comply with laws, rules and regulations of every
community in which it operates and adhere to the highest ethical standards.
Officers, employees and agents of the Company are expected and directed to
manage the business of the Company with complete honesty, candor and
integrity.
Internal auditors monitor the operation of the internal control system, and
actions are taken by management to respond to deficiencies as they are
identified. The Board, operating through its audit committee, which is
composed entirely of directors who are not officers or employees of the
Company, provides oversight to the financial reporting process.
Even effective internal controls, no matter how well designed, have inherent
limitations, such as the possibility of human error or of circumvention or
overriding of controls, and the consideration of cost in relation to benefit
of a control. Further, the effectiveness of an internal control can change
with circumstances.
Avondale Financial Corp.'s management periodically assesses the internal
controls for adequacy. Based upon these assessments, Avondale Financial
Corp.'s management believes that, in all material respects, its internal
controls relating to preparation of consolidated financial statements as of
December 31, 1997 functioned effectively during the year ended December 31,
1997.
Robert S. Engelman, Jr. Howard A. Jaffe
President and Vice President and
Chief Executive Officer Chief Financial Officer
37
AVONDALE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT AT
DECEMBER 31, DECEMBER 31,
ASSETS 1997 1996
------ ------------ ------------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
Cash and due from banks.............................. $ 6,630 $ 8,334
Interest-bearing deposits............................ 60,891 740
-------- --------
Total cash and cash equivalents.................. 67,521 9,074
Securities available-for-sale--At fair value
(amortized cost Dec. 31, 1997-- $46,251; Dec. 31,
1996--$36,037)...................................... 46,373 35,901
Securities held-to-maturity--At amortized cost (fair
value Dec. 31, 1996--$6,488)........................ -- 6,498
Mortgage-backed securities available-for-sale--At
fair value (amortized cost Dec. 31, 1997--$80,481;
Dec. 31, 1996--$136,214)............................ 80,621 136,418
Mortgage-backed securities held-to-maturity--At
amortized cost (fair value Dec. 31, 1997--$53,451;
Dec. 31, 1996--$61,387)............................. 53,719 61,438
Loans held for sale--At cost......................... 52,688 --
Loans................................................ 193,557 324,508
Less: Allowance for loan losses...................... (6,303) (7,208)
-------- --------
Loans, net....................................... 239,942 317,300
Federal Home Loan Bank stock--at cost................ 4,540 4,790
Office buildings and equipment, net.................. 5,264 3,875
Other real estate owned, net......................... 1,105 270
Accrued interest receivable.......................... 9,451 6,896
Interest-only securities and other assets............ 23,392 10,410
Income taxes receivable.............................. 3,866 --
Deferred income taxes................................ 5,664 2,701
-------- --------
Total assets..................................... $541,458 $595,571
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits............................................. $397,110 $330,655
Advances from Federal Home Loan Bank................. 90,803 90,803
Securities sold under agreements to repurchase....... -- 69,146
Other borrowings..................................... -- 32,000
Advance payments by borrowers for taxes and
insurance........................................... 564 931
Accrued interest payable............................. 3,086 2,212
Income taxes payable................................. -- 452
Other liabilities.................................... 3,932 8,483
-------- --------
Total liabilities................................ 495,495 534,682
-------- --------
Stockholders' Equity:
Common stock ($.01 par: 10,000,000 shares
authorized, 3,323,566 and 3,525,288 shares issued
and outstanding, at Dec. 31, 1997 and 1996,
respectively)..................................... 44 44
Capital surplus.................................... 43,536 43,199
Retained earnings.................................. 18,549 31,031
Treasury stock, at cost............................ (13,988) (10,496)
Unrealized net gain on securities available-for-
sale, net of tax of $102 at Dec. 31, 1997 and $21
at Dec. 31, 1996.................................. 152 33
Common stock acquired by ESOP...................... (1,270) (1,693)
Unearned portion of restricted stock awards........ (1,060) (1,229)
-------- --------
Total stockholders' equity....................... 45,963 60,889
-------- --------
Total liabilities and stockholders' equity....... $541,458 $595,571
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR FOR THE YEAR FOR THE NINE
ENDED ENDED MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income:
Loans.................. $ 39,234 $ 24,842 $ 13,536
Securities............. 2,649 3,965 4,193
Mortgage-backed
securities............ 11,259 16,522 14,141
Other.................. 866 552 368
--------- --------- ---------
Total interest
income.............. 54,008 45,881 32,238
Interest expense:
Deposits............... 18,776 14,595 11,881
Advances from the
Federal Home Loan
Bank.................. 5,269 5,236 3,470
Securities sold under
agreements to
repurchase............ 2,880 4,541 2,587
Other borrowings....... 1,402 1,545 1,003
--------- --------- ---------
Total interest
expense............. 28,327 25,917 18,941
Net interest income: 25,681 19,964 13,297
Provision for loan
losses................ 26,527 4,293 1,150
--------- --------- ---------
Net interest income
after provision for
loan losses........... (846) 15,671 12,147
Noninterest income:
Gains on trading
activities, net....... 1 216 27
Security gains, net.... 1,199 2,313 1,012
Securitization income,
net................... 8,759 3,433 --
Gains (losses) on sales
of loans.............. (11,919) 7 9
Loan fees.............. 4,679 625 106
Fees for customer
services.............. 593 361 221
Gain on sale of branch. -- 2,922 --
Other operating income. 596 526 262
--------- --------- ---------
Total noninterest
income.............. 3,908 10,403 1,637
Noninterest expense:
Salaries and employee
benefits.............. 9,368 8,193 4,061
Occupancy and
equipment, net........ 2,069 1,448 1,327
Federal deposit
insurance premiums.... 238 2,886 594
Advertising and public
relations............. 519 701 305
Data processing........ 2,860 1,615 730
Real estate owned
(income) expense, net. (202) 35 24
Legal and professional
fees.................. 1,907 531 404
Other operating
expenses.............. 5,980 4,097 1,778
--------- --------- ---------
Total noninterest
expense............. 22,739 19,506 9,223
--------- --------- ---------
Income (loss) before
income taxes............ (19,677) 6,568 4,561
Provision (benefit) for
income taxes............ (7,195) 2,352 1,784
--------- --------- ---------
Net income (loss)........ $ (12,482) $ 4,216 $ 2,777
========= ========= =========
Per common share:
Basic earnings per common
share................... $ (3.59) $ 1.13 $ 0.69
Diluted earnings per
common share............ $ (3.59) $ 1.13 $ 0.69
Weighted average common
shares outstanding...... 3,476,332 3,719,272 4,019,024
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE NINE MONTHS ENDED DECEMBER 31,
1995
UNREALIZED
NET GAIN (LOSS) COMMON UNEARNED
ON SECURITIES STOCK RESTRICTED TOTAL
COMMON CAPITAL RETAINED TREASURY AVAILABLE-FOR-SALE ACQUIRED STOCK STOCKHOLDERS'
STOCK SURPLUS EARNINGS STOCK NET OF TAX BY ESOP AWARDS EQUITY
------ ------- -------- -------- ------------------ -------- ---------- -------------
(IN THOUSANDS)
BALANCE, MARCH 31, 1995. $-- $ -- $ 24,038 $ -- $ (468) $ -- $ -- $ 23,570
Net Income.............. 2,777 2,777
Issuance of 4,232,000
shares of Common stock. 42 40,528 40,570
Establishment of ESOP
plan................... (2,962) (2,962)
Commitment to release
84,640 ESOP shares..... 155 846 1,001
Issuance of 162,568
shares of Restricted
common stock........... 2 2,335 (2,337) --
Net amortization of
unearned Portion of
restricted stock....... 178 178
Change in unrealized net
gain on securities
available-for-sale, net
of tax of $1,129....... 1,781 1,781
---- ------- -------- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1995................... 44 43,018 26,815 -- 1,313 (2,116) (2,159) 66,915
---- ------- -------- -------- ------- ------- ------- --------
Net Income.............. 4,216 4,216
Purchase of 700,000
shares of Treasury
Stock.................. (10,496) (10,496)
Commitment to release
42,320 ESOP shares..... 181 423 604
Net amortization of
unearned portion of
restricted stock....... 930 930
Change in unrealized net
gain on securities
available-for-sale net
of tax of $(811)....... (1,280) (1,280)
---- ------- -------- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1996................... $ 44 $43,199 $ 31,031 $(10,496) $ 33 $(1,693) $(1,229) $ 60,889
---- ------- -------- -------- ------- ------- ------- --------
Net Income.............. (12,482) (12,482)
Purchase of 230,393
shares of Treasury
Stock.................. (3,492) (3,492)
Commitment to release
42,320 ESOP shares..... 337 423 760
Net amortization of
unearned portion of
restricted stock....... 169 169
Change in unrealized net
gain on securities
available-for-sale net
of tax of $81.......... 119 119
---- ------- -------- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1997................... $ 44 $43,536 $ 18,549 $(13,988) $ 152 $(1,270) $(1,060) $ 45,963
==== ======= ======== ======== ======= ======= ======= ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE YEAR FOR THE NINE
YEAR ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Net Income (loss)...................... $ (12,482) $ 4,216 $ 2,777
Adjustments to reconcile net income
(loss) to net cash flows
From operating activities:
Depreciation......................... 1,284 997 829
Amortization (accretion), net........ (477) (3,060) 1,280
Unearned restricted stock............ 170 930 (2,159)
Provision for loan losses............ 26,527 4,293 1,150
Provision for deferred income taxes.. (3,044) 415 (210)
Net gain on sales of securities
available-for-sale and trading...... (1,200) (2,529) (1,039)
Net gains on sales of loans.......... (7,943) (3,314) --
Net gains on sales of other real
estate owned........................ (347) (149) (21)
Net gain on sale of branch........... -- (2,922) --
Net changes in:
Income taxes receivable............ (3,431) -- 1,951
Prepaid expenses and other assets.. (2,091) (4,033) 421
Accrued interest receivable........ (2,160) (1,464) (1,504)
Income taxes payable............... (452) 417 35
Accrued interest payable........... 874 1,158 328
Other liabilities.................. (5,432) (543) (2,959)
--------- --------- ---------
Net cash flows provided by (used
in) operating activities........ $ (10,204) $ (5,588) $ 879
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturities of securities
held-to-maturity...................... 6,500 400 4,500
Purchases of securities held-to-
maturity.............................. -- -- (1,000)
Purchases of Federal Home Loan Bank
stock................................. 250 (375) (500)
Proceeds from maturities of securities
available-for-sale.................... -- 123,120 --
Proceeds from sales of securities
available-for-sale.................... 7,000 52,750 26,555
Proceeds from sales of mortgage-backed
securities available-for-sale......... 63,079 265,850 121,959
Purchases of securities available-for-
sale.................................. (29,545) (134,970) (49,075)
Purchases of mortgage-backed securities
available-for-sale.................... (22,373) (207,222) (165,728)
Purchases of mortgage-backed securities
held-to-maturity...................... -- (4,424) (29,207)
Principal collected on mortgage-backed
securities held-to-maturity........... 7,718 7,893 16,499
Principal collected on mortgage-backed
securities available-for-sale......... 16,541 27,994 12,943
Principal collected on securities
available-for-sale.................... 12,501 465 360
Proceeds from securitization and sale
of loans.............................. 169,129 73,989 --
Net increase in loans.................. (123,893) (181,454) (39,129)
Proceeds from sales of other real
estate owned.......................... 2,027 2,546 361
Proceeds from sales of office buildings
and equipment......................... -- 3,985 --
Expenditures for office buildings and
equipment............................. (2,673) (2,163) (512)
--------- --------- ---------
Net cash flows provided by (used
in) investing activities........ $ 106,261 $ 28,384 $(101,974)
--------- --------- ---------
41
AVONDALE FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
FOR THE FOR THE YEAR FOR THE NINE
YEAR ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Cash flows from financing activities:
Stock conversion expenditures......... $ -- $ -- $ (562)
Net increase (decrease) in deposits... 66,455 (5,002) (1,451)
Net decrease in advance payments by
borrowers for taxes and Insurance.... (367) (524) (244)
Net increase (decrease) in securities
sold under agreements to Repurchase.. (69,146) (7,646) 55,394
Net increase (decrease) in other
borrowings........................... (32,000) (9,500) 41,500
Proceeds from Federal Home Loan Bank
advances............................. 35,000 62,500 25,000
Repayment of Federal Home Loan Bank
advances............................. (35,000) (50,000) (10,000)
Increase in shares outstanding........ -- -- 2
Capital surplus....................... 517 181 2,491
ESOP committed to be released......... 423 423 423
Purchase of treasury stock............ (3,492) (10,496) --
Refund of excess stock subscriptions.. -- -- (40,758)
-------- -------- --------
Net cash flows provided by (used in)
financing activities................. (37,610) (20,064) 71,795
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.......................... 58,447 2,732 (29,300)
Cash and cash equivalents:
Beginning of period................... 9,074 6,342 35,642
-------- -------- --------
Ending of period...................... $ 67,521 $ 9,074 $ 6,342
======== ======== ========
Supplemental cash flow information:
Interest paid......................... $ 27,453 $ 24,760 $ 18,614
Income taxes paid..................... 425 1,935 1,750
Non cash investing activities:
Transfer of mortgage-backed securities
from available-for-sale to Held-to-
maturity............................. -- -- 11,882
Transfer of mortgage-backed securities
from held-to-maturity to Available-
for-sale............................. -- -- 125,311
Non cash financing activities:
Transfer of deposits to equity........ -- -- 9,784
Transfer common stock subscription
liability to equity.................. -- -- 29,574
Reduction of prepaid conversion costs
and reduction of capital............. -- -- (1,200)
Transfer of other liabilities to
capital.............................. -- -- 12
Increase in prepaid expenses and
increase in capital for ESOP......... -- -- 423
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Avondale Financial Corp. (The
"Company") and its wholly-owned subsidiary, Avondale Federal Savings Bank (the
"Bank"), conform with generally accepted accounting principles and to general
industry practice. The following is a description of the more significant
policies that the Company follows in preparing and presenting its consolidated
financial statements.
Nature of Operations--The Company's lending products consist primarily of
first and second mortgages including equity lines of credit, on owner-occupied
and non-owner occupied one to four family residences. The Company has expanded
its wholesale distribution channels through third party brokers and other
financial institutions to offer equity lines of credit in thirty-two states.
Avondale was previously engaged in the private label credit business, offering
credit cards through third party merchants. Avondale exited the private label
credit business in 1997 and disposed of substantially all of this portfolio.
To a lesser extent, Avondale also originates multi-family, construction,
development and consumer loans, including mobile home loans. The Company also
offers investment products and insurance through its wholly-owned subsidiary,
Avondale Financial Services, Inc. ("AFS"). The Company's revenues are
principally derived from interest on loans and investment securities,
securitization income and fee income.
Principles of Consolidation--The consolidated financial statements include
the accounts and transactions of the Company, the Bank, and the Bank's wholly-
owned subsidiaries, Avondale Financial Services and Avondale Community
Development Corp. All material intercompany balances and transactions have
been eliminated in consolidation.
Investment and Mortgage-Backed Securities--Securities are classified into
three categories: trading, held-to-maturity and available-for-sale. Securities
that are bought principally for the purpose of selling them in the near term
are classified as trading securities. Trading account securities are carried
at fair value in the statement of financial condition. At December 31, 1997,
1996 and 1995, none of the Company's securities were classified as trading.
Realized and unrealized gains and losses are included in noninterest income in
the statement of income.
Securities for which the Company has the intent and ability to hold until
maturity are classified as held-to-maturity. Held-to-maturity securities are
carried at cost, with premiums amortized and discounts accreted using the
level-yield method, adjusted for actual prepayments and changes in prepayment
assumptions.
All securities not classified as trading or held-to-maturity are classified
as available-for-sale. Available-for-sale securities are carried at fair value
with unrealized gains and losses included, on an after-tax basis, as a
separate component of stockholders' equity. The cost of securities sold by the
Company is determined using specific identification.
Interest on Loans--Interest on loans is recorded as earned. The accrual of
interest income is generally discontinued on loans which are past due 90 or
more days as to principal or interest payments or when management deems the
loans or interest uncollectible in part or in full. When loans are placed on
non-accrual status, interest previously accrued is charged against interest
income. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the remaining
balance can be reasonably expected.
Loans Held for Sale--Loans held for sale represent receivables currently on
the statement of financial condition that the Company generally intends to
securitize within the next six months. These assets are reported at the lower
of cost or fair market value.
43
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Origination Fees, Servicing Fees, and Premiums and Discounts--Mortgage
loan origination fees and certain related direct mortgage loan origination
costs are deferred and the net amount is recognized over the contractual life
of the loan as an adjustment to yield. Fees for servicing mortgage loan
portfolios are generally recorded on the accrual basis. Premiums and discounts
on mortgage loans purchased are amortized to income over the lives of the
loans using the level yield method.
Allowance for Loan Losses--Provisions for loan losses are charged to
operations based on management's evaluation of inherent losses in the loan
portfolio. Among the factors considered in evaluating inherent losses are
historical charge-off experience, delinquency, local and national economic
conditions, the borrower's ability to repay and the value of any related
collateral. Management's estimate of the fair value of collateral considers
the current and anticipated real estate market conditions. As a result,
estimates are susceptible to changes that could result in an adjustment to
future results of operations. Recovery of the carrying value of such loans and
related real estate is dependent on economic, operating and other conditions
that may be beyond the Company's control.
Securitization Income--Certain home equity lines of credit are securitized
and sold to investors with limited recourse. The servicing rights to these
loans have been retained by the Company. Upon sale, the loans are removed from
the statement of financial condition and a gain is recognized for the
difference between the carrying value of the loans and the adjusted sales
proceeds. The adjusted sales proceeds are determined based on a present value
estimate of future cash flows for each loan pool sold. Future cash flows are
based on the "excess spread" between the yield of the underlying loans sold
and the securities issued and reflect estimates of prepayments, servicing
fees, operating expenses and other factors. These cash flows are projected
over the life of the deal using assumptions that market participants would use
for similar financial instruments subject to prepayments, credit and interest
rate risk and are discounted at an interest rate that a purchaser unrelated to
the seller of such a financial instrument would demand.
The present value of the excess spread represents the interest-only
securities (I/O strip) recorded as a result of securitization. The resulting
gain is reduced by applicable costs including unamortized loan origination
costs relating to the pool of loans sold. The gain is further reduced by
establishing a reserve for estimated probable losses under the limited
recourse provisions. This reserve amount is netted against the I/O strip. The
I/O strip is amortized as cash flows are received. The fair value of the I/O
strip is evaluated periodically, and any adjustment is recognized as income
immediately.
Because of the sensitivity of the value of the I/O strip to market factors
beyond management's control, the actual amounts realized could differ
materially from the carrying value.
Net gains on sale, recourse provisions, servicing cash flows on receivables
sold, and any adjustment to fair value of the interest only strips are
reported in the accompanying consolidated statements of income as
securitization income.
Effective January 1, 1997, the Company adopted Statement of Financial
Standards No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities ("SFAS No. 125"), which provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The statement was effective for securitization
transactions occurring subsequent to December 31, 1996. The adoption of SFAS
No. 125 did not have a material impact on the Company's consolidated financial
statements.
Other Real Estate Owned--Other real estate owned represents real estate
acquired by foreclosure or by deed in lieu of foreclosure. At the date of
acquisition, acquired property is recorded at the lower of carrying value or
fair value less estimated costs to sell. Any excess of carrying value over
fair value less estimated costs to sell at
44
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the date of acquisition is charged directly to the allowance for loan losses.
Subsequent to acquisition, other real estate owned is adjusted to the lower of
net carrying value or fair value less estimated costs to sell. Provisions for
estimated losses on the basis of subsequent evaluations, gains or losses on
sales and net expenses incurred from maintaining such properties are included
in other expense. The amounts that ultimately could be recovered from other
real estate owned could differ from the amounts used in determining the net
carrying value of the assets as a result of market factors beyond the
Company's control.
Office Buildings and Equipment--Office buildings and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation is charged
to operations over the estimated useful lives of the assets using the
straight-line method. The cost of leasehold improvements is amortized using
the straight-line method over the term of the lease. Maintenance, repairs and
minor improvements are charged to operating expense as incurred.
Securities Sold Under Agreements to Repurchase--The Company enters into
sales of securities under agreements to repurchase generally for periods of
less than ninety days. Fixed coupon agreements are treated as financings and
the obligation to repurchase securities sold is reflected as a liability in
the statement of financial condition. The carrying value of underlying
securities remains in the asset accounts.
Other Borrowings--Other borrowings consist primarily of Federal funds
purchased usually for periods of one to thirty days.
Income Taxes--The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires the use of the
liability method in accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the expected tax effect on future taxable
income resulting from differences between the financial statement and tax
bases of assets and liabilities and the expected tax effect of loss
carryforwards.
Cash Flow Reporting--The Company uses the indirect method to report cash
flows from operating activities. Net reporting of cash transactions has been
used when balance sheet items consist predominantly of maturities of three
months or less, or where otherwise permitted. Other items are reported on a
gross basis. Cash and cash equivalents consist of cash and due from banks and
interest-bearing deposits.
Earnings Per Share--Earnings per share computations are in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share and
are based upon the weighted average shares outstanding during the year taking
into account dilutive stock options. In the year ended December 31, 1996 and
in the nine months ended December 31, 1995, stock options had an anti-dilutive
effect, and therefore are not included in the earnings per share calculation.
Reclassifications--Certain prior year amounts have been reclassified to
conform with the current year's presentation.
Change in Fiscal Year--On May 1, 1995, the Board of Directors of the Company
resolved to change the Company's fiscal year end to December 31 from March 31.
Use of Estimates in Preparation of Financial Statements--The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements, as well as
the reported amounts of income and expenses during the reported periods.
Actual results could differ from those estimates.
45
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recent Accounting Pronouncements--In February 1997, the FASB adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per
Share. This statement establishes standards for computing and presenting
earnings per share ("EPS") and simplifies the standards for computing earnings
per share previously found in Accounting Principles Board Opinion No. 15 ("APB
15"), Earnings Per Share. SFAS 128 supersedes APB 15 and its interpretations
and supersedes or amends other accounting pronouncements related to current
computations of EPS. SFAS 128 replaced the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS for income from continuing operations and for net income on the
face of the statement of income for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. The provisions of SFAS 128 are effective for financial statements
for both interim and annual periods ending after December 15, 1997, with all
prior period EPS data restated to conform with SFAS 128. The adoption of this
statement did not result in any significant disclosures in addition to those
already contained in the Company's financial statements.
In February 1997, the FASB adopted Statement of Financial Accounting
Standards No. 129 ("SFAS 129"), Disclosure of Information about Capital
Structure. This Statement establishes standards for disclosing information
about an entity's capital structure. This Statement requires an entity to
disclose in its financial statements the pertinent rights and privileges of
the various securities outstanding and the number of shares upon conversion,
exercise, or satisfaction of required conditions during at least the most
recent annual fiscal period and any subsequent interim period presented. This
Statement also requires disclosure relative to liquidation preference of
preferred stock and redeemable stock. The provisions of SFAS 129 are effective
for periods ending after December 15, 1997. The adoption of this Statement did
not result in any significant disclosures in addition to those already
contained in the Company's financial statements.
In June 1997, the FASB adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income. This Statement
establishes standards for reporting and disclosure of comprehensive income and
its components in a full set of financial statements. SFAS 130 requires that
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements with the aggregate
amount of comprehensive income reported in that same financial statement. SFAS
130 permits the statement of changes in stockholders' equity to be used to
meet this requirement. Companies are encouraged, but not required, to display
the components of other comprehensive income below the total for net income in
the statement of operations or in a separate statement of comprehensive
income. Companies are also required to display the cumulative total of other
comprehensive income for the period as a separate component of equity in the
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Companies are also required to report comparative totals for comprehensive
income in interim reports. The Company will adopt the provisions of this
Statement, which are only of a disclosure nature, effective January 1, 1998.
In June 1997, the FASB adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related
Information. This Statement supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, and utilizes the "management approach" for
segment reporting. The management approach is based on the way that the chief
operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based
on any manner in which management disaggregates its company such as by
products and services, geography, legal structure and management structure.
SFAS 131 requires disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and more specific and detailed geographic disclosures. This
Statement also requires descriptive information about the way the operating
segments were determined. The provisions of SFAS 131 are effective for fiscal
years
46
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
beginning after December 15, 1997, with earlier application permitted. SFAS
131 does not need to be applied to interim statements in the initial year of
application but such comparative information will be required in interim
statements for the second year. Comparative information for earlier years must
be restated in the initial year of application. The Company will adopt the
provisions of this Statement, which are only of a disclosure nature, effective
January 1, 1998.
2. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
securities are summarized as follows (in thousands):
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
--------- ---------------- ----------------- -------
AVAILABLE-FOR-SALE:
December 31, 1997
U.S. Government agency
securities........... $46,251 $147 $(25) $46,373
======= ==== ==== =======
December 31, 1996
U.S. Government agency
securities........... $36,037 $ 90 $226 $35,901
======= ==== ==== =======
HELD-TO-MATURITY:
December 31, 1996
U.S. Government agency
notes: Federal Home
Loan Bank............ $ 6,498 $ 1 $(11) $ 6,488
======= ==== ==== =======
The maturity of securities is as follows (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ---------- -------------- ----------
AVAILABLE-FOR-SALE:
Term to maturity
Due after one year
through five years... $36,262 $36,363 $21,665 $21,654
Due after five years
through ten years.... 9,989 10,010 14,372 14,247
------- ------- ------- -------
Total............... $46,251 $46,373 $36,037 $35,901
======= ======= ======= =======
HELD-TO-MATURITY:
Term to maturity
Due one year or less.. $ -- $ -- $ 5,498 $ 5,498
Due after five years
through ten years.... -- -- 1,000 990
------- ------- ------- -------
Total............... -- -- $ 6,498 $ 6,488
======= ======= ======= =======
Proceeds from the sales of securities available-for-sale were $7.0 million
for the year ended December 31, 1997 and resulted in gross realized gains of
$66 thousand and no realized losses. Proceeds from the sales of securities
available-for-sale were $52.8 million for the year ended December 31, 1996 and
resulted in gross realized gains of $768 thousand and gross realized losses of
$8 thousand. Proceeds from the sales of securities available-for-sale were
$26.6 million for the nine months ended December 31, 1995 and resulted in
gross realized gains of $55 thousand. There were no sales of securities held-
to-maturity during the years ended December 31, 1997 or 1996 or for the nine
months ended December 31, 1995.
47
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997 and 1996, the Company held structured notes with an
amortized cost of $16.8 and $20.9 million, respectively, and fair value of
$16.8 and $20.7 million, respectively. These securities were issued by the
Federal Home Loan Bank (FHLB) and Student Loan Marketing Association (SLMA).
The structured notes are comprised primarily of securities which have coupon
interest rates which "step up" periodically during the term to maturity.
At December 31, 1996, securities with an amortized cost of $15.4 million and
a fair value of $15.2 million were pledged to secure borrowings.
3. MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
mortgage-backed securities are summarized as follows (in thousands):
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
--------- ---------------- ----------------- --------
AVAILABLE-FOR SALE:
December 31, 1997:
Collateralized Mortgage
Obligations:
Government and Agency. $ 5,546 $ 17 $(104) $ 5,459
Private Issuer........ 17,951 14 (129) 17,836
GNMA Certificates...... 51,874 520 (60) 52,334
FHLMC Certificates..... 2,960 -- (101) 2,859
FNMA Certificates...... 2,150 3 (20) 2,133
-------- ------ ----- --------
Total................ $ 80,481 $ 554 $(414) $ 80,621
======== ====== ===== ========
December 31, 1996:
Collateralized Mortgage
Obligations:
Government and Agency. $ 6,357 $ 6 $(222) $ 6,141
Private Issuer........ 21,105 24 (516) 20,613
GNMA Certificates...... 103,551 984 -- 104,535
FHLMC Certificates..... 2,780 -- (44) 2,736
FNMA Certificates...... 2,421 2 (30) 2,393
-------- ------ ----- --------
Total................ $136,214 $1,016 $(812) $136,418
======== ====== ===== ========
HELD-TO-MATURITY:
December 31, 1997:
Private Issuer
Collateralized
Mortgage Obligations.. $ 36,313 $ 110 $(486) $ 35,937
GNMA Certificates...... 2,393 113 -- 2,506
FHLMC Certificates..... 835 20 -- 855
FNMA Certificates...... 14,178 61 (86) 14,153
-------- ------ ----- --------
Total................ $ 53,719 $ 304 $(572) $ 53,451
======== ====== ===== ========
December 31, 1996:
Private Issuer
Collateralized
Mortgage Obligations.. $ 41,605 $ 166 $(260) $ 41,511
GNMA Certificates...... 3,007 110 -- 3,117
FHLMC Certificates..... 1,036 22 -- 1,058
FNMA Certificates...... 15,790 59 (148) 15,701
-------- ------ ----- --------
Total................ $ 61,438 $ 357 $(408) $ 61,387
======== ====== ===== ========
48
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from the sale of mortgage-backed securities available for sale were
$63.1 million for the year ended December 31, 1997 and resulted in gross gains
of $1.1 million and no realized losses. Proceeds from the sale of mortgage-
backed securities available for sale were $265.9 million for the year ended
December 31, 1996 and resulted in gross gains of $2.2 million and gross
realized losses of $481 thousand. Proceeds from the sale of mortgage-backed
securities available for sale were $122.0 million for the nine months ended
December 31, 1995 and resulted in gross realized gains of $1.0 million and
gross realized losses of $29 thousand. There were no sales of mortgage-backed
securities held-to-maturity during the years ended December 31, 1997 or 1996,
or for the nine months ended December 31, 1995.
At December 31, 1997 and December 31, 1996, mortgage-backed securities with
an amortized cost of $30.9 and $133.1 million, respectively, were pledged to
secure borrowings.
Mortgage-backed securities are comprised of pass-through certificates
representing interests in pools of fixed and variable interest rate single
family mortgage loans originated for terms of 15, 30, or 40 years. However,
very few of these loans have historically remained outstanding for their
entire term and management anticipates similar prepayments will occur in the
future. Generally, scheduled repayments gradually reduce the outstanding
balance until the underlying property is sold and the loan paid off.
Collateralized Mortgage Obligations consist of AAA, AA, A and BBB rated
instruments which are purchased with initial expected maturities of three to
seven years.
As of December 31, 1997 and 1996, the Company had no outstanding commitments
to purchase mortgage-backed securities.
4. LOANS
Loans are summarized as follows (in thousands):
DECEMBER 31, PERCENTAGE DECEMBER 31, PERCENTAGE
1997 OF TOTAL 1996 OF TOTAL
------------ ---------- ------------ ----------
Mortgage loans:
Equity lines of credit....... $116,587 47.10% $120,371 36.94%
One to four family........... 82,610 33.37 101,066 31.02
Multi-family................. 22,709 9.17 23,765 7.29
Construction or development.. 1,076 0.43 2,191 0.67
-------- ------ -------- ------
Total mortgage loans........... 222,982 90.07 247,393 75.92
Consumer loans................. 24,546 9.93 78,434 24.08
-------- ------ -------- ------
Gross loans.................... 247,528 100.00% 325,827 100.00%
======== ====== ======== ======
Less:
Unearned discounts on loans
purchased................... (9) (19)
Deferred loan fees, net...... (1,274) (1,300)
Allowance for loan losses.... (6,303) (7,208)
-------- --------
Loans, net................... $239,942 $317,300
======== ========
At December 31, 1997, home equity loans held for sale totaled $52.7 million.
There were no home equity loans held for sale at December 31, 1996.
At December 31, 1997, and 1996 one to four family mortgage loans included
$5.7 and $6.4 million, respectively, of loans secured by non-owner occupied
properties.
Equity lines of credit consist of first and second mortgage liens on both
owner occupied and non-owner occupied properties which generally have interest
tied to the prime rate, maturities of 5 to 10 years and require
49
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest-only monthly payments until maturity. Outstanding equity lines of
credit and unused equity lines of credit are summarized as follows (in
thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Outstanding lines of credit:
First lien owner occupied........... $ 15,474 $ 18,363
First lien non-owner occupied....... 972 2,062
-------- --------
Total first lien.................. 16,446 20,425
-------- --------
Second lien owner occupied.......... 93,425 90,273
Second lien non-owner occupied...... 531 652
-------- --------
Total second lien................. 93,956 90,925
======== ========
Third lien owner occupied........... 6,185 9,021
-------- --------
Total equity lines of credit...... $116,587 $120,371
======== ========
Unused lines outstanding:
First lien.......................... $ 13,634 $ 17,053
Second lien......................... 40,436 51,081
Third lien.......................... 2,188 2,527
-------- --------
Total unused lines of credit...... $ 56,258 $ 70,661
======== ========
The Company has both adjustable and fixed rate loans. At December 31, 1997,
adjustable interest rate loans totaled $131.5 million and fixed rate loans
totaled $95.6 million. At December 31, 1996, adjustable interest rate loans
totaled $214.1 million and fixed rate loans totaled $111.8 million. All
adjustable interest rate loans reset annually or more frequently. The
adjustable rate loans have interest adjustment caps and are generally indexed
to the prime rate. Market factors may affect the correlation of the interest
rate adjustment with the rates the Company pays on the short-term deposits
that have been primarily utilized to fund these loans.
Loans outstanding to directors and executive officers aggregated $232
thousand at December 31, 1997 and $542 thousand at December 31, 1996.
Additionally, there were no unused lines of credit to directors and executive
officers at December 31, 1997 or 1996. Such loans are made on substantially
the same terms as those for other customers.
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments
to extend credit and unused lines of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of financial condition. The Company's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
Financial instruments whose contract amounts represent credit risk are as
follows (in thousands):
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
--------------- ---------------
Unused home equity lines of credit........ $ 56,258 $ 70,661
Unused private label credit lines......... -- 129,327
Commitments to originate mortgage loans... 56,572 46,015
-------- --------
Total................................. $112,830 $246,003
======== ========
50
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the Company had commitments totaling $428 thousand
to originate fixed rate mortgage loans. As of December 31, 1996, the Company
had no commitments to originate fixed rate mortgage loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness and the amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based upon such
evaluation. Collateral required by the Company generally includes single and
multi-family residential properties and income-producing commercial real
estate properties.
Mortgage loans serviced for others are not included in the accompanying
statements of consolidated financial condition. Servicing loans for others
generally consists of collecting mortgage payments, administering escrow
accounts, remitting payments to investors and foreclosure processing. Loan
servicing income is recorded as a component of securitization income on the
accrual basis and includes servicing fees from investors and certain charges
collected from borrowers. These amounts totaled $817 thousand and $127
thousand for the years ended December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996 the Company serviced loans for the benefit of
others with aggregate unpaid principal balances of $224.7 and $75.4 million,
respectively.
5. ALLOWANCES FOR LOAN LOSSES
Activity in the allowance for loan losses are summarized as follows (in
thousands):
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Balance, beginning of
period................. $ 7,208 $3,460 $2,796
Provision for loan
losses................. 26,527 4,293 1,150
Charge-offs............. (27,946) (754) (502)
Recoveries.............. 1,699 209 16
Reserves on loans sold.. (774) -- --
Other, net.............. (411) -- --
-------- ------ ------
Balance, end of period.. $ 6,303 $7,208 $3,460
======== ====== ======
The balance of non-accrual loans at December 31, 1997 and 1996 was
approximately $6.2 and $5.3 million, respectively. The interest income that
would have been recorded under the original terms of such loans during the
years ended December 31, 1997 and 1996 and for the nine months ended December
31, 1995 was $617, $264 and $265 thousand, respectively. During the years
ended December 31, 1997 and 1996 and for the nine months ended December 31,
1995 the amounts that were included in interest income on such loans were
$242, $389 and $90 thousand, respectively.
6. SECURITIZATIONS
During the years ended December 31, 1997 and 1996, the Company securitized
and sold $170.3 million and $74.7 million, respectively, of its home equity
lines of credit to investors with limited recourse, retaining the servicing
rights to the underlying loans. The Company retained a participation interest
in the investor trust, reflecting the excess of the total amount of loans
transferred to the trust over the portion represented by certificates sold to
investors. The initial participation interests retained in the equity line of
credit trusts totaled $3.5 million for the two 1997 securitizations and $1.5
million for the securitization completed in 1996 and are
51
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
included in loans in the Company's statement of financial condition. The 1997
transactions were treated as sales in accordance with SFAS 125. In conjunction
with these transactions, the Company recorded interest-only strips (I/O
strips) of $17.8 million and $5.9 million at December 31, 1997 and 1996,
respectively. The Company also recorded net gains in 1997 and 1996 of $7.9 and
$3.3 million, respectively, which represents the present value of estimated
future cash flows reduced by the over-the-life recourse reserves and other
transaction related expenses.
The following table presents information regarding loan sale transactions
for the periods indicated (dollar amounts in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Home equity lines of credit sold........ $ 170,312 $ 74,784
Weighted-average coupon................. 13.06% 12.23%
Weighted-average investor pass-through
rate................................... LIBOR + .24% LIBOR + .19%
Net loan sale gains..................... $ 7,943 $ 3,307
The following tables provide certain contractual delinquency information
with the respect to the Company's home equity lines of credit serviced, by
year of origination, as of the dates indicated:
AT DECEMBER 31, 1997
----------------------------------
DELINQUENCY
YEAR OF -------------------------
ORIGINATION BALANCE 30-59 60-89 90+ TOTAL
----------- -------- ----- ----- ---- -----
1995...................................... $ 22,735 7.61% 0.76% 2.37% 10.74%
1996...................................... 97,368 8.23 1.85 2.85 12.93
1997...................................... 104,989 4.02 1.58 0.80 6.40
-------- ---- ---- ---- -----
Total................................. $225,092 6.20% 1.62% 1.84% 9.66%
======== ==== ==== ==== =====
AT DECEMBER 31, 1997
----------------------------------
DELINQUENCY
YEAR OF -------------------------
ORIGINATION BALANCE 30-59 60-89 90+ TOTAL
----------- -------- ----- ----- ---- -----
1995...................................... $ 25,022 8.27% 1.99% 0.48% 10.74%
1996...................................... 51,808 7.80 1.26 1.27 10.33
-------- ---- ---- ---- -----
Total................................. $ 76,830 7.96% 1.50% 1.01% 10.47%
======== ==== ==== ==== =====
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands):
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
--------------- ---------------
Land........................................ $ 607 $ 607
Buildings................................... 2,233 2,228
Leasehold improvements...................... 2,079 1,838
Furniture and equipment..................... 6,226 3,741
------- -------
11,145 8,414
Less allowances for depreciation &
amortization............................... (5,881) (4,539)
------- -------
Total................................... $ 5,264 $ 3,875
======= =======
52
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OTHER REAL ESTATE OWNED (OREO)
Other real estate owned, which was acquired through foreclosure, was $1.1
million and $270 thousand at December 31, 1997 and 1996, respectively. Real
estate owned consists primarily of one to four family residences.
Real Estate owned income (expense) is summarized as follows (in thousands):
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Gain on sales of OREO.. $ 347 $ 256 $ 38
Loss on sales of OREO.. -- (107) (2)
Other expenses......... (145) (184) (60)
----- ----- ----
Other real estate
owned income
(expense), net.... $ 202 $ (35) $(24)
===== ===== ====
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
--------------- ---------------
Loans.................................... $4,733 $2,997
Receivable from trust.................... 3,278 1,855
Securities available-for-sale............ 603 473
Mortgage-backed securities available-for-
sale.................................... 414 898
Securities held-to-maturity.............. -- 108
Mortgage-backed securities held-to-
maturity................................ 423 565
------ ------
Total................................ $9,451 $6,896
====== ======
10. DEPOSITS
Deposit accounts are summarized as follows (dollars in thousands):
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENTAGE AVERAGE PERCENTAGE
NOMINAL RATE BALANCE OF TOTAL NOMINAL RATE BALANCE OF TOTAL
------------ -------- ---------- ------------ -------- ----------
Demand accounts:
Non-interest bearing
demand accounts...... 0.00% $ 6,571 1.65% 0.00% $ 5,876 1.78%
NOW accounts.......... 1.97 9,972 2.51 1.98 9,303 2.81
Money market accounts. 4.12 43,587 10.98 3.95 50,416 15.25
---- -------- ------ ---- -------- ------
Total demand........ 3.31 60,130 15.14 3.32 65,595 19.84
Passbook and statement
accounts of deposits .. 3.61 82,535 20.78 3.38 74,099 22.41
---- -------- ------ ---- -------- ------
Certificate accounts:
Six months or less.... 5.13 40,297 10.15 5.09 51,606 15.61
Six months to one
year................. 6.00 87,060 21.92 5.70 83,921 25.38
One to three years.... 6.11 114,627 28.87 6.02 53,694 16.24
Three to five years... 6.51 12,461 3.14 6.29 1,740 .52
---- -------- ------ ---- -------- ------
Total certificates of
deposit ............. 5.94 254,445 64.07 5.64 190,961 57.75
---- -------- ------ ---- -------- ------
Total Deposits...... 5.06% $397,110 100.00% 4.67% $330,655 100.00%
==== ======== ====== ==== ======== ======
53
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certificates of deposit in excess of $100,000 at December 31, 1997 and
December 31, 1996 totaled $31.9 and $19.6 million, respectively. Deposits in
excess of $100,000 are not insured by the F.D.I.C.
Maturities of certificate accounts at December 31, 1997 are summarized as
follows (in thousands):
Maturing:
Within 12 months.............................................. $209,716
Beyond 12 months but within 24 months......................... 20,611
Beyond 24 months but within 36 months......................... 10,079
Beyond 36 months.............................................. 14,039
--------
Total....................................................... $254,445
========
Interest expense on deposits consists of the following (in thousands):
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
NOW accounts............ $ 184 $ 189 $ 141
Money market accounts... 1,948 2,554 2,802
Passbook accounts....... 2,813 2,135 1,362
Certificate accounts.... 13,831 9,717 7,576
------- ------- -------
Total............... $18,776 $14,595 $11,881
======= ======= =======
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago are summarized as
follows (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- -----------------------------
WEIGHTED YEAR OF WEIGHTED YEAR OF
BALANCE AVERAGE RATE MATURITY BALANCE AVERAGE RATE MATURITY
------- ------------ -------- ------- ------------ --------
Fixed rate:............. $25,000 6.79% 1997
$ 803 2.50% 2003 803 2.50 2003
Variable rate:.......... 85,000 5.83 1998 10,000 5.69 1997
5,000 6.00 2000 55,000 5.64 1998
------- ---- ------- ----
Total............... $90,803 5.81% $90,803 5.93%
======= ==== ======= ====
The Company has pledged its stock in the Federal Home Loan Bank of Chicago
as collateral for the advances from Federal Home Loan Bank of Chicago. In
addition the Company is required to maintain certain qualifying first mortgage
loans or mortgage-backed securities in an amount equal to at least 170 percent
of the outstanding advances.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
There were no securities sold under agreements to repurchase or other
borrowings at December 31, 1997.
Securities sold under agreements to repurchase at December 31, 1996 are
summarized as follows (in thousands):
CARRYING FAIR REPURCHASE
AMOUNT VALUE LIABILITY AMOUNT
-------- ------- ----------------
Mortgage-backed securities............. $65,097 $65,615 $60,451
Government agencies.................... 9,373 9,327 8,695
------- ------- -------
Total.............................. $74,470 $74,942 $69,146
======= ======= =======
54
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other borrowings, which consist of Federal Funds purchased, totaled $32.0
million at December 31, 1996.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data in order to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have an effect on estimated fair value amounts.
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
ASSETS:
Cash and due from depository institutions.... $ 6,630 $ 6,630 $ 8,334 $ 8,334
Interest-bearing deposits.................... 60,891 60,891 740 740
Securities available-for-sale................ 46,373 46,373 35,901 35,901
Securities held-to-maturity.................. -- -- 6,498 6,488
Mortgage-backed securities available-for-
sale........................................ 80,621 80,621 136,418 136,418
Mortgage-backed securities held-to-maturity.. 53,719 53,451 61,438 61,387
Loans........................................ 239,942 245,346 317,300 320,229
I/O strips................................... 17,791 17,791 7,926 7,926
Federal Home Loan Bank stock................. 4,540 4,540 4,790 4,790
LIABILITIES:
Deposits..................................... 397,110 397,469 330,655 331,378
Advances from the Federal Home Loan Bank..... 90,803 90,670 90,803 90,713
Securities sold under agreements to
repurchase.................................. -- -- 69,146 69,101
Other borrowings............................. -- -- 32,000 32,000
The fair value of financial instruments was determined as follows:
CASH AND DUE FROM DEPOSITORY INSTITUTIONS, INTEREST-BEARING DEPOSITS AND
FHLB STOCK--For cash and due from depository institutions, interest-bearing
deposits and FHLB stock, the carrying amount approximates fair value due to
the liquid nature of the assets.
SECURITIES AVAILABLE-FOR-SALE AND SECURITIES HELD-TO-MATURITY--For
securities available-for-sale and securities held-to-maturity, fair values are
based on quoted market prices or dealer quotes. If a quoted price is not
available, fair value is estimated using quoted prices for similar securities.
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE AND MORTGAGE-BACKED SECURITIES
HELD-TO-MATURITY--For mortgage-backed securities available-for-sale, fair
values are based on quoted prices or dealer quotes. If a quoted price is not
available, fair value is estimated using quoted prices for similar securities,
adjusted for any differences in credit ratings or maturities.
LOANS AND LOANS HELD FOR SALE--For certain homogeneous categories of loans,
such as fixed rate residential mortgages, fair value is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. For adjustable rate mortgages, the carrying amount less
a reserve for losses approximates fair value.
55
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
I/O STRIPS--For I/O strips, cash flows are projected over the life of the
securitized loans using prepayment, delinquency, default and interest rate
assumptions that market participants would use for similar financial
instruments subject to prepayment, credit and interest rate risk. These cash
flows are then discounted using an interest rate that a purchaser unrelated to
the seller of such financial instruments would demand.
DEPOSITS--Fair value of demand deposits, savings accounts, and certain money
market deposits approximates carrying value. The fair value of fixed maturity
certificates of deposits is estimated by discounting future cash flows using
the rates offered for deposits of similar remaining maturities at the
respective valuation dates.
ADVANCES FROM THE FEDERAL HOME LOAN BANK--The fair value of advances from
the Federal Home Loan Bank is based on borrowings with similar terms.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS--The
fair value of securities sold under agreements to repurchase and other
borrowings is based on quoted market prices for similar borrowings.
15. COMMITMENTS AND CONTINGENCIES
The Company leases office space for certain of its branch offices. The
future minimum annual rental commitments for these noncancelable leases and
subleases of such space are as follows (in thousands):
GROSS RENTS SUBLEASE RENTS NET
----------- -------------- ------
1998.................................... $1,910 $ 486 $1,424
1999.................................... 1,898 505 1,393
2000.................................... 1,907 514 1,393
2001.................................... 1,054 114 940
2002 and thereafter..................... 769 -- 769
------ ------ ------
Total............................... $7,538 $1,619 $5,919
====== ====== ======
Under the terms of these leases, the Company is required to pay its pro rata
share of the cost of maintenance and real estate taxes. Certain of these
leases also provide for increased rental payments based on increases in the
Consumer Price Index.
Gross rental expense for the years ended December 31, 1997 and 1996, and for
the nine months ended December 31, 1995, amounted to $2.2, $1.6 and $1.1
million, respectively.
In the ordinary course of business, there are various legal proceedings
pending against the Company. Management believes the aggregate liabilities, if
any, resulting from such actions would not have a material adverse effect on
the financial position of the Company. However, as the ultimate resolution of
these proceedings is influenced by factors outside of the Company's control,
it is reasonably possible that the Company's estimated liability under these
proceedings could change. Management believes its reserves for such matters
are adequate as of December 31, 1997.
16. CAPITAL STANDARDS
The Bank is subject to certain regulatory capital requirements administered
by the various federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Bank's financial position. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank
56
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital to average assets (as
defined). Management believes that the Bank meets all capital adequacy
requirements to which it is subject at December 31, 1997 and 1996.
The Bank's regulatory capital at December 31, 1997 and 1996 is presented
below. There were no deductions from capital for interest rate risk.
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------ ------------------ ------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- --------- -------- ------ -----
(DOLLAR AMOUNTS IN THOUSANDS)
As of December 31, 1997:
Total capital (to risk-
weighted assets)............. 48,767 16.89% 23,104 8.00% 28,881 10.00%
Tier 1 capital (to risk-
weighted assets)............. 45,078 8.33 23,069 4.00 32,459 6.00
Tier 1 capital (to average
assets)...................... 45,078 7.35 24,536 4.00 30,670 5.00
As of December 31, 1996:
Total capital (to risk-
weighted assets)............. 63,088 18.99 26,581 8.00 33,226 10.00
Tier 1 capital (to risk-
weighted assets)............. 58,897 17.57 13,290 4.00 19,936 6.00
Tier 1 capital (to average
assets)...................... 58,897 9.89 23,820 4.00 29,777 5.00
17. EMPLOYEE BENEFIT PLANS
The Bank has a profit-sharing plan that covers substantially all of the
Bank's employees. Prior to January 1, 1995, the plan provided for
contributions by the Bank in amounts as declared by the Board of Directors to
a maximum of 15 percent of the participant's compensation and, for voluntary
employee contributions, to a maximum of ten percent of each participant's
compensation. Effective January 1, 1995, the Board of Directors of the Bank
adopted a resolution to amend the profit-sharing plan to incorporate a 401(k)
feature, which includes an employer matching contribution. For 1997 and 1996
the Bank contributed 50% of an employee's contribution up to 2% of salary and
25% of an employee's contributions for the next 4% of salary, with a maximum
Bank contribution of $500. The employer contribution was made for employees
and officers below the title of senior vice president. Compensation expense
for the Bank's contribution was $61 thousand for the year ended December 31,
1997 and $14 thousand for the year ended December 31, 1996. The Bank's
contribution expense was $17 thousand for the nine months ended December 31,
1995.
Effective February 1, 1995, the Board of Directors of the Bank adopted a
deferred compensation plan whereby directors and executive officers may elect
to defer receipt of fees and other compensation otherwise payable for services
as a director or executive officer in accordance with the provisions of the
plan. As of December 31, 1997, 1996 and 1995, there were $348 thousand, $337
thousand and $167 thousand, respectively of fees or compensation deferred in
this plan. In addition, beginning in 1996, Directors are required to receive a
portion of their fee in shares of Avondale Financial Corp. common stock. Stock
received may also be deposited in the deferred compensation plan. As of
December 31, 1997 and 1996, 5,796 and 4,800 shares of common stock,
respectively, were deposited into the deferred plan.
57
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 OMNIBUS INCENTIVE PLAN
During 1997 the Company's stockholders approved the 1997 Omnibus Incentive
Plan ("Omnibus Plan"). The Omnibus Plan replaces the 1995 Stock Option and
Incentive Plan and the Recognition and Retention Plan and authorizes the
issuance of up to 350,000 shares of the Company's common stock, including the
granting of nonqualified stock options, stock appreciation rights and
restricted stock. Subject to the terms and provisions of the Omnibus Plan,
stock-based awards may be granted to directors or employees as determined by
the Compensation Policy Committee of the Board of Directors ("the Committee").
The Committee has discretion in determining the number and type of awards
granted to each recipient. Vesting periods for awards are also at the
discretion of the Committee. No compensation expense was recorded upon
issuance of the stock options under the Omnibus Plan, since the exercise
option price was equal to or greater than the market value at the respective
dates of the grants.
1995 STOCK OPTION AND INCENTIVE PLAN
Prior to adoption of the Omnibus Plan, the Company awarded certain incentive
pay under the terms of the 1995 Stock Option and Incentive Plan (the
"Incentive Plan"). The Incentive Plan authorized the issuance of up to 423,200
shares of the Company's common stock, including the granting of non-qualified
and qualified stock options, stock appreciation rights and limited stock
appreciation rights. Subject to the terms and provisions of the Incentive
Plan, stock options were granted to directors or employees as determined by
the Compensation Policy Committee of the Board of Directors. All options vest
over a five-year period. No compensation expense was recorded upon issuance of
the stock options, since the exercise option price was equal to the market
value at the respective dates of the grants.
The tables on the following page summarize stock-based compensation options
and their related weighted average grant-date fair values for the years ended
December 31, 1997 and 1996:
58
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
OPTION AVERAGE OPTION AVERAGE
SHARES STRIKE PRICE SHARES STRIKE PRICE
-------- ------------ -------- ------------
All stock options:
Balance, beginning of period...... 354,909 $14.345 337,389 $14.375
Granted......................... 166,262 16.098 26,020 13.962
Exercised....................... (7,903) 14.375 -- --
Forfeited....................... (119,232) 14.291 (8,500) 14.375
-------- --------
Balance, end of period............ 394,036 $15.086 354,909 $14.345
======== ======= ======== =======
Options exercisable............... 98,014 $14.498 66,078 $14.375
======== ======= ======== =======
1997 OMNIBUS 1995 STOCK OPTION AND
INCENTIVE PLAN INCENTIVE PLAN
---------------------- ----------------------
WEIGHTED WEIGHTED
OPTION AVERAGE OPTION AVERAGE
SHARES STRIKE PRICE SHARES STRIKE PRICE
-------- ------------ -------- ------------
Balance, December 31, 1995........ -- -- 337,389 $14.375
1996 Activity:
Granted......................... 26,020 13.962
Exercised....................... -- --
Forfeited....................... (8,500) 14.375
--------
Balance, December 31, 1996........ -- -- 354,909 $14.345
-------- -------
1997 Activity:
Granted......................... 163,262 $16.099 3,000 16.063
Exercised....................... -- -- ( 7,903) 14.375
Forfeited....................... (7,770) 14.375 (111,462) 14.285
-------- --------
Balance, December 31, 1997........ 155,492 $16.186 238,544 $14.369
======== ======= ======== =======
Options exercisable............... 7,000 $16.250 91,014 $14.363
======== ======= ======== =======
The weighted average fair value of stock options granted during 1997 was
$4.72, $4.65 and $8.19 for all stock options, Omnibus Plan options and
Incentive Plan options, respectively. The weighted average fair value of stock
options granted during 1996 was $7.04. The fair value of options that were
granted during 1997 and 1996 was determined using the Black-Scholes option
pricing model. The following weighted-average assumptions were used in the
model:
VARIABLE 1997 WEIGHTED-AVERAGE 1996 WEIGHTED-AVERAGE
-------- --------------------- ---------------------
Risk-free interest rate............. 5.96% 6.56%
Expected volatility................. 25.27 18.46
Expected Life....................... 5.09 years 10.00 years
Expected dividends.................. $ -- $ --
In October 1995, the 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 became
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 123 had been used for stock-based compensation costs. The
Company has decided not to adopt the measurement recognition provisions of
SFAS 123.
59
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share after the effect of
income taxes would have been reduced to the following pro forma amounts
(rounded to the nearest thousand except per share data):
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
------------- ------------- -----------------
Net income: As reported $(12,482) $4,216 $2,777
Pro forma (12,808) 3,594 2,662
Basic earnings per
share: As reported $ (3.59) $ 1.13 $ 0.69
Pro forma (3.69) 0.97 0.66
RECOGNITION AND RETENTION PLAN
During 1995, the Company's stockholders approved the Recognition and
Retention Plan (the "RRP") which authorized the issuance of up to 169,280
shares of the Company's common stock as restricted stock. Subject to the terms
and provisions of the RRP, restricted stock was granted to employees as
determined by the Compensation Policy Committee of the Board of Directors.
At December 31, 1995, 162,568 restricted stock shares had been awarded under
the terms of the RRP. Recipients have all of the rights of stockholders,
except that the shares cannot be disposed of until certain restrictions have
lapsed. On the date of the grant, the market price of the shares was added to
common stock and capital surplus and an equal amount was deducted from
stockholders' equity (unearned portion of restricted stock awards). The
unearned portion is being amortized to expense over the five-year vesting
period using the straight-line method.
During 1996, under the terms of the RRP, 2,250 additional shares of stock
were awarded. Also during 1996, 9,000 shares were canceled. During 1997, 7,700
additional shares were granted under the terms of the RRP. Also during 1997,
55,499 shares were canceled.
Amortization of the unearned portion of restricted stock awards was
approximately $170, $930 and $177 thousand for the years ending December 31,
1997 and 1996 and for the nine months ended December 31, 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the Plan of Conversion converting the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, the Bank established an Employee Stock Ownership Plan ("ESOP") for
eligible employees. The ESOP was established for all employees that are 21 or
older and have completed one year of service with the Company. The ESOP
borrowed approximately $3.0 million from the Company to purchase 296,240
shares of the common stock of the Company that was issued in the conversion.
The loan will be repaid principally from the Company's discretionary
contributions to the ESOP over a period of seven years. Collateral for the
loan is the common stock purchased for the ESOP. The loan obligation of the
ESOP is considered unearned compensation and, as such, recorded as a reduction
of the Company's stockholders' equity. Both the loan obligation and the
unearned compensation are reduced by the amount of loan repayments made by the
ESOP. Shares purchased with the loan proceeds are held in an account for
allocation among participants as the loan is repaid. Contributions to the ESOP
and the shares released are allocated among participants on the basis of
compensation in the year of allocation. Benefits vest over a five year period.
Vesting in the ESOP is accelerated upon retirement, death or disability of
the participant. Forfeitures are returned to the Company or reallocated to
other participants to reduce future funding costs. Benefits may be payable
upon retirement, death, disability, or separation from service. As the
Company's annual contributions
60
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are discretionary, benefits payable under the ESOP cannot be estimated. The
Company recorded $670, $604 and $586 thousand of ESOP compensation expense for
the years ended December 31, 1997 and 1996 and for the nine months ended
December 31, 1995, respectively.
18. RESERVE FOR RESTRUCTURING
During 1993, the Company performed a comprehensive analysis of its operating
performance. As a result of this analysis, the Company commenced a major
business restructuring which necessitated a provision to establish a reserve
of $8.5 million to the March 31, 1993 financial statements. This restructuring
focused on three major areas. First, the restructuring of personnel levels at
a cost of approximately $1.3 million was completed during the fiscal year
ended March 31, 1994. Second, the Company restructured the employee
compensation and benefits programs; including a curtailment loss from the
termination of the Company's pension plan of approximately $.7 million which
was paid out during the fiscal year ended March 31, 1994. Third, it was
determined that the Company had significant excess office space. Consequently,
the Company plans to relocate all business functions from its 20 North Clark
Street, Chicago, Illinois location with the exception of the retail banking
space to other facilities. Approximately $6.5 million of the above
restructuring charge represented the cost of this relocation, including $6.0
million write-off of the estimated value of the leased space to be abandoned
and $.5 million write-off of leasehold improvements, which will not result in
any significant cash expenditures beyond the Company's current lease
commitments. The Company has been relocating business functions as office
space becomes subleased.
As of December 31, 1997, 1996 and 1995, $5.8, $4.7 and $2.8 million,
respectively, has been charged to the restructuring accrual.
19. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Current........................... $(4,151) $1,937 $1,574
Deferred.......................... (3,044) 415 210
------- ------ ------
Total income tax provision
(benefit)...................... $(7,195) $2,352 $1,784
======= ====== ======
The difference between recorded income taxes and the amount computed at the
statutory Federal income tax rates are as follows:
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Statutory rate.......... 34.00% 34.00% 34.00%
State income taxes...... 1.88 1.94 0.60
Other................... .69 (0.13) 4.50
----- ----- -----
Effective income tax
rate................. 36.57% 35.81% 39.10%
===== ===== =====
Deferred income taxes reflect the net effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes, and (b) net operating loss and
tax credit carryforwards. The tax effects of items comprising the Company's
deferred tax assets and deferred tax liabilities are as follows (in
thousands):
61
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------- --------------------
Deferred tax assets:
Allowance for loan losses.... $2,089 $2,623
Restructuring................ 1,061 1,610
Depreciation................. 193 247
Federal net operating loss
carryforward................ 4,502 --
State net operating loss
carryforward................ 335 --
Other........................ 504 695
------ ------
Subtotal..................... 8,684 5,175
Less: valuation allowance.... -- (464)
------ ------
Total deferred tax assets.. 8,684 4,711
------ ------
Deferred tax liabilities:
Securitization gains......... (2,004) (1,290)
FHLB stock................... (178) (196)
Accretion on securities...... (493) (482)
Unrealized gains on
securities available-for-
sale........................ (102) (21)
------ ------
Other........................ (243) (21)
------ ------
Total deferred tax
liabilities............... (3,020) (2,010)
------ ------
Net deferred tax assets.... $5,664 $2,701
====== ======
The valuation reserve of $464 thousand at December 31, 1996 related
primarily to the potential inability of the Company to fully utilize the
reversal of certain of the temporary differences for state income tax
purposes.
The Company is permitted under the Internal Revenue Code (the "Code") to
deduct from taxable income a provision for bad debts which differs from the
provisions for such losses recognized in the consolidated statements of
operations. Accordingly, retained earnings at December 31, 1997 included
approximately $5.1 million for which no provision for deferred income taxes
has been provided. If, in the future, this portion of retained earnings is
used for any purpose other than to absorb bad debt losses, Federal income
taxes will be imposed at the then applicable rates.
20. PARENT COMPANY STATEMENTS
Presented below are the condensed statements of financial condition and
statements of income and cash flows for Avondale Financial Corp.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------- --------------------
(IN THOUSANDS)
Cash and due from banks........ $ 50 $ 1,047
Investment in subs............. 45,230 59,857
Income taxes receivable........ 173 173
Prepaid expense & other assets. 516 388
------- -------
Total assets............... $45,969 $61,465
======= =======
Other liabilities.............. $ 6 $ 576
Stockholders' equity........... 45,963 60,889
------- -------
Total liabilities and
equity.................... $45,969 $61,465
======= =======
62
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
(IN THOUSANDS)
Dividends from bank subsidiary..... $ 2,768 $5,034
Interest income.................... 126 202
-------- ------
Total operating income......... 2,894 5,236
Operating expenses................. 630 1,262
Income tax expense (benefit)....... -- (371)
-------- ------
Income before equity in
undistributed earnings of
subsidiaries...................... 2,264 4,345
Equity in undistributed earnings
(loss) of subsidiaries............ (14,746) (129)
-------- ------
Net income (loss).............. $(12,482) $4,216
======== ======
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $(12,482) $ 4,216
Adjustments to reconcile net income
(loss) to net cash flows from operating
activities:
Net change in:
Prepaid expenses and other assets... (128) 242
Other liabilities................... (570) 420
Income taxes receivable............. -- (173)
-------- --------
Net cash flows provided (used) by
operating activities................... (13,180) 4,705
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities,
net.................................... -- 5,477
Dividends from Avondale Federal Savings
Bank................................... 2,768 5,034
Change in equity in Avondale Federal
Savings Bank........................... 11,859 (4,620)
-------- --------
Net cash flows provided by investing
activities............................. 14,627 5,891
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional paid-in capital.............. 337 181
ESOP common stock committed to be
released............................... 423 423
Amortization of unearned restricted
stock.................................. 169 930
Change in unrealized gains on available-
for-sale securities.................... 119 (1,280)
Purchase of treasury stock.............. (3,492) (10,496)
-------- --------
Net cash flows used in financing
activities............................. (2,444) (10,242)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS... $ (997) $ 354
======== ========
Cash and cash equivalents:
Beginning of period..................... $ 1,047 $ 693
-------- --------
End of period........................... $ 50 $ 1,047
======== ========
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors--The information with respect to Directors of the Registrant, set
forth under the caption "Directors and Executive Management" on pages 3 and 4
of the Registrant's Proxy Statement, dated March 13, 1998, relating to the May
12, 1998 Annual Meeting of Stockholders, is incorporated herein by reference.
Executive Officers--The information with respect to "Executive Officers of
the Registrant" set forth under the caption "Executive Officers" on page 4 of
the Registrant's Proxy Statement, dated March 13, 1998, relating to the May
12, 1998 Annual Meeting of stockholders, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" and
"Summary Compensation Table" on pages 5 and 6 of the Registrant's Proxy
Statement, dated March 13, 1998, relating to the May 12, 1998 Annual Meeting
of Stockholders, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities and Certain
Holders Thereof" on pages 2 and 3 of the Registrant's Proxy Statement, dated
March 13, 1998, relating to the May 12, 1998 Annual Meeting of Stockholders,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" on page
11 of the Registrant's Proxy Statement, dated March 13, 1998, relating to the
May 12, 1998 Annual Meeting of Stockholders, is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS:
See "Part II--Item 8. Financial Statements and Supplementary Data"
(b) REPORTS ON FORM 8-K:
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended December 31, 1997.
64
(c) EXHIBITS:
SEQUENTIAL PAGE
REFERENCE TO NUMBER WHERE
REGULATION PRIOR FILING ATTACHED EXHIBITS
S-K OR EXHIBIT ARE LOCATED
EXHIBIT NUMBER IN THIS FORM 10-K
NUMBER DOCUMENT ATTACHED HERETO REPORT
---------- --------------------------- --------------- -----------------
2 Plan of acquisition,
reorganization,
arrangement, liquidation or
succession None Not applicable
3(i) Articles of Incorporation
of the Company ****** Not applicable
3(ii) Bylaws of the Company ****** Not applicable
4 Instruments defining the
rights of security holders,
including indentures * Not applicable
9 Voting trust agreement None Not applicable
10 Material contracts:
(a) Employment Agreement
with Robert S.
Engelman, Jr. ** Not applicable
(b) Severance Pay
Agreement with Anthony
Pallante II ** Not applicable
(d) Severance Pay
Agreement with Howard
A. Jaffe ****** Not applicable
(f) 1995 Stock Option and
Incentive Plan *** Not applicable
(g) Recognition and
Retention Plan **** Not applicable
(h) Unfunded Deferred
Compensation Plan for
Directors and
Executive Officers ****** Not applicable
(i) Omnibus Plan ****** Not applicable
(j) SERP Agreement ****** Not applicable
11 Statement re: computation See Item 8. Financial Statements
of per share earnings and
Supplementary Data Footnote 1
12 Statements re: computation
of ratios Not required Not applicable
13 Annual Report to security
holders None Not applicable
16 Letter re: change in
certifying accountant ***** Not applicable
19 Previously unfiled
documents None Not applicable
21 Subsidiaries of the
registrant 21 Not applicable
22 Published report regarding
matters submitted to vote
of security holders None Not applicable
24 Power of Attorney Not required Not applicable
27 Financial data schedule Not required Not applicable
28 Information from reports
furnished to state
insurance regulatory
authorities Not required Not applicable
99 Additional Exhibits None Not applicable
- --------
* Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act"),
filed with the Securities and Exchange Commission (the "SEC") on June 27,
1994 (Registration No. 33-80774), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
65
** Filed as exhibits to the Company's Form 10-K for the fiscal year ended
March 31, 1995, under the Securities Exchange Act of 1934, filed with the
SEC on June 29, 1995, and incorporated herein by reference in accordance
with Item 601 of Regulation S-K.
*** Filed as exhibit to the Company's Registration Statement on Form S-8
under the Securities Act, filed with the SEC on November 11, 1995
(Registration No. 33-98860), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**** Filed as exhibit to the Company's Registration statement on Form S-8
under the Securities Act, filed with the SEC on November 11, 1995
(Registration No. 33-98862), and incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
***** Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on January 26, 1995, as amended.
****** Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, under the Securities Exchange Act of
1934, filed with the SEC on March 27, 1997, and incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
66
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED, ON THIS 16TH DAY OF
MARCH 1998.
Avondale Financial Corp.
(registrant)
/s/ Robert S. Engelman, Jr.
By: _________________________________
Robert S. Engelman, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ Howard A. Jaffe
By: _________________________________
Howard A. Jaffe
Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH DIRECTOR OF
THE REGISTRANT, WHOSE SIGNATURE APPEARS BELOW, HEREBY APPOINTS ROBERT S.
ENGELMAN, JR. AND HOWARD A. JAFFE AND EACH OF THEM SEVERALLY, AS HIS ATTORNEY-
IN-FACT, TO SIGN IN HIS NAME AND ON HIS BEHALF, AS A DIRECTOR OF THE
REGISTRANT, AND TO FILE WITH THE COMMISSION ANY AND ALL AMENDMENTS TO THIS
REPORT ON FORM 10-K, ON THIS THE 16TH DAY OF MARCH 1998.
SIGNATURE TITLE
--------- -----
/s/ R. Thomas Eiff Director
___________________________________________
R. Thomas Eiff
/s/ Robert S. Engelman, Jr. Director
___________________________________________
Robert S. Engelman, Jr.
/s/ Arthur L. Knight, Jr. Director
___________________________________________
Arthur L. Knight, Jr.
/s/ Jameson A. Baxter Director
___________________________________________
Jameson A. Baxter
/s/ Sandra P. Guthman Director
___________________________________________
Sandra P. Guthman
/s/ Peter G. Krivkovich Director
___________________________________________
Peter G. Krivkovich
/s/ Hipolito Roldan Director
___________________________________________
Hipolito Roldan
/s/ Robert A. Winslow Director
___________________________________________
Robert A. Winslow
67
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
EXHIBITS PAGES
-------- -----
21 Subsidiares of the Registrant.................................. --
68