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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 June 30, 2001
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 August 1, 2001 were as follows:
NUMBER OF SHARES
----------------
20,539,209
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LOCAL FINANCIAL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
June 30, 2001 (unaudited) and December 31, 2000................................................1
Consolidated Statements of Operations-
For the Three Months and Six Months Ended June 30, 2001 and 2000 (unaudited)...................2
Consolidated Statements of Cash Flows-
For the Six Months Ended June 30, 2001 and 2000 (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....................................14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...........................................14
Item 6. Exhibits and Reports on Form 8-K..............................................................14
Signatures ..............................................................................................15
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
June 30, 2001 December 31, 2000
--------------- -----------------
(unaudited)
ASSETS
Cash and due from banks $ 38,536 39,571
Interest bearing deposits with other banks 26,200 4,400
Securities available for sale 513,091 354,048
Loans receivable, net of allowance for loan losses of $27,680 at
June 30, 2001 and $28,345 at December 31, 2000 1,871,352 1,848,876
Federal Home Loan Bank of Topeka and Federal Reserve Bank stock,
at cost 28,785 19,417
Premises and equipment, net 37,980 37,865
Assets acquired through foreclosure and repossession, net 1,014 881
Intangible assets, net 16,218 16,888
Current and deferred taxes, net 6,712 6,976
Other assets 51,460 48,089
----------- -----------
Total assets $ 2,591,348 2,377,011
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 623,076 606,752
Savings 66,735 62,907
Time 1,102,747 1,262,134
----------- -----------
Total deposits 1,792,558 1,931,793
Advances from the Federal Home Loan Bank of Topeka 500,026 190,028
Securities sold under agreements to repurchase and other borrowings 66,207 38,214
Senior notes 41,010 41,160
Other liabilities 19,809 19,545
----------- -----------
Total liabilities 2,419,610 2,220,740
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized; 20,539,269
shares issued and 20,539,209 shares outstanding at June 30, 2001 and
20,537,269 shares issued and 20,537,209
shares outstanding at December 31, 2000 205 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,777 206,758
Retained earnings 109,826 96,003
Treasury stock, 60 shares, at cost (151,274) (151,274)
Accumulated other comprehensive income 6,204 4,579
----------- -----------
Total stockholders' equity 171,738 156,271
----------- -----------
Total liabilities and stockholders' equity $ 2,591,348 2,377,011
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited)
Interest and dividend income:
Loans $ 38,003 37,490 77,314 73,729
Securities available for sale 9,071 7,199 17,236 16,047
Federal Home Loan Bank of Topeka and
Federal Reserve Bank stock 499 326 916 749
Other investments 376 511 1,374 801
--------- --------- --------- ---------
Total interest and dividend income 47,949 45,526 96,840 91,326
--------- --------- --------- ---------
Interest expense:
Deposit accounts 19,461 21,468 41,878 41,868
Advances from the Federal Home Loan Bank of
Topeka 5,435 3,581 9,565 7,690
Securities sold under agreements to
repurchase and other borrowings 530 190 1,016 190
Notes payable 1,212 1,275 2,425 3,528
--------- --------- --------- ---------
Total interest expense 26,638 26,514 54,884 53,276
--------- --------- --------- ---------
Net interest and dividend income 21,311 19,012 41,956 38,050
Provision for loan losses (1,150) (500) (1,900) (1,000)
--------- --------- --------- ---------
Net interest and dividend income after
provision for loan losses 20,161 18,512 40,056 37,050
--------- --------- --------- ---------
Noninterest income:
Deposit related income 3,805 3,610 6,922 6,819
Loan fees and loan service charges 674 430 1,179 888
Net gains on sale of assets 201 147 306 311
Other 841 495 1,715 929
--------- --------- --------- ---------
Total noninterest income 5,521 4,682 10,122 8,947
--------- --------- --------- ---------
Noninterest expense:
Compensation and employee benefits 8,630 7,869 16,452 15,627
Deposit insurance premiums 90 95 180 187
Equipment and data processing 1,615 1,881 3,239 3,359
Occupancy 921 884 1,891 1,768
Advertising 86 144 189 300
Professional fees 253 177 664 528
Other 3,563 2,719 6,993 5,442
--------- --------- --------- ---------
Total noninterest expense 15,158 13,769 29,608 27,211
--------- --------- --------- ---------
Income before income taxes and extraordinary item 10,524 9,425 20,570 18,786
Provision for income taxes 3,472 3,405 6,743 6,786
--------- --------- --------- ---------
Income before extraordinary item 7,052 6,020 13,827 12,000
Extraordinary item - purchase and retirement of
senior notes, net of tax (1) - (4) (871)
--------- --------- --------- ---------
Net income $ 7,051 6,020 13,823 11,129
========= ========= ========= =========
Earnings per share:
Income before extraordinary item:
Basic $ .34 .29 .67 .58
========== ========== ========== ==========
Diluted $ .33 .29 .65 .58
========== ========== ========== ==========
Net income:
Basic $ .34 .29 .67 .54
========== ========== ========== ==========
Diluted $ .33 .29 .65 .54
========== ========== ========== ==========
Average shares outstanding:
Basic 20,539,209 20,537,209 20,539,032 20,537,209
========== ========== ========== ==========
Diluted 21,226,583 20,537,209 21,181,118 20,537,209
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six Months Ended
June 30,
------------------------
2001 2000
---------- ----------
(unaudited)
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income $ 13,823 11,129
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 1,900 1,000
Deferred income tax expense (665) 1,579
Accretion of discount on loans and securities available for
sale, net (1,176) (1,070)
Depreciation and amortization 2,323 2,053
Net change in loans held for sale (4,317) 5,547
Net gains on sale of assets (306) (311)
Change in other assets (3,333) 249
Change in other liabilities (670) (5,458)
---------- ----------
Net cash provided by operating activities 7,579 14,718
---------- ----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale -- 150,480
Proceeds from principal collections on securities available for sale 91,615 32,160
Purchases of securities available for sale (246,008) (68,816)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (9,368) (4,806)
Proceeds from the sale of Federal Home Loan Bank and Federal
Reserve Bank stock -- 12,035
Change in loans receivable, net (20,666) (125,489)
Proceeds from disposal of assets acquired through foreclosure and
repossession 1,087 905
Purchases of premises and equipment (2,145) (7,385)
Proceeds from sales of premises and equipment 46 18
---------- ----------
Net cash (absorbed) by investing activities (185,439) (10,898)
---------- ----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 20,152 20,878
Change in time deposits (159,387) (1,242)
Change in securities sold under agreements to repurchase
and other borrowings 27,993 20,135
Proceeds from advances from the Federal Home Loan Bank 813,113 982,150
Repayments of advances from the Federal Home Loan Bank (503,115) (1,008,029)
Proceeds from the issuance of common stock 19 --
Purchase of senior notes (150) (32,090)
---------- ----------
Net cash provided (absorbed) by financing activities 198,625 (18,198)
---------- ----------
Net change in cash and cash equivalents 20,765 (14,378)
Cash and cash equivalents at beginning of period 43,971 55,822
---------- ----------
Cash and cash equivalents at end of period $ 64,736 41,444
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 54,068 54,575
========== ==========
Income taxes $ 6,162 4,838
========== ==========
Supplemental schedule of noncash investing and financing activities:
Transfers of loans to assets acquired through foreclosure and
repossession $ 1,220 600
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
(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 Local Financial Corporation (the "Company") Form 10-K
for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission.
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost (dollars in
thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Residential real estate loans $ 231,348 250,487
Commercial 1,485,756 1,425,382
Held for sale 1,605 5,922
Consumer loans 180,323 195,430
----------- -----------
Total loans 1,899,032 1,877,221
Less:
Allowance for loan losses (27,680) (28,345)
----------- -----------
Loans receivable, net $ 1,871,352 1,848,876
=========== ===========
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows (dollars in
thousands):
June 30, 2001 December 31, 2000
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
----------------- ------------------ ------------------ -----------------
Fixed rate $ 500,026 4.30% $ 190,028 6.44%
============ =========== ============ ===========
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Although no specific assets are pledged, the FHLB requires the Company
to hold eligible assets with a lending value, as defined, at least
equal to FHLB advances, which can include such items as first and
second residential and commercial mortgage loans and investment
securities which are not already pledged or encumbered.
Scheduled principal repayments to the FHLB at June 30, 2001 are as
follows (dollars in thousands):
Weighted
Average
Amount Contractual Rate
---------------- ----------------
Year Ending December 31, 2005
and thereafter $ 500,026 4.30%
=============== ===========
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The Company had $14.0 million in term fed funds and $52.2 million in
securities sold under agreements to repurchase at June 30, 2001.
Securities sold under agreements to repurchase are summarized as
follows (dollars in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Average outstanding balance $41,330 18,352
Weighted average interest rate during the period 4.49% 5.85
Maximum month-end balance $53,622 38,214
Outstanding balance at end of the period 52,207 38,214
Mortgage-backed securities securing the
agreements at period-end:
Carrying value $60,413 42,053
Estimated market value 60,413 42,053
Accrued interest payable at the end of the period 2 --
The Company routinely provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations.
(5) COMPREHENSIVE INCOME
Comprehensive income for the periods ended June 30, 2001 and 2000
consists of (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 7,051 6,020 13,823 11,129
Other comprehensive income, net of tax:
Unrealized gains (losses) on
securities, net of reclassification
adjustment (172) (126) 1,625 (2,047)
------- ------- ------- -------
Comprehensive income $ 6,879 5,894 15,448 9,082
======= ======= ======= =======
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(6) NET INCOME PER SHARE
Stock options and warrants to purchase 2,674,005 and 2,290,005 shares
of common stock were outstanding as of June 30, 2001 and 2000,
respectively. The stock options and warrants were included in the
computation of diluted net income per share for 2001, but were not
included in 2000 because they were antidilutive.
(7) SENIOR NOTES
During the six months ended June 30, 2001 and 2000, the Company
purchased and retired approximately $150,000 and $32.1 million,
respectively, of senior notes which had been issued in connection with
the Company's recapitalization in 1997. As a result, there is an
extraordinary item charge to income amounting to $4,000 and $871,000,
respectively, net of tax.
(8) 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"). 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.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that a company
recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. This statement was adopted by the Company in 2001 as set forth
in SFAS 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133.
Management has determined this statement did not have an impact on the
consolidated financial position or the results of operations of the
Company upon implementation on January 1, 2001.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately.
Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
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impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue
to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting
units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of
adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in
accordance with Statement 141, to its carrying amount, both of which
would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle
in the Company's consolidated statement of operations.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $15.5 million which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $1.3 million and $670,000 for the year ended
December 31, 2000 and the six months ended June 30, 2001, respectively.
Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle; however,
management does not anticipate an impairment loss at January 1, 2002.
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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.
Please do 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, 2000, 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, 2000 TO JUNE 30, 2001
During the six months ended June 30, 2001, total assets increased
$214.3 million or 9.02%. The $214.3 million increase was due primarily to
commercial loan growth as well as increases in the Company's investment
portfolio where the Company took proactive measures to lock in higher yields in
a declining rate environment. Commercial loan balances during the six months
ended June 30, 2001 rose $60.4 million or 4.24%. Securities available for sale
and Federal Home Loan Bank and Federal Reserve Bank stock rose by $159.0 million
or 44.92% and $9.4 million or 48.25%, respectively.
Total liabilities increased $198.9 million or 8.96% for the six months
ended June 30, 2001 primarily due to an increase in FHLB advances and securities
sold under agreements to repurchase offset by a decrease in time deposits.
During the period, the Company took advantage of market-driven opportunities for
lower cost borrowings at the FHLB resulting in an increase in advances from FHLB
of $310.0 million or 163.13%. This offset a $159.4 million or 12.63% decrease in
time deposits as some public and brokered deposits matured and were not renewed.
Securities sold under agreements to repurchase and other borrowings increased by
$28.0 million or 73.25% and consisted of commercial customer sweep accounts and
term fed funds.
Total stockholders' equity increased $15.5 million during the six
months ended June 30, 2001 which represented net income during the period of
$13.8 million and a $1.6 million increase in unrealized gains on securities net
of tax.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
AND THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
Net Income. The Company reported income before extraordinary item of
$13.8 million or $.67 basic earnings per share for the six months ended June 30,
2001 (based on 20.5 million average shares outstanding), compared to income
before extraordinary item of $12.0 million or $.58 basic earnings per
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share (based on 20.5 million average shares outstanding) for the six months
ended June 30, 2000. Income before extraordinary item rose to $7.1 million or
$.34 basic earnings per share for the three months ended June 30, 2001 (based on
20.5 million average shares outstanding) from $6.0 million or $.29 basic
earnings per share for the three months ended June 30, 2000 (based on 20.5
million average shares outstanding). The extraordinary item charge to income in
the six months ended June 30, 2001 was a result of the Company's purchase and
retirement of $150,000 of senior notes during the period. The extraordinary item
charge to income amounting to $871,000, net of tax, occurred in the first
quarter of 2000 as a result of the Company's purchase and retirement of $32.1
million of senior notes.
Net Interest and Dividend Income. Net interest and dividend income
totaled $42.0 million in the six months ended June 30, 2001 as compared to $38.1
million during the same period in the prior year. Net interest and dividend
income in the three-month comparative periods ended June 30, 2001 totaled $21.3
million and $19.0 million, respectively. In both comparative periods, the
Company saw increasing spreads and net interest margins due primarily to
commercial loan origination volume, increasing yields in the security portfolio
and favorable yields on FHLB advances.
Interest Income. Total interest and dividend income increased by $5.5
million or 6.04% during the six months ended June 30, 2001 as compared to the
same period in the prior year and rose by $2.4 million or 5.32% during the three
months ended June 30, 2001 compared to the same period in the prior year. The
increase in interest income during the six-month comparative period was due
primarily to growth in the Bank's commercial loan portfolio where balances rose
from $1.313 billion at June 30, 2000 to $1.486 billion at June 30, 2001. The
increase in interest income during the three-month comparative period ended June
30, 2001 was a result of increases in the Company's security portfolio.
Interest Expense. Total interest expense increased $1.6 million or
3.02% in the six months ended June 30, 2001 as compared to the same period in
the prior year. Total interest expense increased $124,000 or .47% during the
three months ended June 30, 2001 as compared to the same period in the prior
year. The increases in interest expense during both the six and three-month
comparative periods were primarily the result of increased borrowings at the
FHLB, as the Company took advantage of market-driven opportunities by investing
in lower cost borrowings, offset by a decline in interest expense on senior
notes as a result of the Company's purchase and retirement of a portion of those
notes.
Provision for Loan Losses. The Company established provisions for loan
losses of $1.9 million and $1.15 million during the six months and three months
ended June 30, 2001, respectively. Charge-offs (net of recoveries) during the
same periods were $2.6 million and $1.5 million, respectively. The Company's
basis for provisions 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 small loans, portfolio
seasoning, change in collateral values, and detailed review of specific large
loan relationships.
Noninterest Income. 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. Total noninterest income increased $1.2 million or
13.13% during the six months ended June 30, 2001 as compared to the same period
in the prior year as loan fees and service charges driven by the growth in the
commercial loan portfolio rose 32.8%. During the three months ended June 30,
2001, total noninterest income increased $839,000 or 17.92% with loan fees and
deposit related income growth constituting the majority of the increase between
the comparative periods. Deposit related income growth in the three-month
comparative period is attributable to the Company's increased marketing efforts
in this area.
Noninterest Expense. Total noninterest expense increased $2.4 million
or 8.81% during the six months ended June 30, 2001 as compared to the same
period in the prior year. Total noninterest expense increased $1.4 million or
10.09% during the three months ended June 30, 2001 as compared to the same
period in the prior year. The increases in noninterest expense during both the
six and three-month
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comparative periods resulted primarily from increases in compensation costs as
well as start-up costs related to new marketing initiatives.
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.
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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 June 30,
------------------------------------------------------------------------
2001 2000
---------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- ------- ---------- ----------- -------
Interest-earning assets:
Loans receivable(1) $ 1,888,583 $ 38,003 8.05% $1,777,200 $ 37,490 8.44%
Securities(2) 505,068 9,071 7.18 405,576 7,199 7.10
Other earning assets(3) 64,799 875 5.40 52,122 837 6.42
---------- ---------- ---------- ----------
Total interest-earning assets 2,458,450 47,949 7.80% 2,234,898 45,526 8.15%
---------- ====== ---------- ======
Noninterest-earning assets 119,462 92,070
---------- ----------
Total assets $2,577,912 $2,326,968
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 520,245 3,800 2.93% $ 420,888 2,719 2.60%
Term certificates of deposit 1,118,942 15,661 5.61 1,318,194 18,749 5.72
---------- ---------- ---------- ----------
Total deposits 1,639,187 19,461 4.76 1,739,082 21,468 4.96
Borrowings:
FHLB advances 500,027 5,435 4.30 233,875 3,581 6.06
Securities sold under agreements
to repurchase and other borrowings 52,601 530 4.04 13,970 190 5.47
Senior notes 41,036 1,212 11.81 43,160 1,275 11.81
---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,232,851 26,638 4.79% 2,030,087 26,514 5.25%
---------- ====== ---------- ======
Noninterest-bearing liabilities 178,386 163,251
---------- ----------
Total liabilities 2,411,237 2,193,338
Stockholders' equity 166,675 133,630
---------- ----------
Total liabilities and stockholders'
equity $2,577,912 $2,326,968
========== ==========
Net interest-earning assets $ 225,599 $ 204,811
========== ==========
Net interest income/interest rate spread $ 21,311 3.01% $ 19,012 2.90%
========== ====== ========== ======
Net interest margin 3.47% 3.40%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 110.10% 110.09%
====== ======
Six Months Ended June 30,
----------------------------------------------------------------------
2001 2000
------------------------------------ ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- ------- --------- ---------- --------
Interest-earning assets:
Loans receivable(1) $1,880,695 $ 77,314 8.28% $1,749,066 $ 73,729 8.43%
Securities(2) 468,222 17,236 7.36 456,047 16,047 7.04
Other earning assets(3) 80,724 2,290 5.67 49,135 1,550 6.31
---------- ---------- ---------- ----------
Total interest-earning assets 2,429,641 96,840 8.01% 2,254,248 91,326 8.10%
---------- ====== ---------- ========
Noninterest-earning assets 118,372 94,458
---------- ----------
Total assets $2,548,013 $2,348,706
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 516,678 8,250 3.22% $ 445,781 6,773 3.06%
Term certificates of deposit 1,169,970 33,628 5.80 1,288,059 35,095 5.48
---------- ---------- ---------- ----------
Total deposits 1,686,648 41,878 5.01 1,733,840 41,868 4.86
Borrowings:
FHLB advances 436,903 9,565 4.35 259,144 7,690 5.87
Securities sold under agreements
to repurchase and other borrowings 45,507 1,016 4.50 7,090 190 5.39
Senior notes 41,049 2,425 11.81 56,884 3,528 11.81
---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,210,107 54,884 5.01% 2,056,958 53,276 5.21%
---------- ====== ---------- ========
Noninterest-bearing liabilities 174,953 160,611
---------- ----------
Total liabilities 2,385,060 2,217,569
Stockholders' equity 162,953 131,137
---------- ----------
Total liabilities and stockholders'
equity $2,548,013 $2,348,706
========== ==========
Net interest-earning assets $ 219,534 $ 197,290
========== ==========
Net interest income/interest rate spread $ 41,956 3.00% $ 38,050 2.89%
========== ====== ========== ========
Net interest margin 3.45% 3.38%
====== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.93% 109.59%
====== =======
----------
(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 all securities, including the market valuation accounts.
(3) Includes cash and due from banks, interest-bearing deposits, and Federal
Home Loan Bank of Topeka and Federal Reserve Bank stock.
(4) Includes passbook, NOW and money market accounts.
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14
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 2001, 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) $ 757,612 263,683 488,117 228,771 152,596 1,890,779
Securities(3) 72,627 87,613 137,674 140,598 65,093 503,605
Other interest-earning
assets(4) 89,738 3,783 -- -- -- 93,521
---------- ---------- ---------- ---------- --------- ----------
Total $ 919,977 355,079 625,791 369,369 217,689 2,487,905
========== ========== ========== ========== ========= ==========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 217,743 43,225 79,233 47,808 74,928 462,937
Passbook accounts 3,675 11,026 20,401 12,402 19,231 66,735
Certificates of deposit 402,896 494,972 177,895 26,116 868 1,102,747
Borrowings:
FHLB advances(6) -- -- -- -- 500,026 500,026
Securities sold under
agreements to repurchase
and other borrowings 66,207 -- -- -- -- 66,207
Senior notes -- -- -- 41,010 -- 41,010
---------- ---------- ---------- ---------- --------- ----------
Total $ 690,521 549,223 277,529 127,336 595,053 2,239,662
========== ========== ========== ========== ========= ==========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 229,456 (194,144) 348,262 242,033 (377,364) 248,243
========== ========== ========== ========== ========= ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ 229,456 35,312 383,574 625,607 248,243 248,243
========== ========== ========== ========== ========= ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities
as a percent of total assets 8.85% 1.36 14.80 24.14 9.58 9.58
========== ========== ========== ========== ========== ==========
(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 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.
(6) Maturity based on projected call date and/or actual maturity date.
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
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15
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 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 are 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 June 30, 2001, the Company had unutilized
borrowing capacity with a credit limit subject to the maximum amount of credit
available under the FHLB System Credit Policy.
At June 30, 2001, the Bank had approximately $284.5 million of
outstanding loan commitments (including unused lines of credit) for home equity,
commercial real estate and commercial business loans. Certificates of deposit
which are scheduled to mature within one year totaled $897.9 million at June 30,
2001, and borrowings which are scheduled to mature or reprice within the same
period amounted to $66.2 million. The Bank 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. Since that
time, the Company has purchased and retired $39.0 million of those outstanding
senior notes. These transactions reduced future interest costs associated with
those notes. The remaining $41.0 million of senior notes have an annual debt
service requirement of $4.5 million (or $2.25 million for each semi-annual
period).
Capital Resources. Bank holding companies are required to maintain
capital ratios in accordance with guidelines adopted by the FRB. The guidelines
are commonly known as Risk-Based Capital Guidelines.
On June 30, 2001, the Company exceeded all applicable capital
requirements by having a total risk-based capital ratio of 9.15%, a tier I
risk-based capital ratio of 7.90% and a leverage ratio of 5.85%.
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 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.
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16
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" for Quantitative and
Qualitative Disclosures about Market Risk.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the Annual Meeting of Stockholders on May 23, 2001.
Management solicited proxies for the meeting, and there was no solicitation in
opposition to management's nominees as listed in the Proxy Statement. All
nominees were re-elected for a three-year term. Votes were cast as follows:
Nominee For Withheld Abstain
------- --- -------- -------
Edward A. Townsend 15,148,697 388,995 352,550
Robert A. Kotecki 15,537,692 - 352,550
J. David Rosenberg 15,527,692 10,000 352,550
The stockholders approved an amendment to the Local Financial
Corporation 1998 Stock Option Plan increasing the shares authorized for grant
from 1,720,370 shares to 2,100,370 shares. Votes were cast as follows:
For Against Abstain
--- ------- -------
11,007,112 4,857,835 25,295
The stockholders ratified the appointment of KPMG LLP, independent
auditors, to audit the Company's financial statements for the year ending
December 31, 2001. Votes were cast as follows:
For Against Abstain
--- ------- -------
15,819,801 59,551 10,890
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
There were no Form 8-K's filed during the quarter ended June 30, 2001.
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17
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: August 3, 2001 By /s/ Edward A. Townsend
-------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: August 3, 2001 By /s/ Richard L. Park
----------------------
Richard L. Park
Chief Financial Officer
15