UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2002
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:
001-13949
LOCAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0424192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3601 N.W. 63RD, OKLAHOMA CITY, OK 73116
--------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 841-2298
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports, and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares outstanding of the registrant's $0.01 par value common
stock as of May 1, 2002 were as follows:
NUMBER OF SHARES
----------------
19,157,425
LOCAL FINANCIAL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
March 31, 2002 (unaudited) and December 31, 2001.........................................1
Consolidated Statements of Operations-
For the Three Months Ended March 31, 2002 and 2001 (unaudited)...........................2
Consolidated Statements of Cash Flows-
For the Three Months Ended March 31, 2002 and 2001 (unaudited)...........................3
Notes to Consolidated Financial Statements...............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................15
Signatures ........................................................................................16
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
MARCH 31, 2002 DECEMBER 31, 2001
--------------- -----------------
(unaudited)
ASSETS
Cash and due from banks $ 35,142 $ 50,791
Interest bearing deposits with other banks 68,300 9,700
Securities:
Available for sale 139,785 193,736
Held to maturity 415,686 430,956
--------------- ---------------
Total securities 555,471 624,692
Loans receivable, net of allowance for loan losses of $27,657 at
March 31, 2002 and $27,621 at December 31, 2001 1,964,953 1,972,145
Federal Home Loan Bank of Topeka and Federal Reserve Bank stock, at cost 39,916 42,213
Premises and equipment, net 40,737 38,751
Assets acquired through foreclosure and repossession, net 1,780 1,910
Intangible assets, net 15,548 15,548
Current and deferred taxes, net 6,720 7,408
Other assets 58,184 56,893
--------------- ---------------
Total assets $ 2,786,751 $ 2,820,051
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 682,198 $ 636,315
Savings 75,104 70,932
Time 1,132,170 1,102,115
--------------- ---------------
Total deposits 1,889,472 1,809,362
Advances from the Federal Home Loan Bank of Topeka 600,024 728,205
Securities sold under agreements to repurchase 46,016 38,694
Senior Notes 21,545 21,545
Other liabilities 22,012 18,459
Mandatorily redeemable trust preferred securities 40,250 40,250
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
20,646,769 shares issued and 19,157,425 shares outstanding at
March 31, 2002 and 20,539,269 shares issued and 19,199,925
shares outstanding at December 31, 2001 206 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding - -
Additional paid-in capital 206,847 205,773
Retained earnings 129,559 122,480
Treasury stock, 1,489,344 shares at March 31, 2002 and 1,339,344
shares at December 31, 2001, at cost (171,340) (169,031)
Accumulated other comprehensive income, net of tax 2,160 4,109
--------------- ---------------
Total stockholders' equity 167,432 163,536
--------------- ---------------
Total liabilities and stockholders' equity $ 2,786,751 $ 2,820,051
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
1
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2002 2001
--------------- ---------------
(unaudited)
Interest and dividend income:
Loans $ 34,471 $ 39,311
Securities available for sale 3,621 8,165
Securities held to maturity 6,299 -
Federal Home Loan Bank of Topeka and Federal Reserve Bank stock 518 417
Other investments 107 998
--------------- ---------------
Total interest and dividend income 45,016 48,891
Interest expense:
Deposit accounts 13,652 22,417
Advances from the Federal Home Loan Bank of Topeka 6,482 4,130
Securities sold under agreements to repurchase and other borrowings 127 486
Senior Notes 636 1,213
Trust preferred securities 922 -
--------------- ---------------
Total interest expense 21,819 28,246
Net interest and dividend income 23,197 20,645
Provision for loan losses (1,800) (750)
--------------- ---------------
Net interest and dividend income after provision for loan losses 21,397 19,895
Noninterest income:
Deposit related income 4,293 3,117
Loan fees and loan service charges 526 505
Net gains on sale of assets 70 105
Other 974 874
--------------- ---------------
Total noninterest income 5,863 4,601
--------------- ---------------
Noninterest expense:
Compensation and employee benefits 9,786 7,822
Equipment and data processing 1,867 1,624
Occupancy 1,187 970
Advertising 139 103
Professional fees 264 411
Other 3,432 3,520
--------------- ---------------
Total noninterest expense 16,675 14,450
--------------- ---------------
Income before income taxes and extraordinary item 10,585 10,046
Provision for income taxes 3,506 3,271
--------------- ---------------
Income before extraordinary item 7,079 6,775
Extraordinary item - purchase and retirement of Senior Notes,
net of tax - (3)
--------------- ---------------
Net income $ 7,079 $ 6,772
=============== ===============
Earnings per share:
Income before extraordinary item:
Basic $ 0.37 $ 0.33
=============== ===============
Diluted $ 0.36 $ 0.32
=============== ===============
Net income:
Basic $ 0.37 $ 0.33
=============== ===============
Diluted $ 0.36 $ 0.32
=============== ===============
Average shares outstanding:
Basic 19,174,092 20,538,853
=============== ===============
Diluted 19,887,590 21,131,920
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
2
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2002 2001
--------------- ---------------
(unaudited)
Cash provided (absorbed) by operating activities:
Net income $ 7,079 $ 6,772
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,800 750
Deferred income tax expense (344) 81
Accretion of discounts and amortization of deferred fees on
loans acquired and securities, net (1,458) (1,061)
Depreciation and amortization 987 1,381
Net change in loans held for sale (2,187) (1,848)
Net gains on sale of assets (70) (105)
Change in other assets (1,362) (5,266)
Change in other liabilities 5,597 710
--------------- ---------------
Net cash provided by operating activities 10,042 1,351
--------------- ---------------
Cash provided (absorbed) by investing activities:
Proceeds from principal collections on securities 102,572 38,170
Purchases of securities (35,020) (176,155)
Purchases of Federal Home Loan Bank stock - (9,368)
Proceeds from the sale of Federal Home Loan Bank stock 2,297 -
Change in loans receivable, net 7,430 (10,707)
Proceeds from disposal of assets acquired through foreclosure and
repossession 586 528
Purchases of premises and equipment (3,012) (1,131)
Proceeds from sales of premises and equipment 39 -
--------------- ---------------
Net cash provided (absorbed) by investing activities 74,892 (158,663)
--------------- ----------------
Cash provided (absorbed) by financing activities:
Change in transaction accounts 50,055 3,594
Change in time deposits 30,055 (137,057)
Change in securities sold under agreements to repurchase 7,322 9,912
Proceeds from advances from the Federal Home Loan Bank 802,053 813,113
Repayments of advances from the Federal Home Loan Bank (930,234) (503,114)
Proceeds from the issuance of common stock 1,075 19
Purchase of Senior Notes - (100)
Purchase of treasury stock (2,309) -
--------------- ---------------
Net cash provided (absorbed) by financing activities (41,983) 186,367
--------------- ---------------
Net change in cash and cash equivalents 42,951 29,055
Cash and cash equivalents at beginning of period 60,491 43,971
--------------- ---------------
Cash and cash equivalents at end of period $ 103,442 $ 73,026
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 20,972 $ 28,510
=============== ===============
Income taxes $ - $ (503)
=============== ===============
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to assets acquired through foreclosure and
repossession $ 456 $ 586
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002 and December 31, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared
in accordance with the instructions for Form 10-Q and, therefore, do not
include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of America.
All adjustments (consisting of only normal recurring adjustments) that are
necessary, in the opinion of management, for a fair presentation of the
interim financial statements have been included. The interim financial
information should be read in conjunction with the audited Consolidated
Financial Statements and Notes included in the Local Financial Corporation
(the "Company") Form 10-K for the year ended December 31, 2001 as filed
with the Securities and Exchange Commission.
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost (dollars in
thousands):
MARCH 31, 2002 DECEMBER 31, 2001
---------------- -----------------
(unaudited)
Residential real estate $ 210,890 $ 215,408
Commercial 1,586,812 1,593,432
Held for sale 8,450 6,263
Consumer 186,458 184,663
---------------- ----------------
Total loans 1,992,610 1,999,766
Less:
Allowance for loan losses (27,657) (27,621)
---------------- ----------------
Loans receivable, net $ 1,964,953 $ 1,972,145
================ ================
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows (dollars in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE CONTRACTUAL RATE BALANCE CONTRACTUAL RATE
----------- ---------------- ----------- -----------------
Fixed rate $ 600,024 4.14% $ 728,205 3.75%
=========== ================ =========== =================
4
Additionally, the Company had outstanding letters of credit with the FHLB
of approximately $90.0 million and $77.1 million at March 31, 2002 and
December 31, 2001, respectively. The letters of credit have one-year terms
and were pledged to secure certain deposits.
The FHLB requires the Company to hold eligible assets with a lending value,
as defined, at least equal to FHLB advances and letters of credit issued.
Eligible assets can include such items as first and second mortgage loans,
multifamily mortgage loans, commercial and construction real estate loans,
small business loans and investment securities which are not already
pledged or otherwise encumbered. At March 31, 2002, the Company had
approximately $765.4 million in eligible assets pledged against FHLB
advances.
At March 31, 2002, the Company had additional borrowing capacity of
approximately $388.8 million under the FHLB credit policy.
Scheduled principal repayments to the FHLB at March 31, 2002 are as follows
(dollars in thousands):
WEIGHTED
AVERAGE
AMOUNT CONTRACTUAL RATE
------------- ----------------
Year ending December 31, 2006
and thereafter $ 600,024 4.14%
============= ================
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Periodically, the Company provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations. The
securities underlying the agreements were under the Company's control at
March 31, 2002 and December 31, 2001 and are summarized as follows (dollars
in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
Average outstanding balance $ 39,391 $ 42,987
Weighted average interest rate during the period 1.30% 3.39%
Maximum month-end balance $ 46,016 $ 53,622
Outstanding balance at end of period $ 46,016 $ 38,694
Weighted average interest rate at end of period 1.32% 1.29%
Mortgage-backed securities securing the agreements
at period-end:
Carrying value $ 52,734 $ 53,885
Estimated market value $ 53,641 $ 54,978
Accrued interest payable at the end of the period $ - $ -
(5) STOCKHOLDERS' EQUITY
In connection with the Company's private placement in 1997, warrants to buy
591,000 shares of common stock of the Company were issued to the placement
agent. During the quarter ended March 31, 2002, 100,000 warrants were
exercised for proceeds of $1,000,000. As of March 31, 2002, warrants
totaling 153,333 remain outstanding. The warrants are exercisable for a
five year period ending September 8, 2002 at an exercise price of $10 per
share.
5
During the quarter ended March 31, 2002, the Company repurchased 150,000
shares of the Company's common stock from an officer of the Company at
market price amounting to $2.3 million.
(6) COMMITMENTS AND CONTINGENCIES
As of March 31, 2002, Local Oklahoma Bank (the "Bank") had entered into a
commitment to purchase $20.0 million in new government agency securities to
be issued in April. These securities were issued on April 30, 2002, and,
accordingly, are not included in the accompanying March 31, 2002
consolidated statement of financial condition.
(7) COMPREHENSIVE INCOME
Comprehensive income for the periods ended March 31, 2002 and 2001 consists
of (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2002 2001
------------- -------------
Net income $ 7,079 $ 6,772
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
reclassification adjustment (1,949) 1,797
------------- -------------
Comprehensive income $ 5,130 $ 8,569
============= =============
(8) NET INCOME PER SHARE
Stock options and warrants to purchase 2,228,238 and 2,670,005 shares of
common stock were outstanding as of March 31, 2002 and 2001, respectively.
The stock options and warrants were included in the computation of diluted
net income per share for 2002 and 2001 to the extent they were not
anti-dilutive.
(9) SEGMENTS
The Company operates as one segment. The operating information used by the
Company's chief operating decision-maker for purposes of assessing
performance and making operating decisions about the Company is the
consolidated financial statements presented herein. The Company has one
active operating subsidiary, namely, Local Oklahoma Bank, National
Association, a national banking association. The Bank, in turn, has one
active operating subsidiary, Local Securities Corporation ("Local
Securities"), which is a registered broker-dealer under the Securities
Exchange Act of 1934 and provides retail investment products to customers
of the Bank. While Local Securities qualifies as a separate operating
segment, it is not considered material to the consolidated financial
statements for the purposes of making operating decisions and does not meet
the 10% threshold for disclosure under Statement of Financial Accounting
Standards ("SFAS") No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION.
6
In September 2001, the Company formed Local Financial Capital Trust I (the
"Trust"), a wholly-owned finance subsidiary. The Trust does not qualify as
an operating segment under SFAS No. 131 and has no independent operations
and no other function other than the issuance of its securities and the
related purchase of 9% junior subordinated debentures (the "Debentures")
from the Company and to distribute payments referred thereon to the holders
of its securities.
(10) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS, as of January 1, 2002 and no longer amortizes goodwill. As of the
date of adoption, the Company had unamortized goodwill in the amount of
approximately $15.5 million, which was subject to the transition provisions
of Statement No. 142. The Company has determined there was no transitional
impairment loss at January 1, 2002. There was no amortization expense for
the three months ended March 31, 2002, whereas this expense amounted to
$335,000 for the quarter ended March 31, 2001. The Company's reported net
income for the three months ended March 31, 2001 adjusted for excluding the
effects of goodwill amortization would have been $7.107 million compared to
$7.079 million at March 31, 2002. Likewise, the Company's basic and diluted
earnings per share for the three months ended March 31, 2001 adjusted for
excluding the effects of goodwill amortization would have been $.35 and
$.34, respectively, compared to $.37 and $.36 at March 31, 2002,
respectively.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", which supersedes SFAS No. 142
and portions of APB Opinion No. 30. This statement addresses the
recognition of an impairment loss for long-lived assets to be held and
used, or disposed of by sale or otherwise. This statement is effective for
financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. Management has
determined the impact of adopting this statement will not have a material
affect on the Company's consolidated financial position or results of
operations.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In this Form 10-Q, the Company, when discussing the future, may use words
like "anticipate", "believe", "estimate", "expect", "intend", "should" and
similar expressions, or the negative thereof. These words represent
forward-looking statements. In addition, any analysis of the adequacy of the
allowance for loan losses or the interest rate sensitivity of the Bank's assets
and liabilities represent attempts to predict future events and circumstances
and also represent forward-looking statements.
Many factors could cause future results to differ from what is anticipated
in the forward-looking statements. For example, future financial results could
be affected by (i) deterioration in local, regional, national or global economic
conditions which could cause an increase in loan delinquencies or a decrease in
collateral values; (ii) changes in market interest rates or changes in the speed
at which market interest rates change; (iii) changes in laws and regulations
affecting the financial service industry; (iv) changes in competition and (v)
changes in consumer preferences.
A reader should not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and are not
guarantees, promises or assurances of what will happen in the future. Various
factors, including those described above and those described in the Company's
Form 10-K for the year ended December 31, 2001, could affect the Company's
financial performance and could cause the Company's actual results or
circumstances for future periods to be materially different from what has been
anticipated or projected.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2001 TO MARCH 31, 2002
During the three months ended March 31, 2002, total assets remained
relatively stable, declining $33.3 million or 1.2%. Interest-bearing deposits
with other banks rose $58.6 million during the period as a result of a net
decrease of $69.2 million in the Company's investment portfolio primarily due to
principal paydowns and maturities. The Company's loans receivable, net of
allowance, remained relatively stable at $1.96 billion at March 31, 2002
compared with $1.97 billion at December 31, 2001.
Advances from the FHLB of Topeka declined $128.2 million or 17.6% from
December 31, 2001 as the Company utilized an $80.1 million increase in deposits
as well as the paydowns and maturities in its investment portfolio to meet its
funding needs during the period.
Total stockholders' equity increased $3.9 million during the quarter ended
March 31, 2002. The increase in stockholders' equity came primarily as a result
of earnings during the period offset by an increase in treasury shares. During
the quarter ended March 31, 2002, the Company repurchased 150,000 shares at
market value for $2.3 million as part of a stock repurchase program which began
last year. The increases in additional paid-in capital during the period of $1.1
million were the result of an exercise of 100,000 warrants, which were part of
the original 591,000 warrants issued in conjunction with the Company's 1997
private placement, as well as the exercise of 7,500 incentive stock options
issued under the Company's 1998 Stock Option Plan. See Note 5 of the Notes to
Consolidated Financial Statements. Accumulated other comprehensive income
declined $1.9 million during the period. At March 31, 2002, the Company and the
Bank exceeded all regulatory requirements to be considered well capitalized. See
"--Liquidity and Capital Resources".
8
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31,
2001
NET INCOME. The Company reported income before extraordinary item of
$7.1 million or $.37 basic earnings per share, up 12.1% from $.33 per share
for the first quarter of 2001. Earnings per share data gives effect to the
Company's repurchase of 1.5 million of its outstanding shares. The Company
adopted Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of
January 1, 2002 and, as a result, no longer amortizes goodwill. There was no
amortization expense for the three months ended March 31, 2002, whereas this
expense amounted to $335,000 for the quarter ended March 31, 2001. The
Company's reported net income for the three months ended March 31, 2001
adjusted for excluding the effects of goodwill amortization would have been
$7.107 million compared to $7.079 million at March 31, 2002.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income for the
quarter was $23.2 million, an increase of 12.4% as compared to $20.6 million for
the same quarter in the prior year. The average balance of interest-earning
assets for the quarter increased over the first quarter of 2001 by $251.7
million or 10.5%, partially offsetting a 138 basis point decline in rates earned
on those assets. Rates paid on interest-bearing liabilities declined 160 basis
points between the comparative periods, offsetting an increase of $240.9 million
or 11.0% in the average balance of those liabilities. Net interest margin in the
quarter was 3.50% compared with 3.44% in the same quarter of the prior year. The
improvement in net interest margin reflects the increasing spreads arising from
funding benefits in the declining rate environment during the year.
INTEREST INCOME. Total interest and dividend income totaled $45.0 million
during the three months ended March 31, 2002, down 7.9% from the same period in
the prior year, primarily due to the effect of market-driven rate declines on
the average yield of the Company's loan portfolio. The 155 basis point decline
in average yield on loans was partially offset by a $133.8 million increase in
the average balance of loans between the comparative periods which occurred
primarily in the commercial loan portfolio. Effective December 31, 2001, the
Company reclassified a portion of its investment portfolio from available for
sale to held to maturity. The Company's interest income received on its
investment portfolio rose by 21.5% from $8.2 million during the quarter ended
March 31, 2001 to $9.9 million during the quarter ended March 31, 2002. The
increase in interest income on investments was attributable to an increase in
the average balance of those investments which outpaced rate declines between
the comparative periods.
INTEREST EXPENSE. Total interest expense for the three months ended
March 31, 2002 totaled $21.8 million, down $6.4 million or 22.8% from the
same quarter in the prior year, primarily due to a 192 basis point decline in
the rates paid on deposits coupled with a $67.7 million or 3.9% decline in
the average balance of those deposits. Interest expense on advances from the
FHLB increased $2.4 million or 57.0% for the three months ended March 31,
2002 as compared to the same period in the prior year as the Company relied
upon lower cost advances as a funding source. During the quarter, the Company
paid $922,000 in interest expense on its 9% cumulative trust preferred
securities (the "Trust Preferred Securities") which were issued on September
20, 2001.
PROVISION FOR LOAN LOSSES. The Company increased its provision for loan
losses to $1.8 million for the quarter ended March 31, 2002, up from $750,000
for the same period last year, to cover net charge-offs and to recognize the
increased probability that the recent economic slowdown will have an impact on
its middle-market commercial borrowers. Charge-offs (net of recoveries) during
the quarter were $1.8 million compared with $1.1 million during the same period
in the prior year. The Company's basis for the provision for loan losses taken
was a function of management's credit risk monitoring process that considers
several factors, including among other things, current economic conditions
affecting the Company's customers, the payment performance of individual large
loans and pools of homogeneous
9
small loans, portfolio seasoning, change in collateral values, and detailed
review of specific large loan relationships.
NONINTEREST INCOME. Noninterest income was $5.9 million for the quarter
compared to $4.6 million during the same period in 2001. The components of
noninterest income consist of deposit-related income, loan fees and loan service
charges, net gains on sale of assets and other income. The Company's continued
focus on fee income resulted in a 27.4% increase in noninterest income during
the first quarter of 2002 as compared with the same period in the prior year,
primarily as a result of increased deposit-related service charges.
NONINTEREST EXPENSE. Noninterest expense for the quarter was $16.7 million,
up 15.4% from $14.5 million during the same period in the prior year, primarily
as a result of increases in compensation and data processing costs incurred to
support new business and long-term growth strategies. The Company's January 1,
2002 adoption of Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, had
the effect of reducing noninterest expense for the quarter ended March 31, 2002
by $335,000 through the elimination of goodwill amortization.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. In general,
management's strategy is to evaluate asset and liability balances within
maturity categories to control the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time.
Management's methods for evaluating interest rate risk include an analysis
of the Company's interest rate sensitivity "gap", which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income, while a positive gap would tend to
affect net interest income adversely. Because different types of assets and
liabilities with the same or similar maturities may react differently to changes
in overall market rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
10
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
March 31, 2002, based on the information and assumptions set forth in the notes
below (dollars in thousands):
MORE THAN
THREE TO MORE THAN THREE YEARS
WITHIN THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
------------ ---------- ------------ ------------- ---------- -----------
Interest-earning assets(1):
Loans receivable(2) $ 796,879 $ 308,292 $ 507,575 $ 213,628 $ 155,648 $ 1,982,022
Securities:
Available for sale(3) 30,792 12,838 63,818 13,249 15,766 136,463
Held to maturity 18,370 39,626 131,450 118,260 107,980 415,686
Other interest-earning
assets(4) 139,575 3,783 - - - 143,358
------------ ---------- ------------ ------------- ---------- -----------
Total $ 985,616 $ 364,539 $ 702,843 $ 345,137 $ 279,394 $ 2,677,529
============ ========== ============ ============= ========== ===========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 217,420 $ 26,625 $ 56,873 $ 43,079 $ 168,800 $ 512,797
Passbook accounts 3,087 9,260 18,938 13,223 30,596 75,104
Certificates of deposit 334,313 622,561 129,391 42,473 3,432 1,132,170
FHLB advances - - - 100,000 500,024 600,024
Securities sold under
agreements to repurchase 46,016 - - - - 46,016
Senior Notes - - 21,545 - - 21,545
Mandatorily redeemable
trust preferred securities - - - - 40,250 40,250
------------ ---------- ------------ ------------- ---------- -----------
Total $ 600,836 $ 658,446 $ 226,747 $ 198,775 $ 743,102 $ 2,427,906
============ ========== ============ ============= ========== ===========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 384,780 $ (293,907) $ 476,096 $ 146,362 $ (463,708) $ 249,623
============ ========== ============ ============= ========== ===========
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $ 384,780 $ 90,873 $ 566,969 $ 713,331 $ 249,623 $ 249,623
============ ========== ============ ============= ========== ===========
Cumulative excess of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets 13.81% 3.26% 20.35% 25.60% 8.96% 8.96%
============ ========== ============ ============= ========== ===========
(1) Adjustable-rate loans and securities are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they mature and fixed-rate loans and securities are included in the
periods in which they are scheduled to be repaid, based on scheduled
amortization, in each case as adjusted to take into account estimated
prepayments based on, among other things, historical performance.
(2) Balances have been reduced for nonaccrual loans.
(3) Does not include unrealized gain on securities classified as available for
sale.
(4) Comprised of cash and due from banks, deposits with other banks, Federal
Home Loan Bank stock and Federal Reserve Bank stock.
(5) Adjusted to take into account assumed annual decay rates, which were
applied against money market, NOW and passbook accounts.
11
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields, (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rates, (iii) net interest income, (iv) interest rate spread, and (v) net
interest margin. Information is based on average daily balances during the
indicated periods (dollars in thousands):
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
2002 2001
---------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------- ------------ ---------- -------------- ----------- ----------
ASSETS
Loans receivable(1) $ 2,006,484 $ 34,471 6.96% $ 1,872,716 $ 39,311 8.51%
Securities:
Available for sale(2) 163,660 3,621 8.85 430,967 8,165 7.58
Held to maturity 411,029 6,299 6.13 - - -
------------ ---------- ------------ ---------
Total securities 574,689 9,920 6.90 430,967 8,165 7.58
Other earning assets(3) 71,026 625 3.52 96,828 1,415 5.85
------------ ---------- ------------ ---------
Total interest-earning 2,652,199 45,016 6.85% 2,400,511 48,891 8.23%
---------- ========= --------- ========
Noninterest-earning assets 126,591 117,302
------------ ------------
Total assets $ 2,778,790 $ 2,517,813
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts(4) $ 560,768 2,572 1.86% $ 513,071 4,450 3.52%
Term certificates of deposit 1,106,136 11,080 4.06 1,221,566 17,967 5.96
------------ ---------- ------------ ---------
Total deposits 1,666,904 13,652 3.32 1,734,637 22,417 5.24
FHLB advances 659,747 6,482 3.93 373,078 4,130 4.43
Securities sold under agreements to
repurchase and other borrowings 39,516 127 1.30 38,333 486 5.14
Senior Notes 21,545 636 11.81 41,062 1,213 11.81
Mandatorily redeemable trust preferred securities 40,250 922 9.16 - - -
------------ ---------- ------------ ---------
Total interest-bearing 2,427,962 21,819 3.64% 2,187,110 28,246 5.24%
---------- ========= --------- ========
Noninterest-bearing liabilities 185,856 171,514
Stockholders' equity 164,972 159,189
------------ ------------
Total liabilities and stockholders' equity $ 2,778,790 $ 2,517,813
============ ============
Net interest-earning assets $ 224,237 $ 213,401
============ ============
Net interest income/interest rate spread $ 23,197 3.21% $ 20,645 2.99%
========== ========= ========= ========
Net interest margin 3.50% 3.44%
========= ========
Ratio of average interest-earning to average
interest-bearing 109.24% 109.76%
========= ========
----------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and excludes the allowance
for loan losses which is included in noninterest-earning assets.
(2) Includes the market valuation accounts.
(3) Includes interest-bearing deposits, Federal Home Loan Bank of Topeka stock
and Federal Reserve Bank stock.
(4) Includes passbook, NOW and money market accounts.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the Company's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
originations, to meet withdrawals from deposit accounts, to make principal and
interest payments with respect to outstanding borrowings and to make investments
that take advantage of interest rate spreads. The Company monitors its liquidity
in accordance with guidelines established by the Company and applicable
regulatory requirements. The Company's need for liquidity is affected by loan
demand, net changes in deposit levels and the scheduled
12
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing effort. Liquidity demand caused by net reductions in deposits is
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB, securities sold under agreements to repurchase and other
short and long-term borrowings.
The Company's liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally placed in short-term
investments such as overnight money funds and short-term government agency
securities. If the Company requires funds beyond its ability to generate them
internally, various forms of both short and long-term borrowings provide an
additional source of funds. At March 31, 2002, the Company had $388.8 million in
available borrowing capacity with the FHLB.
At March 31, 2002, the Company had approximately $317.1 million of
outstanding loan commitments (including unused lines of credit) for home equity,
commercial real estate and commercial business loans and an additional $8.4
million in performance standby letters of credit. Certificates of deposit which
are scheduled to mature or reprice within one year totaled $956.9 million at
March 31, 2002, and borrowings which are scheduled to mature or reprice within
the same period amounted to $46.0 million. The Company anticipates that
sufficient funds will be available to meet its current loan commitments and
that, based upon past experience and current pricing policies, it can adjust the
rates of certificates of deposit to retain a substantial portion of its maturing
certificates and also, to the extent deemed necessary, refinance the maturing
borrowings.
On September 8, 1997 and in connection with the Company's recapitalization,
the Company issued $80.0 million of Senior Notes. As of March 31, 2002, the
Company has purchased and retired $58.5 million of those outstanding Senior
Notes. These transactions reduced future interest costs associated with those
notes. The remaining $21.5 million of Senior Notes have an annual debt service
requirement of $2.4 million (or $1.2 million for each semi-annual period).
CAPITAL RESOURCES. The Company issued $35 million in Trust Preferred
Securities in September 2001 with an additional issuance of $5.3 million on
October 3, 2001. The Trust Preferred Securities increased the Company's
regulatory capital, which allows for the continued growth of its banking
franchise. The ability to treat these Trust Preferred Securities as regulatory
capital under Federal Reserve guidelines, coupled with the Federal income tax
deductibility of the related expense, provides the Company with a cost-effective
form of capital.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Bank. The guidelines
are commonly known as Risk-Based Capital Guidelines. On March 31, 2002, the
Company exceeded all applicable capital requirements to be well capitalized by
having a total risk-based capital ratio of 10.86%, a tier I risk-based capital
ratio of 9.60% and a leverage ratio of 6.89%.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars (except with respect to
available for sale securities which are carried at market value), without
considering changes in
13
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present contractual cash obligations and commercial
commitments of the Company as of March 31, 2002. See Note 3 of the Notes to the
Consolidated Financial Statements and "--Liquidity and Capital Resources"
(dollars in thousands):
Payments due by Period
--------------------------------------------------------------------
More Than
Less than One to Three Years Over
Contractual Cash Obligations Total One Year Three Years to Five Years Five Years
----------------------------------------- ---------- ---------- ----------- ------------- -----------
FHLB advances $ 600,024 $ - $ - $ 100,000 $ 500,024
Senior Notes 21,545 - 21,545 - -
Mandatorily redeemable trust preferred
securities 40,250 - - - 40,250
Operating leases 7,686 1,064 1,481 847 4,294
Data processing maintenance obligation 1,060 - 530 530 -
---------- ---------- ----------- ----------- ----------
Total contractual cash obligations $ 670,565 $ 1,064 $ 23,556 $ 101,377 $ 544,568
========== ========== =========== =========== ==========
In order to support strategic objectives, during 2001 management initiated
a project to return its mainframe operations to an internally supported
function. The Company's mainframe processing has been operated in a data center
operated by a third-party servicer. During the first quarter of 2002, the
Company brought its mainframe processing in-house. The Company does not
anticipate this action will have a material impact on its consolidated financial
condition and the contractual obligations are reflected above.
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------
More Than
Unfunded Less than One to Three Years Over
Commercial Commitments Commitments One Year Three Years to Five Years Five Years
----------------------------------------- ----------- ---------- ----------- ------------- ----------
Lines of credit $ 236,827 $ 142,440 $ 86,001 $ 7,496 $ 890
Standby letters of credit 8,427 7,722 705 - -
Other commercial commitments 78,367 12,768 4,627 17,550 43,422
----------- ---------- ----------- ----------- ----------
Total commercial commitments $ 323,621 $ 162,930 $ 91,333 $ 25,046 $ 44,312
=========== ========== =========== =========== ==========
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" included in the
Company's Form 10-K for the year ended December 31, 2001 for Quantitative and
Qualitative Disclosures about Market Risk.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
The Company filed the following Form 8-K during the quarter ended March 31,
2002:
1. A Form 8-K dated February 4, 2002 was filed pursuant to the
release of earnings for 2001.
15
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCAL FINANCIAL CORPORATION
Date: May 8, 2002 By /s/ Edward A. Townsend
------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: May 8, 2002 By /s/ Richard L. Park
---------------------
Richard L. Park
Chief Financial Officer
16