===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 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 2,943,566 shares of the Registrant's common
stock as of August 5, 1998.
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AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1998
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets at June 30, 1998,
December 31, 1997 and June 30, 1997 3
Consolidated condensed statements of income for the three and
six months ended June 30, 1998 and 1997 4-5
Consolidated condensed statements of cash flows for the six
months ended June 30, 1998 and 1997 6-7
Notes to consolidated condensed financial statements 8-9
Item 2. Management's discussion and analysis of financial condition
and results of operations 10-15
PART II. OTHER INFORMATION
Calculation of earnings per share 16
Signatures 17
2
PART I -- FINANCIAL INFORMATION
Item 1. -- Financial Statements
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited--June 30) June 30, 1998 December 31, 1997 June 30, 1997
------------- ----------------- -------------
(Dollar amounts in thousands)
ASSETS
------
Cash and due from banks............................................................ $ 7,705 $ 6,630 $ 7,739
Interest-bearing deposits.......................................................... 60,112 60,891 11,179
-------- -------- --------
Total cash and cash equivalents.................................................. 67,817 67,521 18,918
Trading securities--At fair value (amortized cost June 30, 1998--$2,000)........... 2,075 -- --
Securities available-for-sale--At fair value (amortized cost June 30, 1998--$75,175;
Dec. 31, 1997--$46,251 and June 30, 1997--$33,670)................................ 75,252 46,373 33,544
Securities held-to-maturity--At amortized cost (fair value June 30, 1997--$995).... -- -- 1,000
Mortgage-backed securities available-for-sale--At fair value (amortized cost
June 30, 1998--$77,032; Dec. 31, 1997--$80,481 and June 30, 1997--$124,202)....... 76,960 80,621 124,840
Mortgage-backed securities held-to-maturity--At amortized cost (fair value
June 30, 1998--$48,533; Dec. 31, 1997--$53,451 and June 30, 1997--$57,657)........ 48,733 53,719 57,952
Loans held for sale--at cost....................................................... 28,053 52,688 --
Loans.............................................................................. 166,020 193,557 347,925
Less: Allowance for loan losses.................................................... (5,501) (6,303) (18,555)
-------- -------- --------
Loans, net................................................................... 188,572 239,942 329,370
Federal Home Loan Bank stock--at cost.............................................. 8,040 4,540 4,540
Office buildings and equipment, net................................................ 5,032 5,264 4,453
Other real estate owned, net....................................................... 996 1,105 1,516
Accrued interest receivable........................................................ 5,596 6,847 5,368
Interest-only securities and other assets.......................................... 31,428 23,392 17,500
Income taxes receivable............................................................ 3,866 3,866 --
Deferred income tax................................................................ 5,765 5,664 7,290
-------- -------- --------
Total assets..................................................................... $520,132 $538,854 $606,291
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits........................................................................... $362,734 $397,110 $382,119
Advances from Federal Home Loan Bank............................................... 105,803 90,803 90,803
Securities sold under agreements to repurchase..................................... -- -- 61,873
Advance payments by borrowers for taxes and insurance.............................. 564 564 724
Accrued interest payable........................................................... 464 482 1,357
Income taxes payable............................................................... 1,169 -- 2,021
Other liabilities.................................................................. 5,923 3,932 11,996
-------- -------- --------
Total liabilities................................................................ 476,657 492,891 550,893
-------- -------- --------
Stockholders' Equity:
Common stock ($.01 par: 10,000,000 shares authorized, 3,059,566 shares issued and
outstanding, at June 30, 1998, 3,323,566 issued and outstanding at Dec. 31, 1997
and 3,494,545 issued and Outstanding at June 30, 1997)............................ 44 44 44
Capital surplus.................................................................... 43,536 43,536 43,108
Retained earnings.................................................................. 20,521 18,549 25,737
Treasury stock, at cost............................................................ (18,533) (13,988) (11,045)
Accumulated other comprehensive income, net of tax of $2 at June 30, 1998; $102 at
Dec. 31, 1997 and $198 at June 30, 1997............................................ 3 152 304
Common stock acquired by ESOP...................................................... (1,270) (1,270) (1,693)
Unearned portion of restricted stock awards........................................ (826) (1,060) (1,057)
-------- ------- --------
Total stockholders' equity....................................................... 43,475 45,963 55,398
-------- -------- --------
Total liabilities and stockholders' equity....................................... $520,132 $538,854 $606,291
======== ======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
3
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited--June 30)
(In thousands except per share data)
For the Three Months Ended For the Six Months Ended
----------------------------- ------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-------------- ------------- -------------- --------------
Interest income:
Loans $ 5,960 $ 11,003 $ 12,684 $ 20,744
Securities 1,232 580 2,183 1,180
Mortgage-backed securities 1,820 3,084 3,977 6,212
Other 953 216 2,307 431
-------------- ------------- -------------- --------------
Total interest income 9,965 14,883 21,151 28,567
Interest expense:
Deposits 4,497 4,593 9,380 8,706
Advances from the Federal Home Loan Bank 1,541 1,326 3,271 2,637
Securities sold under agreements to repurchase - 1,144 - 2,132
Other borrowings 1 302 1 747
-------------- ------------- -------------- --------------
Total interest expense 6,039 7,365 12,652 14,222
Net interest income 3,926 7,518 8,499 14,345
Provision for loan losses 764 3,545 1,590 18,059
-------------- ------------- -------------- --------------
Net interest income after provision for loan
losses 3,162 3,973 6,909 (3,714)
Non-interest income:
Net gains from trading activities 75 - 75 -
Net security gains - 64 269 75
Securitization income 3,661 4,442 4,212 4,633
Loan fees 836 1,341 1,906 2,364
Fees for other customer services 153 103 278 381
Other operating income 190 153 316 268
-------------- ------------- -------------- --------------
Total non-interest income 4,915 6,103 7,056 7,721
Non-interest expense:
Salaries and employee benefits 2,381 2,938 4,934 5,121
Occupancy and equipment expenses, net 702 602 1,380 1,106
Federal deposit insurance premiums 61 56 125 123
Advertising and public relations 149 124 266 318
Data processing 462 721 1,065 1,489
Real estate owned expense (income), net (44) 42 (85) 47
Legal and professional 558 559 1,013 992
Other operating expenses 1,018 1,511 2,148 3,134
-------------- ------------- -------------- --------------
Total non-interest expense 5,287 6,553 10,846 12,330
Income (loss) before income taxes 2,790 3,523 3,119 (8,323)
Provision (benefit) for income taxes 1,024 1,238 1,147 (3,029)
-------------- ------------- -------------- --------------
Net income (loss) 1,766 2,285 1,972 (5,294)
-------------- ------------- -------------- --------------
4
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - Continued
(In thousands except per share data)
For the Three Months Ended For the Six Months Ended
----------------------------- -----------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Other comprehensive income (loss):
Unrealized gains on securities, net of tax 16 962 19 224
Less: Reclassification adjustments for gains
included in net income, net of tax -- 40 168 47
--------- --------- --------- ---------
Other comprehensive income (loss) 16 1,002 (149) 271
--------- --------- --------- ---------
Comprehensive income (loss) $ 1,782 $ 3,287 $ 1,823 $ (5,023)
--------- --------- --------- ---------
Per common share:
Basic earnings (loss) per common share $ .56 $ .65 $ .61 $ (1.51)
Diluted earnings (loss) per common share $ .55 $ .65 $ .60 $ (1.51)
Weighted average common shares outstanding 3,165,077 3,503,734 3,244,613 3,516,438
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 Six Months
Ended
---------------------
June 30, June 30,
1998 1997
-------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,972 $ (5,294)
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation 800 577
Accretion, net (856) (162)
Provision for loan losses 1,590 18,059
Benefit for deferred income taxes (101) (4,766)
Net gain on trading activities (75) --
Net gain on sales of mortgage-backed securities available-for-sale (269) (75)
Net gains on sales of loans (3,103) (4,122)
Net gains on sales of real estate owned (113) (22)
Net change in:
Interest-only strips and other assets (8,036) (1,115)
Accrued interest receivable 1,251 940
Income taxes payable 1,169 1,569
Accrued interest payable (18) (209)
Other liabilities 1,991 3,331
-------- ---------
Net cash flows provided by (used in) operating activities (3,798) 8,711
-------- ---------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity $ -- $ 5,500
Sales of Federal Home Loan Bank stock -- 250
Purchases of Federal Home Loan Bank stock (3,500) --
Proceeds from maturities of securities available-for-sale 19,393 2,431
Proceeds from sales of mortgage-backed securities available-for-sale 16,918 5,085
Purchases of trading account securities (2,000) --
Purchases of securities available-for-sale (48,433) --
Purchases of mortgage-backed securities available-for-sale (23,810) (67)
Principal collected on mortgage-backed securities held-to-maturity 5,276 3,580
Principal collected on mortgage-backed securities available-for-sale 11,400 7,075
Proceeds from securitization and sale of loans 57,425 79,568
Net increase in loans (5,530) (113,003)
Proceeds from sales of real estate owned 1,210 172
Expenditures for office properties and equipment (568) (1,155)
-------- ---------
Net cash flows provided by (used in) investing activities 27,781 (10,564)
-------- ---------
6
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- Continued
(Unaudited)
For the Six Months Ended
-------------------------------
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits $(34,376) $ 51,465
Net decrease in advance payments by borrowers for taxes and insurance -- (207)
Net decrease in securities sold under agreement to repurchase -- (7,274)
Net decrease in other borrowings -- (32,000)
Proceeds from Federal Home Loan Bank advances 100,000 5,000
Repayment of Federal Home Loan Bank advances (85,000) (5,000)
Proceeds from exercise of stock options -- 90
Amortization of unearned restricted stock 234 172
Purchase of treasury stock (4,545) (549)
-------- --------
Net cash flows provided by (used in) financing activities (23,687) 11,697
-------- --------
Increase in cash and cash equivalents $ 296 $ 9,844
Cash and cash equivalents - beginning of period 67,521 9,074
-------- --------
Cash and cash equivalents - end of period $ 67,817 $ 18,918
======== ========
Supplemental cash flow information:
Interest paid $ 6,057 $ 14,095
Income taxes paid 15 425
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 and six months ended June 30, 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.
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
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 Leverage capital to adjusted total assets
(as defined). Management believes that the Bank meets all capital adequacy
requirements to which it is subject at June 30, 1998.
The Bank's regulatory capital at June 30, 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
------ ----- ------ -----
Leverage capital (to adjusted total assets) $40,656 7.77% $20,922 4.00%
Tier 1 risk-based capital (to risk-weighted assets) 40,656 15.16 10,725 4.00
Total risk-based capital (to risk-weighted assets) 44,034 16.42 21,451 8.00
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 requirements
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.
In June 1998, the FASB adopted Statement of Financial Accounting Standard
No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 1999. SFAS 133 may be implemented as of the beginning of any fiscal quarter
after June 30, 1998 but cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997. The Company has not yet quantified the impacts
of adopting SFAS 133 on its financial statements and has not determined the
timing of or method of its adoption of SFAS 133. However, SFAS 133 could
increase volatility in earnings and other comprehensive income.
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.
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 $1.8 million in the second quarter of 1998
compared with net income of $2.3 million for the quarter ended June 30, 1997.
1998 second quarter net income benefited from a pretax gain on the
securitization of home equity loans of $3.1 million. Net interest income
decreased 48% to $3.9 million in the quarter compared to $7.5 million in the
prior year's second quarter. The decrease was due primarily to lower receivable
balances as a result of 1997 and 1998 home equity loan securitizations and the
sale of substantially all of the Company's private label credit card portfolio
in the second half of 1997. $61.1 million and $170.3 million of home equity line
of credit receivables were securitized and sold during the second quarter of
1998 and during the year ended December 31, 1997, respectively.
Non-interest income decreased $1.2 million to $4.9 million for the quarter
ended June 30, 1998 compared to the second quarter of the previous year. The
decrease was primarily due to lower gains on the securitization of home equity
loans and lower fees on private label credit cards in 1998, partially offset by
increased servicing income from securitized loans.
Non-interest expense decreased from $6.6 million in the second quarter of
1997 to $5.3 million in the 1998 second quarter. The decrease was due to lower
salary and employee benefits expense, reduced data processing expenses, lower
collection costs and lower temporary help expense. These expenses were all lower
due to the sale of substantially all of the private label credit card portfolio
in the second half of 1997.
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 tables present, 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
June 30, 1998 June 30, 1997
----------------------------- ----------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- ------ ------- --------- ------
Assets:
Interest earning assets:
Loans............................ $244,391 $5,960 9.75% $380,876 $11,003 11.56%
Investment securities............ 138,757 2,185 6.30 42,195 796 7.55
Mortgage-backed securities....... 113,191 1,820 6.43 186,985 3,084 6.60
-------- ------ -------- -------
Total interest-earning
assets.................... 496,339 9,965 8.03 610,056 14,883 9.76
Non interest-earning assets....... 51,905 ------ 26,624 -------
-------- --------
Total assets................... $548,244 $636,680
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits........................ $361,864 4,497 4.97 $367,740 4,593 5.00
Advances from Federal Home Loan
Bank........................... 125,446 1,541 4.91 90,803 1,326 5.84
Securities sold under repurchase
Agreements..................... -- -- -- 81,858 1,144 5.59
Other borrowings................ 38 1 10.53 21,808 302 5.54
-------- ------ -------- -------
Total interest-bearing
liabilities................... 487,348 6,039 4.96 562,209 7,365 5.24
------ -------
Non-interest bearing deposits..... 10,448 5,732
Other liabilities................. 5,920 13,860
-------- --------
Total liabilities.............. 503,716 581,801
Stockholders' equity.............. 44,528 54,879
-------- --------
Total liabilities and
stockholders' Equity.......... $548,244 $636,680
======== ========
Net interest income/Interest rate
spread........................... $3,926 3.07% $ 7,518 4.52%
====== ===== ======= =====
Net interest-earning assets/net
interest margin.................. $ 8,991 3.16% $ 47,847 4.93%
======== ===== ======== =====
Ratio of interest-earning assets
to interest
bearing liabilities.............. 101.84% 108.51%
====== ======
The Company's net interest income totaled $3.9 million for the quarter,
compared to $7.5 million for the year-ago quarter, a decrease of 48%. Average
loan balances were $244.4 million with an average yield of 9.75% for the 1998
quarter, compared to average loan balances of $380.9 million and an average
yield of 11.56% for the year-ago quarter. Investment and mortgage-backed
securities average balances increased $22.8 million for the 1998 second quarter
compared to the 1997 second quarter, with an average yield of 6.36% and 6.77% in
the 1998 and 1997 second quarters, respectively. Average earning assets were
$496.3 million for the quarter ended June 30, 1998 compared to $610.1 million
for the prior year's quarter. The 1998 yield is lower due primarily to a shift
in the mix of average owned assets in 1998 resulting from the securitization of
higher-yielding home equity loans and the sale of substantially all of the
Company's private label credit card portfolio. At June 30, 1998 and 1997, the
Company's consumer loan portfolio totaled $194.1 million and $347.9 million,
respectively. The decrease in the owned portfolio is primarily the result of the
1998 and 1997 securitizations and the sale of substantially all of the private
label credit card portfolio in 1997. Securitized loans serviced for others were
$242.6 million and $151.0 million at June 30, 1998 and 1997, respectively.
Average interest-bearing deposits in the 1998 second quarter were $361.9
million with an average cost of 4.97%, compared to $367.7 million and an average
cost of 5.00% for the year-ago quarter. The decrease in the cost of funds
reflects the change in the deposit mix, with certificates of deposit decreasing
to 60.3% of total deposits, compared to 63.5% in the year-ago quarter. Average
interest-bearing liabilities were $487.3 million
11
during the 1998 second quarter compared to $562.2 million for the year-ago
period. The net interest margin for the quarter was 3.16%, compared to 4.93% for
the second quarter of 1997.
TABLE 1--AVERAGE BALANCES, INTEREST RATES AND YIELDS - Continued
(Dollars in thousands)
For the Six Months Ended For the Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Average Period Yield/ Average Period Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Assets:
Interest earning assets:
Loans................. $247,259 $12,684 10.26% $367,748 $20,744 11.28%
Investment securities. 143,850 4,490 6.24 40,375 1,612 7.99
Mortgage-backed
securities........... 122,422 3,977 6.50 190,988 6,211 6.50
-------- ------- -------- -------
Total interest-
earning assets...... 513,531 21,151 8.24 599,111 28,567 9.54
Non interest-earning ------ ------
assets................ 50,025 27,620
-------- --------
Total assets........ $563,556 $626,731
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits............. $374,943 9,380 5.00 $355,128 8,706 4.90
Advances from Federal
Home Loan Bank...... 128,607 3,271 5.09 90,306 2,637 5.84
Securities sold
under repurchase
Agreements.......... -- -- -- 76,587 2,132 5.57
Other borrowings..... 19 1 10.53 27,497 747 5.43
-------- ------- -------- -------
Total interest-bearing
liabilities........ 503,569 12,652 5.02 549,518 14,222 5.18
------- -------
Non-interest bearing
deposits.............. 8,992 5,984
Other liabilities...... 5,500 12,748
-------- --------
Total liabilities... 518,061 568,250
Stockholders' equity... 45,495 58,481
-------- --------
Total liabilities
and stockholders'
Equity............. $563,556 $626,731
======== ========
Net interest income/
Interest rate spread.. $ 8,499 3.21% $14,345 4.36%
======= ===== ======= =====
Net interest-earning
assets/net interest
margin................ $ 9,962 3.31% $49,594 4.79%
======== ===== ======= =====
Ratio of interest-
earning assets to
interest bearing
liabilities........... 101.98% 109.02%
====== ======
For the first half of 1998, net interest income decreased 41% to $8.5
million. Average loan balances were $247.3 million with an average yield of
10.26% for the first half of 1998 compared to $367.7 million with an average
yield of 11.28% for the year-ago period. Average earning assets were $513.5
million compared to $599.1 million for the same period of 1997. The 1998 yield
is lower due primarily to a shift in the mix of average owned assets in 1998
resulting from the securitization of higher-yielding home equity loans and the
sale of substantially all of the Company's private label credit card portfolio.
The net interest margin for the first half of 1998 was 3.31% compared to 4.79%
for the first six months of 1997.
12
TABLE 2--RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
The following table presents the extent to which changes in interest rates
and changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (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 June 30, 1998 Six Months Ended June 30, 1998
vs Three Months Ended June 30, 1997 vs Six Months Ended June 30, 1997
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income:
Loans receivable $(3,328) $(1,715) $(5,043) $(6,181) $(1,879) $(8,060)
Investment securities 1,521 (132) 1,389 3,229 (351) 2,878
Mortgage-backed securities (1,186) (78) (1,264) (2,227) (7) (2,234)
------- ------- ------- ------ ------- -------
Total interest income (2,993) (1,925) (4,918) (5,179) (2,237) (7,416)
------- ------- ------- ------- ------- -------
Interest expense:
Deposits (73) (23) (96) 496 178 674
Advances from the Federal Home
Loan Bank 426 (211) 215 974 (340) 634
Securities sold under agreements
to repurchase (1,144) -- (1,144) (2,132) -- (2,132)
Other borrowed money (301) -- (301) (746) -- (746)
------- ------- ------ ------- ------- ------
Total interest expense (1,092) (234) (1,326) (1,408) (162) (1,570)
------- ------- ------- ------- ------- -------
Net interest income $(1,901) $(1,691) $(3,592) $(3,771) $(2,075) $(5,846)
======= ======= ======= ======= ======= =======
Provision for loan loss
A reconciliation of the activity in the Company's allowance for loan losses
follows (dollars in thousands):
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 5,834 $ 20,501 $ 6,303 $ 7,208
Provision for loan losses 764 3,545 1,590 18,059
Charge-offs (1,192) (5,523) (2,574) (6,795)
Recoveries 95 32 182 83
-------- -------- -------- --------
Balance at June 30 $ 5,501 $ 18,555 $ 5,501 $ 18,555
======== ======== ======== ========
Loans at June 30 $194,073 $347,925 $194,073 $347,925
Ratio of allowance to total loans 2.84% 5.33% 2.84% 5.33%
13
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 $3.5 million in the second quarter of
1997 to $764 thousand in the most recent quarter primarily due to the sale of
substantially all of the private label credit card portfolio in the second half
of 1997 and lower receivable levels due to securitizations. The provision for
loan losses decreased from $18.1 million in the first six months of 1997 to $1.6
million in the first half of 1998 primarily due to a special loss provision of
$13.0 million in 1997 related to the private label credit card portfolio and
lower receivable balances. The allowance for loan losses was $5.5 million as of
June 30, 1998 compared with $6.3 million as of December 31, 1997 and $18.6
million as of June 30, 1997. The allowance for loan losses as a percentage of
non-performing loans outstanding was 100.1% at June 30, 1998 and 101.7% and
104.4% as of December 31, 1997 and June 30, 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 in "other assets".
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 June 30, 1998 At Dec. 31, 1997 At June 30, 1997
---------------- ---------------- ----------------
Non-accruing loans:
Equity lines of credit $ 4,670 $ 5,159 $ 3,229
One to four family loans 184 207 783
Multi-family 113 47 251
Consumer loans 531 782 13,511
Total non-performing loans $ 5,498 $ 6,195 $ 17,774
=========== =========== ===========
Total non-performing loans to total loans 2.83% 2.50% 5.11%
Real estate owned $ 996 $ 1,105 $ 1,516
Total non-performing assets to total assets 1.25% 1.35% 3.18%
Non-performing loans at June 30, 1998 were $5.5 million, compared to $6.2
million at December 31, 1997 and $17.8 million at June 30, 1997. Non-performing
loans were 2.83% of total loans at June 30, 1998 compared to 2.50% of total
loans at December 31, 1997 and 5.11% at June 30, 1997.
Non-interest income
Non-interest income decreased $1.2 million to $4.9 million for the second
quarter of 1998 compared to the same period of 1997. The decrease in the second
quarter of 1998 compared to 1997 was mainly the result of lower gains on the
securitization of home equity receivables due to securitizing lower levels of
receivables and lower fees on loans, partially offset by higher servicing income
on securitized loans. Securitization servicing income increased from 1997 to
1998 due to the increase in the level of securitized loans serviced for others.
For the first six months of 1998 non-interest income was $7.1 million, a
decrease of $.6 million from the first half of 1997. The decrease was due
primarily to lower securitization and sale gains and lower loan fees, partially
mitigated by increased servicing income.
14
Non-interest expense
Non-interest expense decreased $1.3 million to $5.3 million for the second
quarter of 1998 compared to $6.6 million for the same period of 1997 due
primarily to lower employee, data processing, collection and loan-related costs
which were mainly attributable to the private label credit card portfolio.
Occupancy and certain other expenses increased $.3 million 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 and second mortgage origination platform.
Data processing expenses in the quarter decreased $.3 million compared to the
second quarter of 1997 due to reduced third party service bureau charges that
related to the private label portfolio. Collection expenses also decreased from
1997 to 1998. The net effect of the above variances was to decrease non-
interest expense $1.3 million in the second quarter of 1998 from the second
quarter of 1997.
For the first six months of 1998 non-interest expense was $10.8 million, a
decrease of $1.5 million from the first half of 1997. The decrease was due
primarily to the absence of costs incurred in 1997 related to the private label
credit card portfolio.
Income Taxes
The Company's income tax expense was $1.0 million for the three months
ended June 30, 1998 and $1.1 million for the six months ended June 30, 1998. The
Company's income tax expense was $1.2 million for the three months ended June
30, 1997 and the Company had an income tax benefit of $3.0 million for the six
months ended June 30, 1997. The Company's effective tax rate was 36.7% for the
three months ended June 30, 1998 and 35.1% for the three months ended June 30,
1997 and was 36.8% for the six months ended June 30, 1998 and 36.4% for the six
months ended June 30, 1997.
Balance sheet review
Total assets were $520.1 million at June 30, 1998, compared to $606.3
million at June 30, 1997 and $538.9 million at December 31, 1997. The decrease
from December 31, 1997 was primarily due to lower loan receivables resulting
from the second quarter securitization. The decrease from June 30, 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 $34.4 million to
$362.7 million while total liabilities decreased $16.2 million to $476.7 million
at June 30, 1998 from December 31, 1997. Deposits decreased $19.4 million from
June 30, 1997 to June 30, 1998 while securities sold under agreements to
repurchase decreased $61.9 million and total liabilities decreased $74.2 million
during the same period. Advances from the Federal Home Loan Bank (FHLB)
increased $15.0 million to $105.8 million at June 30, 1998 from $90.8 million at
both December 31 and June 30, 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 7.87% and the risk-based capital ratio of
16.61% at June 30, 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 leverage and risk-based capital ratios were
7.35% and 16.89%, respectively, at December 31, 1997.
As of June 30, 1998, Avondale's book value per share was $14.21 compared to
$13.83 at December 31, 1997 and $15.85 at June 30, 1997. The Company
implemented a stock repurchase program during the second quarter of 1998 whereby
the Company may, from time to time, repurchase up to 10% of its outstanding
stock. As of June 30, 1998, the Company has repurchased approximately 265,000
shares under this program.
15
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 For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1998
------------- -------------
Basic earnings per share:
-------------------------
Net income $1,766 $1,972
Average common shares outstanding 3,165 3,244
Average basic shares outstanding 3,165 3,244
Basic earnings per share $ .56 $ .61
====== ======
Diluted earnings per share:
---------------------------
Net income $1,766 $1,972
Average common shares outstanding 3,165 3,244
Common stock equivalents 39 30
------ ------
Average diluted shares outstanding 3,204 3,274
Diluted earnings per share $ .55 $ .60
====== ======
16
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 3rd day of August 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)
17