================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1998
Commission file number 0-24566
AVONDALE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
36-3895923
(I.R.S. Employer Identification No.)
20 North Clark Street, Chicago, Illinois 60602
(Address of principal executive offices)
Registrant's telephone number, including area code: (312) 782-6200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES: XXX NO:
--- ---
There were issued and outstanding 3,175,066 shares of the Registrant's
common stock as of May 8, 1998.
================================================================================
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1998
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets at March 31, 1998, December 31, 1997 and
March 31, 1997 3
Consolidated condensed statements of income for the three months ended March 31, 1998
and 1997 4 - 5
Consolidated condensed statements of cash flows for the three months ended March 31, 1998
and 1997 6 - 7
Notes to consolidated condensed financial statements 8 - 9
Item 2. Managements discussion and analysis of financial condition and results of operations 10 - 14
PART II. OTHER INFORMATION
Calculation of earnings per share 15
Signatures 16
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited--March 31)
At At At
March 31, December 31, March 31,
1998 1998 1997
-------------- ----------- ------------
(In thousands except per share data)
ASSETS
------
Cash and due from banks.............................................. $ 10,654 $ 6,630 $ 11,917
Interest-bearing deposits............................................ 94,533 60,891 997
--------- ---------- --------
Total cash and cash equivalents................................. 105,187 67,521 12,914
Securities available-for-sale--At fair value (amortized cost
Mar. 31, 1998--$70,382; Dec. 31, 1997--$46,251 and Mar. 31,
1997--$35,822)...................................................... 70,438 46,373 35,270
Securities held-to-maturity--At amortized cost (fair value Mar. 31,
1997--$969)......................................................... -- -- 1,000
Mortgage-backed securities available-for-sale--At fair value
(amortized cost Mar. 31, 1998--$75,979; Dec. 31, 1997--$80,481
and Mar. 31, 1997--$131,487)........................................ 75,915 80,621 130,909
Mortgage-backed securities held-to-maturity--At amortized cost (fair
value Mar. 31, 1998--$51,291; Dec. 31, 1997--$53,451
and Mar. 31, 1997--$59,056)........................................ 51,536 53,719 59,631
Loans held for sale--At cost......................................... 73,387 52,688 --
Loans................................................................ 179,236 193,557 383,117
Less: Allowance for loan losses...................................... (5,834) (6,303) (20,501)
--------- ---------- --------
Loans, net...................................................... 246,789 239,942 362,616
Federal Home Loan Bank stock--at cost............................... 8,040 4,540 4,790
Office buildings and equipment, net.................................. 5,117 5,264 3,599
Other real estate owned, net......................................... 852 1,105 270
Accrued interest receivable.......................................... 9,693 9,451 6,573
Interest-only securities and other assets............................ 23,454 23,392 9,588
Income taxes receivable.............................................. 3,866 3,866 --
Deferred income tax.................................................. 5,771 5,664 7,931
---------- ---------- --------
Total assets.................................................... $606,658 $ 541,458 $635,447
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits............................................................. $ 390,432 $ 397,110 $360,676
Advances from the Federal Home Loan Bank............................. 160,803 90,803 90,803
Securities sold under agreements to repurchase....................... -- -- 85,900
Other borrowings..................................................... -- -- 33,000
Advance payments by borrowers for
taxes and insurance.............................................. 405 564 443
Accrued interest payable............................................. 3,285 3,086 2,184
Income taxes payable................................................. 98 -- 783
Other liabilities.................................................... 5,515 3,932 9,199
---------- ---------- --------
Total liabilities............................................... 560,538 495,495 582,988
---------- ---------- --------
Stockholders Equity:
Common stock ($.01 par: 10,000,000 shares authorized, 3,323,566
shares issued an outstanding, at Mar. 31, 1998 and Dec. 31, 1997
and 3,525,325 issued and outstanding at Mar. 31, 1997).............. 44 44 44
Capital surplus...................................................... 43,536 43,536 43,108
Retained earnings.................................................... 18,754 18,549 23,452
Treasury stock, at cost.............................................. (13,988) (13,988) (10,611)
Accumulated other comprehensive income............................... (13) 152 (698)
(loss), net of tax of ($3) at March 31, 1998;
$102 at Dec. 31, 1997 and ($442) at Mar. 31, 1997
Common stock acquired by ESOP........................................ (1,270) (1,270) (1,693)
Unearned portion of restricted stock awards.......................... (943) (1,060) (1,143)
---------- ---------- --------
Total stockholders' equity...................................... 46,120 45,963 52,459
---------- ---------- --------
Total liabilities and stockholders' equity..................... $ 606,658 $ 541,458 $635,477
========== ========== ========
The accompanying notes are an integral part
of these Consolidated Condensed Financial Statements.
3
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
--------------------------
Mar. 31, 1998 Mar. 31, 1997
------------- -------------
(In thousands except per share data)
Interest income:
Loans $ 6,723 $ 9,741
Securities 951 600
Mortgage-backed securities 2,158 3,128
Other 1,354 215
---------- ----------
Total interest income 11,186 13,684
Interest expense:
Deposits 4,882 4,113
Advances from the Federal Home Loan Bank 1,731 1,311
Securities sold under agreements to repurchase -- 988
Other borrowings -- 445
---------- ----------
Total interest expense 6,613 6,857
Net interest income 4,573 6,827
Provision for loan losses 826 14,514
---------- ----------
Net interest income after provision for loan losses 3,747 (7,687)
Non-interest income:
Net security gains 269 11
Securitization income 551 190
Loan fees 1,071 1,024
Fees for other customer services 125 277
Other operating income 125 114
---------- ----------
Total non-interest income 2,141 1,616
Non-interest expense:
Salaries and employee benefits 2,553 2,182
Occupancy and equipment expenses, net 678 504
Federal deposit insurance premiums 63 67
Advertising and public relations 116 194
Data processing 603 768
Real estate owned expense (income), net (41) 5
Legal and professional 457 203
Other operating expenses 1,129 1,853
---------- ----------
Total non-interest expense 5,558 5,776
Income (loss) before income taxes 330 (11,847)
Provision (benefit) for income taxes 124 (4,268)
---------- ----------
Net income (loss) 206 (7,579)
---------- ----------
4
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME - Continued
(Unaudited)
For the Three Months Ended
--------------------------
Mar. 31, 1998 Mar. 31, 1997
------------- -------------
(In thousands except per share data)
Other comprehensive loss:
Unrealized losses on securities, net of tax of ($199) at
March 31, 1998 and ($443) at March 31, 1997 (333) (738)
Less: Reclassification adjustments for gains included
in net income, net of tax of $101 at March 31, 1998
and $4 at March 31, 1997 168 7
---------- ----------
Other comprehensive loss (165) (731)
---------- ----------
Comprehensive income (loss) $ 41 $ (8,310)
========== ==========
Per common share:
Basic earnings (loss) per common share $ .06 $ (2.15)
Diluted earnings (loss) per common share $ .06 $ (2.15)
Weighted average common shares outstanding 3,323,566 3,529,418
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
5
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
------------------------------
Mar. 31, 1998 Mar. 31, 1997
------------- -------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 206 $ (7,579)
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation 388 277
Accretion, net (73) (68)
Provision for loan losses 826 14,514
Provision for deferred income taxes -- (4,766)
Net gain on sales of securities available-for-sale (269) (11)
Net gains on sales of real estate owned (61) --
Net change in:
Interest-only strips and other assets 208 822
Accrued interest receivable (243) 323
Income taxes payable 98 331
Accrued interest payable 199 (28)
Other liabilities 1,581 534
------------- ------------
Net cash flows provided by (used in) operating activities 2,860 $ 4,349
------------- ------------
Cash flows from investing activities:
Proceeds from maturities of investment securities
held-to-maturity $ -- $ 5,500
Purchases of Federal Home Loan Bank stock (3,500) --
Proceeds from sales of securities available-for-sale 12,191 --
Proceeds from sales of mortgage-backed securities available-
for-sale -- 1,830
Purchases of securities available-for-sale (38,245) --
Purchases of mortgage-backed securities available-
for-sale -- (67)
Principal collected on mortgage-backed securities
held-to-maturity 2,230 1,859
Principal collected on mortgage-backed securities available-
for-sale 4,494 2,983
Principal collected on securities available-for-sale 1,957 226
Net increase in loans (7,981) (59,830)
Proceeds from sales of real estate owned 621 --
Expenditures for office properties and equipment (241) (357)
------------- ------------
Net cash flows used in investing activities (28,474) (47,856)
------------- ------------
6
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- Continued
(Unaudited)
For the Three Months Ended
------------------------------
Mar. 31, 1998 Mar. 31, 1997
------------- -------------
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits $ (6,678) $ 30,021
Net decrease in advance payments by borrowers for taxes and
Insurance (159) (488)
Net increase in securities sold under agreement to repurchase -- 16,753
Net increase in other borrowings -- 1,000
Proceeds from Federal Home Loan Bank advances 100,000 5,000
Repayment of Federal Home Loan Bank advances (30,000) (5,000)
Proceeds from exercise of stock options -- 90
Amortization of unearned restricted stock 117 86
Purchase of treasury stock -- (115)
----------- -----------
Net cash flows provided by financing activities 63,280 47,347
----------- -----------
Increase in cash and cash equivalents $ 37,666 $ 3,840
Cash and cash equivalents -- beginning of period 67,521 9,074
----------- -----------
Cash and cash equivalents -- end of period $ 105,187 $ 12,914
----------- -----------
Supplemental cash flow information:
Interest paid $ 6,414 $ 5,804
Income taxes paid -- 425
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
7
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements include the
accounts of Avondale Financial Corp. and its subsidiaries (the "Company"). In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods have been made. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and industry practice. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles and
industry practice has been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission. The Company believes the
disclosures made in the condensed consolidated financial statements are adequate
so that the financial statements are not misleading. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's December 31, 1997 Annual Report.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of income and expenses during the
reported periods. Actual results could differ from those estimates.
2. REGULATORY CAPITAL
The Company's subsidiary, Avondale Federal Savings Bank (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 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 March 31, 1998.
The Bank's regulatory capital at March 31, 1998 is presented below. There
were no deductions from capital for interest rate risk.
For Capital
(Dollar amounts in thousands) Actual Adequacy Purposes
------------------- --------------------
Amount Ratio Amount Ratio
-------- --------- ---------- --------
Total capital (to risk-weighted assets) $48,477 15.49% $24,717 8.00%
Tier 1 capital (to risk-weighted assets) 44,542 7.02 25,363 4.00
Tier 1 capital (to average assets) 44,542 7.65 23,290 4.00
8
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- Continued
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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. This Statement is effective for fiscal years
beginning after December 15, 1997. Companies are also required to report
comparative totals for comprehensive income in interim reports. The provisions
of this Statement, which are of a disclosure nature, are included in the
accompanying consolidated condensed statements of income.
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 present the required disclosures pursuant
to this statement beginning with the full year financial statements for the year
ended December 31, 1998.
There are no regulatory issues outstanding.
9
Item 2. 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 condensed consolidated financial statements and notes thereto appearing
elsewhere in this report. The Company became the holding company for Avondale
Federal Savings Bank (the "Bank") as of April 3, 1995.
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 non-interest income and expense. Non-interest income had historically
consisted primarily of service charges and other fees. Beginning in 1996 the
Company began securitizing and selling loans, thereby increasing non-interest
income as a result of gains on sales and servicing fees for the securitized
loans. Securitizations have the effect of shifting interest income that would
have been recognized to the securitization income line of the income statement.
The Company also realized gains on sales of securities as the Company continues
to manage its securities portfolio. Non-interest 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 market
interest rates. Lending activities are influenced by the demand for real estate
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.
Results of Operations and Year 2000 Compliance
The Company had net income of $206 thousand in the first quarter of 1998
compared with a loss of $7.6 million for the quarter ended March 31, 1997. The
Company recorded a special $13 million pretax loan loss provision related to its
private label credit card portfolio in the year-ago quarter. 1998 first quarter
net income benefited from a pretax gain on the sale of mortgage-backed
securities of $269 thousand. Net interest income decreased 33% to $4.6 million
in the quarter compared to $6.8 million in the prior year's first quarter due
primarily to lower levels of receivables resulting from securitization activity
and the sale of substantially all of the Company's private label credit card
portfolio. During 1997, $170.3 million of home equity line of credit receivables
were securitized.
Non-interest income increased $524 thousand to $2.1 million for the quarter
ended March 31, 1998 compared to the previous year, primarily due to the gain on
sale of mortgage-backed securities mentioned above and an increase in
securitization income of $361 thousand. Offsetting the increases in security
gains and securitization income, other customer fees decreased from $277
thousand in 1997 to $125 thousand in the first quarter of 1998.
Non-interest expense decreased slightly from $5.8 million in the first
quarter of 1997 to $5.6 million in the 1998 first quarter. Higher personnel and
occupancy cost due to continued investment in the Company's home equity line of
credit business as well as the building of a first mortgage origination platform
were offset by lower private label credit card personnel, collection and
handling costs. 1998 non-interest expense was reduced by an adjustment to
previously established restructuring reserves. The Company reassessed its
remaining restructuring reserves and adjusted them in light of current and
anticipated circumstances relating to leases on certain facilities. As a result,
the Company's restructuring reserve and other operating expenses were reduced.
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 Company has
developed a plan for itself and its third party service providers to ensure year
2000 compliance. The financial impact to the Company of such compliance is not
anticipated by management to be material to the financial position, results of
operations or cash flow of the Company.
10
Net Interest Margin
TABLE 1--AVERAGE BALANCES, INTEREST RATES AND YIELDS
(Dollars in thousands)
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
and the resultant costs, expressed both in dollars and rates. No tax equivalent
adjustments were made. To the extent received, interest on non-accruing loans
has been included in the table.
For the Three Months Ended For the Three Months Ended
March 31, 1998 March 31, 1997
--------------------------- ---------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
---------- ----------- -------- --------- --------- --------
Assets:
Interest earning assets:
Loans............................... $250,157 $ 6,723 10.75% $354,184 $ 9,741 11.00%
Investment securities............... 148,878 2,305 6.19 43,347 816 7.53
Mortgage-backed securities.......... 131,764 2,158 6.55 195,031 3,127 6.41
-------- -------- -------- -------
Total interest-earning assets..... 530,799 11,186 8.43 592,562 13,684 9.24
-------- -------- -------
Non interest-earning assets.............. 51,002 23,913
-------- --------
Total assets.................. $581,801 $616,475
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits....................... $388,093 4,882 5.03 $324,468 4,113 4.80
Advances from Federal Home
Loan Bank..................... 131,817 1,731 5.25 89,836 1,311 5.84
Securities sold under
repurchase Agreements......... -- -- -- 71,028 988 5.56
Other borrowings............... -- -- -- 33,145 445 5.37
-------- -------- -------- -------
Total interest-bearing
liabilities.................. 519,910 6,613 5.09 536,477 6,857 5.11
-------- -------
Non-interest bearing deposits............ 7,610 6,237
Other liabilities........................ 7,812 11,638
-------- --------
Total liabilities............. 535,332 554,352
Stockholders' equity..................... 46,469 62,123
-------- --------
Total liabilities and
stockholders' Equity.......... $581,801 $616,475
======== ========
Net interest income/Interest rate spread. $ 4,573 3.34% $ 6,827 4.12%
======== ====== ======= =====
Net interest-earning assets/net interest
margin.................................. $ 10,889 3.45% $ 56,085 4.61%
======== ====== ======== =====
Ratio of interest-earning assets to
interest bearing liabilities............ 102.09% 110.45%
======= =======
The Company's net interest income totaled $4.6 million for the quarter,
compared to $6.8 million for the year-ago quarter, a decrease of 33%. Average
loan balances were $250.2 million with an average yield of 10.75% for the 1998
quarter, compared to average loan balances of $354.2 million and an average
yield of 11.00% for the year-ago quarter. Investment and mortgage-backed
securities average balances increased $42.3 million for the 1998 first quarter
compared to the 1997 first quarter, with an average yield of 6.36% and 6.62% in
the 1998 and 1997 first quarters, respectively. Average earning assets were
$530.8 million for the quarter ended March 31, 1998 compared to $592.6 million
for the prior year's quarter. At March 31, 1998 and 1997, the Company's consumer
loan portfolio totaled $252.6 million and $383.1 million, respectively. The
decrease in the owned portfolio is primarily the result of the 1997
securitizations and the sale of substantially all of the Company's private label
credit card portfolio. Securitized loans serviced for others were $209.1 million
and $73.7 million at March 31, 1998 and 1997, respectively.
1998 first quarter average deposits were $388.1 million with an average
cost of 5.03%, compared to $342.5 million and an average cost of 4.80% for the
year-ago quarter. The increase in the cost of funds reflects the change in the
deposit mix, with certificates of deposit increasing to 63.6% of total deposits,
compared to 61.3% in the year-ago quarter. Average interest-bearing liabilities
were $519.9 million during the 1998 first quarter compared to $536.5 million for
the year-ago period. The net interest margin for the quarter was 3.45%, compared
to 4.61% for the first quarter of 1997.
11
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 and (iii) the total changes. The changes
attributable to the combined impact of volume and rate have been allocated to
the changes due to volume.
Three Months Ended March 31, 1998
vs Three Months Ended March 31, 1997
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Total
----------- ------- --------
Interest income:
Loans receivable $ (2,796) $ (222) $ (3,018)
Investment securities 1,634 (144) 1,490
Mortgage-backed securities (1,036) 66 (970)
------------ -------- ----------
Total interest income 2,198 (300) (2,498)
------------ -------- ----------
Interest expense:
Deposits 574 195 769
Advances from the Federal Home Loan Bank 551 (131) 420
Securities sold under agreements to repurchase (445) -- (445)
Other borrowed money (988) -- (988)
------------ -------- ----------
Total interest expense (308) 64 (244)
------------ -------- ----------
Net interest income $ (1,890) $ (364) $ (2,254)
============ ======== ==========
Provision for loan loss
A reconciliation of the activity in the Company's allowance for loan losses
follows (dollars in thousands):
Three Months Ended March 31
-----------------------------
1998 1997
-------------- -------------
Balance at January 1 $ 6,303 $ 7,208
Provision for loan losses 826 14,514
Charge-offs (1,382) (1,272)
Recoveries 87 51
------------- ------------
Balance at March 31 $ 5,834 $ 20,501
============= ============
Loans at March 31 $ 252,623 $ 383,117
============= ============
Ratio of allowance to total loans 2.31% 5.35%
==== ====
12
The Company maintains its allowance for loan losses at a level that is
considered by management to be adequate to absorb probable losses on existing
loans, based upon an evaluation of collectibility and prior loss experience.
The provision for loan losses decreased from $14.5 million in the first quarter
of 1997, to $826 thousand in the most recent quarter. The decrease was
primarily due to the combined effects of a special loss provision of $13.0
million in 1997 related to the private label credit card portfolio and lower
levels of owned home equity line of credit receivables due to increased
securitization activity. The allowance for loan losses was $5.8 million as of
March 31, 1998 compared with $6.3 million as of December 31, 1997 and $20.5
million as of March 31, 1997. The allowance for loan losses as a percentage of
non-performing loans outstanding was 95.8% at March 31, 1998 and 101.7% and
200.0% as of December 31, 1997 and March 31, 1997, respectively. In addition to
the loss reserves for owned loans, the Company maintains over-the-life loan loss
reserves associated with securitized loans. These reserves are included as a
reduction of interest-only securities and totaled approximately $6.0 million at
March 31, 1998 and $6.9 million and $1.9 million at December 31, 1997 and March
31, 1997, respectively.
Collectibility is assessed by using credit scoring models to project
delinquency and charge-offs levels. On a monthly basis, the Company analyzes its
home equity loan portfolio along with delinquency expectations and adjusts the
level of loan loss provision, loan approval parameters and product pricing.
Asset Quality
The following table presents a summary of non-performing assets as of the
dates indicated (in thousands):
At At
Mar. 31, 1998 Dec. 31, 1997
------------- -------------
Non-accruing loans:
Equity lines of credit $5,195 $5,159
One to four family loans 241 207
Multi-family -- 47
Consumer loans 651 782
------ ------
Total non-performing loans $6,087 $6,195
====== ======
Total non-performing loans to total loans 2.41% 2.50%
Real estate owned $ 852 $1,105
Total non-performing assets to total assets 1.14% 1.35%
Non-performing loans at March 31, 1998 were $6.1 million, compared to $6.2
million at December 31, 1997 and $10.3 million at March 31, 1997. The decrease
from the prior year and quarter is due primarily to the sale of substantially
all of the Company's private label credit card portfolio in 1997. Non-performing
loans were 2.41% of total loans at March 31, 1998 compared to 2.50% of total
loans at December 31, 1997 and 2.68% at March 31, 1997.
13
Non-interest income
Non-interest income increased $524 thousand to $2.1 million for the first
quarter of 1998 compared to the same period of 1997. The increase in the first
quarter of 1998 compared to 1997 was mainly the result of higher securitization
income ($361 thousand) and higher gains on sales of securities ($258 thousand),
somewhat offset by lower private label credit card and other customer fees ($152
thousand). Securitization income increased from 1997 to 1998 due to the
increase in the level of securitized loans serviced for others.
Non-interest expense
Non-interest expense decreased $218 thousand to $5.6 million for the first
quarter of 1998 compared to $5.8 million for the same period of 1997 due
primarily to lower loan-related costs which were mainly attributable to the
private label credit card portfolio. Personnel and occupancy expense increased
$543 thousand as a result of the Company's continuing investment in its home
equity line of credit product and the creation of a credit scored first mortgage
origination platform. Data processing expenses in the quarter decreased $166
thousand compared to the first quarter of 1997 due to reduced third party
service bureau charges that related to the private label portfolio. Collection
expenses also increased from 1997 to 1998 while temporary help, telephone and
postage and supplies expense decreased.
Income Taxes
The Company's income tax expense was $124 thousand for the three months
ended March 31, 1998 compared to an income tax benefit of $4.3 million for the
year-ago quarter. The Company's effective tax rate was 37.6% for the three
months ended March 31, 1998 and 36.0% for the three months ended March 31, 1997.
Balance sheet review
Total assets were $606.7 million at March 31, 1998, compared to $635.5
million at March 31, 1997 and $541.5 million at December 31, 1997. The increase
from December 31, 1997 was primarily due to higher levels of short-term
investments and government agency securities, as well as increased loan
receivables. The decrease from March 31, 1997 was primarily due to the sale of
the private label credit card portfolio, the securitization of home equity loans
and reduced mortgage-backed securities; somewhat offset by increased short-term
investments and government agency securities. Additionally, deposits decreased
by approximately $6.7 million to $390.4 million while total liabilities
increased $65.0 million to $560.5 million at March 31, 1998 from December 31,
1997. Deposits increased $29.8 million from March 31, 1997 to March 31, 1998
while other borrowings decreased $33.0 million and total liabilities decreased
$22.5 million during the same period. Advances from the Federal Home Loan Bank
(FHLB) increased $70.0 million to $160.8 million at March 31, 1998 from $90.8
million at both December 31, 1997 and March 31, 1997. The use of various funding
types including securitizations, deposits, FHLB advances, Federal Funds and
reverse repurchase agreements reflects the Company's attempt to obtain the most
efficient funding source based on current circumstances.
The leverage capital ratio of 7.34% and the risk-based capital ratio of
15.49% at March 31, 1998 exceed the "well-capitalized" leverage and risk-based
capital ratios established by the Office of Thrift Supervision of 5.0% and
10.0%, respectively. The Company's core and risk-based capital ratios were 7.35%
and 16.89%, respectively, at December 31, 1997.
As of March 31, 1998, Avondale's book value per share was $13.88 compared
to $13.83 at December 31, 1997 and $14.88 at March 31, 1997.
14
PART II - OTHER INFORMATION
The calculation of the Registrant's basic and diluted earnings per share
required by 601(b)(11) of Regulation S-K is presented below (dollars in
thousands, except per share data):
For the three months ended March 31, 1998:
------------------------------------------
Basic earnings per share:
-------------------------
Net income $ 206
Average common shares outstanding 3,324
Common stock equivalents --
------
Average basic shares outstanding 3,324
Basic earnings per share $ .06
======
Diluted earnings per share:
---------------------------
Net income $ 206
Average common shares outstanding 3,324
Common stock equivalents 21
------
Average diluted shares outstanding 3,345
Diluted earnings per share $ .06
======
15
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on this 8th day of May 1998.
AVONDALE FINANCIAL CORP.
(Registrant)
By: /s/ Robert S. Engelman, Jr.
----------------------------
Robert S. Engelman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Howard A. Jaffe
--------------------
Howard A. Jaffe,
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
16