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 June 30, 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 August 12, 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)
June 30, September 30,
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 497 $ 507
Interest-bearing deposits in other financial institutions 2,598 1,271
------ ------
Cash and cash equivalents 3,095 1,778
Investment securities designated as available
for sale - at market 113 121
Mortgage-backed securities held to maturity - at amortized
cost, approximate market value of $2,007 and $2,733
as of June 30, 1999 and September 30, 1998 2,018 2,703
Loans receivable - net 35,359 32,588
Office premises and equipment - at depreciated cost 516 374
Stock in Federal Home Loan Bank - at cost 257 288
Accrued interest receivable 305 216
Prepaid expenses and other assets 53 60
Prepaid federal income taxes - 16
------ ------
Total assets $41,716 $38,144
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $36,153 $31,300
Advances from the Federal Home Loan Bank 300 1,800
Other liabilities 77 155
Accrued federal income taxes 18 -
Deferred federal income taxes 27 26
------ ------
Total liabilities 36,575 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 4,118 3,946
Unrealized losses on securities designated as available
for sale, net of related tax effects (31) (26)
Shares acquired by Employee Stock Ownership Plan (327) (381)
Shares acquired by Management Recognition Plan (214) (264)
Less 49,550 treasury shares - at cost (803) (803)
------ ------
Total shareholders' equity 5,141 4,863
------ ------
Total liabilities and shareholders' equity $41,716 $38,144
====== ======
</TABLE>
3
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $2,174 $1,916 $735 $626
Mortgage-backed securities 108 155 31 46
Investment securities, interest-bearing deposits and other 88 132 24 49
----- ----- --- ---
Total interest income 2,370 2,203 790 721
Interest expense
Deposits 1,146 1,115 389 376
Borrowings 49 40 7 6
----- ----- --- ---
Total interest expense 1,195 1,155 396 382
----- ----- --- ---
Net interest income before provision
for losses on loans 1,175 1,048 394 339
Provision for losses on loans 27 14 9 6
----- ----- --- ---
Net interest income after provision
for losses on loans 1,148 1,034 385 333
Other income
Gain on investment securities transactions - 75 - -
Other operating 64 44 24 13
----- ----- --- ---
Total other income 64 119 24 13
General, administrative and other expense
Employee compensation and benefits 457 345 140 123
Occupancy and equipment 72 57 26 22
Federal deposit insurance premiums 14 14 4 4
Franchise taxes 53 60 15 28
Data processing 52 43 18 13
Other operating 175 173 42 52
----- ----- --- ---
Total general, administrative and other expense 823 692 245 242
----- ----- --- ---
Earnings before income taxes 389 461 164 104
Federal income taxes
Current 128 154 58 16
Deferred 4 3 (7) 23
----- ----- --- ---
Total federal income taxes 132 157 51 39
----- ----- --- ---
NET EARNINGS $ 257 $ 304 $113 $ 65
===== ===== === ===
EARNINGS PER SHARE
Basic $.57 $.64 $.25 $.14
=== === === ===
Diluted $.55 $.62 $.24 $.13
=== === === ===
</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 nine months For the three months
ended June 30, ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $257 $304 $113 $ 65
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (5) 6 3 (14)
Reclassification adjustment for realized gains
included in earnings - (50) - -
--- --- --- ---
Comprehensive income $252 $260 $116 $ 51
=== === === ===
</TABLE>
5
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<TABLE>
London Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30,
(In thousands)
1999 1998
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 257 $ 304
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Gain on investment securities transactions - (75)
Amortization of deferred loan origination fees (107) (96)
Provision for losses on loans 27 14
Depreciation and amortization 26 16
Federal Home Loan Bank stock dividends (14) (15)
Amortization expense of stock benefit plans 111 109
Increase (decrease) in cash due to changes in:
Accrued interest receivable (89) (4)
Prepaid expenses and other assets 7 (51)
Other liabilities (78) (34)
Federal income taxes
Current 34 (140)
Deferred 4 3
------ -----
Net cash provided by operating activities 178 31
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities - 506
Principal repayments on mortgage-backed securities 685 692
Proceeds from sale of investment securities - 177
Purchase of investment securities - (160)
Principal repayments on loans 11,568 7,180
Loan disbursements (14,259) (7,730)
Purchase of office equipment (168) (25)
Proceeds from redemption of Federal Home Loan Bank stock 45 12
------ -----
Net cash provided by (used in) investing activities (2,129) 652
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 4,853 1,262
Repayment of Federal Home Loan Bank advances (1,500) -
Purchase of treasury shares - (521)
Distributions paid on common shares (85) (2,625)
------ -----
Net cash provided by (used in) financing activities 3,268 (1,884)
------ -----
Net increase (decrease) in cash and cash equivalents 1,317 (1,201)
Cash and cash equivalents at beginning of period 1,778 3,664
------ -----
Cash and cash equivalents at end of period $ 3,095 $2,463
====== =====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 113 $ 180
====== =====
Interest on deposits and borrowings $ 1,195 $1,155
====== =====
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net $ (5) $ (44)
====== =====
</TABLE>
6
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London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine month periods ended June 30, 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 nine and three month periods ended June 30, 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 The Citizens Bank of London ("Citizens"), an Ohio commercial bank
wholly-owned by LFC. 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 27,919 unallocated ESOP shares, totaled 449,911 and 451,531 for
the nine and three month periods ended June 30, 1999. Weighted-average common
shares deemed outstanding, which gives effect to 33,856 unallocated ESOP shares,
totaled 475,080 and 472,631 for the nine and three month periods ended June 30,
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 463,626 and 465,246 for the nine
and three month periods ended June 30, 1999, and 493,434 and 492,977 for the
nine and three month periods ended June 30, 1998. Incremental shares related to
the assumed exercise of stock options included in the computation of diluted
earnings per share totaled 13,715 for each of the nine and three months periods
ended June 30, 1999, and 18,354 and 20,346 for the nine and three month periods
ended June 30, 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 nine month periods ended June 30, 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 changed 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 established 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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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 June 30,
1999
At June 30, 1999, LFC had total assets of $41.7 million, an increase of $3.6
million, or 9.4%, over September 30, 1998. The increase in assets was funded
primarily by a $4.9 million increase in deposits, which was partially offset by
a $1.5 million decline in borrowings.
Cash and interest-bearing deposits totaled $3.1 million at June 30, 1999, a $1.3
million, or 74.1%, increase over the total at September 30, 1998.
Investment securities and mortgage-backed securities decreased by $693,000, to a
total of $2.1 million at June 30, 1999, primarily reflecting principal
repayments on mortgage-backed securities.
Loans receivable increased by $2.8 million, or 8.5%, as loan disbursements of
$14.3 million exceeded principal repayments of $11.6 million. Loan disbursements
during the nine month period ended June 30, 1999, exceeded the volume of
disbursements for the same period in 1998 by $6.5 million, or 84.5%.
At June 30, 1999, Citizens' allowance for loan losses totaled $228,000, compared
to the $201,000 level maintained at September 30, 1998. Citizens had no
nonperforming loans at June 30, 1999, compared to nonperforming loans of
$268,000, or .82% of the total loan portfolio at September 30, 1998. At June 30,
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 June 30, 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 $36.2 million at June 30, 1999, an increase of $4.9 million, or
15.5%, 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 June 30,
1999 (continued)
Advances from the Federal Home Loan Bank (the "FHLB") amounted to $300,000 at
June 30, 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 $5.1 million at June 30, 1999, an increase of
$278,000, or 5.7%, over September 30, 1998, levels. The increase resulted
primarily from net earnings of $257,000, coupled with the effects of the
amortization of stock benefit plans, which were partially offset by regular
dividends totaling $85,000, or $.18 per share.
At June 30, 1999, Citizens was required to maintain regulatory capital
sufficient to meet certain minimum capital standards promulgated by the Federal
Deposit Insurance Corporation. As of June 30, 1999, Citizens' regulatory capital
was well in excess of such minimum capital requirements.
Comparison of Operating Results For the Nine Month Periods Ended June 30, 1999
and 1998
General
Net earnings for the nine month period ended June 30, 1999, totaled $257,000, a
decrease of $47,000, or 15.5%, from the comparable 1998 period. The decrease in
earnings resulted primarily from a $13,000 increase in the provision for losses
on loans, a $55,000 decrease in other income and a $131,000 increase in general,
administrative and other expense, which were partially offset by a $127,000
increase in net interest income and a $25,000 decrease in the provision for
federal income taxes.
Net Interest Income
Interest income on loans for the nine months ended June 30, 1999, increased by
$258,000, or 13.5%, compared to the nine months ended June 30, 1998. The
increase was primarily due to an approximate $4.4 million, or 14.9%, increase in
the weighted-average balance outstanding. Interest income on mortgage-backed
securities decreased by $47,000, or 30.3%, 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 $44,000, or
33.3%, due primarily to an $899,000, or 25.1%, decrease in the average
outstanding balance year to year.
Interest expense on deposits increased by $31,000, or 2.8%, during the nine
months ended June 30, 1999. This increase resulted primarily from an approximate
$3.3 million, or 10.6%, 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 $9,000, or 22.5%, during the nine
months ended June 30, 1999. The increase was primarily due to an increase in the
weighted-average balance of advances outstanding.
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 Nine Month Periods Ended June 30, 1999
and 1998 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $127,000, or 12.1%, during the nine months
ended June 30, 1999, compared to the nine months ended June 30, 1998.
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 Citizens,
the status of past due principal and interest payments, and general economic
conditions, particularly as such conditions relate to Citizens' loan portfolio.
As a result of such analysis, management elected to record a $27,000 provision
for losses on loans during the nine-month period ended June 30, 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
Citizens will be adequate to cover losses on nonperforming assets in the future.
Other Income
Other income totaled $64,000 during the nine months ended June 30, 1999, a
decrease of $55,000, or 46.2%, from the nine month period ended June 30, 1998.
The decrease resulted primarily from a $75,000 gain on investment securities
transactions recorded in the 1998 period, which was partially offset by a
$20,000, or 45.5%, 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 $131,000, or 18.9%,
during the nine months ended June 30, 1999, compared to 1998. The increase was
primarily comprised of a $112,000, or 32.5%, increase in employee compensation
and benefits, due primarily to an increase in staffing levels related to
Citizens' implementation of the commercial lending function, and normal merit
increases, coupled with a $15,000, or 26.3%, increase in occupancy and equipment
expense year to year.
Federal Income Taxes
The provision for federal income taxes decreased by $25,000, or 15.9%, for the
nine month period ended June 30, 1999, compared to the same period in 1998, due
primarily to a $72,000, or 15.6%, decrease in pretax earnings. LFC's effective
tax rates amounted to 33.9% and 34.1% during the nine months ended June 30, 1999
and 1998, respectively.
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 June 30, 1999
and 1998
General
Net earnings for the three month period ended June 30, 1999, totaled $113,000,
an increase of $48,000, or 73.8%, over the comparable 1998 period. The increase
in earnings resulted primarily from a $55,000 increase in net interest income
and an $11,000 increase in other income, which were partially offset by a $3,000
increase in the provision for losses on loans, a $3,000 increase in general,
administrative and other expense and a $12,000 increase in the provision for
federal income taxes.
Net Interest Income
Interest income on loans for the three months ended June 30, 1999, increased by
$109,000, or 17.4%, compared to the three months ended June 30, 1998. The
increase was primarily due to an approximate $5.2 million, or 17.4%, increase in
the weighted-average balance outstanding. Interest income on mortgage-backed
securities decreased by $15,000, or 32.6%, 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 $25,000, or
51.0%.
Interest expense on deposits increased by $13,000, or 3.5%, during the three
months ended June 30, 1999. This increase resulted primarily from an approximate
$4.4 million, or 14.0%, 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 $1,000, or 16.7%, during the three
months ended June 30, 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 $55,000, or 16.2%, during the three months
ended June 30, 1999, compared to the three months ended June 30, 1998.
Provision for Losses on Loans
Management elected to record a $9,000 provision for loan losses during the
three-month period ended June 30, 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 Citizens' allowance
for loan losses will be adequate to cover losses on nonperforming assets in the
future.
Other Income
Other income totaled $24,000 during the three months ended June 30, 1999, an
increase of $11,000, or 84.6%, over the three month period ended June 30, 1998.
The increase resulted primarily from an increase in other operating income,
comprised primarily of service fees on deposit accounts, late charges on loan
accounts and rental income on leased office space and safety deposit boxes.
12
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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 June 30, 1999
and 1998 (continued)
General, Administrative and Other Expense
General, administrative and other expense increased by $3,000, or 1.2%, during
the three months ended June 30, 1999, compared to the same period in 1998. The
increase was primarily due to an increase of $17,000, or 13.8%, in employee
compensation and benefits, due primarily to an increase in staffing levels year
to year, coupled with normal merit increases, partially offset by a $10,000
decrease in other operating expense year to year.
Federal Income Taxes
The provision for federal income taxes increased by $12,000, or 30.8%, for the
three month period ended June 30, 1999, compared to the same period in 1998, due
primarily to a $60,000, or 57.7%, increase in pretax earnings. LFC's effective
tax rates amounted to 31.1% and 37.5% during the three months ended June 30,
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 had been fully tested as of
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.
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)
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.
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 nine
months ended June 30, 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: August 13, 1999 By: /s/John J. Bodle
----------------------- -------------------------------
John J. Bodle
President and
Chief Executive Officer
Date: August 13, 1999 By: /s/Joyce E. Bauerle
----------------------- -------------------------------
Joyce E. Bauerle
Treasurer and
Principal Accounting Officer
16
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