- --------------------------------------------------------------------------------
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 ended September 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
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 2,902,566 shares of the Registrant's
common stock as of November 4, 1998.
- --------------------------------------------------------------------------------
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated condensed balance sheets at September 30, 1998,
December 31, 1997 and September 30, 1997 3
Consolidated condensed statements of income for the three and
nine months ended September 30, 1998 and 1997 4-5
Consolidated condensed statements of cash flows for the
nine months ended September 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 10-16
PART II. OTHER INFORMATION
Calculation of earnings per share 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited--September 30) September December September
30, 1998 31, 1997 30, 1997
-------- -------- ---------
(Dollar amounts in thousands)
ASSETS
------
Cash and due from banks........................................................................... $ 7,615 $ 6,630 $ 12,754
Interest-bearing deposits......................................................................... 78,285 60,891 628
-------- -------- ---------
Total cash and cash equivalents.............................................................. 85,900 67,521 13,382
Trading securities--At fair value (amortized cost September 30, 1998--$2,000)..................... 2,208 -- --
Securities available-for-sale--At fair value (amortized cost September 30, 1998--$78,542;
December 31, 1997--$46,251 and September 30, 1997--$43,092)..................................... 78,843 46,373 43,115
Securities held-to-maturity--At amortized cost (fair value September 30, 1997--$1,000)............ -- -- 1,000
Mortgage-backed securities available-for-sale--At fair value (amortized cost September 30, 1998--
$62,020; December 31, 1997--$80,481 and September 30, 1997--$92,619)............................ 62,041 80,621 92,984
Mortgage-backed securities held-to-maturity--At amortized cost (fair value September 30, 1998--
$46,017; December 31, 1997--$53,451 and September 30, 1997--$55,320)............................ 45,110 53,719 55,793
Loans held for sale............................................................................... 25,787 52,688 --
Loans............................................................................................. 162,058 193,557 348,215
Less: Allowance for loan losses................................................................... (5,551) (6,303) (5,729)
-------- -------- ---------
Loans, net................................................................................... 182,294 239,942 342,486
Federal Home Loan Bank stock--at cost............................................................. 8,040 4,540 4,540
Office buildings and equipment, net............................................................... 4,705 5,264 4,814
Other real estate owned, net...................................................................... 938 1,105 465
Accrued interest receivable....................................................................... 5,841 6,847 6,445
Interest-only securities and other assets......................................................... 22,458 23,392 18,997
Income taxes receivable........................................................................... 4,717 3,866 --
Deferred income tax............................................................................... 5,647 5,664 12,897
-------- -------- ---------
Total assets................................................................................. $508,742 $538,854 $ 596,918
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Interest bearing deposits......................................................................... $350,883 $390,409 $ 390,581
Non-interest bearing deposits..................................................................... 9,261 6,701 5,864
Advances from Federal Home Loan Bank.............................................................. 105,803 90,803 90,803
Securities sold under agreements to repurchase.................................................... -- -- 32,453
Other Borrowings.................................................................................. -- -- 18,000
Advance payments by borrowers for taxes and insurance............................................. 45 564 77
Accrued interest payable.......................................................................... 608 482 1,258
Income taxes payable.............................................................................. -- -- 2,260
Other liabilities................................................................................. 4,013 3,932 9,552
-------- -------- ---------
Total liabilities............................................................................ 470,613 492,891 550,848
-------- -------- ---------
Stockholders' Equity:
Common stock ($.01 par: 10,000,000 shares authorized, 2,902,566 shares issued and outstanding, at
September 30, 1998, 3,323,566 issued and outstanding at December 31, 1997 and 3,494,545
issued and outstanding at September 30, 1997)................................................... 44 44 44
Capital surplus................................................................................... 43,536 43,536 43,108
Retained earnings................................................................................. 17,292 18,549 16,419
Treasury stock, at cost........................................................................... (20,968) (13,988) (11,045)
Accumulated other comprehensive gain, net of tax of $121 at September 30, 1998;
$102 at December 31, 1997 and $141 at September 30, 1997....................................... 201 152 208
Common stock acquired by ESOP..................................................................... (1,270) (1,270) (1,693)
Unearned portion of restricted stock awards....................................................... (706) (1,060) (971)
-------- -------- ---------
Total stockholders' equity................................................................... 38,129 45,963 46,070
-------- -------- ---------
Total liabilities and stockholders' equity................................................... $508,742 $538,854 $ 596,918
======== ======== =========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
3
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited-September 30)
(In thousands except per share data)
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
Interest income:
Loans $ 5,654 $ 9,969 $ 18,338 $ 30,713
Securities 1,115 552 3,298 1,732
Mortgage-backed securities 2,286 2,855 6,263 9,066
Other 1,085 146 3,402 577
---------- ---------- ---------- ----------
Total interest income 10,140 13,522 31,301 42,088
Interest expense:
Deposits 4,264 5,007 13,644 13,713
Advances from the Federal Home Loan Bank 1,276 1,312 4,547 3,949
Securities sold under agreements to repurchase -- 488 -- 2,620
Other borrowings 1 352 2 1,099
---------- ---------- ---------- ----------
Total interest expense 5,541 7,159 18,193 21,381
Net interest income 4,599 6,363 13,108 20,707
Provision for loan losses 1,062 6,523 2,652 24,582
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,537 (160) 10,456 (3,875)
Non-interest income:
Net gains from trading activities 134 -- 208 --
Net security gains 49 1,133 318 1,208
Securitization income (loss) (4,829) 376 (617) 5,008
Net loss on sale of loans -- (11,755) -- (11,755)
Loan fees 521 1,341 2,427 3,707
Fees for other customer services 154 103 431 484
Other operating income 145 167 461 434
---------- ---------- ---------- ----------
Total non-interest income (3,826) (8,635) 3,228 (914)
Non-interest expense:
Salaries and employee benefits 2,228 2,498 7,162 7,619
Occupancy and equipment expenses, net 681 611 2,062 1,717
Federal deposit insurance premiums 60 57 184 180
Advertising and public relations 142 66 408 384
Data processing 450 699 1,515 2,189
Real estate owned expense (income), net (50) (190) (134) (144)
Legal and professional 509 725 1,521 1,486
Other operating expenses 871 1,399 3,018 4,762
---------- ---------- ---------- ----------
Total non-interest expense 4,891 5,865 15,736 18,193
Loss before income taxes (5,180) (14,660) (2,052) (22,982)
Benefit for income taxes (1,943) (5,342) (795) (8,371)
---------- ---------- ---------- ----------
Net loss (3,237) (9,318) (1,257) (14,611)
---------- ---------- ---------- ----------
4
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - Continued
(Unaudited-September 30)
(In thousands except per share data)
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
Other comprehensive income (loss):
Unrealized gains on securities, net of tax 229 612 248 930
Less: Reclassification adjustments for gains included
In net income, net of tax 31 708 199 755
----------- ----------- ----------- -----------
Other comprehensive income (loss) 198 (96) 49 175
----------- ----------- ----------- -----------
Comprehensive loss $ (3,039) $ (9,414) $ (1,208) $ (14,436)
----------- ----------- ----------- -----------
Per common share:
Basic loss per common share $ (1.09) $ (2.67) $ (.40) $ (4.16)
Diluted loss per common share $ (1.09) $ (2.67) $ (.40) $ (4.16)
Weighted average common shares outstanding 2,970,001 3,494,545 3,152,357 3,509,968
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
5
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
-------------------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,257) $ (14,611)
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation 1,207 912
Accretion, net (2,926) (645)
Provision for loan losses 2,652 24,582
Deferred income tax expense (benefit) 17 (10,346)
Net gain on trading activities (208) --
Net gain on sales of mortgage-backed securities available-for-sale (318) (1,208)
Net gains on sales of loans (3,711) (4,122)
Net gains on sales of real estate owned (180) (284)
Net change in:
Interest-only strips and other assets 934 (2,613)
Accrued interest receivable 1,006 845
Income taxes payable -- 1,807
Income taxes receivable (851) --
Accrued interest payable 126 (954)
Other liabilities 81 550
-------------- --------------
Net cash flows used in operating activities (3,428) (6,087)
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity $ -- $ 5,500
Sale of Federal Home Loan Bank stock -- 250
Purchases of Federal Home Loan Bank stock (3,500) --
Proceeds from maturities of securities available-for-sale 36,968 --
Proceeds from sales of securities available-for-sale -- 7,000
Proceeds from sales of mortgage-backed securities available-for-sale 17,732 47,424
Purchases of trading account securities (2,000) --
Purchases of securities available-for-sale (68,421) (14,545)
Purchases of mortgage-backed securities available-for-sale (23,810) (14,914)
Principal collected on mortgage-backed securities held-to-maturity 10,934 5,695
Principal collected on mortgage-backed securities available-for-sale 24,609 12,716
Principal collected on securities available-for-sale -- 665
Proceeds from securitization and sale of loans 74,781 79,568
Net increase in loans (17,867) (132,980)
Proceeds from sales of real estate owned 2,140 1,823
Expenditures for office properties and equipment (648) (1,851)
-------------- --------------
Net cash flows provided by (used in) investing activities 50,918 (3,649)
-------------- --------------
6
AVONDALE FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- Continued
(Unaudited)
For the Nine Months Ended
-------------------------
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ (36,966) $ 65,791
Net decrease in advance payments by borrowers for taxes and insurance (519) (854)
Net decrease in securities sold under agreement to repurchase -- (36,693)
Net decrease in other borrowings -- (14,000)
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 354 259
Purchase of treasury stock (6,980) (549)
-------------- --------------
Net cash flows provided by (used in) financing activities (29,111) 14,044
-------------- --------------
Increase in cash and cash equivalents $ 18,379 $ 4,308
Cash and cash equivalents - beginning of period 67,521 9,074
-------------- --------------
Cash and cash equivalents - end of period $ 85,900 $ 13,382
-------------- --------------
Supplemental cash flow information:
Interest paid $ 18,067 $ 22,335
Income taxes paid 79 425
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 nine months ended September 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 September 30, 1998.
The Bank's regulatory capital at September 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) $ 34,612 6.82% $ 20,291 4.00%
Tier 1 risk-based capital (to risk-weighted assets) 34,612 12.54 11,039 4.00
Total risk-based capital (to risk-weighted assets) 38,088 13.80 22,078 8.00
8
AVONDALE FINANCIAL CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- Continued
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
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.
In October 1998, the FASB adopted Statement of Financial Accounting
Standard No. 134 ("SFAS 134"), Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise. This Statement amends SFAS No. 65, Accounting for Certain
Mortgage Banking Activities, and requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. The
provisions of SFAS 134 are effective for the first fiscal quarter beginning
after December 15, 1998, with earlier application permitted. The Company intends
on adopting the provisions of this statement, which at this time allow the
Company to reclassify its retained interest-only securities as available for
sale from trading, in the fourth quarter of 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 primarily dependent upon its net
interest income, which is the difference between interest income on its
interest-earning 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 what would have been recognized as interest income 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 a net loss of $3.2 million in the third quarter of 1998
compared with a net loss of $9.3 million for the quarter ended September 30,
1997. 1998 third quarter results include a pretax charge for the write-down of
interest-only securities of $6.1 million. In addition, results for the 1998
third quarter benefited from a pretax gain on the securitization and sale of
home equity loans of $607 thousand. The Company realized substantially smaller
gains than in previous periods due to increased prepayment speeds being
experienced in the market. Net interest income decreased 28% to $4.6 million in
the quarter compared to $6.4 million in the prior year's third 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 higher-yielding private label credit card portfolio in the third
quarter of 1997. $80.1 million and $170.3 million of home equity line of credit
receivables were securitized and sold during 1998 and during the year ended
December 31, 1997, respectively.
The Company experienced a non-interest loss of $3.8 million for the quarter
ended September 30, 1998 compared to an $8.6 million loss in the third quarter
of the previous year. The improvement was primarily due to increased servicing
income from securitized loans and the absence of the 1997 loss on the sale of
the private label credit card portfolio, partially offset by the charge for the
write-down of interest-only securities and lower fees on private label credit
cards.
Non-interest expense decreased from $5.9 million in the third quarter of
1997 to $4.9 million in the 1998 third quarter. The decrease was due primarily
to lower salary and employee benefits expense, reduced data processing expenses,
lower collection costs and lower temporary help expense, partially offset by
lower gains on sale of REO properties and higher advertising costs. Expenses
decreased primarily 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. Among the risks to the
Company of not becoming year 2000 compliant are the loss of financial and non-
financial data, defection of customers and direct and indirect financial loss.
To address these risks, the Company has developed a plan for itself and its
third party service providers to ensure year 2000 compliance. As part of
10
this plan, the Company has created a committee of specialists to ensure that the
Company and its vendors will be prepared for the year 2000. The committee has
determined the Company's and its vendor's critical processes that must be made
year 2000 compliant. On a regular basis, the committee evaluates and tests the
Company's and its third party vendor's readiness for the year 2000. The Company
has tested the majority of its internal systems and has determined them to be
year 2000 compliant. The Company has been working with its third party vendors
to determine their level of compliance and is currently awaiting results of the
vendors' testing. To date, the financial impact to the Company of such
compliance has not been, and is not anticipated by management to be, material to
the financial position, results of operations or cash flow of the Company. In
conjunction with the Company's previously announced merger, the Company will
convert to Coal City's computer systems which are already year 2000 compliant.
If the merger is not completed as anticipated, management will be required to
assess alternative contingency plans to ensure that the Company and its vendors
will become year 2000 compliant.
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
September 30, 1998 September 30, 1997
----------------------------- -----------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- ------ -------- --------- ------
Assets:
Interest earning assets:
Loans ......................................................... $197,132 $ 5,654 11.47% $358,260 $ 9,969 11.13%
Investment securities ......................................... 139,804 2,200 6.29 38,405 697 7.26
Mortgage-backed securities .................................... 119,947 2,286 7.62 177,983 2,856 6.42
-------- ------- -------- -------
Total interest-earning assets ......................... 456,883 10,140 8.88 574,648 13,522 9.41
------- -------
Non interest-earning assets ....................................... 53,335 38,762
-------- --------
Total assets .......................................... $512,218 $613,410
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits ...................................................... $348,520 4,264 4.89 $385,986 5,007 5.19
Advances from Federal Home Loan Bank .......................... 105,803 1,276 4.82 90,803 1,312 5.78
Securities sold under repurchase agreements ................... -- -- -- 34,171 488 5.71
Other borrowings .............................................. 22 1 18.18 25,145 352 5.60
-------- ------- -------- ------
Total interest-bearing liabilities .................... 454,345 5,541 4.88 536,105 7,159 5.34
------- ------
Non-interest bearing deposits ..................................... 8,208 6,037
Other liabilities ................................................. 7,539 14,188
-------- --------
Total liabilities ..................................... 470,092 556,330
Stockholders' equity .............................................. 42,126 57,080
-------- --------
Total liabilities and stockholders' equity ............ $512,218 $613,410
======== ========
Net interest income/Interest rate spread .......................... $ 4,599 4.00% $ 6,363 4.07%
======= ===== ======= ====
Net interest-earning assets/net interest Margin ................... $ 2,538 4.03% $ 38,543 4.43%
======== ===== ======== ====
Ratio of interest-earning assets to interest Bearing liabilities .. 100.56% 107.19%
======== ========
The Company's net interest income decreased 28% compared to the prior
year's quarter. Average loan balances were $197.1 million with an average yield
of 11.47% for the 1998 quarter, compared to average loan balances of $358.3
million and an average yield of 11.13% for the year-ago quarter. Investment and
mortgage-backed securities average balances increased $43.4 million for the 1998
third quarter compared to the 1997 third quarter, with an average yield of 6.91%
and 6.56% in the 1998 and 1997 third quarters, respectively. Average
11
interest-earning assets were $456.9 million for the quarter ended September 30,
1998 compared to $574.6 million for the prior year's quarter. At September 30,
1998 and 1997, the Company's on balance sheet consumer loan portfolio totaled
$187.8 million and $348.2 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 $235.9 million and $139.0 million at
September 30, 1998 and 1997, respectively.
Average interest-bearing deposits in the 1998 third quarter were $348.5
million with an average cost of 4.89%, compared to $386.0 million and an average
cost of 5.19% 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 59.8% of total deposits, compared to 64.0% in the year-ago quarter. Average
interest-bearing liabilities were $454.3 million during the 1998 third quarter
compared to $536.1 million for the year-ago period. The net interest margin for
the quarter was 4.03%, compared to 4.43% for the third quarter of 1997. The net
interest margin decreased from the year-ago quarter primarily due to lower-
yielding securities replacing higher-yielding consumer loans.
TABLE 1--AVERAGE BALANCES, INTEREST RATES AND YIELDS - Continued
(Dollars in thousands)
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------ ----------------------------
Average Period Yield/ Average Period Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- ------ -------- -------- ------
Interest earning assets:
Loans................................................................ $230,366 $18,338 10.61% $364,528 $30,713 11.23%
Investment securities................................................ 142,487 6,700 6.27 39,708 2,309 7.75
Mortgage-backed securities........................................... 121,589 6,263 6.87 186,627 9,066 6.48
-------- ------- -------- ------- ------
Total interest-earning assets..................................... 494,442 31,301 8.44 590,863 42,088 9.50
------- -------
Non interest-earning assets........................................... 51,814 31,361
-------- --------
Total assets....................................................... $546,256 $622,224
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits............................................................ $366,038 13,644 4.97 $365,509 13,713 5.00
Advances from Federal Home Loan Bank................................ 120,923 4,547 5.01 90,474 3,949 5.82
Securities sold under repurchase Agreements......................... -- -- -- 62,312 2,620 5.61
Other borrowings.................................................... 20 2 13.33 26,681 1,099 5.49
-------- ------- -------- -------
Total interest-bearing liabilities................................ 486,981 18,193 4.98 544,976 21,381 5.23
------- -------
Non-interest bearing deposits......................................... 8,731 6,002
Other liabilities..................................................... 6,184 13,237
-------- -------
Total liabilities................................................. 501,896 564,215
Stockholders' equity.................................................. 44,360 58,009
-------- --------
Total liabilities and stockholders' Equity........................ $546,256 $622,224
======== ========
Net interest income/Interest rate spread.............................. $13,108 3.46% $20,707 4.27%
======= ===== ======= =====
Net interest-earning assets/net interest Margin....................... $ 7,461 3.53% $45,887 4.67%
======== ===== ======= =====
Ratio of interest-earning assets to interest Bearing liabilities...... 101.53% 108.42%
======= =======
For the first nine months of 1998, net interest income decreased 37% to $13.1
million. Average loan balances were $230.4 million with an average yield of
10.61% for the nine months ended September 30, 1998 compared to $364.5 million
with an average yield of 11.23% for the year-ago period. Average interest-
earning assets were $494.4 million compared to $590.9 million for the same
period of 1997. The net interest margin for the first nine months of 1998 was
3.53% compared to 4.67% for the first nine months of 1997. The net interest
margin decreased for the first nine months of 1998 compared to the same period
of 1997 primarily due to lower-yielding investment securities replacing higher-
yielding consumer loans in the Company's balance sheet.
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 Nine Months Ended
September 30, 1998 September 30, 1998
vs Three Months Ended vs Nine Months Ended
Sept. 30, 1997 Sept. 30, 1997
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------- -----------------------------
Volume Rate Total Volume Rate Total
Interest income:
Loans receivable $(4,621) $ 306 $(4,315) $(10,680) $(1,695) $(12,375)
Investment securities 1,596 (93) 1,503 4,833 (442) 4,391
Mortgage-backed securities (1,106) 536 (570) (3,350) 547 (2,803)
------- ------ ------- -------- ------- --------
Total interest income (4,131) 749 (3,382) (9,197) (1,590) (10,787)
------- ------ ------- -------- ------- --------
Interest expense:
Deposits (458) (285) (743) 20 (89) (69)
Advances from the Federal Home Loan Bank 181 (217) (36) 1,145 (547) 598
Securities sold under agreements
to repurchase (488) -- (488) (2,620) -- (2,620)
Other borrowed money (351) -- (351) (1,097) -- (1,097)
------- ------ ------- -------- ------- --------
Total interest expense (1,116) (502) (1,618) (2,552) (636) (3,188)
------- ------ ------- -------- ------- --------
Net interest income $(3,015) $1,251 $(1,764) $ (6,645) $ (954) $ (7,599)
======= ====== ======= ======== ======= ========
Provision for loan loss
A reconciliation of the activity in the Company's allowance for loan losses
follows (dollars in thousands):
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 5,501 $ 18,555 $ 6,303 $ 7,208
Provision for loan losses 1,062 6,523 2,652 24,582
Charge-offs (1,150) (20,483) (3,724) (27,277)
Recoveries 138 1,545 320 1,627
Reclassifications -- (411) -- (411)
-------- -------- -------- --------
Balance at September 30 $ 5,551 $ 5,729 $ 5,551 $ 5,729
======== ======== ======== ========
Loans at September 30 $187,845 $348,215 $187,845 $348,215
Ratio of allowance to total loans 2.96% 1.65% 2.96% 1.65%
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 $6.5 million in the third quarter
of 1997 to $1.1 million in the most recent quarter primarily due to the sale of
substantially all of the private label credit card portfolio in the third
quarter of 1997 and lower owned receivable levels due to securitizations. The
provision for loan losses decreased from $24.6 million in the first nine months
of 1997 to $2.7 million in the first nine months of 1998 primarily due to loss
provisions totaling $17.7 million in 1997 related to the private label credit
card portfolio and lower average owned receivable balances due to the
securitization of home equity loans. The allowance for loan losses was $5.6
million as of September 30, 1998 compared with $6.3 million as of December 31,
1997 and $5.7 million as of September 30, 1997. The allowance for loan losses as
a percentage of non-performing loans outstanding was 98.3% at September 30, 1998
and 101.7% and 93.4% as of December 31, 1997 and September 30, 1997,
respectively.
In conjunction with the use of credit scoring models, future delinquency
and charge-off levels are projected. On a monthly basis, the Company analyzes
its home equity loan portfolio along with these delinquency and charge-off
projections and adjusts the level of loan loss provision, loan approval
parameters and product pricing. Other loan categories are provided for through
analysis of historical portfolio trends and analysis of future probable losses.
Asset Quality
The following table presents a summary of non-performing assets as of the
dates indicated (in thousands):
At Sept. 30, At Dec. 31, At Sept. 30,
1998 1997 1997
------------ ----------- ------------
Non-accruing loans:
Equity lines of credit $4,341 $5,159 $4,122
One to four family loans 552 207 664
Multi-family 159 47 111
Consumer loans 594 782 1,240
------ ------ ------
Total non-performing loans $5,646 $6,195 $6,137
====== ====== ======
Total non-performing loans to total
loans 3.01% 2.50% 1.76%
Real estate owned $ 938 $1,105 $ 465
Total non-performing assets to total
assets 1.11% 1.35% 1.11%
Non-interest income
Non-interest income increased $4.8 million from a loss of $8.6 million in
the 1997 third quarter to a loss of $3.8 million for the third quarter of 1998.
The improvement was primarily due to increased securitization servicing income
and the absence of the 1997 loss on the sale of the private label credit card
portfolio, partially offset by the write-down of interest-only securities and
lower fees on private label credit cards. In accordance with its quarterly
process to determine fair value, the Company reviewed its assumptions of
prepayment speeds, discount rates and loan losses. The Company has revised its
discount rate to reflect reduced liquidity and higher risk premiums being
required by the markets, adjusted prepayments to be in line with both historical
experience and expectations for the future, and utilized loan losses consistent
with the Company's non-judgmental models. The application of the foregoing
assumptions resulted in a pretax fair value writedown charge of $6.1 million.
Securitization servicing income increased from 1997 to 1998 due to the increase
in the level of securitized loans serviced for others.
For the first nine months of 1998 non-interest income was $3.2 million, an
increase of $4.1 million from the same period of 1997. The increase was due
primarily to increased securitization servicing income and the absence of the
1997 loss on the sale of the private label credit card portfolio, mitigated by
lower private label credit card loan fees and the writedown to fair value on the
interest-only securities.
14
Interest-only securities
On a quarterly basis, the Company performs a review to determine the fair
value of its interest-only strips. As part of this review, the Company reviews
its assumptions of prepayment speeds, discount rates and loan losses. In the
third quarter of 1998, the Company revised its discount rate to reflect reduced
liquidity and higher risk premiums being required by capital markets, adjusted
prepayments to be in line with both historical experience and expectations for
the future, and utilized loan losses consistent with the Company's non-
judgmental models. The third quarter analysis was based upon net CPR speeds
ranging from approximately 30% to 45%, historical and forecasted losses
discounted at the risk-free rate and an overall discount rate of 12%. The
revision of the foregoing assumptions resulted in a pretax charge to the
interest-only securities of $6.1 million. The Company will continue to review
its assumptions quarterly and revise them when circumstances dictate.
Non-interest expense
Non-interest expense decreased $1.0 million to $4.9 million for the third
quarter of 1998 compared to $5.9 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.
For the nine months ended September 30, 1998, non-interest expense was
$15.7 million, a decrease of $2.5 million from the same period 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 had an income tax benefit of $1.9 million for the three months
ended September 30, 1998 and $.8 million for the nine months ended September 30,
1998. The Company had an income tax benefit of $5.3 and $8.4 million for the
three and nine months ended September 30, 1997, respectively. The Company's
effective tax rate was 37.5% for the three months ended September 30, 1998 and
36.4% for the three months ended September 30, 1997 and was 38.7% for the nine
months ended September 30, 1998 and 36.4% for the nine months ended September
30, 1997.
Balance sheet review
Total assets were $508.7 million at September 30, 1998, compared to $596.9
million at September 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 and third quarter securitizations. The decrease from
September 30, 1997 was primarily due to the sale of substantially all of the
private label credit card portfolio and the securitization of home equity loans,
partially offset by increased short-term investments. Additionally, deposits
decreased by approximately $37.0 million to $360.1 million while total
liabilities decreased $22.3 million to $470.6 million at September 30, 1998 from
December 31, 1997. Deposits decreased $36.3 million from September 30, 1997 to
September 30, 1998 while securities sold under agreements to repurchase and
other borrowings decreased $32.5 and $18.0 million, respectively. Total
liabilities decreased $80.2 million during the same period. Advances from the
Federal Home Loan Bank (FHLB) increased $15.0 million to $105.8 million at
September 30, 1998 from $90.8 million at both December 31 and September 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 market
conditions.
The core capital ratio of 6.82% and the risk-based capital ratio of 13.80%
at September 30, 1998 exceed the "well-capitalized" core 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 8.33% and
16.89%, respectively, at December 31, 1997.
As of September 30, 1998, Avondale's book value per share was $13.14
compared to $13.83 at December 31, 1997 and $13.18 at September 30, 1997. The
Company implemented a stock repurchase program
15
during the second quarter of 1998 which was completed in the third quarter of
1998 whereby the Company repurchased 380 thousand shares of its outstanding
stock. The Company implemented another stock repurchase program in the third
quarter whereby the Company may, from time to time, repurchase up to an
additional 5% of its outstanding stock. As of September 30, 1998, the Company
has repurchased 41 thousand shares under this program.
Subsequent Event
On October 13, 1998 the Company and Coal City Corporation ("Coal City"),
the holding company for Manufacturers Bank, announced they had entered into a
definitive agreement in connection with a merger of equals. The combined company
will be called MB Financial, Inc. ("MB Financial") and have assets of
approximately $1.4 billion. Coal City is a privately held bank holding company
headquartered in Chicago whose principal subsidiary, Manufacturers Bank,
operates eight banking offices in the Chicago metropolitan area. At June 30,
1998, Coal City had consolidated assets of $870 million and total shareholders
equity of $46 million.
Under the terms of the agreement, Coal City will be merged into the Company
and the Company will be renamed MB Financial, Inc. (the "Merger"). Immediately
following the Merger, the Bank's five retail branches will be merged into
Manufacturers Bank. Each share of Coal City common stock will be converted into
83.5 shares of MB Financial common stock while each share of Avondale will be
converted into 1 share of MB Financial. On a pro forma basis, the total number
of shares outstanding will be approximately 7.0 million shares. Shareholders of
Coal City will own approximately 58.5% of the combined company, while
stockholders of the Company will own approximately 41.5%.
In connection with the agreement, the Company and Coal City granted each
other an option to acquire up to 19.9% of the outstanding common stock of the
other upon the occurrence of certain events. A restructuring charge for
severance payments, facilities writedowns and other merger-related costs could
be approximately $10 million pre-tax. Concurrent with the Merger, the Company is
considering strategic alternatives for the divestiture of its national mortgage
origination operation. Accordingly, management is presently reviewing several
alternatives to accomplish such a divestiture. Any expected financial impact of
such a divestiture is included in the $10 million pretax charge discussed above.
The transaction is expected to close in the first quarter of 1999 and will
be accounted for as a purchase of the Company by Coal City. Consummation of the
transaction is subject to regulatory approval, and the approval of the
stockholders of both Avondale and Coal City and certain other conditions.
Except for the historical information contained herein, the matters contained in
the Company's SEC filings, may express "forward looking statements" that involve
risk and uncertainties, including statements concerning future events of
performance and assumptions and other statements that are other than statements
of historical facts. The Company cautions readers not to place undue reliance on
any forward-looking statements, which speak as of the date made. Readers are
advised that various factors, including but not limited to, changes in laws,
regulations or Generally Accepted Accounting Principals; the Comany's and the
combined company's competitive position within its market areas; unforeseen
changes in interest rates; unforeseen downturns in the local or regional or
national economies. These and other factors may cause the Company's actual
results for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
16
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 Nine
Months Ended Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
Basic earnings per share:
- -------------------------
Net loss $ (3,237) $ (1,257)
Average common shares outstanding 2,970 3,152
Average basic shares outstanding 2,970 3,152
Basic earnings per share $ (1.09) $ (.40)
========== ==========
Diluted earnings per share:
- ---------------------------
Net loss $ (3,237) $ (1,257)
Average common shares outstanding 2,970 3,152
Common stock equivalents -- --
---------- ----------
Average diluted shares outstanding 2,970 3,152
Diluted earnings per share $ (1.09) $ (.40)
========== ==========
17
SIGNATURES
----------
Pursuant to the requirements 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 3rd day of November 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)
18