FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
----------------------------------------
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 No. 0-26248
LONDON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-1452807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 East High Street
London, Ohio 43140
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 852-0787
Check whether the issuer (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
As of May 14, 1999, the latest practicable date, 479,450 of the registrant's
common shares, without par value, were issued and outstanding.
Page 1 of 16 pages
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London Financial Corporation
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II - OTHER INFORMATION 15
SIGNATURES 16
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, September 30,
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 715 $ 507
Interest-bearing deposits in other financial institutions 2,151 1,271
------ ------
Cash and cash equivalents 2,866 1,778
Investment securities designated as available
for sale - at market 108 121
Mortgage-backed securities held to maturity- at amortized
cost, approximate market value of $2,235 and $2,733
as of March 31, 1999 and September 30, 1998 2,222 2,703
Loans receivable - net 34,306 32,588
Office premises and equipment - at depreciated cost 468 374
Stock in Federal Home Loan Bank - at cost 253 288
Accrued interest receivable 254 216
Prepaid expenses and other assets 45 60
Prepaid federal income taxes - 16
------ ------
Total assets $40,522 $38,144
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $34,968 $31,300
Advances from the Federal Home Loan Bank 300 1,800
Other liabilities 152 155
Accrued federal income taxes 66 -
Deferred federal income taxes 33 26
------ ------
Total liabilities 35,519 33,281
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued - -
Additional paid-in capital 2,398 2,391
Retained earnings - substantially restricted 4,033 3,946
Unrealized losses on securities designated as available
for sale, net of related tax effects (34) (26)
Shares acquired by Employee Stock Ownership Plan (327) (381)
Shares acquired by Management Recognition Plan (264) (264)
Less 49,550 treasury shares - at cost (803) (803)
------ ------
Total shareholders' equity 5,003 4,863
------ ------
Total liabilities and shareholders' equity $40,522 $38,144
====== ======
</TABLE>
3
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six months ended Three months ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $1,439 $1,290 $719 $625
Mortgage-backed securities 77 109 37 52
Investment securities, interest-bearing deposits and other 64 83 31 33
----- ----- --- ---
Total interest income 1,580 1,482 787 710
Interest expense
Deposits 757 739 377 368
Borrowings 42 34 13 8
----- ----- --- ---
Total interest expense 799 773 390 376
----- ----- --- ---
Net interest income 781 709 397 334
Provision for losses on loans 18 8 9 6
----- ----- --- ---
Net interest income after provision
for losses on loans 763 701 388 328
Other income
Gain on investment securities transactions - 75 - 69
Other operating 40 31 20 15
----- ----- --- ---
Total other income 40 106 20 84
General, administrative and other expense
Employee compensation and benefits 317 222 166 110
Occupancy and equipment 46 35 25 18
Federal deposit insurance premiums 10 10 5 5
Franchise taxes 38 32 16 28
Data processing 34 30 19 16
Other operating 133 121 93 61
----- ----- --- ---
Total general, administrative and other expense 578 450 324 238
----- ----- --- ---
Earnings before income taxes 225 357 84 174
Federal income taxes
Current 70 138 36 16
Deferred 11 (20) (3) 40
----- ----- --- ---
Total federal income taxes 81 118 33 56
----- ----- --- ---
NET EARNINGS $ 144 $ 239 $ 51 $118
===== ===== === ===
EARNINGS PER SHARE
Basic $.32 $.50 $.11 $.25
=== === === ===
Diluted $.31 $.48 $.11 $.24
=== === === ===
</TABLE>
4
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
For the six months For the three months
ended March 31, ended March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $144 $239 $51 $118
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (8) 20 (8) 50
Reclassification adjustment for realized gains
included in earnings - (50) - (46)
--- --- -- ---
Comprehensive income $136 $209 $43 $122
=== === == ===
</TABLE>
5
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31,
(In thousands)
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 144 $ 239
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Gain on investment securities transactions - (75)
Provision for losses on loans 18 8
Amortization of deferred loan origination fees (81) (59)
Depreciation and amortization 15 10
Federal Home Loan Bank stock dividends (10) (10)
Amortization expense of stock benefit plans 61 109
Increase (decrease) in cash due to changes in:
Accrued interest receivable (38) 3
Prepaid expenses and other assets 32 (36)
Other liabilities (3) (78)
Federal income taxes
Current 66 (38)
Deferred 11 (20)
----- ----
Net cash provided by operating activities 215 53
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities - 506
Purchase of investment securities designated as available
for sale - (160)
Proceeds from sale of investment securities designated
as available for sale - 177
Principal repayments on mortgage-backed securities 481 481
Principal repayments on loans 7,769 4,395
Loan disbursements (9,424) (4,104)
Purchase of office equipment (109) (3)
Redemption of Federal Home Loan Bank stock 45 -
----- -----
Net cash provided by (used in) investing activities (1,238) 1,292
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 3,668 1,224
Repayment of advances from Federal Home Loan Bank (1,500) -
Distributions paid on common shares (57) (2,594)
----- -----
Net cash provided by (used in) financing activities 2,111 (1,370)
----- -----
Net increase (decrease) in cash and cash equivalents 1,088 (25)
Cash and cash equivalents at beginning of period 1,778 3,664
----- -----
Cash and cash equivalents at end of period $2,866 $3,639
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 18 $ 100
===== =====
Interest on deposits and borrowings $ 806 $ 774
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of applicable tax effects $ (8) $ (57)
===== =====
</TABLE>
6
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London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended March 31, 1999 and 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of consolidated
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of London Financial Corporation ("LFC" or the
"Corporation") included in the Annual Report on Form 10-KSB for the year ended
September 30, 1998. However, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) which are necessary for a fair
presentation of the consolidated financial statements have been included. The
results of operations for the six and three month periods ended March 31, 1999,
are not necessarily indicative of the results which may be expected for an
entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LFC
and Citizens Bank, an Ohio commercial bank wholly-owned by LFC, ("Citizens").
Prior to January 4, 1998, Citizens was an Ohio savings and loan association. All
significant intercompany items have been eliminated.
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the London Financial Corp.
Employee Stock Ownership Plan (the "ESOP") that are unallocated and not
committed to be released. Weighted-average common shares outstanding, which
gives effect to 27,918 unallocated ESOP shares, totaled 449,102 and 451,531 for
the six and three month periods ended March 31, 1999. Weighted-average common
shares deemed outstanding, which gives effect to 33,856 unallocated ESOP shares,
totaled 476,304 for each of the six and three month periods ended March 31,
1998.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under LFC's stock
option plan. Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share totaled 465,519 and 467,948 for the six and
three month periods ended March 31, 1999, and 495,350 and 495,359 for the six
and three month periods ended March 31, 1998. Incremental shares related to the
assumed exercise of stock options included in the computation of diluted
earnings per share totaled 16,417 for each of the six and three months periods
ended March 31, 1999, and 19,046 and 19,055 for the six and three month periods
ended March 31, 1998, respectively.
4. Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
7
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London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six month periods ended March 31, 1999 and 1998
4. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management adopted SFAS No. 130 effective October 1, 1998, as required, without
material impact on LFC's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Management adopted SFAS No. 131 effective October 1, 1998, as
required, without material impact on LFC's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on LFC's financial position or results of
operations.
8
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Corporation's operations and the Corporation's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for losses on loans, the effects of the year 2000 on certain information
technology systems and the effect of certain recent accounting pronouncements.
Discussion of Financial Condition Changes from September 30, 1998 to March 31,
1999
At March 31, 1999, LFC had total assets of $40.5 million, an increase of $2.4
million, or 6.2%, over September 30, 1998. The increase in assets was funded
primarily by a $3.7 million increase in deposits, which was partially offset by
a $1.5 million decline in borrowings.
Cash and interest-bearing deposits totaled $2.9 million at March 31, 1999, a
$1.1 million, or 61.2%, increase over the total at September 30, 1998.
Investment securities and mortgage-backed securities decreased by $494,000, to a
total of $2.3 million at March 31, 1999, primarily reflecting principal
repayments on mortgage-backed securities.
Loans receivable increased by $1.7 million, or 5.3%, as loan disbursements of
$9.4 million exceeded principal repayments of $7.8 million. Loan disbursements
during the six month period ended March 31, 1999, exceeded the volume of
disbursements for the same period in 1998 by $5.3 million, or 129.6%.
At March 31, 1999, Citizens' allowance for loan losses totaled $219,000,
compared to the $201,000 level maintained at September 30, 1998. Citizens had no
nonperforming loans at March 31, 1999, compared to nonperforming loans of
$268,000, or .82% of the total loan portfolio at September 30, 1998. At March
31, 1999, Citizens' allowance for loan losses was comprised solely of a general
loan loss allowance which is includible as a component of regulatory risk-based
capital. Although management of LFC believes that its allowance for loan losses
was adequate at March 31, 1999, based on the available facts and circumstances,
there can be no assurance that the allowance will be adequate to absorb actual
loan losses during the current period or that additions to such allowance will
not be necessary in future periods, which could adversely affect LFC's results
of operations.
Deposits totaled $35.0 million at March 31, 1999, an increase of $3.7 million,
or 11.7%, over the $31.3 million of deposits outstanding at September 30, 1998.
Such increase resulted primarily from management's efforts to increase deposits
through marketing strategies.
9
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from September 30, 1998 to March 31,
1999 (continued)
Advances from the Federal Home Loan Bank amounted to $300,000 at March 31, 1999,
a decrease of $1.5 million, or 83.3%, from September 30, 1998. Proceeds from
deposit growth were used to repay such advances during the period.
Shareholders' equity totaled $5.0 million at March 31, 1999, an increase of
$140,000, or 2.9%, over September 30, 1998, levels. The increase resulted
primarily from net earnings of $144,000, coupled with the effects of the
amortization of stock benefit plans, which were partially offset by regular
dividends totaling $57,000, or $.12 per share.
At March 31, 1999, Citizens was required to maintain regulatory capital
sufficient to meet certain minimum capital standards promulgated by the Federal
Deposit Insurance Corporation. As of March 31, 1999, Citizens' regulatory
capital was well in excess of such minimum capital requirements.
Comparison of Operating Results For the Six Month Periods Ended March 31, 1999
and 1998
General
Net earnings for the six month period ended March 31, 1999, totaled $144,000, a
decrease of $95,000, or 39.7%, from the comparable 1998 period. The decrease in
earnings resulted primarily from a $10,000 increase in the provision for losses
on loans, a $66,000 decrease in other income and a $128,000 increase in general,
administrative and other expense, which were partially offset by a $72,000
increase in net interest income and a $37,000 decrease in the provision for
federal income taxes.
Net Interest Income
Interest income on loans for the six months ended March 31, 1999, increased by
$149,000, or 11.6%, compared to the six months ended March 31, 1998. The
increase was primarily due to an approximate $4.1 million increase in the
weighted-average balance outstanding. Interest income on mortgage-backed
securities decreased by $32,000, or 29.4%, due primarily to a decrease in the
weighted-average portfolio balance outstanding year to year. Interest income on
investment securities and other interest-earning assets decreased by $19,000, or
22.9%.
Interest expense on deposits increased by $18,000, or 2.4%, during the six
months ended March 31, 1999. This increase resulted primarily from an increase
in the weighted average balance of deposits outstanding, which was offset by a
decrease in the cost of deposits.
Interest expense on borrowings increased by $8,000, or 23.5%, during the six
months ended March 31, 1999. The increase was primarily due to an increase in
the weighted-average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $72,000, or 10.2%, during the six months ended
March 31, 1999, compared to the six months ended March 31, 1998.
10
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Operating Results For the Six Month Periods Ended March 31, 1999
and 1998 (continued)
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, and general economic
conditions, particularly as such conditions relate to the Bank's loan portfolio.
As a result of such analysis, management elected to record an $18,000 provision
for loan losses during the six-month period ended March 31, 1999. The current
period provision was attributable to growth in the commercial loan portfolio.
There can be no assurance that the allowance for loan losses of the Bank will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income totaled $40,000 during the six months ended March 31, 1999, a
decrease of $66,000, or 62.3%, from the six month period ended March 31, 1998.
The decrease resulted primarily from a $75,000 gain on investment securities
transactions in the 1998 period, which was partially offset by a $9,000, or
29.0%, increase in other operating income. Other operating income is comprised
primarily of service fees on deposit accounts, late charges on loan accounts and
rental income on leased office space and safety deposit boxes.
General, Administrative and Other Expense
General, administrative and other expense increased by $128,000, or 28.4%,
during the six months ended March 31, 1999, compared to 1998. The increase was
primarily comprised of a $95,000, or 42.8%, increase in employee compensation
and benefits, due primarily to an increase in staffing levels year to year and
normal merit increases, coupled with a $12,000, or 9.9%, increase in other
operating expense year to year.
Federal Income Taxes
The provision for federal income taxes decreased by $37,000, or 31.4%, for the
six month period ended March 31, 1999, compared to the same period in 1998.
LFC's effective tax rates amounted to 36.0% and 33.1% during the six months
ended March 31, 1999 and 1998, respectively.
Comparison of Operating Results For the Three Month Periods Ended March 31, 1999
and 1998
General
Net earnings for the three month period ended March 31, 1999, totaled $51,000, a
decrease of $67,000, or 56.8%, from the comparable 1998 period. The decrease in
earnings resulted primarily from a $3,000 increase in the provision for losses
on loans, a $64,000 decrease in other income and an $86,000 increase in general,
administrative and other expense, which were partially offset by a $63,000
increase in net interest income.
11
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Operating Results For the Three Month Periods Ended March 31, 1999
and 1998 (continued)
Net Interest Income
Interest income on loans for the three months ended March 31, 1999, increased by
$94,000, or 15.0%, compared to the three months ended March 31, 1998. The
increase was primarily due to an approximate $4.6 million increase in the
weighted-average balance outstanding. Interest income on mortgage-backed
securities decreased by $15,000, or 28.8%, due primarily to a decrease in the
weighted-average portfolio balance outstanding year to year. Interest income on
investment securities and other interest-earning assets decreased by $2,000, or
6.1%.
Interest expense on deposits increased by $9,000, or 2.4%, during the three
months ended March 31, 1999. This increase resulted primarily from an increase
in the weighted average balance of deposits outstanding, which was offset by a
decrease in the cost of deposits.
Interest expense on borrowings increased by $5,000, or 62.5%, during the three
months ended March 31, 1999. The increase was primarily due to an increase in
the weighted-average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $63,000, or 18.9%, during the three months
ended March 31, 1999, compared to the three months ended March 31, 1998.
Provision for Losses on Loans
Management elected to record a $9,000 provision for loan losses during the
three-month period ended March 31, 1999, compared to the $6,000 recorded in the
1998 quarter. The current period provision was attributable to growth in the
commercial loan portfolio. There can be no assurance that the allowance for loan
losses of the Bank will be adequate to cover losses on nonperforming assets in
the future.
Other Income
Other income totaled $20,000 during the three months ended March 31, 1999, a
decrease of $64,000, or 76.2%, from the three month period ended March 31, 1998.
The decrease resulted primarily from a $69,000 gain on investment securities
transactions in the 1998 period, which was partially offset by a $5,000, or
33.3%, increase in other operating income. Other operating income is comprised
primarily of service fees on deposit accounts, late charges on loan accounts and
rental income on leased office space and safety deposit boxes.
General, Administrative and Other Expense
General, administrative and other expense increased by $86,000, or 36.1%, during
the three months ended March 31, 1999, compared to the same period in 1998. The
increase was primarily comprised of a $56,000, or 50.9%, increase in employee
compensation and benefits, due primarily to an increase in staffing levels year
to year, coupled with normal merit increases, coupled with a $32,000 increase in
other operating expense year to year.
12
<PAGE>
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Operating Results For the Three Month Periods Ended March 31, 1999
and 1998 (continued)
Federal Income Taxes
The provision for federal income taxes decreased by $23,000, or 41.1%, for the
three month period ended March 31, 1999, compared to the same period in 1998.
LFC's effective tax rates amounted to 39.3% and 32.2% during the three months
ended March 31, 1999 and 1998, respectively.
Year 2000 Compliance Matters
As with most providers of financial services, Citizens' operations are heavily
dependent on information technology systems. Citizens is addressing the
potential problems associated with the possibility that the computers that
control or operate Citizens' information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. Citizens has been
working with the companies that supply or service its information technology
systems to identify and remedy any year 2000 related problems.
Citizens' primary data processing applications are handled by a third-party
service bureau, Fiserv. Fiserv has advised Citizens that it has migrated to a
fully Year 2000 compliant processing system that will be fully tested by July 1,
1999. Management has also reviewed Citizens' ancillary equipment and is in the
process of providing the appropriate remedial measures, including requesting
service providers to assure Citizens that their systems and products are fully
year 2000 compliant. Citizens has upgraded its existing teller operating system
with a capital expenditure of approximately $65,000. No assurance can be given,
however, that significant expense will not be incurred in future periods. In the
unlikely event that Citizens is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
Citizens' current systems, programs and equipment year 2000 compliant, LFC's net
earnings and financial condition could be adversely affected.
Citizens has developed a contingency plan in case mission-critical systems are
not successfully renovated in a timely manner or if they actually fail at Year
2000 critical dates. The contingency plan states that Citizens deems the
likelihood of failure of the service provider's efforts to implement Year 2000
changes to the on-line core account processing system to be remote; however, a
more likely scenario is that the service provider's system will be down for
several days or weeks upon arrival of Year 2000. The plan, therefore, primarily
addresses action to deal with the latter possibility rather than with a
catastrophic event, including Citizens' ability to process transactions manually
over a short-term period, if necessary, upon arrival of the year 2000. Citizens
does not consider contingency planning to be a static process; therefore, the
plan will be amended to address a catastrophic event if testing results indicate
greater concern.
13
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000 Compliance Matters (continued)
In addition to possible expense related to its own systems, Citizens could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in Citizens' primary market area. Because Citizens' loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and Citizens' primary market area is not significantly dependent upon
one employer or industry, Citizens does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that borrowers fail to prepare properly for Year
2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. Citizens is assessing such risks among
its customers. LFC could also be materially adversely affected if other third
parties, such as governmental agencies, clearing houses, telephone companies,
utilities and other service providers fail to prepare properly. Citizens is
therefore attempting to assess these risks and take action to minimize their
effect.
14
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London Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibit 27: Financial Data Schedule for the six
months ended March 31, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 By: /s/John J. Bodle
------------------------------ --------------------------
John J. Bodle
President and
Chief Executive Officer
Date: May 14, 1999 By: /s/Joyce E. Bauerle
------------------------------ --------------------------
Joyce E. Bauerle
Treasurer and
Principal Accounting Officer
16
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<S> <C>
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<FISCAL-YEAR-END> SEP-30-1999
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<PERIOD-END> MAR-31-1999
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0
0
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