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 September 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 November 1, 2001 were as follows:
NUMBER OF SHARES
----------------
20,539,209
LOCAL FINANCIAL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
September 30, 2001 (unaudited) and December 31, 2000........................................... 1
Consolidated Statements of Operations-
For the Three Months and Nine Months Ended September 30, 2001
and 2000 (unaudited)........................................................................... 2
Consolidated Statements of Cash Flows-
For the Nine Months Ended September 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......................................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signatures .............................................................................................. 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
ASSETS
Cash and due from banks $ 45,181 39,571
Interest bearing deposits with other banks 79,400 4,400
Securities available for sale 542,211 354,048
Loans receivable, net of allowance for loan losses of $27,664 at
September 30, 2001 and $28,345 at December 31, 2000 1,925,179 1,848,876
Federal Home Loan Bank of Topeka and Federal Reserve Bank Stock, at 33,784 19,417
cost
Premises and equipment, net 38,379 37,865
Assets acquired through foreclosure and repossession, net 1,737 881
Intangible assets, net 15,883 16,888
Current and deferred taxes, net 5,216 6,976
Other assets 53,698 48,089
--------------- ---------------
Total assets $ 2,740,668 2,377,011
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 618,614 606,752
Savings 69,147 62,907
Time 1,130,436 1,262,134
--------------- ---------------
Total deposits 1,818,197 1,931,793
Advances from the Federal Home Loan Bank of Topeka 600,025 190,028
Securities sold under agreements to repurchase 45,082 38,214
Senior notes 41,010 41,160
Other liabilities 18,421 19,545
Mandatory redeemable trust preferred securities 35,000 -
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 September 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 117,020 96,003
Treasury stock, 60 shares, at cost (151,274) (151,274)
Accumulated other comprehensive income 10,205 4,579
--------------- ---------------
Total stockholders' equity 182,933 156,271
--------------- ---------------
Total liabilities and stockholders' equity $ 2,740,668 2,377,011
=============== ===============
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 Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
(unaudited)
Interest and dividend income:
Loans $ 37,725 40,712 115,039 114,441
Securities available for sale 8,956 6,642 26,192 22,689
Federal Home Loan Bank of Topeka and
Federal Reserve Bank stock 524 373 1,440 1,122
Other investments 687 160 2,061 961
---------- ---------- ---------- ----------
Total interest and dividend income 47,892 47,887 144,732 139,213
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 18,152 22,394 60,030 64,262
Advances from the Federal Home Loan
Bank of Topeka 5,620 4,382 15,185 12,072
Securities sold under agreements to
repurchase and other borrowings 419 365 1,435 555
Notes payable 1,212 1,274 3,637 4,802
Trust preferred securities 97 - 97 -
---------- ---------- ---------- ----------
Total interest expense 25,500 28,415 80,384 81,691
---------- ---------- ---------- ----------
Net interest and dividend income 22,392 19,472 64,348 57,522
Provision for loan losses (1,775) (500) (3,675) (1,500)
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for loan losses 20,617 18,972 60,673 56,022
---------- --------- --------- ---------
Noninterest income:
Deposit related income 3,802 3,275 10,724 10,094
Loan fees and loan service charges 458 434 1,637 1,322
Net gains on sale of assets 222 223 528 534
Other 815 504 2,530 1,433
---------- ---------- ---------- ----------
Total noninterest income 5,297 4,436 15,419 13,383
---------- ---------- ---------- -----------
Noninterest expense:
Compensation and employee benefits 8,357 7,871 24,809 23,498
Equipment and data processing 1,633 1,628 4,872 4,987
Occupancy 999 1,039 2,890 2,807
Advertising 125 153 314 453
Professional fees 329 217 993 745
Other 3,638 2,843 10,811 8,472
---------- ----------- ----------- ----------
Total noninterest expense 15,081 13,751 44,689 40,962
---------- ----------- ----------- ----------
Income before income taxes and extraordinary
item 10,833 9,657 31,403 28,443
Provision for income taxes 3,639 3,496 10,382 10,282
---------- ---------- ---------- ----------
Income before extraordinary item 7,194 6,161 21,021 18,161
Extraordinary item - purchase and retirement
of senior notes, net of tax -- -- (4) (871)
---------- ---------- ---------- ----------
Net income $ 7,194 6,161 21,017 17,290
========== ========== ========== ==========
Earnings per share:
Income before extraordinary item:
Basic $ 0.35 0.30 1.02 0.88
========== ========== ========== ==========
Diluted $ 0.34 0.30 0.99 0.88
========== ========== ========== ==========
Net income:
Basic $ 0.35 0.30 1.02 0.84
========== ========== ========== ==========
Diluted $ 0.34 0.30 0.99 0.84
========== ========== ========== ==========
Average shares outstanding:
Basic 20,539,209 20,537,209 20,539,091 20,537,209
========== ========== ========== ==========
Diluted 21,349,796 20,537,209 21,238,203 20,537,209
========== ========== ========== ==========
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)
Nine Months Ended
September 30,
----------------------------
2001 2000
----------- -----------
(unaudited)
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income $ 21,017 17,290
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 3,675 1,500
Deferred income tax expense 186 3,835
Accretion of discount on loans acquired and securities available for sale (1,939) (1,456)
Depreciation and amortization 3,483 2,890
Net change in loans held for sale 1,093 2,515
Net gains on sale of assets (528) (534)
Change in other assets (5,607) (1,036)
Change in other liabilities (2,132) (9,981)
----------- -----------
Net cash provided by operating activities 19,248 15,023
----------- -----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 19,813 190,460
Proceeds from principal collections on securities available for sale 179,378 45,992
Purchases of securities available for sale (376,178) (73,165)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (14,367) (6,632)
Proceeds from the sale of Federal Home Loan Bank stock -- 12,035
Change in loans receivable, net (82,048) (221,334)
Proceeds from disposal of assets acquired through foreclosure and repossession 1,525 1,304
Purchases of premises and equipment (3,550) (8,798)
Proceeds from sales of premises and equipment 51 68
----------- -----------
Net cash (absorbed) by investing activities (275,376) (60,070)
----------- -----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 18,102 38,672
Change in time deposits (131,698) (2,378)
Change in securities sold under agreements to repurchase 6,868 32,084
Proceeds from advances from the Federal Home Loan Bank 1,049,365 2,646,634
Repayments of advances from the Federal Home Loan Bank (639,368) (2,643,106)
Proceeds from the issuance of common stock 19 --
Proceeds from the issuance of trust preferred securities 35,000 --
Payment of trust preferred securities issuance costs (1,400) --
Purchase of senior notes (150) (32,090)
----------- -----------
Net cash provided by financing activities 336,738 39,816
----------- -----------
Net change in cash and cash equivalents 80,610 (5,231)
Cash and cash equivalents at beginning of period 43,971 55,822
----------- -----------
Cash and cash equivalents at end of period $ 124,581 50,591
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 80,527 84,384
=========== ===========
Income taxes $ 11,083 7,588
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to assets acquired through foreclosure and repossession $ 2,438 1,039
=========== ===========
Transfer of loans securitized to investments available for sale $ -- 36,504
=========== ===========
Transfer of loans securitized to other assets $ -- 364
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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):
September 30, 2001 December 31, 2000
------------------ -----------------
Residential real estate loans $ 214,919 250,487
Commercial 1,549,389 1,425,382
Held for sale 4,829 5,922
Consumer loans 183,706 195,430
----------- -----------
Total loans 1,952,843 1,877,221
Less:
Allowance for loan losses (27,664) (28,345)
----------- -----------
Loans receivable, net $ 1,925,179 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):
September 30, 2001 December 31, 2000
-------------------------------- -----------------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
------- ---------------- ------- ----------------
Fixed rate $ 600,025 4.14% $ 190,028 6.44%
========== ========== ========== ==========
4
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 September 30, 2001 are as
follows (dollars in thousands):
Weighted
Average
Amount Contractual Rate
----------- ----------------
Year ending December 31, 2005
and thereafter $ 600,025 4.14%
=========== ===========
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as
follows (dollars in thousands):
September 30, December 31,
2001 2000
------------- ------------
Average outstanding balance $ 41,781 18,352
Weighted average interest rate during the period 4.01% 5.85%
Maximum month-end balance $ 53,622 38,214
Outstanding balance at end of period 45,082 38,214
Mortgage-backed securities securing the agreements
at period-end:
Carrying value 51,242 42,053
Estimated market value 51,242 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) SENIOR NOTES
During the nine months ended September 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. Subsequent to the quarter ended September 30,
2001, the Company purchased and retired an additional $19.5 million of
senior notes, which will result in an extraordinary item charge to
income of $1.6 million, net of tax, in the fourth quarter of 2001.
(6) MANDATORY REDEEMABLE TRUST PREFERRED SECURITIES
On September 20, 2001, Local Financial Capital Trust I (the "Trust"), a
newly-formed Delaware business trust and wholly-owned finance
subsidiary of the Company, issued 1,400,000 shares of its 9.00%
Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") for an aggregate price of $35 million. An additional
210,000 shares of these securities were
5
subsequently issued on October 3, 2001 for an aggregate price of $5.3
million. The Trust Preferred Securities will mature on September 30,
2031. Distributions on the Trust Preferred Securities and on the common
securities issued to the Company are payable on March 31, June 30,
September 30 and December 31 of each year beginning December 31, 2001.
The proceeds from the sale of the Trust Preferred Securities and the
common securities were used by the Trust to purchase $41.5 million of
9% junior subordinated debentures (the "Debentures") of the Company,
which have the same payment terms as the preferred securities. Except
under certain circumstances, the common securities issued to the
Company possess sole voting rights with respect to matters involving
the Trust. Under certain circumstances, the Company may, from time to
time, defer the Debentures' interest payments, which would result in a
deferral of distribution payments on the related Trust Preferred
Securities and, with certain exceptions, prevent the Company from
declaring or paying cash distributions on the Company's common stock
and any other future debt ranking equally with or junior to the
Debentures.
Subject to any applicable regulatory approvals, the Trust Preferred
Securities and the common securities issued by the Trust to the Company
are redeemable in whole or in part on or after September 30, 2006, or
at any time in whole, but not in part, from the date of issuance upon
the occurrence of certain events. The Trust Preferred Securities are
presently fully included in Tier 1 capital for capital adequacy
determination purposes. The obligations of the Company with respect to
the issuance of the Trust Preferred Securities constitute a full and
unconditional guarantee by the Company of the Trust's obligation with
respect to the Trust Preferred Securities subject to certain
limitations.
(7) COMMITMENTS AND CONTINGENCIES
As of September 30, 2001, the Bank had entered into a commitment to
purchase $175.0 million in new government agency securities to be
issued in October. These securities were issued on October 30, 2001,
and, accordingly, are not included in the accompanying September 30,
2001 consolidated statement of financial condition.
(8) COMPREHENSIVE INCOME
Comprehensive income for the periods ended September 30, 2001 and 2000
consists of (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income $ 7,194 6,161 21,017 17,290
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 4,001 2,415 5,626 368
---------- ---------- ---------- ----------
Comprehensive income $ 11,195 8,576 26,643 17,658
========== ========== ========== ==========
(9) NET INCOME PER SHARE
Stock options and warrants to purchase 2,689,005 and 2,680,005 shares
of common stock were outstanding as of September 30, 2001 and 2000,
respectively. The stock options and warrants
6
were included in the computation of diluted net income per share for
2001 to the extent they were not anti-dilutive. None of the stock
options and warrants were included in the computation of diluted net
income per share in 2000 as they were all anti-dilutive.
(10) 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.
In September 2001, the Company formed Local Financial Capital Trust I,
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 the Debentures from the Company and to distribute
payments referred thereon to the holders of its securities.
(11) NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. Statement No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a
business. However, it retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that reporting to
a component of an entity that either has been disposed of by sale,
abandonment, or in a distribution to owners or is classified as held
for sale. The statement is effective for fiscal years beginning after
December 15, 2001. Management has determined the impact of this
statement will not have a material impact on the consolidated financial
position or the future results of operations of the Company.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement
No. 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 No. 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 No. 142 will require
7
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 No. 142.
Statement No. 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
impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of or Statement No. 144 upon adoption.
The Company is required to adopt the provisions of Statement No. 141
immediately and Statement No. 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 No. 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 No. 142.
Statement No. 141 will require upon adoption of Statement No. 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 No. 141 for recognition apart from goodwill. Upon adoption
of Statement No. 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 No. 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 No. 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 No. 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 Statement Nos. 141 and 142. Amortization
expense related to goodwill was $1.0 million and $1.3 million for the
nine months ended September 30, 2001 and for the year ended December
31, 2000, respectively. Because of the extensive effort needed to
comply with adopting Statement Nos. 141 and 142, it is not
8
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.
9
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 SEPTEMBER 30, 2001
During the nine months ended September 30, 2001, total assets increased
$363.7 million or 15.30%. The growth in assets during the period was
attributable to continued commercial loan growth as well as growth in the
investment portfolio as the Company maintained its strategy of pursuing
additions to the investment portfolio in this declining rate environment. These
activities were funded primarily by investment cashflows and FHLB borrowings.
Commercial loan balances during the nine months ended September 30, 2001 rose
$124.0 million or 8.70%. Securities available for sale and Federal Home Loan
Bank stock rose by $188.2 million or 53.15% and $14.4 million or 74.0%,
respectively, during the nine months ended September 30, 2001. Interest-bearing
deposits with other banks were $79.4 million at September 30, 2001 compared with
$4.4 million at December 31, 2000. The larger balance at September 30, 2001 was
attributable to FHLB borrowings, which were received on September 24, 2001 and
invested in overnight deposits. These funds were reinvested in securities
available for sale on October 30, 2001.
FHLB advances increased $410.0 million as the Company took advantage of
market-driven opportunities for lower cost borrowings. The increase in FHLB
advances offset a $131.7 million or 10.43% decrease in time deposits as some
public and brokered deposits matured and were not renewed.
On September 20, 2001, the Trust issued $35.0 million of 9.00%
Cumulative Trust Preferred Securities. These securities are included in the
Company's consolidated statements of financial condition and are presented under
the caption "Mandatory Redeemable Trust Preferred Securities". An additional
$5.3 million of these securities were subsequently issued on October 3, 2001.
See Note 7 to the Notes to Consolidated Financial Statements included herein.
10
Total stockholders' equity increased $26.7 million during the nine
months ended September 30, 2001 which reflected net income during the period of
$21.0 million and a $5.6 million increase in unrealized gains on securities net
of tax.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER
30, 2000 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
Net Income. The Company reported income before extraordinary item of
$21.0 million or $1.02 basic earnings per share for the nine months ended
September 30, 2001, compared to income before extraordinary item of $18.2
million or $.88 basic earnings per share for the nine months ended September 30,
2000. Income before extraordinary item rose to $7.2 million or $.35 basic
earnings per share for the three months ended September 30, 2001 from $6.2
million or $.30 basic earnings per share for the three months ended September
30, 2000 Basic earnings per share for the periods are based on 20.5 million
average shares outstanding. The extraordinary item charge to income in the nine
months ended September 30, 2001 and 2000 was a result of the Company's purchase
and retirement of $150,000 and $32.1 million, respectively, of senior notes
during such periods.
Subsequent to September 30, 2001, the Company purchased and retired an
additional $19.5 million of senior notes, which will result in an extraordinary
item charge to income of $1.6 million in the fourth quarter of 2001.
Net Interest and Dividend Income. Net interest and dividend income
totaled $64.3 million in the nine months ended September 30, 2001, up 11.9% from
the same period in the prior year primarily due to the increase in commercial
loan volume. Likewise, net interest and dividend income in the three-month
comparative period ended September 30, 2001 totaled $22.4 million, a 15.00%
increase over the same period in the prior year. The increase in the three-month
comparative period came as the Company replaced maturing time deposits with
lower cost FHLB borrowings as a primary source of funding.
Interest Income. Total interest and dividend income increased by $5.5
million or 3.96% during the nine months ended September 30, 2001 as compared to
the same period in the prior year and remained constant during the three months
ended September 30, 2001 compared to the same period in the prior year.
Increases in the Bank's commercial loan volume and security portfolio
contributed positively to interest income during both the three and nine-month
periods; however, they were offset in the three months ended September 30, 2001
by the effect of declining rates on the loan portfolio. The Bank also recognized
certain interest income from commercial loan prepayments and other sources
during the quarter ended September 30, 2001, which resulted in higher spreads
and net interest margins for the quarter and nine months ended September 30,
2001.
Interest Expense. Total interest expense decreased $1.3 million or
1.60% in the nine months ended September 30, 2001 as compared to the same period
in the prior year. Total interest expense decreased $2.9 million or 10.26%
during the three months ended September 30, 2001 as compared to the same period
in the prior year. The decreases in interest expense during both the nine and
three-month comparative periods were primarily the result of market-driven rate
declines as well as volume declines on time deposits offset partially by the
effect of additional borrowings at the FHLB as the Company took advantage of
lower cost borrowing opportunities.
Provision for Loan Losses. The Company established provisions for loan
losses of $3.7 million and $1.8 million during the nine months and three months
ended September 30, 2001, respectively. Charge-offs (net of recoveries) during
the same periods were $4.4 million and $1.8 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
11
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 $2.0 million or
15.21% and $861,000 or 19.41% during the nine and three-month comparative
periods, respectively. In both comparative periods, loan fees and service
charges driven by the growth in the commercial loan portfolio and deposit
related income resulting from increased marketing efforts were the primary
contributors to higher noninterest income.
Noninterest Expense. Total noninterest expense increased $3.7 million
or 9.10% during the nine months ended September 30, 2001 as compared to the same
period in the prior year. Total noninterest expense increased $1.3 million or
9.67% during the three months ended September 30, 2001 as compared to the same
period in the prior year. The increases in noninterest expense during both the
nine and three-month 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.
12
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 September 30,
---------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Loans receivable(1) $1,921,171 $ 37,725 7.85% $1,865,844 $ 40,712 8.73%
Securities(2) 511,849 8,956 7.00% 379,308 6,642 7.00%
Other earning assets(3) 49,734 1,211 9.74% 29,767 533 7.16%
---------- ---------- ---------- ----------
Total interest-earning 2,482,754 47,892 7.72% 2,274,919 47,887 8.42%
---------- ========== ---------- ==========
Noninterest-earning assets 116,367 93,668
---------- ----------
Total assets $2,599,121 $2,368,587
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts(4) $ 515,993 3,632 2.79% $ 420,087 3,856 3.65%
Term certificates of deposit 1,124,768 14,520 5.12% 1,298,159 18,538 5.68%
---------- ---------- ---------- ----------
Total deposits 1,640,761 18,152 4.39% 1,718,246 22,394 5.18%
FHLB advances 513,933 5,620 4.28% 272,759 4,382 6.29%
Securities sold under agreements to
repurchase and other borrowings 48,787 419 3.41% 24,364 365 5.96%
Senior notes 41,010 1,212 11.81% 43,160 1,274 11.81%
Mandatory redeemable trust preferred
securities 4,185 97 9.27% -- -- --
---------- ---------- ---------- ----------
Total interest-bearing 2,248,676 25,500 4.49% 2,058,529 28,415 5.49%
---------- ========== ---------- ==========
Noninterest-bearing liabilities 174,887 168,852
Stockholders' equity 175,558 141,206
---------- ----------
Total liabilities and
stockholders' equity $2,599,121 $2,368,587
========== ==========
Net interest-earning assets $ 234,078 $ 216,390
========== ==========
Net interest income/interest rate spread $ 22,392 3.23% $ 19,472 2.93%
========== ========== ========== ==========
Net interest margin 3.61% 3.42%
========== ==========
Ratio of average interest-earning to
average interest-bearing 110.41% 110.51%
========== ==========
Nine Months Ended September 30,
---------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Loans receivable(1) $1,894,335 $ 115,039 8.14% $1,788,276 $ 114,441 8.53%
Securities(2) 482,925 26,192 7.23% 430,172 22,689 7.03%
Other earning assets(3) 70,281 3,501 6.64% 42,632 2,083 6.51%
---------- ---------- ---------- ----------
Total interest-earning 2,447,541 144,732 7.91% 2,261,080 139,213 8.21%
---------- ========== ---------- ==========
Noninterest-earning assets 117,309 94,558
---------- ----------
Total assets $2,564,850 $2,355,638
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts(4) $ 516,447 11,882 3.08% $ 419,323 10,629 3.39%
Term certificates of deposit 1,154,737 48,148 5.57% 1,309,359 53,633 5.47%
---------- ---------- ---------- ----------
Total deposits 1,671,184 60,030 4.80% 1,728,682 64,262 4.97%
FHLB advances 462,862 15,185 4.33% 263,715 12,072 6.01%
Securities sold under agreements to
repurchase and other borrowings 46,612 1,435 4.12% 12,890 555 5.75%
Senior notes 41,036 3,637 11.81% 52,767 4,802 11.81%
Mandatory redeemable trust preferred
securities 1,410 97 9.17% -- -- --
---------- ---------- ---------- ----------
Total interest-bearing 2,223,104 80,384 4.83% 2,058,054 81,691 5.30%
---------- ========== ---------- ==========
Noninterest-bearing liabilities 174,545 163,043
Stockholders' equity 167,201 134,541
---------- ----------
Total liabilities and
stockholders' equity $2,564,850 $2,355,638
========== ==========
Net interest-earning assets $ 224,437 $ 203,026
========== ==========
Net interest income/interest rate spread $ 64,348 3.08% $ 57,522 2.91%
========== ========== ========== ==========
Net interest margin 3.50% 3.39%
========== ==========
Ratio of average interest-earning to
average interest-bearing 110.11% 109.86%
========== ==========
----------
(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 bank, interest-bearing deposits, Federal Home
Loan Bank of Topeka stock and Federal Reserve Bank stock.
(4) Includes passbook, NOW and money market accounts.
13
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
September 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) $ 827,237 282,361 493,962 199,060 140,575 1,943,195
Securities(3) 99,841 126,766 158,923 73,008 68,031 526,569
Other interest-earning
assets(4) 158,365 -- -- -- -- 158,365
------------ ------------ ------------ ------------ ------------ ------------
Total $ 1,085,443 409,127 652,885 272,068 208,606 2,628,129
============ ============ ============ ============ ============ ============
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 195,099 45,562 83,517 50,390 78,938 453,506
Passbook accounts 3,808 11,425 21,138 12,850 19,926 69,147
Certificates of deposit 275,261 616,831 213,088 24,400 856 1,130,436
FHLB advances(6) -- -- -- 100,000 500,025 600,025
Securities sold under
agreements to repurchase 45,082 -- -- -- -- 45,082
Senior notes 19,381 -- 21,629 -- -- 41,010
Mandatory redeemable trust
preferred securities -- -- -- -- 35,000 35,000
------------ ------------ ------------ ------------ ------------ ------------
Total $ 538,631 673,818 339,372 187,640 634,745 2,374,206
============ ============ ============ ============ ============ ============
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 546,812 (264,691) 313,513 84,428 (426,139) 253,923
============ ============ ============ ============ ============ ============
Cumulative excess of interest-
earning assets over
interest-bearing liabilities $ 546,812 282,121 595,634 680,062 253,923 253,923
============ ============ ============ ============ ============ ============
Cumulative excess of interest-
earning assets over
interest-bearing liabilities
as a percent of total assets 19.95% 10.29 21.73 24.81 9.27 9.27
============ ============ ============ ============ ============ ============
(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 net 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.
(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
14
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 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 September 30, 2001, the Company had $381.4
million in available borrowing capacity with the FHLB.
At September 30, 2001, the Bank had approximately $286.8 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 $892.1 million at
September 30, 2001, and borrowings which are scheduled to mature or reprice
within the same period amounted to $64.5 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. As of
October 3, 2001, 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 $2.6 million (or $1.3 million for each
semi-annual period).
Capital Resources. The Company issued $35 million of 9.00% Cumulative
Trust Preferred Securities in September of 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 FRB. The guidelines are commonly known
as Risk-Based Capital Guidelines. On September 30, 2001, the Company exceeded
all applicable capital requirements to be well capitalized by having a total
risk-based capital ratio of 11.08%, a tier I risk-based capital ratio of 9.83%
and a leverage ratio of 7.46%.
15
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.
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, 2000 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's during the quarter ended
September 30, 2001:
1. A Form 8-K dated July 18, 2001 was filed pursuant to the release of
second quarter earnings.
2. A Form 8-K dated September 18, 2001 was filed pursuant to the
release of information pertaining to the Company's Stock Repurchase Program.
3. A Form 8-K dated September 20, 2001 was filed pursuant to issuance
of the Trust's Trust Preferred Securities public offering.
16
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: November 9, 2001 By /s/ Edward A. Townsend
---------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: November 9, 2001 By /s/ Richard L. Park
---------------------------
Richard L. Park
Chief Financial Officer
17