<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to _____________________.
Commission file number 0-24566
AVONDALE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 36-3895923
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 North Clark Street, Chicago, Illinois 60602
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 782-6200
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES: XXX NO:
--- ---
3,525,325 common shares of stock were outstanding as of May 13, 1997.
<PAGE>
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
-----------------------------------------
FORM 10-Q
---------
MARCH 31, 1997
--------------
<TABLE>
<CAPTION>
INDEX
- -----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at March 31, 1997, December 31, 1996
and March 31, 1996.................................................................... 2
Condensed consolidated statements of income for the three months ended
March 31, 1997 and March 31, 1996..................................................... 3
Condensed consolidated statements of cash flows for the three months ended
March 31, 1997 and March 31, 1996..................................................... 4-5
Notes to condensed consolidated financial statements.................................. 6-7
Item 2. Management's discussion and analysis of financial condition and results
of operations.................................................................... 8-13
PART II. OTHER INFORMATION
Calculation of earnings per share..................................................... 15
Signatures............................................................................ 16
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
--------------------
AVONDALE FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) Mar. 31,1997 Dec. 31,1996 Mar. 31,1996
------------ ------------- ------------
(in thousands except per share data)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 11,917 $ 8,334 $ 6,014
Interest-bearing deposits 997 740 1,591
------------ ------------ ------------
Total cash and cash equivalents 12,914 9,074 7,605
Securities available for sale- At fair value
(amortized cost Mar 31, 1997-$35,822; Dec 31, 1996-$36,037
and Mar 31, 1996 - $47,584) 35,270 35,901 48,166
Securities held-to-maturity -At amortized cost
(fair value Mar 31, 1997-$969;Dec 31, 1996-$6,488 and Mar
31, 1996-$6,806) 1,000 6,498 6,885
Mortgage-backed securities available-for-sale-At fair value
(amortized cost Mar 31, 1997- $131,487; Dec 31, 1996
-$136,214 and Mar 31, 1996 - $202,909) 130,909 136,418 203,080
Mortgage-backed securities held-to-maturity-At amortized cost
(fair value Mar 31, 1997-$59,056 ;Dec 31, 1996-$61,387
and Mar 31, 1996-$64,571) 59,631 61,438 64,310
Loans 383,117 324,508 235,118
Less: Allowance for loan loss 20,501 7,208 4,043
------------ ------------ ------------
Loans, net 362,616 317,300 231,075
Federal Home Loan Bank stock - at cost 4,790 4,790 4,790
Office buildings and equipment, net 3,955 3,875 4,156
Other real estate owned, net 270 270 1,062
Accrued interest receivable 6,573 6,896 4,235
Prepaid expenses and other assets 9,588 10,410 1,528
Deferred income tax 7,931 2,701 2,839
------------ ------------ ------------
Total assets $ 635,447 $ 595,571 $ 579,731
============ ============ ============
Deposits $ 360,676 $ 330,655 $ 329,152
Advances from Federal Home Loan Bank 90,803 90,803 95,803
Securities sold under agreements to repurchase 85,900 69,146 42,568
Other borrowings 33,000 32,000 40,000
Advance payments by borrowers for taxes and insurance 443 931 708
Accrued interest payable 2,184 2,212 1,198
Income taxes payable 783 452 674
Other liabilities 9,199 8,483 8,000
------------ ------------ ------------
Total liabilities 582,988 534,682 518,103
------------ ------------ ------------
Common stock ($.01 par: 10,000,000 shares authorized, 3,525,325,
3,525,288 and 4,014,568 issued and outstanding,at Mar. 31, 1997,
Dec. 31, 1996 and Mar 31, 1996, respectively ) 44 44 44
Capital surplus 43,108 43,199 43,018
Retained earnings 23,452 31,031 27,755
Treasury stock (10,611) (10,496) (5,634)
Unrealized net gain (loss) on securities available-for-sale,
net of tax of ($442) at Mar. 31, 1997, $21 at Dec. 31, 1996
and $287 at Mar. 31, 1996 (698) 33 453
Common Stock acquired by ESOP (1,693) (1,693) (2,116)
Unearned portion of restricted stock awards (1,143) (1,229) (1,892)
------------ ------------ ------------
Total stockholders' equity 52,459 60,889 61,628
------------ ------------ ------------
Total liabilities and stockholders' equity $ 635,447 $ 595,571 $ 579,731
============ ============ ============
See accompanying notes to Condensed Consolidated Financial Statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
AVONDALE FINANCIAL CORP. For the Three Months Ended
CONDENSED CONSOLIDATED STATEMENTS OF INCOME Mar. 31, 1997 Mar. 31, 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME:
Loans $ 9,741 $ 5,010
Securities 600 1,582
Mortgage-backed securities 3,128 4,757
Other 215 115
----------------------------------
Total interest income 13,684 11,464
INTEREST EXPENSE:
Deposits 4,113 3,760
Advances from the Federal Home Loan Bank 1,311 1,197
Securities sold under agreements to repurchase 988 1,107
Other borrowings 445 419
----------------------------------
Total interest expense 6,857 6,483
NET INTEREST INCOME 6,827 4,981
Provision for loan losses 14,514 650
----------------------------------
Net interest income after provision for loan losses (7,687) 4,331
NONINTEREST INCOME:
Net security gains (losses) 11 596
Net gains on sales of loans - 7
Loan servicing income 1,214 60
Fees for other customer services 277 88
Other operating income 114 121
----------------------------------
Total noninterest income (expense) 1,616 872
NONINTEREST EXPENSE:
Salaries and employee benefits 2,182 1,964
Occupancy and equipment expenses, net 504 233
Federal deposit insurance premiums 67 196
Advertising and public relations 194 234
Data processing 768 238
Real estate owned expense, net 5 30
Legal and professional 203 115
Other operating expenses 1,853 799
----------------------------------
Total noninterest expense 5,776 3,809
Income before income taxes (11,847) 1,394
Provision (benefit) for income taxes (4,268) 454
----------------------------------
NET INCOME (LOSS) $ (7,579) $ 940
==================================
PER COMMON SHARE:
Earnings (Loss) per common share (2.15) 0.23
Weighted average common shares outstanding 3,529,418 4,025,660
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
3
<PAGE>
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOLLOWING PERIODS (In thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1997 March 31, 1996
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (7,579) $ 940
Adjustments to reconcile net income
to net cash flows from operating
actives:
Depreciation 277 244
Amortization (accretion), net (68) (1,588)
Provision for loan losses 14,514 650
Provision (benefit) for deferred
income taxes (4,766) 12
Net gain(loss) on sales of
securities available-for-sale
and mortgage-backed securities (11) (596)
Net gains on sales of real estate
owned - (35)
Net changes in:
Prepaid expenses and other assets 822 (1,019)
Accrued interest receivable 323 828
Income taxes payable 331 639
Accrued interest payable (28) 144
Other liabilities 534 (615)
-------------------------------
Net cash flows provided by (used in)
operating activities 4,349 (396)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturates of investment
securities held-to-maturity 5,500 -
Purchases of Federal Home Loan Bank
stock - (375)
Proceeds from sales securities
available-for-sale - 43,506
Proceeds from sales of
mortgage-backed securities
available-for-sale 1,830 52,555
Purchases of securities
available-for-sale - (14,550)
Purchases of mortgage-backed
securities available-for-sale (67) (45,324)
Purchases of mortgage-backed
securities held-to-maturity - (1,829)
Principal collected on
mortgage-backed securities
held-to-maturity 1,859 2,303
Principal collected on
mortgage-backed securities
available-for-sale 2,983 9,825
Principal collected on securities
available-for-sale 226 465
Net increase in loans (59,830) (13,707)
Proceeds from sales of real estate
owned - 259
Expenditures for office properties
and equipment (357) (422)
-------------------------------
Net cash flows provided by (used in)
investing activities (47,856) 32,706
-------------------------------
</TABLE>
4
<PAGE>
AVONDALE FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOLLOWING PERIODS (In thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $30,021 $ (6,709)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (488) (747)
Net increase (decrease) in securities sold
under agreement to repurchase 16,753 (34,224)
Net increase (decrease) in other borrowings 1,000 (1,500)
Proceeds from Federal Home Loan Bank advances 5,000 32,500
Repayment of Federal Home Loan Bank advances (5,000) (15,000)
Proceeds from exercise of stock options 90
Unearned Restricted Stock 86 267
Purchase of Treasury Stock (115) (5,634)
------- --------
Net cash flows provided by (used in) financing
activities 47,347 (31,047)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,840 1,263
CASH AND CASH EQUIVALENTS - Beginning of year 9,074 6,342
------- --------
CASH AND CASH EQUIVALENTS - End of year 12,914 7,605
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 5,804 6,339
Income taxes paid 425 --
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AVONDALE FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Avondale
Financial Corp. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods have been made. The results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year.
The unaudited interim financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission, although the Company believes the disclosures are adequate
to make the information not misleading. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 1996 Annual Report.
Primary and fully diluted earnings per share are computed by dividing net income
by average shares of common stock and common stock equivalents outstanding. The
strike price of stock options outstanding is above the market price as of March
31, 1997 and therefore do not represent a dilutive effect. These options
therefore are not included in the earnings per share calculation. As of March
31, 1997 there are no stock equivalents outstanding.
NOTE 2 - REGULATORY CAPITAL
Pursuant to the Financial Institution Reform, Recovery and Enforcement Act of
1989 (FIRREA), savings institutions must meet three separate minimum capital-to-
assets requirements: (1) a risk-based capital requirement of 8% of risk-weighted
assets, (2) a core capital ratio of 3% core capital to adjusted total assets,
and (3) a tangible capital requirement of 1.5% tangible core capital to adjusted
total assets. The following table summarizes, as of March 31, 1997, Avondale
Federal Savings Bank's (the "Bank") capital requirements under FIRREA and its
actual capital ratios at that date:
<TABLE>
<CAPTION>
Bank
Capital Actual
Requirement Capital
----------- -------
<S> <C> <C>
Risk-based 8.00% 14.56%
Core 3.00% 8.10%
Tangible 1.50% 8.10%
</TABLE>
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements - In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" and
Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of Information
about Capital Structure". SFAS 128 establishes standards for computing and
presenting earnings per share. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. These statements are effective
for financial statements issued for periods ending after December 15, 1997.
Management does not expect the adoption of these statements to have a
significant impact on the financial position and results of operations of the
Company.
6
<PAGE>
In October, 1995, FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation". The accounting
method for stock-based compensation provided in the statement, in particular for
stock options, differs from APB Opinion No. 25, under which most of the
accounting requirements for stock-based compensation were previously contained.
The measurement and recognition provisions of the statement are effective in
1996. An entity that continues to apply Opinion 25 is required to provide pro
forma net income and earnings per share, as if the accounting method in SFAS No.
123 had been used for stock-based compensation costs. The Company has decided
not to adopt the measurement recognition provisions of SFAS No. 123.
Statement of Financial Accounting Standards No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" is effective for transactions occurring after December 31, 1996.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control is surrendered, and
derecognizes liabilities when extinguished. The Company believes that the impact
to the financial statement upon the adoption of SFAS 125 was not material.
There are no regulatory issues outstanding.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
General
The Company was formed in June 1993 and became the holding company for
Avondale upon consummation of the Conversion to stock form on April 3, 1995.
The Company has conducted no business other than that directly related to the
Bank. The Company's results of operations are primarily dependent upon the
Bank's net interest income, which is the difference between interest income on
its interest-earning assets such as loans and mortgage-backed or other
securities, and interest paid on its interest-bearing liabilities, such as
deposits and other borrowed funds. Net interest income is directly affected by
the relative amounts of interest-earning assets and interest-bearing liabilities
and the interest rates earned or paid on such amounts. The Company's results of
operations are also affected by the provision for loan losses and the level of
noninterest income and expenses. Noninterest income consists primarily of
service charges and other fees. Noninterest expense includes salaries and
employee benefits, real estate owned, occupancy of premises, federal deposit
insurance premiums, data processing expenses and other operating expenses.
The operating results of Avondale are also affected by general economic
conditions, the monetary and fiscal polices of federal agencies and the
policies of agencies that regulate financial institutions. Avondale's cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate loans and other types of loans, which is in turn affected by the
interest rates at which such loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996.
General. Avondale reported a $7.6 million loss for the three months ended
March 31, 1997, compared to $940,000 net income for the quarter ended March 31,
1996. The loss was a result of a special $13 million provision for loan losses
during the quarter. The provision is due to a higher than expected delinquency
rates in one of the Bank's private label credit card programs. Outside of the
special loan loss provision, the Company made significant progress in net
interest income, the result of an increasing loan portfolio; in addition,
noninterest income showed significant improvement over the prior year. Earnings
per share for the quarter was a loss of $2.15 compared with earnings per share
of $.23 for the quarter a year ago. The Company's return on average assets was
- -4.92% for the period ended March 31, 1997 and 0.62% for the three months ended
March 31, 1996.
Net Interest Income. Net interest income increased $1.8 million to $6.8 million
for the quarter ended March 31, 1997 from $5 million for the three months ended
March 31, 1996. The increase is a result of continued loan growth, the average
loan balance increasing $130 million from a year-ago period while investment and
mortgage-backed securities declined $124 million. Average interest earning
assets were $593 million for the current period compared to $587 million for the
three months ended March 31, 1996. The net interest margin for the quarter was
4.61% compared to 3.39% for the same period ended March 31, 1996.
Comparison of Financial Condition as of March 31, 1997 and December 31, 1996
General. Total assets increased $40 million or 6.70% to $635 million as of
March 31, 1997 from $595 million as of December 31, 1996. The loan portfolio
grew by $59 million. This increase was concentrated in the home equity lines of
credit which grew $43 million and the private label credit card program which
grew $7 million. These increases were offset by a $13 million decrease in
securities portfolio. Avondale continues to focus on the origination of equity
lines of credit. The Company utilizes a credit scoring model, whereby the equity
lines of credit are priced according to the credit worthiness of the customer,
as well as the loan to value percentage. The Company originated 2,158 home
equity line of credit loans with lines of $66 million for the three months ended
March 31, 1997. It is the Company's
8
<PAGE>
intent to securitize and sell a significant portion of its home equity consumer
loan portfolio during the second quarter of 1997 subject to certain market
factors. The growth in private label credit card program will be slowed in order
to better manage credit risk volatility.
Total liabilities increased $48 million from December 31, 1996 to March 31,
1997. Total deposits increased $30 million and borrowings increased $18 million
over this period of time. Total stockholders' equity decreased by $8 million
from December 31, 1996 to March 31, 1997. The decrease is attributed to current
period operating loss of $7.6 million and the securities available-for-sale
portfolio had a net unrealized loss of $731,000 as of March 31, 1997.
TABLE 1: AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
and the resultant costs, expressed both in dollars and rates. No tax equivalent
adjustments were made. To the extent received, interest on non-accruing loans
has been included in the table.
<TABLE>
<CAPTION>
For the Quarter Ended: For the Quarter Ended:
------------------------------- -------------------------------
31-Mar-97 31-Mar-96
------------------------------- -------------------------------
Average Quarterly Yield/ Average Quarterly Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans receivable $354,184 9,741 11.00% $224,396 5,010 8.93%
Investment securities 43,347 816 7.53 81,767 1,696 8.30
Mortgage-backed securities 195,031 3,127 6.41 280,943 4,757 6.77
-------- ------ -------- -------
Total interest-earning assets 592,562 13,684 9.24 587,106 11,463 7.81
------ -------
Non interest-earning assets 23,913 17,853
-------- --------
Total assets 616,475 $604,959
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $342,468 4,113 4.80% $328,208 3,760 4.58%
Advances from Federal Home Loan Bank 89,836 1,311 5.84 86,902 1,197 5.51
Securities sold under repurchase agreements 71,028 988 5.56 77,337 1,107 5.73
Other borrowings 33,145 445 5.37 31,780 419 5.27
-------- ------ -------- -------
Total interest-bearing liabilities 536,477 6,857 5.11 524,227 6,483 4.95
------ -------
Non-interest bearing deposits 6,237 4,631
Other liabilities 11,637 11,044
-------- --------
Total liabilities 554,351 539,902
Equity 62,123 65,057
-------- --------
Total liabilities and equity 616,475 604,959
======== ========
Net interest income/Interest rate spread 6,827 4.12% $ 4,980 2.86%
====== ===== ======= =====
Net interest-earning assets/net interest margin 56,085 4.61% $ 62,879 3.39%
-------- ===== -------- =====
Ratio of interest-earning assets to
interest bearing liabilities 110.45% 111.99%
======== ========
</TABLE>
9
<PAGE>
TABLE 2 - RATE/VOLUME ANALYSIS OF NET INTEREST
INCOME
(In Thousands)
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated (in thousands). Information is provided in each
category with respect to (1) changes attributable to changes in volumes, (ii)
changes attributable to changes in rate, and (iii) net changes. The changes
attributable to the combined impact of volume and rate have been allocated to
the changes due to volume.
<TABLE>
<CAPTION>
Three Months ended March 31, 1997
vs. Three Months ended March 31, 1996
Increase (Decrease) Due to
--------------------------------------
Volume Rate Net
-------- ------ -------
<S> <C> <C> <C>
Interest Income:
Loans receivable $ 3,580 $1,151 $ 4,731
Investment securities (725) (155) (880)
Mortgage-backed securities (1,379) (251) (1,630)
------- ------ -------
Total interest income 1,476 745 2,221
------- ------ -------
Interest Expense
Deposits 242 111 353
Advances from the Federal
Home Loan Bank 43 71 114
Other borrowed money 18 8 26
Securities sold under
agreements to repurchase (88) (31) (119)
------- ------ -------
Total interest expense 215 159 374
------- ------ -------
Net interest income $ 1,261 $ 586 $ 1,847
======= ====== =======
</TABLE>
Interest Income: Interest income increased $2.2 million to $13.6 million in the
three months ended March 31, 1997 from $11.4 million for the quarter ended March
31, 1996. The primary reason for the increase was due to a change in earning
assets mix, from lower yielding securities to higher yielding loans. Overall
securities had a negative volume variance of $2.1 million while loans had a
positive variance of $3.6 million for the three months period ended March 31,
1997 compared to the three months ended March 31, 1996. Average interest-earning
assets outstanding increased $ 6 million to $593 million in the three months
ended March 31, 1997, from $587 million during the same period for the prior
year. The yield on loans increased from 8.93% to 11.00%. The Company has
emphasized the origination of equity lines of credit utilizing credit-scoring
models using risk-based pricing, whereby the interest rate of the loan is
determined by both the borrower's credit score and the ratio of the loan to the
appraised value of the property. Interest on investment securities decrease $2.5
million for the three months ended March 31, 1997 to $3.9, from $6.4 million for
the quarter ended March 31, 1996. The average investment securities outstanding
decreased 47% from $82 million for the quarter ended March 31, 1996 to $43
million for the same period ended March 31, 1997. The yield on investment
securities decreased from 8.30% to 7.53% respectively for the same time periods.
Interest on mortgage-backed securities decreased $1.7 million from $4.8 million
to $3.1 million. The average mortgage-backed securities outstanding decreased
$86 million to $195 million for the quarter ended March 31, 1997 from $281
million for the three months ended March 31, 1997. Yields on mortgage-backed
securities decreased .36% over the same period, to 6.41%.
10
<PAGE>
Interest Expense. Interest expense increased $374,000 from $6.5 million for the
three months ended March 31, 1996 to $6.9 million for the quarter ended March
31, 1997. This increase was attributable to both an average increase in
interest-bearing liabilities of $12 million from $524 million for the three
months ended March 31, 1996 to $536 million for the three months ended
March 31, 1997; as well as an increase in the average cost of interest-bearing
liabilities of 0.17% from 4.95% for the three months ended March 31, 1996 to
5.11% for the same period ended March 31, 1997. The average balance on deposits
Increased $14 million, and the cost of interest-bearing deposits increased
from 4.58% for the quarter ended March 31, 1996 to 4.80% for the three months
ended March 31, 1997. During the same period of time, non-interest-bearing
deposits increased from an average of $4.6 million for the three months ended
March 31, 1996 to $6.2 million for the three months ended March 31, 1997.
Interest on Federal Home Loan Bank advances increased $114,000 from the three
months ended March 31, 1996 compared to the same period ended March 31, 1997.
This increase was attributable to both an average increase in average Federal
Home Loan Bank advances outstanding of $2 million from $87 million for the
three months ended March 31, 1996 to $89 million for the three months ended
March 31, 1997; as well as an increase in the average cost of borrowing of
0.33% from 5.51% for the three months ended March 31, 1996 to 5.84% for the
same period ended March 31, 1997. Interest on securities sold under agreement
to repurchase and other borrowings decreased $93,000 from $1.5 million for the
three months ended March 31, 1996 to $1.4 million for the three months ended
March 31, 1997. The average balance of securities sold under agreement to
repurchase and other borrowings decreased $5 million from the three months
ended March 31, 1996 to the same period ended March 31, 1997. The average rate
on these borrowings decreased from 5.59% to 5.50% for the quarters ended
March 31, 1996 and March 31, 1997, respectively.
Provision for Loan Loss. The Company maintains its allowance for loan losses at
a level which is considered by management to be adequate to absorb loan losses
on existing loans, based on an evaluation of the collectibility of loans and
prior loan loss experience. The evaluation takes into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific loans, and the value of related collateral.
Although, because the allowance is based on management's best estimates and the
impact of certain factors that are beyond the control of the company, the
estimated allowance could differ materially from actual experience. Loans are
evaluated and categorized into risk categories. For each risk category, the
methodology assigns a percentage of principal amount of the category that should
be maintained as a general valuation allowance. To the extent that the amount of
loans categorized into the respective risk categories requires the general
valuation allowance to be increased, the provision for loan losses will be
impacted accordingly. Therefore, in the event Avondale is required to increase
its allowance for loan losses, operating results could be adversely affected.
The allowance for loan losses is established through a provision for loan losses
charged to expense.
A reconciliation of the activity in Avondale's allowance for possible loan
losses is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
Mar. 31, 1997 Mar. 31, 1996
------------- -------------
<S> <C> <C>
Balance at January 1 $ 7,208 $ 3,460
Provision for possible loan losses 14,514 650
Charge-offs (1,272) (67)
Recoveries 51 -
-------- --------
Balance at March 31 20,501 4,043
======== ========
Loans at March 31 383,117 235,118
======== ========
Ratio of allowance of loans 5.35% 1.72%
======== ========
</TABLE>
11
<PAGE>
The provision for loan losses increased $13.9 million to $14.5 million for
the three months ended March 31, 1997 from $650,000 for the quarter ended March
31, 1996. The increase was a result of a $13 million provision for loan loss
during the quarter. This provision is the outgrowth of higher than expected
delinquency rate and the resulting potential for subsequent loan losses in one
of the Bank's private label credit card programs. This portfolio has a balance
of $58 million and which represents approximately 15% of the Bank's loans
outstanding. The allowance for loan losses was $20.5 million as of March 31,
1997 compared $4 million as of March 31, 1996,
Non-Performing Assets. Non-performing loans were 2.68% of total loans as of
March 31, 1997, as compared to 1.63% as of March 31, 1996. Net charge-offs were
$1.2 million for the period, compared to $67,000 for the three months ended
March 31, 1996. The increase in ratio of non-performing loans to total loans and
charge-offs is attributable to higher than expected delinquency rates in one of
the Bank's private label credit card programs. As of March 31, 1997 this
portfolio has a non-performing loan ratio of 7.38% and a 60 days and over
delinquency rate of 14.8%. All the other aspects of the Bank's loan program are
performing in line with expectations, with a non-performing ratio to total loans
of 1.81%, virtually the same delinquency level as December 31, 1996 of 1.90% and
March 31, 1996 of 1.63%. Total loans increased $58 million to $383 million as of
March 31, 1997 from $325 million as of December 31, 1996. During the same period
the allowance for loan loss as a percentage of loans outstanding increased to
5.35% at March 31, 1997 from 1.72% at March 31, 1996 as the Company continues to
conservatively record provisions for the continued growth in the home equity
line of credit portfolio and to cover potential losses on the credit program as
mentioned above. The allowance for loan loss as a percentage of non-performing
loans increased from 105.29% on March 31, 1996 to 200.1% as of March 31, 1997
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(In thousands)
At At At
March 31, December 31, March 31,
1997 1996 1996
--------- ------------ ----------
<S> <C> <C> <C>
Non-accruing loans:
Equity lines of credit $ 2,968 $2,150 $1,561
One to four family loans 1,703 1,523 1,542
Multi-family 378 365 694
Consumer loans 5,201 1,256 93
--------- ---------- ---------
Total non-performing loans 10,250 5,294 3,890
--------- ---------- ---------
Total non-performing loans to total
loans 2.68% 1.63% 1.63%
========= ========== =========
Real estate owned $ 270 $ 270 $ 837
Total non-performing loans and
real estate owned to total assets 1.66% 0.93% 0.82%
========= ========== =========
</TABLE>
Non-Interest Income: Non-interest income increased $744,000 or 85.32% to $1.6
million for the three months ended March 31, 1997 from $872,000 for the same
period a year ago, due to substantial increase in loan servicing fees, which
increased $1.1 million to $1.2 million for the three months ended March 31,
1997. The Bank receives loan servicing income in connection with its first $75
million Securitization of home equity loans, which closed during the fourth
quarter of 1996. The Company had $11,000 in securities gains for the three
months ended March 31, 1997, down from $585,000 in the quarter a year-ago
reflecting the decline in the size of the portfolio, which has shrunk in size
over the past year, to provide funding for the increasing loan business.
Non-Interest Expense: Non-interest expenses increased $2 million or 52% to $5.8
million for the three months ended March 31, 1997 from $3.8 million for the
three months ended March 31, 1996. Salaries
12
<PAGE>
and employee benefits increased $218,000 and temporary personnel cost increased
$327,000 to support the growth in the Bank's consumer lending program. Occupancy
expenses increased from $233,000 for the three months ended March 31, 1996 to
$504,000 for the current period mainly due to the lower lease restructuring
charge reversal . The lease restructuring charge was recorded in year-ended
March 1993. Data processing expenses increased $530,000 to $768,000 for the
current period. The increase is due to higher volume in loan accounts serviced
by the data processing system.
Other operating costs increased by $540,000. Many of these cost relate to
the increase in loan volume. Telephone expenses increased $158,000 to $204,000
for the current period. Postage expense increased $146,000 to $213,000 for the
current period as volume increased, and contracted services increased by $40,000
to $123,000.
Provision for Income Taxes. The provision for income taxes was a benefit of $4.3
million due to the loss in the current period. The provision was $454,000 in the
same period ended March 31, 1996. The respective income tax expense represented
effective tax rates of 36% for the quarter ended March 31, 1997 and 32.60% for
the three months ended March 31, 1996.
13
<PAGE>
PART 11 - OTHER INFORMATION
The calculation of the Registrant's primary and fully diluted earnings per share
required by 601(b)(11) of Regulation S-K is presented below (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1997:
Primary
----------------------------------------
<S> <C>
Net income $(7,579)
Average common shares outstanding 3,529
Common stock equivalent -
-------
Average primary shares outstanding 3,529
Primary earning per share $ (2.15)
Fully diluted earnings per share
----------------------------------------
Net income $(7,579)
Average common shares outstanding 3,529
Common stock equivalent -
-------
Average fully diluted shares outstanding 3,529
Fully diluted earning per share $ (2.15)
</TABLE>
14
<PAGE>
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 13th day of May, 1996.
AVONDALE FINANCIAL CORP.
(Registrant)
Robert S. Engelman, Jr.
President and Chief Executive Officer
/s/ Robert S. Engelman, Jr. (Principal Executive Officer)
- --------------------------
Howard A. Jaffe,
Vice President
and Chief Financial Officer
(Principal Financial Officer and
/s/ Howard A. Jaffe (Principal Accounting Officer)
- --------------------------
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
financial statements as of and for the 3 months ended March 31, 1997 and March
31, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 11,917 6,014
<INT-BEARING-DEPOSITS> 997 1,591
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 166,179 251,246
<INVESTMENTS-CARRYING> 60,631 71,195
<INVESTMENTS-MARKET> 60,025 71,377
<LOANS> 383,117 235,118
<ALLOWANCE> 20,501 4,043
<TOTAL-ASSETS> 635,447 579,731
<DEPOSITS> 360,676 329,152
<SHORT-TERM> 178,899 93,872
<LIABILITIES-OTHER> 12,609 10,580
<LONG-TERM> 30,804 84,499
<COMMON> 0 0
52,459 61,628
0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 635,447 579,731
<INTEREST-LOAN> 9,741 5,010
<INTEREST-INVEST> 3,728 6,339
<INTEREST-OTHER> 215 115
<INTEREST-TOTAL> 13,684 11,464
<INTEREST-DEPOSIT> 4,113 3,760
<INTEREST-EXPENSE> 6,857 6,483
<INTEREST-INCOME-NET> 6,827 4,981
<LOAN-LOSSES> 14,514 650
<SECURITIES-GAINS> 11 596
<EXPENSE-OTHER> 5,776 3,809
<INCOME-PRETAX> (11,847) 1,394
<INCOME-PRE-EXTRAORDINARY> (7,579) 940
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,579) 940
<EPS-PRIMARY> (2.15) 0.23
<EPS-DILUTED> (2.15) 0.23
<YIELD-ACTUAL> 9.24 7.81
<LOANS-NON> 10,250 3,890
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 7,208 3,460
<CHARGE-OFFS> 1,272 67
<RECOVERIES> 51 0
<ALLOWANCE-CLOSE> 20,501 4,043
<ALLOWANCE-DOMESTIC> 18,191 1,629
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,310 2,354
</TABLE>
