PROSPECTUS
21,128,209 Shares of Common Stock
$80,000,000 of 11.0% Senior Notes due September 8, 2004
LOCAL FINANCIAL CORPORATION
This Prospectus relates to the public offer and sale of up to 21,128,209
shares of common stock, par value $0.01 per share (the "Common Stock"), of Local
Financial Corporation (the "Company") and up to $80.0 million of the Company's
11.0% Senior Notes due September 8, 2004 (the "Senior Notes"). The Common Stock
covered by this Prospectus includes up to 591,000 shares which may be issued in
connection with warrants previously granted to the Company's placement agent,
which assisted the Company in the private placement of 19,700,000 shares of
Common Stock and the Senior Notes, which were issued and sold on September 8,
1997 (the "Private Placement"). The Common Stock covered by this Prospectus also
includes 837,209 shares which were issued by the Company in connection with its
acquisition of Green Country Banking Corporation ("Green Country"). The Senior
Notes are general unsecured obligations of the Company and rank senior to such
other indebtedness as the Company may incur. At December 31, 1997, the Company
had borrowings of $80.1 million (not including the Senior Notes), all of which
ranked junior to the Senior Notes. All of the Common Stock and the Senior Notes
offered hereby are collectively referred to herein as the "Local Securities."
For additional information with respect to the terms of the Local Securities,
see "Description of Senior Notes" and "Description of Capital Stock."
The Local Securities were issued and sold in private placement transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), to persons reasonably believed by the Company to
be "qualified institutional buyers" (as defined by Rule 144A under the
Securities Act) or other "accredited investors" (as defined in Rule 501(a) of
Regulation D under the Securities Act. In connection with the Private Placement,
the Company executed and delivered for the benefit of the holders of the Local
Securities a Registration Rights Agreement dated September 8, 1997 (the
"Registration Rights Agreement"), providing for, among other things, the filing
with the Securities and Exchange Commission (the "Commission") of the
Registration Statement of which this Prospectus forms a part. The Company has
also agreed to register the Common Stock which was issued in connection with its
acquisition of Green Country. The Local Securities offered hereby may be offered
and sold from time to time (the "Offering") by the holders named herein or, if
required, by holders named in an accompanying supplement (a "Prospectus
Supplement") or by their respective transferees, pledgees, donees, or their
successors (collectively, the "Selling Holders") pursuant to this Prospectus and
a Prospectus Supplement, if required.
The Local Securities may be sold by the Selling Holders from time to time
directly to purchasers or through underwriters, dealers or agents at market
prices or negotiated prices. See "Plan of Distribution." If required, the names
of any such underwriters, dealers or agents involved in the sale of the Local
Securities in respect of which this Prospectus is being delivered and the
applicable underwriter's discount, dealer's purchaser price or agent's
commission, if any, will be set forth in a Prospectus Supplement.
The Selling Holders will receive all of the net proceeds from the sale of
the Local Securities and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the Local Securities. The Company
is responsible for payment of all other expenses incident to the offer and sale
of the Local Securities.
The Selling Holders and any underwriters, dealers or agents which
participate in the distribution of the Local Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit on the resale of the Local Securities purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act. See "Plan of Distribution" for a description of indemnification
arrangements.
The Company has received approval from the American Stock Exchange ("AMEX")
to have the Common Stock and the Senior Notes listed on the AMEX under the
symbols "LO" and "LO.A," respectively. Prior to this Offering, there has not
been a public market for the Local Securities and there can be no assurance that
an active public trading market for either or both of the Common Stock or the
Senior Notes will develop or be sustained.
<PAGE>
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THE LOCAL SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND, THE BANK INSURANCE FUND OR ANY GOVERNMENT AGENCY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is April 20, 1998
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and the Company's Consolidated Financial Statements, including the accompanying
Notes, appearing elsewhere in this Prospectus. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
Unless the context otherwise requires, references herein to the Company include
Local Federal and Local America. A glossary of terms applicable to the Indenture
and the Senior Notes is set forth under "Description of Senior Notes--Certain
Definitions."
The Company
General. The Company is a Delaware corporation headquartered in Oklahoma
City, Oklahoma. The Company was organized in 1993 to become the holding company
of Local Federal Bank, F.S.B. ("Local Federal"), a federally chartered savings
institution. Local Federal was organized in 1908 under the name Local Building
and Loan Association, changed to a federal mutual charter in 1935 and converted
to the stock form of organization in 1983. Local Federal's wholly-owned
subsidiaries include Local America Inc. and its wholly-owned subsidiary, Local
America Bank of Tulsa, F.S.B. ("Local America"), a federally chartered savings
institution. Local Federal and Local America are collectively referred to herein
as the "Banks." The Company also owns through Local Federal two indirect
automobile finance subsidiaries, Local Acceptance Company of Florida ("Local
Acceptance" or "LAC") and Star Financial Services Corporation ("Star") of
Oklahoma. The loan receivables of LAC and Star were sold in late December 1997.
See "Risk Factors--Risks Relating to the Company's Lending and Investment
Activities--Sub-prime Automobile Lending." At December 31, 1997, the Company had
consolidated assets of $1.88 billion, substantially all of which is comprised of
its direct and indirect 100% ownership interest in the Banks, consolidated
liabilities of $1.80 billion, consolidated deposits of $1.60 billion and
consolidated stockholders' equity of $82.6 million.
The Banks presently conduct business through forty-one branch offices
located throughout the state of Oklahoma, with heavy concentration in the
Oklahoma City and Tulsa areas. Twenty-eight branch offices operate under the
Local Federal name. Seven of these branch offices are located in Oklahoma City
and nine additional branches are within a fifty mile radius. Local America
operates thirteen branches in the Tulsa area. According to SNL Securities, as of
June 30, 1997, the Banks ranked fourth in Oklahoma by deposit market share among
depository institutions and first in deposit market share among thrift
institutions.
Prior to the Private Placement and the Redemption (as defined and described
below), the Banks' strategy was to run a low cost institution structured around
the following areas: (i) a nationally diversified wholesale commercial real
estate mortgage portfolio; (ii) an Oklahoma-based retail deposit franchise
operated on a low-overhead basis delivering a traditional set of thrift products
and services, including conforming single-family residential home loans, home
equity, student guaranteed, direct automobile and installment loans through its
branch network; (iii) a wholesale securities portfolio involving derivative
mortgage securities funded both by retail as
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well as wholesale funding through advances from the Federal Home Loan Bank
("FHLB") of Topeka and securities sold under agreements to repurchase ("reverse
repurchase agreements"); and (iv) during the past few years, origination of
indirect sub-prime automobile finance contracts purchased from dealerships in
Oklahoma and Florida. Portfolios of residential loans packaged and sold by the
Resolution Trust Corporation ("RTC") and the Federal Deposit Insurance
Corporation ("FDIC") were also purchased. Both LAC and Star were incorporated in
an attempt to engage in the purchase and servicing of sub-prime automobile
finance contracts in their respective markets. See "Business."
Operating Results. The Company reported net income of $13.6 million, $14.4
million and $52.5 million during the years ended June 30, 1996, 1995 and 1994,
respectively. However, beginning in fiscal 1996, the Company's results of
operations have been adversely impacted by increases to the provision for loan
losses to cover realized and inherent losses associated with the Company's
indirect automobile receivables. During fiscal 1996, net income declined by
$847,000 or 5.9% from fiscal 1995 levels, as the Company's provision for loan
losses increased by $4.0 million to $5.1 million. An aggregate of $4.5 million
of such provision was related to the indirect automobile receivables portfolio.
The Company's financial position deteriorated further during fiscal 1997. For
the fiscal year ended June 30, 1997, the Company experienced a net loss of $30.0
million. This loss reflects a $28.4 million provision for loan losses which
primarily related to the Company's indirect automobile receivables. The loss
during fiscal 1997 was also due to $29.9 million of losses which were recognized
on the sale of a portion of the Company's adjustable-rate collateralized
mortgage obligations ("CMOs") with interest rate adjustments tied to the FHLB
Eleventh District Cost of Funds Index ("COFI"), and a non-recurring $10.3
million special assessment (before applicable tax benefits) which was recorded
in fiscal 1997 in connection with legislation which recapitalized the Savings
Association Insurance Fund ("SAIF").
Primarily as a consequence of actions taken in connection with the Private
Placement and the Redemption (described below), during the six months ended
December 31, 1997, the Company incurred a net loss of $86.0 million.
Specifically, the Company incurred $125.5 million of losses on the sale of
securities, of which an aggregate loss of $53.4 million was incurred in
connection with the liquidation or write-off of the Company's hedging contracts,
and an aggregate loss of $72.0 million was incurred on the sale and
mark-to-market of the Company's securities portfolio (which primarily related to
the sale and mark-to-market of the Company's COFI-based CMOs). The market for
fixed income securities improved during the three month period ended December
31, 1997 and the Company sold a portion of the remaining COFI-based CMO
portfolio for a gain of $12.8 million. The Company also recorded a $25.6 million
provision for loan losses during the six months ended December 31, 1997,
primarily to cover realized and inherent losses with respect to the Company's
portfolio of indirect automobile receivables. This portfolio was sold in late
December 1997. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Private Placement and the Redemption. On August 25, 1997, the Company
entered into a Redemption Agreement, as amended on September 5, 1997 (the
"Redemption Agreement"), with Barron Collier and Miles Collier, the sole
stockholders of the Company (the "Selling
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Stockholders"), pursuant to which the Company agreed to redeem all of the
Company's issued and outstanding shares of Common Stock for consideration of
$154.0 million, subject to adjustment as described under "The Private Placement
and the Redemption Transactions--The Redemption Agreement" (the "Redemption"),
and the satisfaction of various conditions, including the raising of funds
through a private placement of at least $190.0 million of Common Stock and at
least $70.0 million of Senior Notes. In addition, pursuant to the Redemption
Agreement, the Company agreed to prepay a promissory note payable to the mother
of the Selling Stockholders at a price equal to the principal amount thereof
plus accrued and unpaid interest thereon to the date of prepayment (i.e., $7.2
million).
On September 8, 1997, the Company entered into a Purchase Agreement with
Friedman Billings, Ramsey & Co., Inc. ("FBR" or the Placement Agent") and the
various purchasers of the Local Securities (the "Purchase Agreement"), which
provided, among other things, for the purchase on such date of an aggregate of
$197.0 million of Common Stock and $80.0 million of Senior Notes. A closing was
held on such date at which the Redemption was consummated. In connection
therewith, Edward A. Townsend, the present Chairman of the Board and Chief
Executive Officer of the Company and the Banks, Jan A. Norton, the present
President of the Company and the Banks and Joseph A. Leone, a director of Local
Federal, were elected directors of the Company and all of the persons then
serving as directors of the Company resigned. The remaining directors who
presently serve as directors of the Company were then elected and management
appointments were made. In connection with the Private Placement, the Company on
September 8, 1997 also entered into the Registration Rights Agreement with the
initial purchasers of the Local Securities and the Placement Agent, pursuant to
which, among other things, the Company agreed to file within 120 days a shelf
registration statement with the Commission providing for the offer and sale of
the Local Securities. The Registration Statement of which this Prospectus forms
a part, has been filed in satisfaction of such requirement. See "The Private
Placement and the Redemption Transactions--The Purchase Agreement," "Management"
and "Registration Rights."
Initiatives by New Management. Since the completion of the Private
Placement and the Redemption, new management has been actively implementing the
measures that were described in the Company's Confidential Private Placement
Memorandum dated August 25, 1997. These actions include reducing the level of
the Company's CMOs with interest rate adjustments tied to the COFI, eliminating
all swap and hedging contracts and resolving the Company's portfolio of indirect
automobile loans. While the actions taken are expected to favorably impact the
Company on a going forward basis, as described above under "--Operating
Results," during the six months ended December 31, 1997, the implementation of
these measures resulted in a net loss of $86.0 million. The Company's results
for the first half of fiscal 1998 were significantly impacted by nonrecurring
charges relating to disposition of the hedging contracts, the writedown and
disposition of securities and additional reserves taken by management. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
New management of the Company has already implemented several initiatives
since consummation of the Private Placement and the Redemption which are
intended to enhance the
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Banks' franchise, particularly in the Oklahoma markets where the Company
operates. In the commercial real estate lending area, the Company has hired an
individual with over fifteen years experience in the Oklahoma City market. In
addition, the Company intends to establish a commercial business lending
function, and has recruited two experienced senior executives from the Oklahoma
City market. These individuals have worked together successfully in Local
Financial's markets and are highly visible to area entrepreneurs and small
business owners.
The Company is presently in the process of updating 13 branch facilities.
The projects include drive-in expansions to better accommodate checking account
growth, interior renovations to provide greater customer privacy, parking lot
remodeling to improve customer accessibility and space availability and interior
teller line expansion to more efficiently provide customer service. In addition,
the Company has applied for regulatory approval for a second Edmond branch and
is evaluating a new larger site location for the Purcell branch.
The Company will also consider acquisition opportunities when it perceives
such acquisitions will enhance the Company's franchise value. The Company
anticipates that its focus will be on the acquisition of community-oriented
commercial banks and savings institutions which are located in communities
outside of the larger metropolitan markets of Oklahoma City and Tulsa and in
smaller, less urban markets. Except for the acquisition of Green Country
discussed below, there are no current plans, arrangements, understandings or
agreements regarding any such acquisition opportunities.
Finally, the Company is attempting to establish more of a sales culture at
both Local Federal and Local America. The Company's marketing department is
actively working on a number of campaigns to promote Local Federal and Local
America, including: a new checking account campaign; a corporate image
advertising campaign focusing on the Company's commitment to local markets; a
home equity loan campaign; and a campaign featuring the Company's new commercial
and industrial lending capabilities. The Company's emphasis is to work on ways
to better serve the Banks' customers, as well as to promote additional fee
income through investment products and overdraft protection.
Acquisition of Green Country Banking Corporation. On October 22, 1997,
Local Financial and Local America entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Green Country and its wholly owned subsidiary,
Green Country Bank, FSB ("Green Country Bank"), pursuant to which Green Country
would be merged with and into the Company, with the Company as the surviving
corporation, and in connection therewith, Green Country Bank would be merged
with and into Local America (collectively, the "Merger"). The Merger was
consummated on February 16, 1998 and, in connection therewith, each outstanding
share of common stock and preferred stock of Green Country was converted into
27.907 and 4,150.27 newly-issued shares, respectively, of the Company's Common
Stock. As a result of the foregoing, an aggregate of 837,209 shares of the
Company's Common Stock were issued in connection with the Merger to the three
existing shareholders of Green Country, which include Edward A. Townsend,
Chairman and Chief Executive Officer of the Company, and Jan A. Norton,
President and Chief Operating Officer of the Company. The shares of Company
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Common Stock issued in connection with the Merger are subject to the terms and
conditions of the Registration Rights Agreement. The Merger was accounted for
under the purchase method of accounting. At December 31, 1997, Green Country
Bank operated out of three full-service offices located in Miami, Grove and
Commerce, Oklahoma, and had consolidated assets, liabilities, deposits and
stockholders' equity of $106.5 million, $100.4 million, $77.0 million and $6.1
million, respectively.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision (the "OTS").
The Banks, as federally chartered savings banks, are subject to comprehensive
regulation and examination by the OTS, as their chartering authority and primary
regulator, and by the FDIC, which administers the SAIF, which insures the Banks'
deposits to the maximum extent permitted by law. The Banks are members of the
FHLB of Topeka, which is one of the 12 regional banks which comprise the FHLB
System. The Banks are further subject to regulations of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") governing reserves
required to be maintained against deposits and certain other matters.
The Company's executive offices are located at 3601 NW 63rd Street,
Oklahoma City, Oklahoma 73116-2087 and its main telephone number is (405)
841-2100.
The Offering
The Private Placement....... The Local Securities issued to investors in the
Private Placement were sold by the Company on
September 8, 1997. An aggregate of 19.7 million
shares of Common Stock were sold to 113
purchasers and an aggregate of $80.0 million of
the Senior Notes were sold to 38 purchasers. In
connection therewith, the Company executed and
delivered for the benefit of the holders of the
Local Securities the Registration Rights
Agreement, providing for, among other things, the
filing of the Registration Statement of which
this Prospectus forms a part. See "The Private
Placement and the Redemption Transactions" and
"Selling Holders."
Securities Offered.......... 21,128,209 shares of Common Stock and $80.0
million aggregate principal amount of Senior
Notes.
The Senior Notes............ See "Description of the Senior Notes."
Maturity Date.......... September 8, 2004
Interest Payment Dates. Semi-annually on March 1 and September 1,
commencing March 1, 1998.
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Ranking................ The Senior Notes are general unsecured
obligations of the Company and will rank senior
to such other Indebtedness (as defined in the
Indenture) as the Company may incur.
Because the Company is the sole stockholder of
the Banks, the rights of creditors of the Banks
to payments from the Banks is, in effect, senior
to the rights of the Company as a stockholder of
the Banks, and in effect, senior to the rights of
holders of Senior Notes, who will have no direct
claim against the Banks for payment.
Interest Reserve
Accccount.............. The Indenture pursuant to which the Senior Notes
is issued required the Company to establish at
the time of issuance of the Senior Notes the
Interest Reserve Account, which is a segregated
account which contains a sufficient amount of
cash and other Permitted Investments to pay the
aggregate interest payments scheduled to be made
with respect to the Senior Notes for the next two
succeeding Interest Payment Dates.
Sinking Fund........... None
Mandatory or Optional
Redemption............. None
Change of Control...... Upon a Change of Control (as defined in the
Indenture), holders of Senior Notes will have the
option to require the Company to repurchase all
outstanding Senior Notes at 101% of their
principal amount, plus accrued interest to the
date of repurchase. There can be no assurance
that the Company will have the funds available to
repurchase the Senior Notes in the event of a
Change of Control.
Certain Additional
Covenants.............. The Indenture pursuant to which the Senior Notes
have been issued contains certain additional
covenants that, among other things, limit:
(i) the incurrence of Indebtedness by the
Company, except for certain Junior Indebtedness;
(ii) the payment of dividends and the making of
certain other distributions by the Company and
its subsidiaries; (iii) the incurrence of certain
liens on the Company's assets; (iv) the sale or
other transfer of capital stock of the Banks; and
(v) the Company's ability to enter into any
arrangement that would impose certain
restrictions on the ability of subsidiaries of
the Company to make dividend and other payments
of the Company. The Indenture also restricts the
Company's and the Banks' ability to merge,
consolidate or sell all or substantially all of
the assets of the Company or the Banks.
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Acceleration.......... The maturity of the Senior Notes may be
accelerated upon an Event of Default, as defined
in the Indenture. Such Events of Default include,
among other things, continued default in payment
of interest upon any Senior Note for a period of
thirty days, continued breach of certain
covenants or warranties of the Indenture for a
period of thirty days after notice of such
default from the holders of at least 25% of the
outstanding principal balance of the Senior
Notes, bankruptcy of the Company or the Banks,
the appointment of a conservator or receiver for
the Company or the Banks, default by the Company
or a Subsidiary on any Indebtedness in excess of
5% of the Company's Consolidated Tangible Net
Worth, which default has not been cured within 30
days, the entry of a final judgment in excess of
5% of the Company's Consolidated Tangible Net
Worth or the continuing failure of either of the
Banks to comply with their Regulatory Capital
Requirements.
The Common Stock............ See "Description of Capital Stock."
Dividends............... The Company does not expect to pay a dividend on
the Common Stock in the immediate future, but
rather will retain any earnings and increase
capital. The Company's ability to pay dividends
will depend principally on the ability of Local
Federal to pay dividends to the Company.
In connection with the OTS' most recent
regulatory examination of Local Federal, the OTS
informed Local Federal that as a result of Local
Federal's recent financial condition and
operating results, it was being deemed an
institution in need of more than normal
supervision and, consequently, was being
designated as a Tier 3 institution for purposes
of the OTS' capital distribution regulation. Tier
3 institutions may not make capital distributions
without obtaining the prior approval of the OTS.
In addition, the OTS can impose growth
restrictions on savings institutions which are in
need of more than normal supervision. However, as
a result of, among other things, the capital
raised in the Private Placement and the
initiatives undertaken by new management in
connection with the Private Placement and the
Redemption, the Midwest Regional Office of the
OTS forwarded a letter to Local Federal, dated as
of December 8, 1997, indicating that the OTS was
removing its designation of Local Federal as an
institution in need of more than normal
supervision and upgrading Local Federal's status
from a Tier 3 institution to a Tier 1
institution.
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A Tier 1 institution is authorized to make
capital distributions without OTS approval during
a calendar year of up to the higher of (i) 100
percent of its net income to the date of such
distribution during the calendar year plus the
amount that would reduce by one-half its surplus
capital ratio, as defined, at the beginning of
the calendar year; or (ii) 75% of its net income
over the most recent four-quarter period.
Applicable regulations require, however, that all
savings institutions give the OTS at least 30
days advance notice of any capital distributions,
and the OTS may prohibit any capital distribution
that it determines would constitute an unsafe or
unsound practice. As of January 1, 1998, under
applicable regulations of the OTS, the total
capital available for the payment of dividends by
Local Federal to the Company was $27.5 million,
assuming application of the OTS' safe harbor for
capital distributions. See generally
"Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation."
Market for Local Securities.. The Company has received approval to have the
Common Stock and the Senior Notes listed on the
AMEX under the symbols "LO" and "LO.A,"
respectively. Prior to the Offering, there has
not been a public market for the Local Securities
and there can be no assurance that an active
public trading market for either or both of the
Common Stock or the Senior Notes will develop or
be sustained.
Use of Proceeds.............. The Selling Holders will receive all of the
proceeds from the Local Securities sold pursuant
to this Prospectus. See "Use of Proceeds" for a
discussion of the use of the net proceeds from
the Private Placement.
Risk Factors
Prospective investors are urged to carefully review the matters discussed
under "Risk Factors."
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except Per Share Data)
The selected consolidated financial data of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements of the Company, including the related Notes,
included herein.
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet and Other Data:
Total assets $1,881,365 $2,625,181 $3,278,511 $3,264,850 $3,325,613 $2,306,605
Cash and due from banks 34,152 15,904 13,640 14,497 11,678 16,639
Loans receivable, net 953,470 1,013,824 1,018,135 804,610 708,566 544,453
Securities available for sale 518,107 985,565 1,741,725 361,402 373,532 700,396
Securities and other investment securities held -- 408,207 392,324 1,983,756 2,078,748 897,577
to maturity
Equity securities available for sale -- -- 11,604 12,287 17,076 1,764
Non-performing assets(1) 921 12,570 16,185 10,889 10,961 11,164
Deposits 1,602,533 1,644,356 1,602,460 1,577,821 1,474,171 1,416,098
Securities sold under agreements to repurchase -- 310,801 1,079,194 779,626 381,829 52,540
Promissory note payable -- 7,010 14,020 21,030 28,040 35,050
Senior notes payable 80,000 -- -- -- -- --
FHLB advances 80,136 531,161 439,011 703,202 1,287,377 703,767
Total liabilities 1,798,740 2,522,552 3,170,452 3,121,631 3,198,925 2,228,490
Stockholders' equity 82,625 102,629 108,059 143,219 126,688 78,115
Number of full-service customer facilities 41 41 41 41 41 42
Approximate number of employees 525 546 536 471 423 378
<CAPTION>
Six Months
Ended December 31, Years Ended June 30,
--------------------- --------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Interest and dividend income $ 85,204 $119,100 $222,664 $236,156 $214,558 $175,143 $141,991
Interest expense 59,823 92,562 169,761 187,488 162,590 104,496 85,301
------ ------ ------- ------- ------- ------- ------
Net interest income 25,381 26,538 52,903 48,668 51,968 70,647 56,690
Provision for loan losses (25,578)(2) (9,734) (28,428)(2) (5,117) (1,157) (1,764) 580
------ ------ ------- ------- ------- ------- ------
Net interest income (loss) after
provision for loan losses (197) 16,804 24,475 43,551 50,811 68,883 57,270
Noninterest income (loss) (107,149)(3) 2,185 (17,124)(3) 10,316 16,632 29,916 14,256
Noninterest expense 22,685 29,372 49,256 35,427 46,460 25,089 35,775
-------- ------ ------- ------- ------- ------- ------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting principle and
extraordinary item (130,031) (10,383) (41,905) 18,440 20,983 73,710 35,751
Provision (benefit) for income taxes (44,075) (3,573) (11,860) 4,872 6,568 27,516 4,884
-------- ------ ------- ----- ----- ------ -----
Income before cumulative effect of
change in accounting principle and
extraordinary item (85,956) (6,810) (30,045) 13,568 14,415 46,194 30,867
Cumulative effect of change in
accounting principle -- -- -- -- -- 6,266 --
Utilization of net operating loss
carryforwards -- -- -- -- -- -- 4,284
--------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (85,956) $ (6,810) $(30,045) $ 13,568 $ 14,415 $ 52,460 $ 35,151
========= ======== ======== ======== ======== ======== =======
Historical basic and diluted net income
(loss) per share(4) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94 $ 3.40 $ 2.28
========= ======== ======== ======== ======== ======== ========
Pro forma basic and diluted net income
(loss) per share(5) $ (4.36) N/A $ 1.53 $ N/A N/A N/A N/A
========= ======== ======== ======== ======== ======== ========
Dividends declared per share(4) $ -- $ 0.03 $ 0.03 $ 0.69 $ 1.28 $ 0.99 $ 1.43
========= ======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
At or For the Six
Months Ended
December 31, At or For the Years Ended June 30,
--------------------- --------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios(6):
Return on assets (3.84)% (0.21)% (0.98)% 0.41% 0.43% 1.58% 1.52%
Return on common equity (101.45) (6.35) (28.77) 10.00 10.59 41.41 49.99
Dividend payout ratio(7) -- N/A N/A 77.98 137.38 29.09 62.74
Net interest spread(8) 2.13 1.45 1.57 1.36 1.32 1.80 2.29
Net interest margin(9) 2.34 1.62 1.78 1.52 1.59 2.46 2.75
Noninterest expense to average 0.99 0.87 1.56 1.04 1.36 0.75 1.55
assets(10)
Efficiency ratio(11)(12) N/A 56.14 56.14 57.07 72.75 28.67 52.21
Capital Ratios(13):
Local Federal Bank, F.S.B
Tangible 6.89 4.99 5.17 4.94 4.89 4.45 4.78
Core 6.98 5.07 5.25 5.04 5.03 4.60 5.10
Risk-based 14.14 12.59 12.34 12.71 13.22 13.60 14.50
Local America Bank, F.S.B.
Tangible 15.80 10.58 11.97 10.54 10.13 10.31 10.81
Core 15.90 10.69 12.07 10.69 10.33 10.60 11.30
Risk-based 28.45 24.66 25.31 28.14 26.23 33.70 36.60
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period(1) 0.05 0.93 0.48 0.49 0.33 0.33 0.48
Nonperforming loans to total loans at
end of period(1) 0.06 0.82 0.38 0.51 0.38 0.46 0.18
Allowance for loan losses to total
loans at end of period 2.09 0.50 1.10 0.31 0.56 0.51 0.39
Allowance for loan losses to
nonperforming loans at
end of period(1) 3,272.20 56.22 291.49 60.43 147.82 110.38 210.66
</TABLE>
- ----------------
(1) Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets consist
of nonperforming loans, real estate acquired through foreclosure or
deed-in-lie thereof and repossessions (such as automobiles), net of
writedowns and reserves.
(2) Primarily reflects provisions established by management to cover realized
and inherent losses with respect to the Company's portfolio of indirect
automobile receivables. See "The Company--Operating Results,"
"--Initiatives by New anagement" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations."
(3) Primarily reflects losses incurred by the Company relating to the
liquidation or disposition of certain hedging contracts and the disposition
of investment securities and adjustments to reflect market values. See "The
Company--Operating Results," "--Initiatives by New Management" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(4) Net Income (loss) per share and dividends per share are based upon the
weighted average number of shares outstanding during the period. As a
result of the Private Placement and the Redemption transactions described
under "The Private Placement and the Redemption Transactions," the weighted
average number of shares used in the computation of income (loss) per share
and dividends per share is 15,400,000 for each of the years in the
three-year period ended June 30, 1997 (based on an equivalent number of
shares for the 60 shares outstanding prior to the recapitalization). For
the six months ended December 31, 1997 the weighted average number of
shares is 18,066,000. See also Note 1 of the Notes to Consolidated
Financial Statements.
(5) Pro forma net income (loss) per share assumes that the 19,700,000 shares
issued in the recapitalization were outstanding for the six months ended
December 31, 1997 and for the year ended June 30, 1997.
(6) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods presented. All ratios are annualized
where appropriate.
(7) The dividend payout ratio represents dividends declared per share divided
by net income per share.
(8) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(9) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(10) Noninterest expense excludes the amortization of intangibles.
(11) Represents noninterest expense (exclusive of amortization of intangibles)
divided by the aggregate of net interest income before provision for loan
losses and noninterest income (exclusive of gains and losses on sales of
assets).
<PAGE>
(12) For the year ended June 30, 1997 and the six months ended December 31,
1996, the efficiency ratio does not reflect the $10.3 million one-time
special assessment (before applicable tax benefits) to recapitalize the
SAIF which was accrued during the quarter ended September 30, 1996. See
"Regulation--Regulation of Federal Savings Institutions--FDIC Assessments."
(13) The tangible and core capital ratios are calculated as a percent of
adjusted total assets and the risk-based capital ratio is calculated as a
percent of total risk-weighted assets. See "Regulation--Regulation of
Federal Savings Institutions--Regulatory Capital Requirements" for
information with respect to the Banks' regulatory capital requirements.
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing Local Securities in the Offering. This Prospectus contains certain
forward-looking statements and information relating to the Company that are
based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document, the words "anticipate," "believe," "estimate,"
"expect," "intend," "should" and similar expressions, or the negative thereof,
as they relate to the Company or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future looking events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Prospectus. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Risks Relating to the Company's Financial Condition and Results of Operations
The Company has recognized significant losses in recent periods which have
adversely affected the Company's financial condition. The Company reported a
$86.0 million and $30.0 million net loss for the six months ended December 31,
1997 and the fiscal year ended June 30, 1997, respectively, after reporting net
income of $13.6 million, $14.4 million and $52.5 million for the years ended
June 30, 1996, 1995 and 1994, respectively. The net loss reported for the six
months ended December 31, 1997 was attributable to deliberate actions taken by
the Company's new management subsequent to the Private Placement and the
Redemption to restructure the Company's balance sheet. Specifically, the Company
incurred $125.5 million of losses on the sale of assets, of which an aggregate
loss of $53.4 million was incurred in connection with liquidation or write-off
of the hedging contracts which the Company had entered into to reduce its
exposure to interest rates, see "--Risks Relating to the Company's Lending and
Investment Activities--Interest Rate Swaps, Floors and Caps," and an aggregate
loss of $72.0 million was incurred on the sale and mark-to-market of the
Company's securities portfolio (which primarily related to the sale and
mark-to-market of the Company's COFI-based CMOs). The Company also recorded a
$25.6 million provision for loan losses during the six months ended December 31,
1997, primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables, all of which had been
sold as of December 31, 1997. See "--Risks Relating to the Company's Lending and
Investment Activities--Sub-prime Automobile Lending." The market for fixed
income securities improved during the three-month period ended December 31, 1997
and the Company sold an additional $330.6 million of COFI-based CMOs for a
pre-tax gain of $12.7 million. As of December 31, 1997, the Company recorded, as
a separate component of stockholders' equity, unrealized gains with respect to
its securities portfolio of $2.3 million (net of taxes).
For the fiscal year ended June 30, 1997, the net loss recognized by the
Company was primarily attributable to a $28.4 million provision for loan losses,
which was also primarily
12
<PAGE>
associated with the Company's indirect automobile finance receivables, $29.2
million of losses on the sale of assets, of which $29.9 million related to the
sale of CMOs with interest rate adjustments tied to COFI, and a non-recurring
$10.3 million special assessment (before applicable tax benefits) which was
recorded in connection with the SAIF recapitalization. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
At December 31, 1997, the Company had $428.6 million of adjustable-rate
mortgage-related securities with interest rate adjustments tied to COFI (all of
which were classified as available for sale). As of such date, the Company had a
net unrealized pretax gain of $3.1 million with respect to its COFI-based
mortgage-related securities portfolio. During the six months ended December 31,
1997 and fiscal 1997, the Company disposed of COFI-based CMOs having an
aggregate carrying value of $675.8 million and $758.9 million, respectively, for
an aggregate sale price of $672.6 million and $729.0 million, respectively. The
Company's future operating results will be impacted by, among other things, the
quality of its assets, including its portfolio of COFI-based CMOs. See "--Risks
Relating to the Company's Lending and Investing Activities--Investments in
Mortgage-Related Securities."
Risks Relating to the Company's Lending and Investment Activities
General. Since 1989, the Company's principal lending focus has been on the
origination and purchase of loans secured primarily by commercial and
multi-family real estate located throughout the United States. To a lesser
extent, the Company has also originated various types of single-family
residential and consumer loans and, through two wholly-owned subsidiaries, has
purchased sub-prime automobile finance receivables from automobile dealerships
located in Florida and Oklahoma. In addition, the Company's investment strategy
has focused on the investment in mortgage-backed and related securities and
other similar investments permitted by applicable laws and regulations (which
include mortgage participation certificates insured or guaranteed by U.S.
government agencies and government sponsored enterprises, collateralized
mortgage obligations and U.S. government and agency investment securities). At
December 31, 1997, the Company's gross loans receivable amounted to $982.3
million or 52.2% of total assets and the Company's mortgage-backed and
investment securities amounted to $518.1 million or 27.5% of total assets. As of
such date, the Company's single-family residential, commercial real estate,
commercial business and consumer loans amounted to $287.3 million, $645.2
million, $4.0 million, $45.8 million or 29.2%, 65.7%, 0.4% and 4.7% of the
Company's total loan portfolio, respectively. As described below, the Company's
lending and investing strategies may be considered to involve a higher degree of
risk than the single-family residential lending traditionally emphasized by
savings institutions.
Commercial Real Estate Lending. The Company originates and purchases
commercial and multi-family real estate loans (referred to herein as "commercial
real estate loans"). In addition, the Company also purchases loans secured by
various forms of commercial real estate located throughout the United States.
Commercial real estate lending in general entails different and significant
risks when compared to single-family residential lending because such loans
typically
13
<PAGE>
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the property or the borrower's business. In addition, the geographic diversity
of the real estate securing the Company's commercial real estate loans may
entail additional risks. Such purchased loans may be more difficult to monitor
and the properties securing such loans may be located in states which could in
the future experience adverse economic conditions. The Company attempts to
address this risk by only originating and purchasing loans that meet the
Company's underwriting standards. At December 31, 1997, $162,000 or 0.03% of the
Company's commercial real estate loans were classified as nonperforming. See
"Business--Lending Activities--Commercial Real Estate Loans" and "--Asset
Quality--Nonperforming Assets."
Sub-prime Automobile Lending. In December 1993, the Company established LAC
as a wholly-owned subsidiary of Local Federal. Prior to February 1997, LAC,
which is headquartered in Hollywood, Florida, purchased sub-prime automobile
loans, normally on a discounted basis, from car dealerships in and around
Hollywood, Florida. In addition, in January 1995, the Company established Star
as a wholly-owned subsidiary of Local Federal. Prior to February 1997, Star,
which is headquartered in Oklahoma City, purchased sub-prime automobile loans
from car dealerships located in Oklahoma.
During the fourth quarter of 1996, the prior Board of Directors of the
Company became aware of a significant deterioration in the credit quality of its
portfolio of indirect automobile finance receivables. Consequently, in February
1997, the Company discontinued its third-party automobile loan purchase activity
and since such date, LAC and Star have only been servicing the loans which
remain in their respective portfolios. During the fiscal year ended June 30,
1997, the Company provided $28.4 million to the allowance for loan losses, of
which $28.1 million related to the indirect automobile portfolio. In addition,
during the three months ended September 30, 1997, primarily in connection with
the closing of the Private Placement and the Redemption, the Company established
a provision for loan losses of $25.4 million which primarily related to the
indirect automobile portfolio. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Results of Operations--
Provisions for Loan Losses" and Business--Lending Activities--Indirect
Automobile Finance Receivables."
During the last quarter of calendar 1997, management determined to sell the
indirect automobile portfolio and completely end its involvement in such
business. Toward that end, the Company solicited bids for a possible sale of the
portfolio. In late December 1997, the Company entered into three contracts for
the sale of $54.1 million of its gross indirect automobile receivables
(approximately 7,019 loans). The Company received $44.3 million in proceeds from
such sales. The purchase price for each loan was at a negotiated discount from
its outstanding principal balance, based upon the length of delinquency of
payment pursuant to the loan terms. Pursuant to the terms of the loan purchase
agreements, the Company is obligated to repurchase any loan sold as to which
there is a material breach of a representation or warranty by the Company for a
period which ranges from six months to one year, depending on the particular
loan purchase contract. During the six months ended December 31, 1997, the
Company charged off an aggregate of $16.5 million of indirect automobile finance
receivables which included losses
14
<PAGE>
incurred on such sales, ongoing losses on the receivables incurred during the
period as well as charge-offs associated with all other assets pertaining to
such business. Management is of the opinion that the reserves which have
previously been established with respect to this portfolio will be sufficient to
cover any loans it may be required to repurchase pursuant to the loan purchase
agreements and that there will be no further impact on the Company's statement
of operations. See "Business--Asset Quality--Allowance for Loan Losses."
Investments in Mortgage-Related Securities. From time to time the Company
has invested in a variety of mortgage-related securities such as floating-rate
CMOs tied to COFI. The COFI is a compilation of the average rates paid by
institutions which are members of the 11th District of the FHLB System, which
index generally adjusts more slowly to changes in market rates of interest when
compared to other indices. As a result, the values of the Company's COFI-based
CMOs have declined in recent periods. In late 1996 and in anticipation of the
proposed sale of the Company, the Company began reducing its securities,
particularly its CMO holdings, through periodic bulk sale transactions. During
fiscal 1997, the Company sold $743.9 million of securities and recognized $29.6
million of net losses with respect to such sales. At June 30, 1997, the
Company's securities portfolio amounted to $1.4 billion ($1.1 billion of which
consisted of COFI-based CMOs) or 53.1% of total assets. As of such date, the
Company had $32.0 million of unrealized losses with respect to its securities
portfolio (net of applicable tax benefits).
During September 1997 and in connection with the Private Placement and the
Redemption, new management of the Company determined that its CMO portfolio was
"other than temporarily impaired" due to its intention to sell the portfolio in
the near future, for which management is of the opinion that the fair value of
the adjustable-rate security portfolio will not recover to approximately the
amortized cost of the portfolio prior to the expected time of sale. As a result,
in accordance with generally accepted accounting principles ("GAAP"), the
Company wrote-down its remaining CMO portfolio by $54.7 million. In addition to
the foregoing, since assuming control of the Company on September 8, 1997, new
management has been accelerating the disposition of its securities portfolio,
particularly its COFI-based mortgage-related securities. During the six months
ended December 31, 1997, the Company sold $869.8 million of securities and
utilized the proceeds of such sales to repay all of its outstanding reverse
repurchase agreements and $451.0 million or 84.9% of its outstanding FHLB
advances. The remaining proceeds were invested in short-term investments. At
December 31, 1997, the Company's securities portfolio amounted to $518.1 million
($428.6 million of which consisted of COFI-based mortgage-related securities) or
27.5% of assets. As of such date, all of the Company's securities were
classified as available for sale and the Company had unrealized gains with
respect to the portfolio of $2.3 million (net of applicable taxes) and the
Company had no trading securities. Management of the Company may continue to
reduce its securities portfolio, particularly its CMO holdings, as market
conditions permit. Although the Company has reduced its investment in
mortgage-related securities in recent periods, it continues to maintain a
substantial investment which could adversely affect the Company's results of
operations depending on, among other things, the future interest rate
environment. There can be no assurance as to the amount of actual losses to be
incurred upon the disposition of all or part of the remaining COFI-based CMO
portfolio. See "Management's Discussion and
15
<PAGE>
Analysis of Financial Condition and Results of Operations--Results of
Operations--Noninterest Income" and "Business--Investment Activities."
Interest Rate Swaps, Floors and Caps. The Company in the past has been a
party to various hedging contracts such as interest rate swaps, floors and caps,
which were utilized in order to reduce its exposure to fluctuations in interest
rates. During the three months ended September 30, 1997, the Company terminated
all outstanding interest rate swaps, caps and floors. Specifically, the Company
terminated interest rate swaps with an aggregate notional value of $500.0
million which resulted in losses of $47.3 million (excluding applicable tax
benefits). The Company also terminated interest rate cap and floor agreements
with an aggregate notional value of $2.4 billion, which resulted in losses of
$2.2 million (excluding applicable tax benefits). Upon termination of the
foregoing interest rate swap, cap and floor agreements, the Company recognized
all deferred gains and losses which resulted from prior hedging activities,
which resulted in an additional loss of approximately $3.9 million (excluding
applicable tax benefits). The foregoing losses resulted in an aggregate net tax
benefit of approximately $18.7 million.
Risks Relating to Outstanding Litigation With Respect to Interest Rate Swaps,
Floors and Caps
Pursuant to the Redemption Agreement, the Selling Stockholders are
responsible to the Company for any aggregate pre-tax loss (net of any related
tax benefit) to the Company in excess of $42.5 million which results from the
sale or termination of the Company's existing hedging contracts. The Company is
currently attempting to collect such difference (which it estimates to amount to
$4.6 million and which is reflected in the Company's consolidated statement of
financial condition as a receivable included in other assets) from the Selling
Stockholders and has filed a lawsuit in the United States District Court for the
Western District of Oklahoma in order to facilitate such recovery. However, no
assurance can be made that the Company will be able to recover from the Selling
Stockholders all or a portion of such $4.6 million.
Risks Relating to the Adequacy of the Company's Allowance for Losses
The Company's allowance for loan losses amounted to $20.5 million or
2.09% of total loans and 3,727.20% of total nonperforming loans, each at
December 31, 1997. The Company brings its total allowance for loan losses to a
level considered appropriate by management by charging the provision for loan
losses to earnings. The Company established provisions for loans losses of $25.6
million, $9.7 million, $28.4 million, $5.1 million and $1.2 million during the
six months ended December 31, 1997 and 1996 and the years ended June 30, 1997,
1996 and 1995, respectively. During such respective periods, loan charge-offs
(net of recoveries) amounted to $16.5 million, $7.5 million $20.2 million, $6.5
million and $253,000. The $25.6 million and $28.4 million provisions established
during the six months ended December 31, 1997 and the year ended June 30, 1997
were intended primarily to cover realized and inherent losses with respect to
the Company's portfolio of indirect automobile receivables. As of December 31,
1997, the Company's portfolio of such indirect automobile loans had been sold.
See "Risk Factors--Risks Relating to the Company's Lending and Investment
Activities--Sub-prime Automobile Lending."
16
<PAGE>
Future additions to the allowance for loan losses may be necessary due to
changes in economic conditions and the performance of the Company's loan
portfolio. Future additions to the Company's allowance for losses on foreclosed
assets may also be necessary to reflect changes in the economies and markets for
real estate in which the Company's real estate owned is located (as of December
31, 1997, all of the Company's real estate owned was located in Oklahoma City,
Oklahoma) and other factors (such as, among other things, the condition of the
properties, occupancy levels and vacancy rates) which may result in adjustments
which are necessary to ensure that the Company's foreclosed assets are carried
at fair value, less estimated costs to dispose of the properties. Moreover, the
OTS, as an integral part of its examination process, periodically reviews the
Company's allowances for losses and the carrying values of its assets. The Banks
were most recently examined by the OTS in this regard during the second quarter
of 1997. In connection with such examination, the OTS directed the Company to
establish additional reserves with respect to its indirect automobile loan
receivables portfolio, which reserves are reflected in the Company's results of
operations for the year ended June 30, 1997. Future increases in the provisions
for losses on loans and foreclosed assets would adversely affect the Company's
results of operations. See "Business--Asset Quality--Allowance for Loan Losses."
Concerns With Respect to the Company's New Management
In connection with the closing of the transactions contemplated by the
Private Placement and the Redemption, the prior members of the Company's Board
of Directors resigned. A new Board of Directors, under the leadership of Edward
A. Townsend, the Chairman of the Board and Chief Executive Officer, are now
responsible for the direction and operation of the Company. In addition to
electing Mr. Townsend as Chief Executive Officer, the Company's new Board of
Directors elected Jan A. Norton as President. Messrs. Townsend and Norton are
expected to have a significant role in the development and management of the
Company's business. The Company has entered into three-year employment
agreements with both of such officers, which agreements will automatically
extend for an additional one-year term beginning at the end of the first
anniversary of the effective date, unless prior notice is given by either party.
The loss of services of one or both of such officers could disrupt and have a
material adverse effect on the operations of the Company. See "Management."
Concerns Relating to Dividend Restrictions Applicable to the Company
Payment of dividends on the Common Stock is at the discretion of the
Board of Directors, subject to applicable regulatory and other restrictions
imposed by law and subject to the terms of the Indenture. The Company does not
expect to pay a dividend on the Common Stock but intends to retain earnings and
increase capital. The Company's ability to pay dividends will depend principally
on the ability of Local Federal to pay dividends to the Company.
In connection with the OTS' most recent regulatory examination of Local
Federal which occurred prior to the Private Placement and the Redemption, the
OTS informed Local Federal that as a result of Local Federal's recent financial
condition and operating results, it was being deemed an institution in need of
more than normal supervision and, consequently, was being designated as a Tier 3
institution for purposes of the OTS' capital distribution regulation. Tier 3
institutions may not make capital distributions without obtaining the prior
approval of the OTS.
17
<PAGE>
In addition, the OTS can impose growth restrictions on savings institutions
which are in need of more than normal supervision. However, as a result of,
among other things, the capital raised in the Private Placement and the
initiatives undertaken by new management in connection with the Private
Placement and the Redemption, the Midwest Regional Office of the OTS forwarded a
letter to Local Federal, dated as of December 8, 1997, indicating that the OTS
was removing its designation of Local Federal as an institution in need of more
than normal supervision and upgrading Local Federal's status from a Tier 3
institution to a Tier 1 institution.
A Tier 1 institution is authorized to make capital distributions without
OTS approval during a calendar year of up to the higher of (i) 100 percent of
its net income to the date of such distribution during the calendar year plus
the amount that would reduce by one-half its surplus capital ratio, as defined,
at the beginning of the calendar year; or (ii) 75% of its net income over the
most recent four-quarter period. Applicable regulations require, however, that
all savings institutions give the OTS at least 30 days advance notice of any
capital distributions, and the OTS may prohibit any capital distribution that it
determines would constitute an unsafe or unsound practice. As of January 1,
1998, under applicable regulations of the OTS, the total capital available for
the payment of dividends by Local Federal to the Company was $27.5 million,
assuming application of the OTS' safe harbor for capital distributions. See
generally "Regulation--Regulation of Federal Savings Institutions--Capital
Distribution Regulation."
Impact of Fluctuations in Interest Rates on the Company's Financial Condition
and Results of Operations
The Company's operating results depend to a large extent on its net
interest income, which is the difference between the interest and dividend
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities. Changes in the general level
of interest rates can affect the Company's net interest income by affecting the
spread between the Company's interest-earning assets and interest-bearing
liabilities. This may be due to the disparate maturities or period to repricing
of the Company's interest-earning assets and interest-bearing liabilities, as
well as in the case of an increase in the general level of interest rates,
periodic caps which limit the interest rate change on many of the Company's
adjustable-rate mortgage loans. In addition to its effect on the Company's
interest rate spread, changes in the general level of interest rates also
affect, among other things, the ability of the Company to originate loans, the
value of the Company's interest-earning assets and its ability to realize gains
from the sale of such assets, the average life of the Company's interest-earning
assets, and the Company's ability to obtain deposits in competition with other
available investment alternatives. Interest rates are highly sensitive to many
factors, including governmental monetary policies, domestic and international
economic and political conditions and other factors beyond the control of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management."
18
<PAGE>
Risks to Investors As a Result of the Company's Limited Source of Payments on
the Senior Notes
The Company is a holding company with no significant business operations of
its own. The Company's only significant asset is all of the common stock of
Local Federal. Other than the interest reserve account established pursuant to
the Indenture in the Private Placement and operating cash reserves retained from
the proceeds of the Private Placement, the Company's only source of cash to pay
interest on and principal of the Senior Notes will consist of distributions from
Local Federal. There can be no assurance that the earnings from Local Federal
will be sufficient to make distributions to the Company to enable it to pay
interest on the Senior Notes when due or principal of the Senior Notes at
maturity or that such distributions will be permitted by applicable federal
banking laws and regulations. Moreover, distributions from Local Federal may not
be sufficient to pay the principal amount of the Senior Notes prior to maturity
upon the occurrence of an event of default (as defined in the Indenture) or to
repurchase the Senior Notes upon a change of control (as defined therein). If
there shall occur an event of default or a requirement for the Company to
repurchase the Senior Notes upon a change of control or, in the event that
earnings from Local Federal are not sufficient to make distributions to the
Company to enable it to pay the principal amount of the Senior Notes at
maturity, the Company may be required to adopt one or more alternatives, such as
borrowing funds, selling its equity securities and/or the equity securities or
assets of the Banks, or seeking loans from the Banks. There can be no assurance
that any of the foregoing actions could be effected on satisfactory terms, that
any of the foregoing actions would enable the Company to pay the principal
amount of the Senior Notes or that any of such actions would be permitted by the
terms of the Indenture or applicable federal banking laws and regulations. See
"Description of Senior Notes."
Federal banking laws and regulations, including the regulations of the OTS,
limit the Banks' ability to pay dividends. The Banks generally may not declare
dividends or make any other capital distribution to the Company if, after the
payment of such dividend or other distribution, they would fall within any of
the three undercapitalized categories under the prompt corrective action
standards established by the OTS and the other federal banking agencies pursuant
to the Federal Deposit Insurance Act. In addition, a capital distribution
regulation of the OTS also limits the Banks' ability to pay dividends and make
other capital distributions in a manner which depends upon the extent to which
the Banks meet their respective regulatory capital requirements. The Home
Owners' Loan Act ("HOLA") requires every savings institution subsidiary of a
savings and loan holding company to give the OTS at least 30 days' advance
notice of any proposed dividends or capital distributions. The OTS may prohibit
any dividend or other capital distribution that it determines would constitute
an unsafe or unsound practice. There are also various statutory and regulatory
limitations on the extent to which the Banks can finance or otherwise transfer
funds to the Company or non-banking subsidiaries of the Company, whether in the
form of loans, extensions of credit, investments or asset purchases. The
Director of the OTS may further restrict these transactions in the interests of
safety and soundness.
As of January 1, 1998, under regulations of the OTS, the total capital
available for payment of dividends by Local Federal to the Company was $27.5
million, assuming application
19
<PAGE>
of the OTS' safe harbor for capital distributions. See "Regulation--Regulation
of Federal Savings Institutions--Capital Distribution Regulations."
Concerns as to the Lack of a Prior Public Market for the Common Stock and the
Senior Notes
Prior to this Offering, there has not been a public market for the Local
Securities. The Company has received approval to have the Common Stock and the
Senior Notes listed on the AMEX under the symbols "LO" and "LO.A," respectively.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company. Because there can be no assurance that buyers and sellers of the Local
Securities can be readily matched, investors may wish to consider the potential
illiquid and long-term nature of an investment in the Local Securities. There
can be no assurance that an active and liquid trading market for either or both
of the Common Stock or the Senior Notes will develop, or once developed, will
continue. The absence of a liquid and active trading market, or the
discontinuance thereof, may have an adverse effect on both the price and the
liquidity of the Local Securities.
Possible Effect of Economic Conditions on the Company's Business
The success of the Company is dependent to a certain extent upon general
economic conditions, particularly in the areas in which it conducts its business
activities. Adverse changes in the economic conditions of these areas may impair
the ability of the Company to collect loans and would otherwise have an adverse
effect on its business, including the demand for new loans, the ability of
customers to repay loans and the value of both the real estate which secures its
loans and its foreclosed assets.
Economic conditions within the Company's primary market area remain strong.
During 1997, employment grew 2.8% within Oklahoma, as compared to nationwide
growth of 2.2%. Total personal income increased by 4.7% within Oklahoma, which
compares favorably with the growth experienced nationwide. Nevertheless, no
assurance can be made that economic conditions will not deteriorate either
within Oklahoma or the country as a whole. Any such deterioration would
adversely affect the Company's business.
Possible Effect of Competition on the Company's Business
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for deposits
historically has come from other thrift institutions, commercial banks and
credit unions doing business in its market areas. In addition, as with all
banking organizations, the Company has experienced increasing competition from
nonbanking sources. For example, the Company competes for funds with full
service and discount broker-dealers and with other investment alternatives, such
as mutual funds and corporate and governmental debt securities. The Company's
competition for loans comes principally from other thrift institutions,
commercial banks, mortgage banking companies,
20
<PAGE>
consumer finance companies,insurance companies and other institutional lenders.
A number of institutions with which the Company competes for deposits and loans
have significantly greater assets, capital and other resources than the Company.
In addition, many of the Company's competitors are not subject to the same
extensive federal regulation that governs savings and loan holding companies
such as the Company and federally-chartered and federally-insured savings
institutions such as the Banks. As a result, many of the Company's competitors
have advantages over the Company in conducting certain businesses and providing
certain services.
Possible Effect of Regulatory Changes on the Company's Business
Both the Company, as a savings and loan holding company, and the Banks, as
federally-chartered savings institutions, are subject to significant
governmental supervision and regulation, which is intended primarily for the
protection of depositors and the federal deposit insurance funds. Statutes and
regulations affecting the Company and the Banks may be changed at any time, and
the interpretation of these statutes and regulations by examining authorities
also is subject to change. There can be no assurance that future changes in
applicable statutes and regulations or in their interpretation will not
adversely affect the business of the Company. The Company is subject to
regulation and examination by the OTS, and the Banks are subject to examination
by the OTS, as their chartering authority and primary regulator, and by the
FDIC, as the insurer of their deposits through the SAIF administered by it.
There can be no assurance that the OTS or the FDIC will not, as a result of such
regulation and examination, impose various requirements or regulatory sanctions
upon the Company or the Banks, as applicable. In addition to governmental
supervision and regulation, each of the Company and the Banks is subject to
changes in federal and state laws, including changes in tax laws, which could
materially and adversely affect the real estate industry, such as repeal of the
federal mortgage interest deduction. See "Regulation"
Certain Charter and Bylaw Provisions Which May Restrict a Potential Change
of Control of the Company
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include (i) a Board of
Directors classified into three classes with the directors of each class having
staggered, three-year terms, (ii) a provision establishing certain advance
notice procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at an annual meeting of stockholders and
(iii) a provision that special meetings of the stockholders of the Company may
be called by stockholders only upon the written request of holders of at least a
majority of the outstanding shares of capital stock entitled to vote at any such
meeting. The Company's Certificate of Incorporation authorizes the Board of
Directors of the Company to issue shares of preferred stock without stockholder
approval and upon such terms as the Board of Directors may determine. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisition, financings and other corporate purposes, could also
have the effect of making it more difficult for a third party to
21
<PAGE>
acquire, or of discouraging a third party from acquiring, a controlling interest
in the Company. See "Description of Capital Stock--Restrictions on Acquisition
of the Company."
THE COMPANY
The Company is a Delaware corporation headquartered in Oklahoma City,
Oklahoma. The Company was organized in 1993 to become the holding company of
Local Federal. Local Federal was organized in 1908 under the name Local Building
and Loan Association, changed to a federal mutual charter in 1935 and converted
to the stock form of organization in 1983. Local Federal's wholly-owned
subsidiaries include Local America. The Company also owns through Local Federal
two indirect automobile finance subsidiaries, Local Acceptance and Star. At
December 31, 1997, the Company had consolidated assets of $1.88 billion,
substantially all of which is comprised of its direct and indirect 100%
ownership interest in the Banks, consolidated liabilities of $1.80 billion,
consolidated deposits of $1.60 billion and consolidated stockholders' equity of
$82.6 million.
The Banks presently conduct business through forty-one branch offices
located throughout the state of Oklahoma, with heavy concentration in the
Oklahoma City and Tulsa areas. Twenty-eight branch offices operate under the
Local Federal name. Seven of these branch offices are located in Oklahoma City
and nine additional branches are within a fifty mile radius. Local America
operates thirteen branches in the Tulsa area. According to SNL Securities, as of
June 30, 1997, the Banks ranked fourth in Oklahoma by deposit market share among
depository institutions and first in deposit market share among thrift
institutions.
The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the OTS. The Banks, as federally chartered
savings banks, are subject to comprehensive regulation and examination by the
OTS, as their chartering authority and primary regulator, and by the FDIC, which
administers the SAIF, which insures the Banks' deposits to the maximum extent
permitted by law. The Banks are members of the FHLB of Topeka, which is one of
the 12 regional banks which comprise the FHLB System. The Banks are further
subject to regulations of the Federal Reserve Board governing reserves required
to be maintained against deposits and certain other matters.
The Company's executive offices are located at 3601 NW 63rd Street,
Oklahoma City, Oklahoma 73116-2087 and its main telephone number is (405)
841-2100.
22
<PAGE>
The following chart sets forth the structure of the Company and its
subsidiaries. For additional information, see "Business--Subsidiaries."
-----------------
Local Financial
Corporation
-----------------
-----------------
Local Federal
Bank, F.S.B.
-----------------
<TABLE>
- -------------------- ------------- ------------- ------------------- ------------------ -----------------
Local Star Star Financial
Local America, Securities Properties Local Acceptance Services Local Mortgage
Inc. Corporation Inc. Company of Florida Corporation Corporation
- -------------------- ------------- ------------- -------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
- --------------------
Local America Bank
of Tulsa, F.S.B.
- --------------------
- --------------------
Service
Corporation of
Tulsa, Inc.
- --------------------
</TABLE>
23
<PAGE>
THE PRIVATE PLACEMENT AND THE REDEMPTION TRANSACTIONS
The Redemption Agreement. On August 25, 1997, the Company entered into the
Redemption Agreement with the Selling Stockholders, pursuant to which the
Company agreed to redeem all of the Company's issued and outstanding shares of
Common Stock for consideration of $154.0 million, subject to adjustment as
described below. The Redemption Agreement was subject to the satisfaction or
waiver of various conditions, including that the Company shall have completed
the sale of at least $70.0 million of Senior Notes and $190.0 million of Common
Stock. In addition, pursuant to the Redemption Agreement, the Company agreed to
prepay a promissory note payable to the mother of the Selling Stockholders at a
price equal to the principal amount thereof plus accrued and unpaid interest
thereon to the date of prepayment (i.e., $7.2 million).
The amount to be ultimately paid to the Selling Stockholders in connection
with the Redemption is subject to adjustment as follows. Upon consummation of
the Redemption, the Company deposited a portion of the amount to be paid to the
Selling Stockholders (i.e., $10.0 million) in an escrow account (the "FDIC
Dispute Escrow Account"). In the event that upon the resolution of certain
litigation between the Company and the FDIC (the "FDIC Dispute") (see
"Business--Legal Proceedings"), the Company is required to make a net payment to
the FDIC, then such payment shall be made as follows: (i) first, from the
Company's reserve in respect of the FDIC Dispute as of the date of consummation
of the Redemption and (ii) second, from the FDIC Dispute Escrow Account. If the
aggregate amount of such payment exceeds both the reserve amount and the amount
in the FDIC Dispute Escrow Account, then the Selling Stockholders will pay such
excess. If after payment in full of the amount of such payment to the FDIC, any
remaining reserve amount (plus interest on such remaining amount from the date
of consummation of the Redemption) and any remaining balance in the FDIC Dispute
Escrow Account will be paid to the Selling Stockholders. If upon resolution of
the FDIC Dispute, the FDIC is required to make a net payment to the Company,
then the Company shall pay such amount to the Selling Stockholders, together
with the amount of the reserve in respect of the FDIC Dispute (plus interest
from the date of consummation of the Redemption), and the entire amount of the
FDIC Dispute Escrow Amount will be paid to the Selling Stockholders. The Selling
Stockholders will be responsible for the payment of all reasonable costs and
expenses incurred by the Company in connection with the FDIC litigation, except
that such costs and expenses will be paid out of the FDIC Dispute Escrow Account
to the extent funds are available therein.
Pursuant to the Redemption Agreement, if the Company's unaudited
consolidated stockholders' equity (after adding back to total stockholders'
equity (i) any provisions for loan losses recognized by the Company after May
31, 1997, (ii) the amount of any unrealized loss on COFI-based CMOs categorized
as available for sale under SFAS No. 115, (iii) the after-tax amount of certain
losses on the sale of available for sale CMOs during June of 1997 and (iv)
certain legal fees and expenses incurred by the Company in connection with the
Private Placement and the Redemption) (as adjusted, the "Adjusted
24
<PAGE>
Equity Amount") as of the closing date of the Redemption is less than $144.5
million, then the purchase price will be reduced by the amount of such
shortfall, and if the Adjusted Equity Amount is greater than $144.5 million,
then the purchase price will be increased by the amount of such excess. Upon
consummation of the Redemption, the Company deposited $5.0 million of the
proceeds to be paid to the Selling Stockholders in an escrow account with
respect to such equity adjustment. The Company and the Selling Stockholders have
been unable to agree on the Adjusted Equity Amount and, pursuant to the terms of
the Redemption Agreement, will have this matter determined by an independent
accounting firm selected by each party's representative. The Company and the
Selling Stockholders have each selected an independent accounting firm, which
accounting firms are required pursuant to the Redemption Agreement to agree on a
third independent accounting firm to resolve the dispute. As of the date of this
Prospectus, the accounting firms have not yet agreed on a third accounting firm
to resolve such dispute.
If the sale or termination of the Company's existing hedging contracts
results in an aggregate pre-tax loss to the Company in excess of $42.5 million,
the Selling Stockholders will pay to the Company such excess, net of any related
tax benefit. If the sale or termination of the Company's existing hedging
contracts results in an aggregate pre-tax loss to the Company which is less than
$42.5 million, the Company will pay to the Selling Stockholders such difference,
net of any related tax benefit. The Company is currently attempting to collect
such difference (which it estimates to amount to $4.6 million) from the Selling
Stockholders and has filed a lawsuit in the United States District Court for the
Western District of Oklahoma in order to facilitate such recovery. However, no
assurance can be made that the Company will be able to recover from the Selling
Stockholders all or a portion of such $4.6 million.
Pursuant to the Redemption Agreement, the Selling Stockholders have made
certain representations and warranties to the Company, which representations and
warranties will survive for six months after the date of the Redemption
Agreement, or until March 8, 1998.
The Company and the Selling Stockholders have entered into an Escrow
Agreement with The Bank of New York, as Escrow Agent, dated the date of closing
of the Redemption Agreement (the "Escrow Agreement"), which provides for the
establishment of the escrow accounts to be utilized in connection with the
adjustments to the purchase price under the Redemption Agreement, which are
described above. The funds deposited into escrow have been invested in
short-term certificates of deposit, short-term obligations of the United States,
any state or agency thereof or money market mutual funds investing in the
foregoing instruments. Pursuant to the terms of the Redemption Agreement and the
Escrow Agreement, the Selling Stockholders may provide the Company with
substitute collateral which is acceptable to it in replacement for funds which
have been deposited in one or more of such escrow accounts. The Escrow Agent
will release such escrowed funds to the Selling Stockholders upon receipt of a
joint notice from the Company and the Selling Stockholders.
25
<PAGE>
The Company and the Selling Stockholders have jointly and severally agreed
to indemnify the Escrow Agent for, and hold it harmless against, any loss,
liability or expenses (including attorney's fees and other costs of defense)
which may be incurred, or that arises out of or in connection with, its
performance of its duties and obligations under the Escrow Agreement; except
where the Escrow Agent shall have been adjudged negligent or to have acted in
bad faith or through willful misconduct. The Escrow Agreement provides for a
mechanism for the parties to remove the Escrow Agent and for the Escrow Agent to
resign and provides for the parties to equally pay the fees and expenses of the
Escrow Agent.
The Purchase Agreement. On September 8, 1997, the Company entered into the
Purchase Agreement with FBR and the various purchasers of the Local Securities
issued pursuant to the Private Placement, which provided, among other things,
for the purchase on such date of an aggregate of $197.0 million of Common Stock
and $80.0 million of Senior Notes. A closing was held on such date at which the
Redemption was consummated.
In connection with the consummation of the transactions contemplated by the
Purchase Agreement and the Redemption Agreement, Edward A. Townsend, the present
Chairman of the Board and Chief Executive Officer of the Company and the Banks,
Jan A. Norton, the present President of the Company and the Banks and Joseph A.
Leone were elected directors of the Company. All of the persons then serving as
directors of the Company resigned. Following such resignations and appointments,
the new members of the Board of Directors caused Robert A. Kotecki, George Nigh
and Kenneth W. Townsend to be appointed to the Company's Board of Directors and
management appointments were made.
The obligations of the purchasers of the Local Securities issued pursuant
to the Purchase Agreement were subject to the satisfaction or waiver, prior to
the closing of the transaction, of various conditions, including, among other
things: (a) the continued accuracy of all representations and warranties made by
the Company in the Purchase Agreement (which representations and warranties
shall survive for six months from the date of the Purchase Agreement, or until
March 8, 1998) and the performance in all material respects of all covenants and
agreements to be performed by the Company prior to the closing of the
transaction; (b) the execution by the Company and both of the Selling
Stockholders of the Redemption Agreement and the consummation of the transaction
contemplated thereby; and (c) the Company shall have obtained the requisite
stockholder approval of an amendment to its Certificate of Incorporation to
increase its authorized Common Stock to 25,000,000 shares and to authorize
Preferred Stock of 5,000,000 shares and shall have filed with the Secretary of
State of the State of Delaware the appropriate documentation in order to effect
such amendment.
The Purchase Agreement provided for the Company to pay the Placement Agent
a fee equal to, in the aggregate, (i) 7.0% of the gross proceeds raised with
respect to the sale of the Common Stock in the Private Placement and (ii) 5.5%
of the gross proceeds raised with respect to the sale of the Senior Notes in the
Private Placement. In addition, the
26
<PAGE>
Company reimbursed the Placement Agent for its actual out-of-pocket expenses
pertaining to its engagement, including legal fees and expenses and indemnified
the Placement Agent against certain liabilities arising out of its engagement,
including certain liabilities under the securities laws.
Pursuant to the Purchase Agreement, the Company issued warrants to the
Placement Agent to purchase a number of shares of Common Stock equal to an
aggregate of 3.0% of the Common Stock issued in the Private Placement, or
591,000 shares. The warrants are exercisable for a five-year period commencing
upon the date of consummation of the Private Placement, at an exercise price per
share equal to the $10.00 per share price of the Common Stock issued in the
Private Placement. The shares of Common Stock underlying the warrants are
subject to the provisions of the Registration Rights Agreement. The warrants
contain anti-dilution provisions providing for appropriate adjustments of the
exercise price and the number of underlying shares of Common Stock which may be
purchased upon exercise in the event of any recapitalization, reclassification,
stock dividend, stock split or similar transaction. The warrants will not
entitle the Placement Agent to any rights as stockholders of the Company unless
and until the warrants are exercised and the underlying shares of Common Stock
are purchased thereunder. See "Registration Rights."
Under the terms of a letter agreement which was assumed by the Company
pursuant to the Purchase Agreement, the Company has retained FBR as exclusive
financial advisor in connection with, among other things, strategic
opportunities and initiatives as well as capital markets financing (the "Post
Placement Engagement"). The term of FBR's engagement shall continue for 24
months from completion of the Private Placement and shall be renewed annually
unless terminated by either party. During the term of the Post Placement
Engagement, and for a period of twelve months following any termination of the
Post Placement Engagement, FBR shall be (i) exclusive financial advisor in
connection with any sale of stock or assets, merger, acquisition or other
strategic transaction entered into or completed by the Company or the Banks,
(ii) exclusive underwriters or placement agent in connection with any offering
of equity or debt securities entered into or completed by the Company or the
Banks, (iii) lead manager in connection with any securitization or similar
transaction entered into or completed by the Company or the Banks; (iv)
exclusive agent in connection with the exercise of warrants or options in the
Company or the Banks by employees, agents or others pursuant to a cashless
exercise or other exercise program and (v) dealer manager in connection with any
tender offer (including any self tender). Fees and expenses to be paid by the
Company to FBR in connection with any such transactions shall be subject to
mutual agreement of the parties. Robert A. Kotecki, a director of the Company
and the Banks, is a Senior Vice President of FBR.
In connection with the Private Placement, the Company on September 8,
1997 also entered into the Registration Rights Agreement with the initial
purchasers of the Local Securities and the Placement Agent, pursuant to which,
among other things, the Company agreed to file within 120 days a shelf
registration statement with the Commission providing for the offer and sale of
the Local Securities. The Registration Statement of which this
27
<PAGE>
Prospectus forms a part has been filed in satisfaction of such requirement. See
"Registration Rights."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges of the Company for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
----------------- ------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Ratios of earnings to fixed charges:
Including interest on deposits N/A N/A N/A 1.10 1.13 1.71 1.42
Excluding interest on deposits N/A 1.60 1.48 1.94 1.95 3.63 4.42
Dollar amount of excess (deficiency)
of earnings to fixed charges:
Including interest on deposits $(130,031) $(10,383) $(41,905) $18,440 $20,983 $ 73,710 $35,751
========= ======== ======== ======= ======= ======== =======
Excluding interest on deposits $(89,359) $30,836 $ 41,186 $99,613 $89,218 $129,057 $93,675
======== ======= ======== ======= ======= ======== =======
</TABLE>
For purposes of computing the ratios of earnings to fixed charges, earnings
represent net income (loss) before extraordinary items and cumulative effect of
changes in accounting principles plus applicable income taxes and fixed charges.
Fixed charges, excluding interest on deposits, include gross interest expense
(other than on deposits). Fixed charges, including gross interest on deposits,
including all interest expense.
USE OF PROCEEDS
The Selling Holders will receive all of the proceeds from the Local
Securities sold pursuant to this Prospectus.
On September 8, 1997, the Company completed the Private Placement. Net
proceeds from the sale of the Local Securities in the Private Placement were
approximately $258.0 million, after deducting the commission of the Placement
Agent and offering expenses payable by the Company. Pursuant to the terms of the
Purchase Agreement and the Redemption Agreement, the net proceeds from the sale
of the Local Securities in the Private Placement were used as follows: (i)
$154.0 million, which is subject to adjustment as described under "The Private
Placement and the Redemption Transactions--The Redemption Agreement," was used
to redeem all of the Company's then issued and outstanding shares of common
stock held by the Selling Stockholders; (ii) $7.2 million was used to prepay a
promissory note payable to the mother of the Selling Stockholders at a price
equal to the principal amount thereof plus accrued and unpaid interest thereon
to the date of prepayment and (iii) $83.8 million was used to make capital
contributions
28
<PAGE>
to the Banks which, after giving effect to the after tax loss on
the sale or termination of the Company's existing hedging contracts and the
additional write-downs and reserves recognized in connection with the closing of
the Private Placement and the Redemption, was the required amount to cause each
of the Banks to be classified as "well capitalized" pursuant to the OTS' prompt
corrective action capital standards . See "Regulation--Regulation of Federal
Savings Institutions--Regulatory Capital Requirements." In addition to the
foregoing, the Company used $8.8 million of the net proceeds from the Private
Placement to establish the Interest Reserve Account in accordance with the terms
of the Senior Notes, see "Description of the Senior Notes--Interest Reserve
Account," and approximately $3.0 million of the net proceeds were retained by
the Company for general corporate purposes. The Company anticipates that it will
utilize all or a portion of such proceeds to retire outstanding indebtedness of
Green Country following consummation of the Merger. See "Prospectus Summary--The
Company--Proposed Acquisition of Green Country Banking Corporation." Initially,
the net proceeds from the sale of the Local Securities in the Private Placement
that have been contributed to the Banks as well as retained by the Company were
used to pay-off short-term borrowings with the remaining proceeds invested in
short-term money market instruments.
DIVIDENDS AND MARKET FOR LOCAL SECURITIES
The Board of Directors of the Company does not presently intend to
implement a policy of paying dividends on the Common Stock. Rather, the Company
expects to retain earnings to increase capital. The initiation of a cash
dividend policy will depend upon a number of factors, including investment
opportunities available to the Company or the Banks, capital requirements, the
Company's and the Banks' financial condition and results of operations, tax
considerations, statutory and regulatory limitations, general economic
conditions and the terms of the Indenture. No assurances can be given that any
dividends will be paid or that, if paid, will not be reduced or eliminated in
future periods. See "Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation," "Description of Senior
Notes--Certain Covenants--Limitations on Dividends and Other Payment
Restrictions Affecting Subsidiaries" and "Description of Capital Stock."
Dividends from the Company will depend principally on the ability of Local
Federal to pay dividends to the Company. In connection with the OTS' most recent
regulatory examination of Local Federal, the OTS informed Local Federal that as
a result of Local Federal's recent financial condition and operating results, it
was being deemed an institution in need of more than normal supervision and,
consequently, was being designated as a Tier 3 institution for purposes of the
OTS' capital distribution regulation. Tier 3 institutions may not make capital
distributions without obtaining the prior approval of the OTS. In addition, the
OTS can impose growth restrictions on savings institutions which are in need of
more than normal supervision. However, as a result of, among other things, the
capital raised in the Private Placement and the initiatives undertaken by new
management in connection with the Private Placement and the Redemption, the
Midwest Regional Office of the OTS forwarded a letter to Local Federal, dated as
of December 8, 1997, indicating that the OTS was removing its designation of
Local Federal as an
29
<PAGE>
institution in need of more than normal supervision and upgrading Local
Federal's status from a Tier 3 institution to a Tier 1 institution.
As described in Regulation--Regulation of Federal Savings Institutions--
Capital Distribution Regulation," a Tier 1 institution is authorized to make
capital distributions without OTS approval during a calendar year of up to the
higher of (i) 100 percent of its net income to the date of such distribution
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio, as defined, at the beginning of the calendar year; or
(ii) 75% of its net income over the most recent four-quarter period. Applicable
regulations require, however, that all savings institutions give the OTS at
least 30 days advance notice of any capital distributions, and the OTS may
prohibit any capital distribution that it determines would constitute an unsafe
or unsound practice. As of January 1, 1998, under applicable regulations of the
OTS, the total capital available for the payment of dividends by Local Federal
to the Company was $27.5 million, assuming application of the OTS' safe harbor
for capital distributions. See "Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation."
Any payment of dividends by Local Federal to the Company which would be
deemed to be drawn out of Local Federal's bad debt reserves would require a
payment of taxes at the then-current tax rate by Local Federal on the amount of
earnings deemed to be removed from the reserves for such distribution. If not
paid out of current period earnings, taxes on any such distribution to the
extent made out of such reserves would also be subject to the Company's
carryforward of net operating losses. See "Taxation."
Unlike the Banks, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends may be dependent, in part, upon dividends
from Local Federal. The Company is subject, however, to the requirements of
Delaware law, which generally limit dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
Since consummation of the Private Placement, transactions in the Local
Securities have been limited, and there is no established market for the Local
Securities at this time. The Company has received approval to have the Common
Stock and the Senior Notes listed on the AMEX under the symbols "LO" and "LO.A,"
respectively. The development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Company. Accordingly, the number of active buyers and sellers of the
Common Stock or the Senior Notes at any particular time may be limited. Under
such circumstances, investors in the Common Stock or the Senior Notes could have
difficulty disposing of their securities and should not view the Common Stock or
the Senior Notes as a short-term investment. Accordingly, there can be no
assurance that an active and liquid trading market for the Common Stock or the
Senior Notes will develop or that, if developed, it will continue, nor is there
any assurance that persons purchasing shares of Common Stock or Senior
30
<PAGE>
Notes will be able to sell them at or above the purchase price therefor. While
the Company has received approval to have the Common Stock and the Senior Notes
listed on the AMEX, no assurance can be given that they will in fact be listed
on the AMEX or that they will trade on the AMEX.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, which gives effect to the consummation of the
Private Placement and the Redemption. The table should be read in conjunction
with the Consolidated Financial Statements of the Company, including the related
Notes, included elsewhere herein.
December 31, 1997
-----------------
(In Thousands)
Deposits............................................... $1,602,533
Borrowings:
FHLB advances......................................... 80,136
Senior Notes.......................................... 80,000
Other liabilities...................................... 36,071
---------
Total liabilities.................................. 1,798,740
Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; none outstanding.......................... --
Common Stock, $0.01 par value; 25,000,000 shares
authorized; 19,700,060 shares issued and 19,700,000
outstanding(1)........................................ 197
Additional paid-in-capital............................. 197,766
Retained earnings...................................... 31,760
Treasury stock, 60 shares, at cost..................... (149,436)
Unrealized gains on securities available for sale,
net of income tax of $1,259.......................... 2,338
-----
Total stockholders' equity............................. 82,625
-------
Total liabilities and stockholders' equity.............. $1,881,365
=========
- ------------------------
(1) As of February 16, 1997, there were 20,537,269 shares of Common Stock
issued and 20,537,209 shares of Common Stock outstanding, which gives
effect to the Company's acquisition of Green Country. See "Prospectus
Summary--The Company--Acquisition of Green Country Banking Corporation."
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus.
Changes in Financial Condition
General. Total assets decreased by $743.8 million or 28.3% during the six
months ended December 31, 1997 and by $653.3 million or 19.9% during the year
ended June 30, 1997. The substantial decrease in total assets during fiscal 1997
and the first quarter of fiscal 1998 was primarily due to the sale of an
aggregate of $1.63 billion of mortgage-backed and other securities and, during
the three months ended September 30, 1997, and a $54.7 million write-down with
respect to the Company's remaining COFI-based CMO portfolio. The sale of
mortgage-backed and other securities reflects the implementation of new
management's strategy to reduce the Company's securities portfolio, particularly
its COFI-based CMO portfolio. The proceeds from such sales were used primarily
to repay outstanding reverse repurchase agreements and advances from the FHLB of
Topeka. As a result of the foregoing, reverse repurchase agreements, which
amounted to $1.1 billion at June 30, 1996, were fully paid off as of December
31, 1997, and advances from the FHLB of Topeka declined from $439.0 million at
June 30, 1996 to $80.1 million at December 31, 1997, a reduction of $358.9
million or 81.8%. The shift in the composition of the Company's asset and
liability mix reflects new management's operational philosophy. See "Prospectus
Summary--The Company."
Cash and Cash Equivalents. Cash and cash equivalents (consisting of cash
and due from banks and interest-bearing deposits with other banks) amounted to
$54.2 million, $105.4 million and $13.6 million at December 31, 1997 and June
30, 1997 and 1996, respectively. The Company manages its cash and cash
equivalents based upon the Company's operating, investing and financing
activities. See "--Liquidity and Capital Resources."
Securities. Beginning in 1993, the Company under its prior management began
to implement an investment strategy whereby it purchased mortgage-backed and
related securities and financed those securities primarily through reverse
repurchase agreements and FHLB advances. The Company predominantly purchased
adjustable-rate Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") CMOs tied to COFI. As a result, at June 30,
1996, the Company's securities portfolio amounted to $2.1 billion ($1.9 billion
of which consisted of COFI-based CMOs) or 65.1% of total assets. The COFI is a
compilation of the average rates paid by savings institutions which are members
of the 11th District of the FHLB system, and the COFI generally adjusts more
slowly to changes in market rates of interest when compared to adjustable-rate
loans and securities with interest rates based on other indices. As a result of
recent fluctuations in the level of interest rates as well as the structure of
the COFI, the values of the Company's COFI-based CMOs have declined in recent
periods. At June 30, 1996, the Company had $48.5 million of unrealized losses
with respect to its securities portfolio (net of applicable tax benefits).
32
<PAGE>
In late 1996 and in anticipation of the proposed sale of the Company, the
Company began reducing its securities, particularly its CMO holdings, through
periodic bulk sale transactions. During fiscal 1997, the Company sold $743.9
million of securities and recognized $29.6 million of losses with respect to
such sales. At June 30, 1997, the Company's securities portfolio amounted to
$1.4 billion ($1.1 billion of which consisted of COFI-based CMOs) or 53.1% of
total assets. As of such date, the Company had $32.0 million of unrealized
losses with respect to its securities portfolio (net of applicable tax
benefits).
During September 1997 and in connection with the Private Placement and the
Redemption, new management of the Company determined that its CMO portfolio was
"other than temporarily impaired" (as defined in SFAS No. 115) and, in
accordance with GAAP, wrote-down its CMO portfolio by $54.7 million. In
addition, since assuming control of the Company on September 8, 1997, new
management has been accelerating the disposition of its securities portfolio,
particularly its COFI-based CMOs. During the six months ended December 31, 1997,
the Company sold $869.8 million of securities and utilized the proceeds of such
sales to repay all of its outstanding reverse repurchase agreements and $451.0
million or 84.9% of its outstanding FHLB advances. The remaining proceeds were
invested in short-term investments. At December 31, 1997, the Company's
securities portfolio amounted to $518.1 million ($428.6 million of which
consisted of COFI-based mortgage-related securities) or 27.5% of assets. As of
such date, all of the Company's securities were classified as available for sale
and the Company had unrealized gains with respect to the portfolio of $2.3
million (net of applicable taxes) and the Company had no trading securities.
Management may continue to reduce its securities portfolio, particularly its CMO
holdings, as market conditions permit. For additional information, see
"Business--Investment Activities," "Capitalization" and Note 5 of the Notes to
Consolidated Financial Statements.
Loans Receivable. Net loans receivable amounted to $953.5 million, $1.01
billion and $1.02 billion at December 31, 1997 and June 30, 1997 and 1996,
respectively. Net loans receivable decreased by $60.4 million or 6.0% during the
six months ended December 31, 1997 and by $4.3 million or 0.4% during the year
ended June 30, 1997. During the six months ended December 31, 1997, the Company
sold $1.7 million of guaranteed student loans and $54.9 million of indirect
automobile receivables and experienced $123.2 million of loan repayments, which
was partially offset by $118.7 million of loan originations and purchases.
During the year ended June 30, 1997, the Company sold $12.0 million of
guaranteed student loans and experienced $316.6 million of loan repayments,
which was partially offset by $320.2 million of loan originations and purchases.
New management intends to emphasize lending activities as opposed to investing
activities in order to enhance the weighted average yield on its
interest-earning assets and, thus, its results of operations. Consequently,
management expects its loan portfolio to grow over the next several years. For
additional information, see "Business--Lending Activities" and Note 6 of the
Notes to Consolidated Financial Statements.
Nonperforming Assets and Allowance for Loan Losses. Nonperforming
assets (consisting of non-accruing loans, accruing loans greater than 90 days
delinquent and foreclosed assets) have declined significantly since June 30,
1996. At December 31, 1997, nonperforming assets amounted to $921,000 or .05% of
total assets, as compared to $12.6 million or .48% and $16.2
33
<PAGE>
million or .49% as of June 30, 1997 and 1996, respectively. The decline in
nonperforming assets during the six months ended December 31, 1997 reflected a
$2.9 million decline in non-accrual loans (primarily commercial real estate
loans) and an $8.4 million decline in foreclosed assets, and was primarily due
to the transfer of a $6.0 million retail shopping center from real estate owned
to real estate held for investment during the period. Local Federal has
profitably managed the shopping center since it became real estate owned. The
property was transferred to real estate held for investment during the period
because the Company had exceeded the five year regulatory limit for holding real
estate owned.
At December 31, 1997, the Company's allowance for loan losses amounted to
$20.5 million, as compared to $11.4 million and $3.2 million at June 30, 1997
and 1996, respectively. In connection with the Private Placement and the
Redemption, new management increased the Company's reserves, particularly with
respect to the Company's indirect automobile portfolio which was sold as of
December 31, 1997. See "Risk Factors--Risks Relating to the Company's Lending
and Investment Activities--Sub-prime Automobile Lending." The increase with
respect to the Commercial Real Estate portfolio came as a result of the
portfolio review performed by an independent third party for new management
during the due diligence process. Their recommendations for increase were based
on industry standards for real estate portfolios, OTS supervisory guidelines,
high dollar concentration in out-of-market loans and discovery of 11 loans
considered classified OAEM (Other Assets Especially Mentioned) by the review
team that were previously unclassified by the Company. The allowance for
consumer loans includes the estimated probable losses that may arise from the
Representations and Warranties issued in conjunction with the sale of the
indirect auto portfolio. The Company's allowance for loan losses represented
2.09% of the total loan portfolio, which the Company believes is adequate given
the asset-based lending nature of their commercial real estate portfolio. Total
nonperforming loans had declined at December 31, 1997, for the reasons stated
above and the allowance covered many multiples of the risk from this source. At
June 30, 1997 the ratios were 1.01% of total loans and 291.49% of total
nonperforming loans as compared to .31% and 60.43%, respectively at June 30,
1996. Although management of the Company believes that its allowance for loan
losses was adequate at December 31, 1997 based on facts and circumstances
available to it, there can be no assurance that additions to such allowance will
not be necessary in future periods. For additional information, see
"Business--Asset Quality."
Deposits. At December 31, 1997, deposits totalled $1.60 billion, as
compared to $1.64 billion and $1.60 billion at June 30, 1997 and 1996,
respectively. One of the Company's strategies is to promote retail deposit
growth as a cost-efficient funding source as well as a source of fee income and
cross-selling opportunities. In connection with the acquisition of Green
Country, the Company acquired three branch offices and assumed $77.0 million of
Green Country Bank's deposits (as of December 31, 1997). In addition, Local
Federal is currently seeking OTS approval to open a second branch office in
Edmond, Oklahoma. The Company expects to continue to focus on expanding its
branch network and retail deposit franchise. For additional information, see
"Business--Sources of Funds--Deposits" and Note 9 of the Notes to Consolidated
Financial Statements.
Borrowings. Other than deposits, the Company's primary sources of funds
have historically consisted of the sale of securities under agreements to
repurchase (consisting of agreements to purchase on a specified later date the
same securities or substantially identical securities) ("reverse repurchase
agreements") and advances from the FHLB of Topeka. Although a substantial
portion of the Company's growth in its securities portfolio in recent periods
has been funded through the use of reverse repurchase agreements and FHLB
advances, new management is in the process of reducing its securities holdings
and utilizing the proceeds therefrom to pay down borrowings. Consequently,
reverse repurchase agreements declined from $1.1 billion at June 30, 1996 to $0
at December 31, 1997. Similarly, advances from the FHLB of Topeka declined from
$439.0 million at June 30, 1996 to $80.1 million at December 31, 1997. For
34
<PAGE>
additional information, see "Business--Sources of Funds--Borrowings" and Notes
10 and 11 of the Notes to Consolidated Financial Statements.
Prior to the Private Placement and the Redemption, the Company had
outstanding a promissory note payable to Isabel Collier Read, a former
stockholder and the mother of the Selling Stockholders. At June 30, 1997 and
1996, the promissory note had an outstanding principal balance of $7.0 million
and $14.0 million, respectively. The promissory note required annual
installments of $7.0 million plus accrued interest and bore interest at a
specified prime lending rate which could not exceed 8.0% nor fall below 5.7%. On
September 8, 1997 in connection with the closing of the Private Placement and
the Redemption, the Company prepaid the promissory note at a price equal to the
principal amount thereof plus accrued and unpaid interest thereon. For
additional information, see "Business--Sources of Funds--Borrowings" and Note 12
of the Notes to Consolidated Financial Statements.
Pursuant to the Private Placement, the Company issued $80.0 million of
Senior Notes which are due in September 2004 and which bear interest at the rate
of 11.0%, payable semi-annually. The Company has established an interest reserve
account with an independent trustee which contains $8.8 million, which is
sufficient to pay the aggregate interest payments scheduled to be made with
respect to the first two interest payment dates on the Senior Notes. Debt
issuance costs of approximately $4.3 million at December 31, 1997 were
capitalized and reflected as Other Assets. For additional information, see
"Business--Sources of Funds--Borrowings" and Note 13 of the Notes to
Consolidated Financial Statements.
Stockholders' Equity. Stockholders' equity declined from $108.1 million at
June 30, 1996 to $102.6 million at June 30, 1997 and further declined to $82.6
million at December 31, 1997. The decline in stockholders' equity during fiscal
1997 was primarily due to the $30.0 million net loss recognized during the year.
The decline in stockholders' equity during the six months ended December 31,
1997 reflected certain charges recognized by the Company as a result of certain
initiatives undertaken by new management in connection with the Private
Placement and the Redemption, which was partially offset by the capital raised
from the sale of Local Securities in the Private Placement. Such charges
included (i) a $25.6 million provision for loan losses, which primarily related
to the Company's indirect automobile portfolio, (ii) $53.4 million of losses
recognized with respect to the liquidation or write-off of all of the Company's
outstanding hedging contracts, (iii) $72.0 million of losses on the sale and
mark-to-market of the Company's securities portfolio (which primarily related to
the sale and mark-to-market of the Company's COFI-based CMOs). The market for
fixed income securities improved during the three month period ended December
31, 1997 and during such period the Company sold a portion of the remaining
COFI-based CMO portfolio for a gain of $12.7 million. At December 31, 1997, the
ratio of the Company's stockholders' equity to total assets amounted to 4.4% and
both of the Banks exceeded their respective minimum regulatory capital
requirements. See "--Liquidity and Capital Resources."
35
<PAGE>
Results of Operations
General. The Company's results of operations depend substantially on its
net interest and dividend income, which is the difference between interest and
dividend income on interest-earning assets, which consist primarily of loans
receivable, mortgage-backed and investment securities and various other
short-term investments, and interest expense on interest-bearing liabilities,
which consist primarily of deposits and borrowings. The Company's results of
operations have also been significantly affected by the net costs of hedging its
interest rate exposure; its provisions for losses on loans resulting from the
Company's assessment of the adequacy of its allowance for losses on loans; the
level of its noninterest income, including deposit related income, loan fees and
service charges and net gains (losses) on sales of assets; the level of its
noninterest expense, such as compensation and employee benefits, deposit
insurance premiums, provisions for losses on foreclosed assets, equipment and
data processing expense and occupancy expense; and provisions (benefits) for
income taxes.
Net Income (Loss). The Company reported net income (loss) of $(86.0)
million, $(6.8) million, $(30.0) million, $13.6 million and $14.4 million during
the six months ended December 31, 1997 and 1996 and the years ended June 30,
1997, 1996 and 1995, respectively. The net loss reported for the six months
ended December 31, 1997 is attributable to deliberate actions taken by the
Company's new management subsequent to the Private Placement and Redemption to
restructure the Company's balance sheet. Specifically, the Company incurred
$125.5 million of losses on the sale and write-down of assets, of which an
aggregate loss of $53.4 million was incurred in connection with the liquidation
or write-off of the hedging contracts which the Company had entered into in
order to reduce its exposure to interest rates. See "--Asset and Liability
Management." In addition, the Company recognized a loss of $72.0 million on the
sale and mark-to-market of the Company's securities portfolio (which primarily
related to the sale and mark-to-market of the Company's COFI-based CMOs). The
Company also recorded a $25.4 million provision for loan losses during the
three-months ended September 30, 1997, primarily to cover realized and inherent
losses with respect to the Company's portfolio of indirect automobile
receivables which had been sold as of December 31, 1997. See "Risk Factors--
Risks Relating to the Company's Lending and Investment Activities--Sub-prime
Automobile Lending." The market for fixed income securities improved during the
three-month period ended December 31, 1997 and the Company sold $330.6 million
of the remaining COFI-based CMO portfolio for a gain of $12.7 million in
furtherance of its plan to accelerate the disposition of the COFI-based CMOs.
The effect of these transactions on the Company's operating results for the
first two quarters of fiscal year 1998 is shown below.
36
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
December 31, 1997 September 30, 1997
----------------- ------------------
(In Thousands)
<S> <C> <C>
Net interest income before provision for loan losses....... $13,109 $ 12,272
Provision for loan losses.................................. (225) (25,353)
----- -------
Net interest income (loss) after provision for loan
losses................................................... 12,884 (13,081)
Net gains (losses) on sale of assets....................... 12,816 (125,485)
Other noninterest income................................... 2,632 2,888
----- -----
Total noninterest income (loss)............................ 15,448 122,597)
Total noninterest expense.................................. 9,117 13,568
----- ------
Income (loss) before (provision) benefit for income
taxes.................................................... 19,215 (149,246)
(Provision) benefit for income taxes....................... (6,720) 50,795
------ ------
Net income (loss).......................................... $12,495 $ (98,451)
====== ========
</TABLE>
The net loss recognized during the fiscal year ended June 30, 1997 was
primarily attributable to a $28.4 million provision for loan losses, which was
principally associated with the Company's indirect automobile finance
receivables, $29.9 million of losses which were related to the sale of CMOs with
interest rate adjustments tied to COFI, and a non-recurring $10.3 million
special assessment (before applicable tax benefits) which was recorded in
connection with legislation in 1996 which recapitalized the SAIF.
The Company recognized net income of $13.6 million during the year ended
June 30, 1996, as compared to net income of $14.4 million during the year ended
June 30, 1995. The $847,000 or 5.9% decrease in the Company's net income during
fiscal 1996 was primarily due to a $6.3 million decrease in noninterest income,
a $4.0 million increase in the provision for loan losses, and a $3.3 million
decrease in net interest and dividend income, which was substantially offset by
a $11.0 million decrease in noninterest expense and a $1.7 million decline in
the provision for income taxes.
Net Interest and Dividend Income. Net interest and dividend income is
determined by the Company's net interest spread (i.e., the difference between
the yields earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities.
Net interest and dividend income totalled $25.4 million, $26.5 million,
$52.9 million, $48.7 million and $52.0 million during the six months ended
December 31, 1997 and 1996 and the years ended June 30, 1997, 1996 and 1995,
respectively. Net interest and dividend income decreased by $1.2 million or 4.4%
during the six months ended December 31, 1997, as compared to the same period in
the prior year, due to a significant decline in the average balance of
securities of $1.1 billion during the period, which is attributable to the sale
and writedown of such securities. Net interest and dividend income increased by
$4.2 million or 8.7% during the year ended June 30, 1997 due to a $22.1 million
increase net interest-earning assets and a 21
37
<PAGE>
basis point increase in the Company's net interest spread. Net interest and
dividend income declined by $3.3 million or 6.4% during the year ended June 30,
1996 due to a $83.6 million decline in net interest-earning assets, which was
partially offset by an increase in the Company's interest rate spread of 4 basis
points.
38
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------------------------------------------------
1997 1996
--------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance
------- -------- ---- ------- -------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)................. $1,009,843 $49,788 9.78% $1,020,534 $53,179 10.34% $1,041,342
Securities(2)........................ 1,000,808 31,306 6.21 2,107,408 62,176 5.85 1,845,179
Securities purchased under
agreements to resell 60,000 1,711 5.66 38,921 1,040 5.30 27,174
Other earning assets(3).............. 76,415 2,399 6.23 78,544 2,705 6.83 65,903
---------- ------- ---------- ------- ----------
Total interest-earning assets...... 2,147,066 85,204 7.87% 3,245,407 119,100 7.28% 2,979,598
------- ==== ------- ====
Noninterest-earning assets.............. 92,823 55,873 92,630
---------- ---------- ----------
Total assets....................... $2,239,889 $3,301,280 $3,072,228
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)............. 266,112 3,603 2.69% 269,044 3,776 2.78% 268,047
Term certificates of deposit........ 1,301,703 37,069 5.65 1,308,314 37,443 5.68 1,329,463
---------- ------- ---------- ------- ----------
Total deposits.................... 1,567,815 40,672 5.15 1,577,358 41,219 5.18 1,597,510
Borrowings:
FHLB advances....................... 391,711 14,005 7.09 987,618 32,353 6.50 848,733
Securities sold under agreements to
repurchase........................ 55,235 2,073 7.45 567,000 18,426 6.45 418,784
Promissory note payable............. 2,591 108 8.27 14,020 564 7.98 12,852
Senior notes........................ 49,565 2,965 11.87 -- -- -- --
---------- ------- ---------- ------- ----------
Total interest-bearing
liabilities..................... 2,066,917 59,823 5.74% 3,145,996 92,562 5.84% 2,877,879
------- ==== ------- ====
Noninterest bearing liabilities......... 88,248 48,071 89,914
---------- ---------- ----------
Total liabilities................. 2,155,165 3,194,067 2,967,793
Stockholders' equity.................... 84,724 107,213 104,435
---------- ---------- ----------
Total liabilities and
stockholders' equity............ $2,239,889 $3,301,280 $3,072,228
========== ========== ==========
Net interest-earning assets............. $ 80,149 $ 99,411 $ 101,719
========== ========== ==========
Net interest income/interest rate
spread................................ $25,381 2.13% $26,538 1.45%
======= ======= ====
Net interest margin..................... 2.34% 1.62%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 103.88% 103.16%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)................. $1,041,342 $107,715 10.34% $ 867,151 $ 95,839 11.05%
Securities(2)........................ 1,845,179 109,224 5.92 2,255,318 134,761 5.98
Securities purchased under
agreements to resell 27,174 1,488 5.48 4,467 322 7.21
Other earning assets(3).............. 65,903 4,237 6.43 79,847 5,234 6.56
---------- ------- ---------- --------
Total interest-earning assets...... 2,979,598 222,664 7.47% 3,206,783 236,156 7.36%
======= ==== -------- ====
Noninterest-earning assets.............. 92,630 89,147
---------- ----------
Total assets....................... $3,072,228 $3,295,930
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)............. 268,047 7,473 2.79% 280,111 7,828 2.79%
Term certificates of deposit........ 1,329,463 75,618 5.69 1,271,079 73,345 5.77
---------- -------- ---------- --------
Total deposits.................... 1,597,510 83,091 5.20 1,551,190 81,173 5.23
Borrowings:
FHLB advances....................... 848,733 57,442 6.77 869,568 58,309 6.71
Securities sold under agreements to
repurchase........................ 418,784 28,202 6.73 686,558 46,400 6.76
Promissory note payable............. 12,852 1,026 7.98 19,862 1,606 8.09
Senior notes........................ -- -- -- -- -- --
---------- -------- ---------- --------
Total interest-bearing
liabilities..................... 2,877,879 169,761 5.90% 3,127,178 187,488 6.00%
-------- ==== -------- ====
Noninterest bearing liabilities......... 89,914 33,075
---------- ----------
Total liabilities................. 2,967,793 3,160,253
Stockholders' equity.................... 104,435 135,677
---------- ----------
Total liabilities and
stockholders' equity............ $3,072,228 $3,295,930
========== ==========
Net interest-earning assets............. $ 101,719 $ 79,605
========== ==========
Net interest income/interest rate
spread................................ $52,903 1.57% $ 48,668 1.36%
======= ==== ======== ====
Net interest margin..................... 1.78% 1.52%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 103.53% 102.55%
====== ======
</TABLE>
<PAGE>
----------------------------------
1995
----------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
Interest-earning assets:
Loans receivable (1)................. $ 769,943 $ 74,791 9.71%
Securities(2)........................ 2,425,301 134,051 5.53
Securities purchased under
agreements to resell -- -- --
Other earning assets(3).............. 73,807 5,716 7.74
---------- --------
Total interest-earning assets...... 3,269,051 214,558 6.56%
-------- ====
Noninterest-earning assets.............. 58,674
----------
Total assets....................... $3,327,725
==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)............. 342,451 9,679 2.83%
Term certificates of deposit........ 1,149,834 58,556 5.09
---------- --------
Total deposits.................... 1,492,285 68,235 4.57
Borrowings:
FHLB advances....................... 952,373 55,747 5.85
Securities sold under agreements to
repurchase........................ 634,282 36,503 5.76
Promissory note payable............. 26,872 2,105 7.83
Senior notes........................ -- -- --
---------- --------
Total interest-bearing
liabilities..................... 3,105,812 162,590 5.24%
-------- ====
Noninterest bearing liabilities......... 85,744
----------
Total liabilities................. 3,191,556
Stockholders' equity.................... 136,169
----------
Total liabilities and
stockholders' equity............ $3,327,725
==========
Net interest-earning assets............. $ 163,239
==========
Net interest income/interest rate
spread................................ $ 51,968 1.32%
======= ====
Net interest margin..................... 1.59%
====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 105.26%
======
----------
(1) The average balance of loans receivable includes nonperforming
loans, interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held to maturity
and available for sale.
(3) Includes cash and due from banks, FHLB stock and interest-bearing
deposits at other banks.
(4) Includes passbook, NOW and money market accounts.
39
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Six Months Ended December 31, 1997
Compared to Six Months Ended
December 31, 1996
--------------------------------------------------------
Increase (decrease) due to
-----------------------------------
Total
Rate/ Net Increase
Rate Volume Volume (Decrease)
---- ------ ------ ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................................... $(2,864) $ (557) $ 30 $(3,391)
Securities.......................................... 3,745 (32,649) (1,966) (30,870)
Securities purchased under agreements to resell..... 70 563 38 671
Other earning assets................................ (239) (73) 6 (306)
------- --------- -------- ---------
Total net change in income on interest-earning
assets.............................................. 712 (32,716) (1,892) (33,896)
------- -------- ------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts............................. (133 (41) 1 (173)
Term certificates of deposit..................... (186 (189) 1 (374)
------ -------- ------- --------
Total deposits................................. (319) (230) 2 (547)
Borrowings:
FHLB advances................................... 2,958 (19,521) (1,785) (18,348)
Securities sold under agreements to repurchase.. 2,854 (16,631) (2,576) (16,353)
Promissory note payable......................... 20 (460) (16) (456)
Senior notes.................................... -- -- 2,965 2,965
------- --------- -------- ---------
Total net change in expense on interest-bearing
liabilities....................................... 5,513 (36,842) (1,410) (32,739)
----- ------- ------- -------
Change in net interest income....................... $(4,801) $ 4,126 $ (482) $ (1,157)
======= ======= ====== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997 compared to 1996
----------------------------------------------------------
Increase (decrease) due to
-------------------------------------
Total
Rate/ Net Increase
Rate Volume Volume (Decrease)
---- ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable.................................... $(6,142) $ 19,252 $(1,234) $11,876
Securities.......................................... (1,259) (24,507) 229 (25,537)
Securities purchased under agreements to resell..... (77) 1,637 (394) 1,166
Other earning assets................................ (101) 18 (997)
------- -------- ------- -------
(914)
Total net change in income on interest-earning
assets.............................................. (7,579) (4,532) (1,381) (13,492)
------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts............................. (19) (337) 1 (356)
Term certificates of deposit..................... (1,048) 3,369 (48) 2,273
------- -------- ------- -------
Total deposits................................. (1,067) 3,032 (47) 1,918
Borrowings:
FHLB advances................................... 543 (1,397) (13) (867)
Securities sold under agreements to repurchase.. (165) (18,098) 65 (18,198)
Promissory note payable......................... (20) (567) 7 (580)
Senior notes.................................... -- -- -- --
------- -------- ------- --------
Total net change in expense on interest-bearing
liabilities....................................... (709) (17,030) 12 (17,727)
------- -------- ------- -------
Change in net interest income....................... $(6,870) $12,498 $(1,393) $ 4,235
======= ======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996 compared to 1995
-------------------------------------------------
Increase (decrease) due to
------------------------------
Total
Rate/ Net Increase
Rate Volume Volume (Decrease)
---- ------ ------ ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................................... $10,304 $ 9,443 $1,301 $21,048
Securities.......................................... 10,867 (9,395) (762) 710
Securities purchased under agreements to resell..... -- -- 322 322
Other earning assets................................ (878) 467 (72) (482)
------- -------- ------ -------
Total net change in income on interest-earning
assets.............................................. 20,293 515 789 21,598
------- ------- ------ -------
Interest-bearing liabilities:
Deposits:
Transaction accounts............................. (109) (1,762) 20 (1,851)
Term certificates of deposit..................... 7,793 6,174 822 14,789
------- ------- ------- -------
Total deposits................................. 7,684 4,412 842 12,938
Borrowings:
FHLB advances................................... 8,115 (4,847) (706) 2,562
Securities sold under agreements to repurchase.. 6,364 3,008 525 9,897
Promissory note payable......................... 68 (549) (18) (499)
Senior notes.................................... -- -- -- --
------- ------- ------- -------
Total net change in expense on interest-bearing
liabilities....................................... 22,231 2,024 643 24,898
------- ------- ------- -------
Change in net interest income....................... $(1,912) $(1,163) $ (225) $(3,300)
</TABLE>
40
<PAGE>
Interest Income. Total interest and dividend income decreased by $33.9
million or 28.5% during the six months ended December 31, 1997, as compared to
the same period in the prior year, decreased by $13.5 million or 5.7% during the
year ended June 30, 1997 and increased by $21.6 million or 10.1% during the year
ended June 30, 1996. Interest income on loans receivable decreased by $3.4
million or 6.4% during the six months ended December 31, 1997, as compared to
the same period in the prior year, and increased by $11.9 million or 12.4% and
$21.0 million or 28.1% during the years ended June 30, 1997 and 1996,
respectively. The decrease in interest on loans receivable during the six months
ended December 31, 1997 was due to a decline in the average yield earned on the
Company's loan portfolio of 56 basis points. This decline in the average yield
reflected, in part, the discontinuance of the Company's third-party automobile
loan purchase activity. Such loans generally carry higher yields than
traditional real estate secured loans. The increase in interest on loans
receivable during the years ended June 30, 1997 and 1996 was primarily due to
increases in the average balance of loans outstanding of $174.2 million and
$97.2 million, respectively. During fiscal 1997, prior management significantly
increased its originations of third-party automobile loans, and, during fiscal
1997 and 1996, the Company continued its emphasis on the origination and
purchase of commercial real estate loans. During such years, the Company
originated and purchased a total of $320.2 and $432.2 million of loans, which
included $73.6 million and $179.6 million of third-party automobile loans and
$205.5 million and $202.5 million of commercial real estate loans, respectively.
Interest income on securities and other interest-earning assets (which
include mortgage-backed and related securities, including CMOs, U.S. Government
and agency securities, FHLB stock and, during fiscal 1997 and 1996, interest
rate caps and floors and Student Loan Marketing Association preferred stock)
decreased by $30.5 million or 46.3% during the six months ended December 31,
1997, as compared to the same period in the prior year, decreased by $25.4
million or 18.1% during the year ended June 30, 1997 and increased slightly by
$550,000 or 0.4% during the year ended June 30, 1996. The decline in interest
income on such investments during the six months ended December 31, 1997 and the
year ended June 30, 1997 was primarily due to the decreases in the average
balance of such investments of $1.1 billion and $410.1 million during such
respective periods. During fiscal 1997, the Company began reducing its
securities holdings (primarily its COFI-based CMO's) through periodic bulk sale
transactions which resulted in the sale of $743.9 million of securities during
the year. During the first half of fiscal 1998 and in connection with the
Private Placement and the Redemption, new management of the Company determined
that its remaining CMO portfolio was "other than temporarily impaired" in
accordance with SFAS No. 115 and, pursuant to GAAP, wrote-down the portfolio by
$54.7 million. In addition, since assuming control of the Company on September
8, 1997, new management has been accelerating the disposition of its securities
portfolio, particularly its COFI-based CMOs. During the six months ended
December 31, 1997, the Company sold $865.1 million of securities. Management
expects to continue to reduce what remains of the portfolio as market conditions
permit.
Interest Expense. Total interest expense decreased by $32.7 million or
35.4% during the six months ended December 31, 1997, as compared to the same
period in the prior year, decreased by $17.7 million or 9.5% during the year
ended June 30, 1997 and increased by $24.9
41
<PAGE>
million or 15.3% during the year ended June 30, 1996. Interest expense on
deposits, the largest component of the Company's interest-bearing liabilities,
decreased by $547,000 or 1.3% during the six months ended December 31, 1997, as
compared to the same period in the prior year, and increased by $1.9 million or
2.4% and $12.9 million or 19.0% during the years ended June 30, 1997 and 1996,
respectively. The Company has increased its average balance of deposits during
each of the periods presented in accordance with the Company's strategy to
promote retail deposit growth.
Interest expense on FHLB advances decreased by $18.3 million or 56.7%
during the six months ended December 31, 1997, as compared to the same period in
the prior year, decreased slightly by $867,000 or 1.5% during the year ended
June 30, 1997 and increased by $2.6 million or 4.6% during the year ended June
30, 1996. Similarly, interest expense on reverse repurchase agreements decreased
by $16.4 million or $88.8 during the three months ended September 30, 1997, as
compared to the same period in the prior year, decreased by $18.2 million or
39.2% during the year ended June 30, 1997 and increased by $9.9 million or 27.1%
during the year ended June 30, 1996. As discussed previously, beginning in 1993,
the Company began to implement an investment strategy whereby it purchased
mortgage-backed and related securities and financed those securities primarily
through reverse repurchase agreements and FHLB advances. However, during fiscal
1997 and continuing through the first quarter of fiscal 1998, the Company has
begun to reduce its securities holdings through periodic bulk sale transactions
and has utilized the proceeds therefrom to pay off its reverse repurchase
agreements and pay down FHLB advances.
During the periods presented, interest expense on notes payable consisted
of interest paid on a promissory note payable to Isabel Collier Read and, since
September 8, 1997, interest accrued with respect to the Senior Notes. Interest
expense on the promissory note amounted to $108,000, $282,000, $1.0 million,
$1.6 million and $2.1 million during the six months ended December 31, 1997 and
1996 and the years ended June 30, 1997, 1996 and 1995, respectively. Interest
expense on the Senior Notes (which began to accrue on September 8, 1997)
amounted to $2.7 million during the six months ended December 31, 1997. On
September 8, 1997, in connection with the closing of the Private Placement and
the Redemption, the Company issued $80.0 million of the Senior Notes (which are
due in September 2004 and bear interest at the rate of 11.0% payable
semi-annually) and prepaid the promissory note held by Ms. Read at a price equal
to the principal amount thereof plus accrued and unpaid interest thereon.
Provision for Loan Losses. The provision for loan losses is charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on (i) an estimate by management of loan losses
that occurred during the current period and (ii) an ongoing adjustment of prior
estimates of losses occurring in prior periods. To serve as a basis for making
this provision each quarter, the Company maintains an extensive credit risk
monitoring process that considers several factors, including among other things,
current economic conditions affecting the Company's customers, the payment
performance of individual large loans and pools of homogeneous small loans,
portfolio seasoning, changes in collateral values, and detailed reviews of
specific large loan relationships. For large loans deemed to be impaired due
42
<PAGE>
to an expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Company's recorded investment in the
loan to the present value of expected cash flows discounted at the loans'
effective interest rate, the fair value of the collateral or the loan's
observable market price. While management endeavors to use the best information
available in making its evaluations, future adjustments to the allowance for
loan losses may be necessary if economic conditions change substantially from
the assumptions used in making the evaluations. In addition, regulatory
examiners may require the Banks to recognize additions to their allowances based
upon their judgments about information available to them at the time of their
examination.
The Company established provisions for loan losses of $25.6 million, $9.7
million, $28.4 million, $5.1 million and $1.2 million during the six months
ended December 31, 1997 and 1996 and the years ended June 30, 1997, 1996 and
1995, respectively. During such respective periods, loan charge-offs (net of
recoveries) amounted to $16.5 million, $7.5 million, $20.2 million, $6.5 million
and $253,000. The $25.6million and $28.4 million provisions established during
the six months ended December 31, 1997 and the year ended June 30, 1997 were
intended primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables. At December 31, 1997,
the Company's portfolio of such indirect automobile loans had been sold. See
"Risk Factors--Risks Relating to the Company's Lending and Investment
Activities--Sub-prime Automobile Lending."
Noninterest Income. Total noninterest income (loss) amounted to $(107.1)
million, $2.2 million, $(17.1) million, $10.3 million and $16.6 million during
the six months ended December 31, 1997 and 1996 and the years ended June 30,
1997, 1996 and 1995, respectively. The components of noninterest income consist
of deposit related income, loan fees and loan service charges, net gains
(losses) on sale of assets and other miscellaneous income. The noninterest
losses recognized during the six months ended December 31, 1997 and the year
ended June 30, 1997 primarily related to losses incurred on the sale of
securities. Specifically, during the first quarter of fiscal 1998, the Company
incurred $125.5 million of losses on the sale and write-down of assets, of which
an aggregate loss of $53.4 million was incurred in connection with the
liquidation of the hedging contracts previous management had entered into in an
attempt to reduce the Company's exposure to interest rates. See "--Asset and
Liability Management." In addition, the Company recognized a loss of $17.3
million on the sale of securities ($16.0 million of which related to the sale of
CMOs with interest rate adjustments tied to COFI) and a loss of $54.7 million
which related to the write-down of the Company's remaining COFI-based CMO
portfolio to reflect market values. The market for fixed income securities
improved during the three month period ended December 31, 1997 and the Company
sold a portion of the remaining COFI-based CMO portfolio for a gain of $12.7
million. During the year ended June 30, 1997, the Company recognized $29.6
million of losses on the sale of securities ($29.9 million of which related to
the sale of CMOs with interest rate adjustments tied to COFI).
Noninterest Expense. Total noninterest expense decreased by $6.7 million or
22.8% during the six months ended December 31, 1997, as compared to the same
period in the prior year, increased by $13.8 million or 39.0% during the year
ended June 30, 1997 and decreased
43
<PAGE>
by $11.0 million or 23.7% during the year ended June 30, 1996. The decrease in
noninterest expense during the six months ended December 31, 1997 was primarily
due to the absence of the $10.3 million (before applicable tax benefits) special
assessment which was recognized by the Company in September 1996 in connection
with the recapitalization of the SAIF, which was partially offset by a $5.0
million increase in miscellaneous other expenses. Pursuant to legislation
effective September 30, 1996, all SAIF member institutions were required to pay
a one-time special assessment equal to 65.7 basis points for all SAIF-assessable
deposits as of March 31, 1995. This legislation resulted in the recapitalization
of the SAIF and, consequently, during the fourth calendar quarter of 1996, the
FDIC lowered the Banks' assessment rates. See "Regulation--Regulation of Federal
Savings Institutions--FDIC Assessments." The increase in miscellaneous other
expense recognized by the Company during the three months ended September 30,
1997 primarily reflected non-recurring charges which were related to the Private
Placement and the Redemption which were consummated on September 8, 1997.
The increase in noninterest expense during the year ended June 30, 1997 was
due primarily to the one-time special SAIF assessment which was recognized by
the Company in September 1996, as discussed above. In addition, during fiscal
1997, the Company's provision for uninsured risk and losses increased by $1.9
million or 140.5% due to the Company's reassessment of its potential liability
with respect to the FDIC Dispute. See "Business--Legal Proceedings."
The decrease in noninterest expense during the year ended June 30, 1996 was
due primarily to a $9.6 million or 40.4% decrease in compensation and employee
benefits which reflected bonuses and other payments which were made during
fiscal 1995 to the former senior management of the Company pursuant to certain
employment agreements with such individuals. In addition, during fiscal 1996,
the Company's provision for uninsured risk and losses declined by $4.4 million
or 76.0% as the Company continued to reassess the adequacy of its reserves for
any potential liability to the FDIC in connection with the FDIC Dispute. See
"Business--Legal Proceedings." Partially offsetting these decreases during the
fiscal year was a $1.1 million or 17.0% increase in miscellaneous other expense
(consisting primarily of expenses relating to the operations of Star, which
commenced business in January 1995).
Provision (Benefit) for Income Taxes. During the six months ended December
31, 1997 and 1996 and the years ended June 30, 1997, 1996 and 1995, the Company
recognized $(44.1) million, $(3.6) million, $(11.9) million, $4.9 million and
$6.6 million of provisions (benefits) for income taxes. At December 31, 1997,
the Company had approximately $40.8 million and $190.5 million of net operating
loss carryforwards available for federal and state income tax purposes,
respectively. The state net operating loss carryforwards expire in varying
amounts between 2006 and 2013. The federal net operating loss carryforwards
expire in 2013. At December 31, 1997, a valuation allowance for all available
state net operating loss carryforwards was established as it was determined to
be more likely than not that the benefit of the deferred tax asset would not be
realized. Historically, the Company has generated income for federal income tax
purposes. Based on the current strategy of new management, no valuation
allowance for other deferred tax assets has been established as the Company
believes it is more likely than not that sufficient
44
<PAGE>
income for federal income tax purposes will be realized. The change in ownership
of the Company did not result in a limitation on the utilization of the net
operating losses. See "Taxation" and Note 15 of the Notes to Consolidated
Financial Statements.
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 match asset and liability balances within maturity
categories to limit the Company's exposure to earnings variations and variations
in the value of assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Asset/Liability Management Committee, which is comprised of the Chief
Executive Officer, the President, the Chief Financial Officer, the Treasurer,
the Director of Retail Operations and the Director of Commercial Real Estate of
the Company, in accordance with policies approved by the Board of Directors of
the Company. The Asset/Liability Management Committee meets at least monthly to
review, among other things, the sensitivity of the Company's assets and
liabilities to interest rate changes, the book and market values of assets and
liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities and prepayments
of loans, investments and borrowings. The Asset/Liability Management Committee
also approves and establishes pricing and funding decisions with respect to
overall asset and liability composition and reports to the full Board of
Directors.
One of the primary goals of the Company's Asset/Liability Management
Committee is to effectively increase the duration of the Company's liabilities
and/or effectively contract the duration of the Company's assets so that the
respective durations are matched as closely as possible. This duration
adjustment can be accomplished either internally by restructuring the Company's
balance sheet, or externally by adjusting the duration of the Company's assets
and/or liabilities through the use of hedging contracts, such as interest rate
swaps, caps and floors. Although the Company has in the past hedged its interest
rate exposure externally through the use of various hedging contracts, the
Company's current strategy is to hedge internally through the use of core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments and FHLB advances, together with an emphasis on investing in
shorter-term or adjustable rate assets which are more responsive to changes in
interest rates, such as adjustable rate U.S. Government agency mortgage-backed
securities, short-term U.S. Government agency securities and commercial and
consumer loans. The foregoing strategies are more fully described below.
Internal hedging through balance sheet restructuring generally involves
either the attraction of longer-term or less rate sensitive funds (i.e., core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments or FHLB advances) or the investment in certain types of shorter-term
or adjustable-rate assets such as adjustable-rate mortgage-backed securities,
shorter-term U.S. Government agency securities and commercial and consumer
loans.
45
<PAGE>
External hedging has generally involved the Company's use of interest rate
swaps, caps and floors. The Company previously utilized interest rate swaps to
hedge its outstanding FHLB advances and reverse repurchase agreements while the
Company previously utilized interest rate caps and floors to hedge the Company's
COFI-based CMO portfolio. The notional amount of hedging contracts represents
the underlying amount on which periodic cash flows are calculated and exchanged
between counterparties. However, this notional amount does not represent the
amount of borrowings or securities which would effectively be hedged by that
hedging contract. In selecting the type and amount of hedging contract to
utilize, the Company compares the duration of a particular contract, or its
change in value for a 100 basis point movement in interest rates, to that of the
borrowings or securities to be hedged. A hedging rate contract with the
appropriate offsetting duration often may have a notional amount much greater
than the face amount of the borrowings and/or securities being hedged.
During the six months ended December 31, 1997, the Company terminated all
outstanding interest rate swaps, caps and floors. Specifically, the Company
terminated interest rate swaps with an aggregate notional value of $500.0
million which resulted in losses of $47.3 million (excluding applicable tax
benefits). The Company also terminated interest rate cap and floor agreements
with an aggregate notional value of $2.4 billion, which resulted in losses of
$2.2 million (excluding applicable tax benefits). Upon termination of the
foregoing interest rate swap, cap and floor agreements, the Company recognized
all deferred gains and losses which resulted from prior hedging activities,
which resulted in an additional loss of approximately $3.9 million (excluding
applicable tax benefits). The foregoing losses resulted in an aggregate net tax
benefit of approximately $18.7 million.
Pursuant to the Redemption Agreement, the Selling Stockholders are
responsible to the Company for any aggregate pre-tax loss (net of any related
tax benefit) to the Company in excess of $42.5 million which results from the
sale or termination of the Company's existing hedging contracts. The Company is
currently attempting to collect such difference (which it estimates to amount to
$4.6 million) from the Selling Stockholders and has filed a lawsuit in the
United States District Court for the Western District of Oklahoma in order to
facilitate such recovery. However, no assurance can be made that the Company
will be able to recover from the Selling Stockholders all or a portion of such
$4.6 million.
The Asset/Liability Management Committee'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
46
<PAGE>
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.
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
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
------ ------ ----------- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans $ 17,489 $ 59,544 $ 54,484 $ 35,672 $119,660 $ 286,849
Commercial real estate 230,594 99,262 92,871 101,623 124,771 649,121
Consumer 5,748 14,530 9,289 6,964 9,169 45,700
Securities(1)(3) 459,147 19,741 6,548 5,927 23,147 514,510
Other interest-earning assets (4) 277,299 -- -- -- -- 277,299
------- -------- -------- -------- -------- ----------
Total $990,277 $193,077 $163,192 $150,186 $276,747 $1,773,479
======== ======== ======== ======== ======== ==========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 10,189 $ 30,566 $ 53,964 $ 31,623 $ 53,942 $ 180,284
Passbook accounts 2,401 7,202 15,379 11,393 32,562 68,937
Certificates of deposit 298,636 682,206 288,328 16,727 435 1,286,332
Borrowings:
FHLB advances 30,100 -- -- 50,000 36 80,136
Senior notes -- -- -- -- 80,000 80,000
--------- --------- --------- -------- -------- ----------
Total $ 341,326 $ 719,974 $ 357,671 $109,743 $166,975 $1,695,689
========= ========= ======== ======== ======== ==========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 648,951 $(526,897) $(194,479) $ 40,443 $109,772 $ 77,790
========= ========= ========= ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 648,951 $ 122,054 $ (72,425) $(31,982) $ 77,790 $ 77,790
========= ======== ========= ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets 34.49% 6.49% (3.85)% (1.70)% 4.13% 4.13%
===== ==== ===== ===== ==== ====
</TABLE>
- ----------
(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 are due 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 non-performing loans, which amounted to
$626,000 at December 31, 1997.
(3) Does not include unrealized gain on securities classified as available for
sale of $3.6 million.
(4) Comprised of cash and due from banks, deposits with other banks,
repurchase agreements and FHLB stock.
47
<PAGE>
(5) Adjusted to take into account assumed annual decay rates which were
applied against money market, NOW and passbook accounts of 31.31%, 17.07%
and 13.93%, respectively.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Company. For information with respect to the estimated
percentage change of the Company's net interest income over a four-quarter
period and NPV based on an indicated change in interest rates, see
"Regulation--Regulation of Federal Savings Institutions--Regulatory Capital
Requirements."
48
<PAGE>
Liquidity and Capital Resources
Liquidity. Liquidity refers to the Company's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
originations, to meet withdrawals from deposit accounts, to make principal and
interest payments with respect to outstanding borrowings and to make investments
that take advantage of interest rate spreads. The Company monitors its liquidity
in accordance with guidelines established by the Company and applicable
regulatory requirements. The Company's need for liquidity is affected by loan
demand, net changes in deposit levels and the scheduled maturities of its
borrowings. The Company can minimize the cash required during the times of heavy
loan demand by modifying its credit policies or reducing its marketing effort.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Company has limited control. The Company derives its
liquidity from both its assets and liabilities. Liquidity is derived from assets
by receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of Topeka 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 invested 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 December 31, 1997, the Company had $328.0 million
in borrowing capacity under a collateralized line of credit with the FHLB of
Topeka, of which $4.1 million was outstanding as of such date. The Bank does not
currently accept brokered deposits as a source of liquidity, and does not
anticipate a change in this practice in the foreseeable future.
At December 31, 1997, the Company had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $67.4 million. Certificates of deposit which are scheduled to mature
within one year totaled $983.3 million at December 31, 1997, and borrowings that
are scheduled to mature within the same period amounted to $4.1 million. The
Company anticipates that it will have sufficient funds 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.
49
<PAGE>
Beginning March 1, 1998, the Company is required to begin making interest
payments on the Senior Notes, which is expected to be initially funded through
an interest reserve account established with an independent trustee and
subsequently through dividends from the Banks. The Senior Notes have an annual
debt reserve requirement of $8.8 million (or $4.4 million for each semi-annual
period). The Interest Reserve Account currently contains cash and other
investments permitted by the Indenture governing the Senior Notes sufficient to
pay the aggregate interest payments scheduled to be made on March 1, 1998 and
September 1, 1998.
Capital Resources. Federally insured savings institutions such as the Banks
are required to maintain minimum levels of regulatory capital. See
"Regulation--Regulation of Federal Savings Institutions--Regulatory Capital
Requirements." The following table reflects the Banks' actual levels of
regulatory capital and applicable regulatory capital requirements at December
31, 1997.
<TABLE>
<CAPTION>
Required(4) Actual Excess
------------------- --------------------- ---------------------
Percent Amount Percent Amount Percent Amount
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Local Federal:
Tangible capital ............ 1.50% $ 27,665 6.89% $127,024 5.39% $ 99,359
Core capital(1) ............. 3.00 55,384 6.98 128,803 3.98 73,419
Risk-based capital(2)(3)..... 8.00 76,022 14.14 134,331 6.14 58,309
Local America:
Tangible capital ............ 1.50 9,230 15.80 97,246 14.30 88,016
Core capital(1) ............. 3.00 18,482 15.90 97,975 12.90 79,493
Risk-based capital (2)(3).... 8.00 28,511 28.45 101,398 20.45 72,887
</TABLE>
- ----------
(1) Does not reflect amendments which were proposed by the OTS in April 1991,
which would increase this requirement to between 4% and 5%.
(2) Does not reflect the interest-rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets and risk-based capital is computed as a percentage of adjusted
risk-weighted assets.
(4) Does not reflect the requirements to be met in order for an institution to
be deemed "adequately capitalized" under applicable laws and regulations.
See "Regulation--Regulation of Federal Savings Institutions--Prompt
Corrective Action."
Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
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
50
<PAGE>
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.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's Notes to Consolidated Financial
Statements.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, which was
effective, on a prospective basis, for transactions occurring after December 31,
1996. SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. SFAS No. 125 extends the "available for sale" and "trading" approach of
SFAS No. 115 to non-security financial assets that can be contractually prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired after
January 1, 1997. The adoption of SFAS No. 125 did not have a material adverse
effect on the Company's consolidated financial condition or results of
operations.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No.
51
<PAGE>
128 requires restatement of all prior-period EPS data presented. This Statement
did not have a material adverse impact on the consolidated financial position,
the future results of operations of the Company or the net income (loss) per
share reported in the consolidated financial statements.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. Specifically, the Statement requires all entities to provide
the capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provisions of APB Opinion No. 15 will now
need to make those disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes 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. 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 in the equity section of a statement of financial position. 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 does not anticipate that this
Statement will have a material adverse impact on the consolidated financial
position or the future results of operations of the Company.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted. Management does not anticipate that this Statement will have a
material adverse impact on the consolidated financial position or the future
results of operations of the Company.
BUSINESS
Lending Activities
General. The Company has historically generated loans through its own
branch network in the case of residential and consumer loans and, in the case of
commercial real estate loans, through a network of loans brokers, mortgage
bankers and unaffiliated financial institutions. All commercial real estate and
residential real estate mortgages are generally secured by first trust
52
<PAGE>
deeds on real property. Consumer loans are comprised of direct automobile loans
originated by the Banks as well as an indirect automobile finance receivables
portfolio, a mix of home equity and other secured and unsecured consumer loans.
As of December 31, 1997, the Company's net loans receivable portfolio amounted
to $953.5 million or 50.7% of the Company's total consolidated assets.
The following table presents information on the Company's consolidated loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
December 31, ----------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
-------- ---------- --------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential real
estate loans ........................... $287,262 $ 282,034 $ 280,173 $282,319 $292,119 $272,089
Construction loans ....................... -- -- -- 5,000 -- 332
Commercial real estate loans(1) .......... 645,240 638,091 606,811 496,803 404,572 260,373
Commercial business loans ................ 4,043 -- -- -- -- --
Consumer loans(2) ........................ 45,751 122,908 165,380 42,189 32,846 28,451
-------- ---------- ---------- -------- -------- --------
Total gross loans ............... 982,296 1,043,033 1,052,364 826,311 729,537 561,245
-------- ---------- ---------- -------- -------- --------
Less:
Unaccreted discounts ................... (7,824) (12,522) (16,163) (15,451) (16,880) (13,918)
Unearned interest ...................... -- (4,479) (13,959) (890) (142) --
Allowance for loan losses .............. (20,484)(3) (11,435)(3) (3,228) (4,593) (3,689) (2,172)
Loans in process ....................... -- -- -- -- (3) (42)
Deferred income ........................ (518) (773) (879) (767) (257) (660)
-------- ---------- ---------- -------- -------- --------
Loans receivable, net ............ $953,470 $1,013,824 $1,018,135 $804,610 $708,566 $544,453
======== ========== ========== ======== ======== ========
</TABLE>
- ----------
(1) Includes loans secured by multi-family residential properties.
(2) At December 31, 1997 and June 30, 1997, 1996, 1995, 1994 and 1993,
includes $0, $82.2 million, $33.3 million, $21.7 million, $1.9 million and
$0 of indirect automobile loan receivables.
(3) See "--Allowance for Loan Losses" for information on the increase in the
Company's allowance for loan losses during fiscal 1997 and the six months
ended December 31, 1997.
53
<PAGE>
Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the Company's total loan
portfolio at December 31, 1997, as well as the dollar amount of such loans which
are scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due or Repricing
in Year(s) Ended December 31,
Total at -------------------------------------------------------------------
December 31, There-
1997 1998 1999 2000 2001 2002 after
-------- ------- ------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential real estate ............ $287,262 $ 607 $ 1,016 $ 1,863 $ 3,148 $ 4,176 $276,452
Commercial real estate ............. 649,283 38,627 31,964 47,627 93,630 60,145 377,290
Consumer ........................... 45,751 15,083 1,658 2,209 2,879 2,280 21,642
-------- ------- ------- ------- ------- ------- --------
Total(1) ........................... $982,296 $54,317 $34,638 $51,699 $99,657 $66,601 $675,384
======== ======= ======= ======= ======= ======= ========
</TABLE>
- ----------
(1) Of the $928.0 million of loan principal repayments contractually due after
December 31, 1998, $529.3 million have fixed rates of interest and $398.7
million have adjustable rates of interest. Commercial, consumer and total
loans are presented net of undistributed loan proceeds.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which generally give the Banks the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates).
Origination, Purchase and Sale of Loans. The lending activities of the
Banks are subject to the written, non-discriminatory underwriting standards and
loan origination procedures established by the Banks' Boards of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, loan brokers, mortgage bankers, unaffiliated
financial institutions, existing customers, walk-in customers and advertising.
In its present marketing efforts, the Banks emphasize their customized personal
service, competitive rates, and an efficient underwriting and approval process.
Property valuations are performed by the Banks' staff as well as by independent
outside appraisers approved by the Banks' Boards of Directors. The Banks
generally require title, hazard and, to the extent applicable, flood insurance
on its security property.
54
<PAGE>
A savings institution generally may not make loans to any one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At December 31, 1997, Local Federal's and Local
America's regulatory limit on loans-to-one borrower was $21.9 million and $15.2
million, respectively. As of such date, the five largest loans or groups of
loans-to-one borrower, including related entities, held in the Banks' portfolios
aggregated $25.9 million, $22.2 million, $21.2 million, $18.0 million and $16.8
million. All of the loans which exceed the Banks' respective lending limits were
originated during periods when the asset size of the Banks was greater and the
Banks' lending limits were higher. As a result, such loans are grandfathered and
comply with such OTS regulations. All of these five largest loans or loan
concentrations were secured by commercial real estate and were performing in
accordance with their terms at December 31, 1997.
The following table shows the activity in the Company's loan portfolio
during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
Six Months Ended -------------------------------------------------
December 31, 1997 1997 1996 1995
----------------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Gross loans held at beginning
of period ........................................ $1,043,033 $1,052,364 $ 826,311 $729,537
Originations of loans:
Single-family residential ....................... 27,331 41,115 50,126 20,032
Commercial real estate .......................... 33,245 118,527 114,818 121,554
Commercial business ............................. 4,449 -- -- --
Consumer ........................................ 20,460 73,627 179,554 54,222
---------- ---------- ---------- --------
Total originations ........................ 85,485 233,269 344,498 195,808
---------- ---------- ---------- --------
Purchases of loans:
Single-family residential ....................... -- -- -- 3,524
Commercial real estate .......................... 32,503 86,939 87,714 142,516
Commercial business ............................. 700 -- -- --
Construction .................................... -- -- -- 5,000
---------- ---------- ---------- --------
Total purchases ........................... 33,203 86,939 87,714 151,040
---------- ---------- ---------- --------
Total originations and purchases ........ 118,688 320,208 432,212 346,848
---------- ---------- ---------- --------
Loans sold:
Consumer loans(1) ............................... 1,735 11,974 15,009 27,537
Consumer (indirect auto) ........................ 54,135 -- -- --
Single-family residential ....................... -- -- 13 --
Commercial real estate .......................... -- -- -- 62,147
---------- ---------- ---------- --------
Total sold ................................ 55,870 11,974 15,022 89,684
Repayments(2) ...................................... (123,231) (316,559) (186,173) (159,185)
Transfers to real estate owned ..................... (324) (1,006) (4,964) (1,205)
Net activity in loans .............................. (60,737) (9,331) 226,053 96,774
---------- ---------- ---------- --------
Gross loans held at end of
period ........................................... $ 982,296 $1,043,033 $1,052,364 $826,311
========== ========== ========== ========
</TABLE>
- ----------
(1) Consists solely of guaranteed student loans.
(2) Includes repossessions with respect to indirect automobile loans.
55
<PAGE>
Commercial Real Estate Loans. As of December 31, 1997, commercial real
estate loans (which include multi-family residential loans) amounted to $645.2
million or 65.7% of the Company's total loan portfolio. The Banks originate and
purchase whole loans and loan packages through a network of loan brokers,
mortgage bankers and institutions throughout the country with whom the Banks
have relationships, who find potential loans based upon the Banks' established
underwriting and pricing guidelines. All originations and purchases undergo a
three-step underwriting and evaluation process. First, an initial review of the
loan package is conducted by the originator to determine conformity to
guidelines and consistency with the Banks' lending philosophy. An indication of
pricing and terms may be issued in the case of loans which have already been
originated. Second, once the indication is accepted by the borrower and a
completed application submitted, a detailed underwriting is conducted in which
both the originator and the Banks' in-house appraiser conduct an onsite
inspection and analysis. Rent rates are analyzed and compared to market rents,
reported occupancy is checked against evidence onsite, environmental issues are
identified and the appropriate level of investigation is conducted and a final
credit write-up is prepared. Finally, the Banks' closing department reviews the
totality of work, including completeness of analysis and documentation, title
searches, borrower background checks, appraisal and environmental reports and
other pertinent data. Only after these three broad steps is a final approval and
disbursement made.
The Company also purchases packages of commercial real estate loans from a
financial institution located in Oregon and a financial institution located in
Utah. These loans are secured primarily by multi-family residential and
nonresidential real estate and are generally purchased on a servicing retained
basis. Commercial real estate loans purchased by the Company are underwritten
pursuant to the same guidelines as direct loan originations. The Company
purchased a total of $32.5 million and $86.9 million of commercial real estate
loans during the first six months of fiscal 1998 and the year ended June 30,
1997, respectively.
The Banks impose in-house lending limits which are below statutory lending
limits. While the OTS statutory limit is 15% of an institution's unimpaired
capital and surplus (or with respect to Local Federal and Local America,
approximately $21.9 million and $15.2 million, respectively, at December 31,
1997), new management of the Company generally restricts single loans to $12 to
$15 million in size and generally limits exposure to any single borrower to $20
million.
The Company originates both fixed-rate and adjustable rate commercial real
estate loans. Fixed-rate commercial real estate loans generally have terms to
maturity of between five and ten years and amortize over a period of up to 30
years. Adjustable-rate commercial real estate loans have interest rates which
generally adjust every six months, one-year, three years and five years
56
<PAGE>
in accordance with a designated index (either the London Interbank Offer Rate,
the prime rate quoted in the Wall Street Journal or U.S. Treasury rates).
Loan-to-value ratios on commercial real estate loans are generally limited
to a maximum of 80% for apartments and manufactured housing communities (loans
on real estate as distinguished from manufactured homes), 75% on mini-storage
units and multi-tenant warehouses, 70% for offices and 65% for hotels and retail
properties.
Wholesale commercial real estate origination/acquisition volume was
relatively stable in fiscal 1996 and 1997, amounting to $202.5 million and
$205.4 million, respectively, and amounting to $65.7 million for the six months
ended December 31, 1997.
By virtue of its nationwide wholesale commercial mortgage originations, the
commercial real estate portfolio is diversified geographically. As of December
31, 1997, the states in which the highest geographic concentration of assets
existed were Oregon (14.0%), California (13.9%), New York (12.1%) and Texas
(11.3%). In terms of primary collateral type, as of December 31, 1997, $282.8
million or 43.7% of the commercial mortgage portfolio was secured by apartment
buildings, $118.5 million or 18.3% of the commercial mortgage portfolio was
secured by hotels and motels and $99.4 million or 15.4% of the commercial
mortgage portfolio was secured by manufactured housing communities. The largest
single commercial real estate loan as of such date had an outstanding principal
balance of $15.9 million and is secured by a 100-unit apartment building located
in Tennessee. Multiple commercial mortgage loans to one borrower are generally
cross-collateralized and cross-defaulted.
Under prior management, the Company originated and purchased commercial
real estate loans secured by properties located throughout the United States.
New management expects to continue the origination and purchase of commercial
and multi-family residential loans throughout the United States but plans to
emphasize the origination and purchase of loans secured by multi-family and
commercial real estate located within the State of Oklahoma and surrounding
states. The Company recently hired an experienced commercial real estate lender
with over 15 years of experience in the Oklahoma City market. As a result, the
Company expects to expand its origination of commercial real estate loans,
particularly within its local market area.
The Company also anticipates that during fiscal 1998 it will begin to
originate within the State of Oklahoma commercial business loans. The Company
has recently hired two senior loan officers from the Oklahoma City market who
have significant commercial business lending experience and who have worked
together in the past and are well known in the local business community.
Commercial lending entails different and significant risks when compared to
single-family residential lending because such loans typically involve large
loan balances to single borrowers and because the payment experience on such
loans is typically dependent on the successful operation of the project or the
borrower's business. The risks relating to commercial real estate lending can
also be significantly affected by supply and demand conditions in the local
market
57
<PAGE>
for apartments, offices, warehouses or other commercial space. The
Company attempts to minimize its risk exposure by imposing stringent
underwriting standards and continually monitoring the operation and physical
condition of the collateral.
As shown under "--Asset Quality," the Company's nonperforming commercial
real estate loans amounted to $162,000 or 0.03% of total commercial real estate
loans at December 31, 1997, as compared to $2.0 million or 0.3% of total
commercial real estate loans at June 30, 1997. The Company had no commercial
real estate owned at December 31, 1997, as compared to $6.2 million or 71.4% of
total foreclosed assets as of June 30, 1997. The decline was primarily due to
the transfer of a $6.0 million retail shopping center from real estate owned to
real estate held for investment. Local Federal has profitably managed the
shopping center since it became real estate owned. The property was transferred
to real estate held for investment during the period because the Company had
exceeded the 5-year regulatory limit for holding real estate owned.
Single-Family Residential Real Estate Loans. At December 31, 1997, the
Company's single-family residential mortgage loan portfolio amounted to $287.3
million or 29.2% of the total loan portfolio. All of the Company's single-family
residential mortgage loans are secured by properties located in the State of
Oklahoma. The majority of the single-family residential loan portfolio consist
of conforming loans (i.e., not insured or guaranteed by a federal agency) with
an average balance of below $100,000 per loan. For the six months ended December
31, 1997 and the year ended June 30, 1997, the Company originated $27.1 million
and $41.1 million of single-family residential mortgage loans, respectively. The
single-family residential loan portfolio was originated through the Banks'
retail branch network as well as through a centralized residential loan
origination center. New management expects to increase the Banks' emphasis on
single-family residential lending within its primary market area in Oklahoma.
The loan-to-value ratio, maturity and other provisions of the loans made by
the Banks generally have reflected the policy of making less than the maximum
loan permissible under applicable regulations, in accordance with market
conditions and underwriting standards established by the Banks. The Company's
lending policies on single-family residential mortgage loans generally limits
the maximum loan-to-value ratio to 95% of the lesser of the appraised value or
purchase price of the property and generally all single-family residential loans
in excess of an 80% loan-to-value ratio require private mortgage insurance.
The Banks offer fixed-rate single-family residential loans with terms of 15
to 30 years. Such loans are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses, which are
provisions giving the Banks the right to declare a loan immediately due and
payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid.
Since the early 1980s, the Banks have been offering adjustable-rate loans
in order to decrease the vulnerability of its operations to changes in interest
rates. At December 31, 1997, $66.2 million or 23.1% of the single-family
residential loans in the Company's total loan portfolio consisted of
adjustable-rate loans.
58
<PAGE>
The Banks' single-family residential adjustable-rate loans are fully
amortizing loans with contractual maturities of up to 30 years. These loans have
interest rates which are scheduled to adjust every year in accordance with a
designated index (i.e., the weekly average yield on U.S. Treasury securities
adjusted to a constant comparable maturity, as made available by the Federal
Reserve Board). There is a 2% cap on the rate adjustment per period and a 6% cap
on the rate adjustment over the life of the loan. The Banks' adjustable-rate
loans are not currently convertible into fixed-rate loans, are not assumable, do
not contain prepayment penalties and do not produce negative amortization.
The demand for adjustable-rate loans in the Company's primary market area
has been a function of several factors, including the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding only fixed-rate loans in an increasing interest
rate environment.
At December 31, 1997, total non-performing single-family residential
mortgages and foreclosed single-family residential assets amounted to $413,000
and $264,000, respectively.
Consumer Loans. Consumer loans totaled $45.8 million as of December 31,
1997 and consisted of $27.8 million of home equity loans, $7.6 million of
deposit secured loans, $7.1 million of guaranteed student loans, $3.0 million of
automobile finance loans and $332,000 of property improvement and personal
loans. These loans are originated through the Banks' branch network. Under the
Banks' home equity underwriting guidelines, loans are restricted to not more
than $100,000, and the loan-to-value may not exceed 100% at origination.
Applications are taken at the branch level but underwriting, except in the case
of cash secured loans, is done centrally. New management expect to increase the
Banks' emphasis on consumer lending within its primary market area in Oklahoma.
As of December 31, 1997, the Banks had $51,000 of nonperforming consumer loans
and had $31,000 in foreclosed consumer loans.
From February 1994 until February 1997, the Banks, through LAC and Star,
purchased sub-prime automobile finance receivables from auto dealers. LAC,
established in 1993, purchased contracts, normally on a discounted basis, from
dealers in and around Hollywood, Florida. Star, established in 1995, purchased
auto contracts from dealers in Oklahoma and operated a branch origination office
in Tulsa. All purchases of automobile paper by the Banks were performed by these
subsidiaries. Summarized financial reports were submitted to the Board of
Directors of the
59
<PAGE>
Banks. All dealer relationships, underwriting, pricing, purchasing and servicing
of contracts were controlled at the subsidiary level.
Evidence of significant credit problems came to the attention of the former
Board of Directors of the Company during the fourth calendar quarter of 1996.
Upon additional scrutiny of the causes of this deterioration, it became evident
that both Star and LAC were going to continue to incur credit losses and that
these losses were mounting rapidly. Management of the Banks further believe that
it has uncovered evidence of fraud at LAC and has notified law enforcement
authorities. In February 1997, the Banks stopped originations permanently and
dismantled the origination infrastructure of the two subsidiaries. Since such
date, the two subsidiaries have only been servicing and collecting remaining
contracts.
The condition of the indirect automobile finance receivables portfolio has
had a direct and material adverse impact on the Company's results of operations.
During the six months ended December 31, 1997 and the years ended June 30, 1997
and 1996, the Company provided an aggregate of $23.4 million, $28.1 million and
$4.5 million in provisions for loan losses to cover realized and inherent losses
associated with respect to this portfolio. At December 31, 1997, the Company's
portfolio of indirect automobile receivables had been sold. See "Risk Factors--
Risks Relating to the Company's Lending and Investment Activities--Sub-prime
Automobile Lending."
Asset Quality
Loan Delinquencies. When a borrower fails to make a required payment on a
loan, the Company attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the 15th day after a
payment is due (30th day in the case of commercial real estate loans), at which
time a late payment is assessed. In most cases, deficiencies are cured promptly.
If a delinquency extends beyond 15 days (30 days in the case of commercial real
estate loans), the loan and payment history is reviewed and efforts are made to
collect the loan. While the Company generally prefers to work with borrowers to
resolve such problems, when the account becomes 90 days delinquent, the Company
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
60
<PAGE>
The following table presents information as of December 31, 1997
with respect to the delinquent loans of the Company on a consolidated basis:
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------
Total Loans Delinquent
60 - 89 Days 90 Days and Over 60 Days or More
---------------------------- ------------------------------ -----------------------------
Percent of Percent of Percent of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential ... 27 $ 693 0.24% 16 $ 342 0.12% 43 $1,035 0.36%
Commercial real estate ...... 2 162 0.03 2 1,224 0.19 4 1,386 0.22
Consumer .................... 8 155 0.34 5 65 0.14 13 220 0.48
-- ------ ---- -- ------ ---- -- ------ ----
Total .............. 37 $1,010 0.11% 23 $1,631 0.17% 60 $2,641 0.27%
== ====== ==== == ====== ==== == ====== ====
</TABLE>
61
<PAGE>
Nonperforming Assets. All loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, the Company does not accrue interest on loans past due 90 days
or more except when the estimated value of the collateral and collection efforts
are deemed sufficient to ensure full recovery. Consumer loans generally are
written down when the loan becomes over 120 days delinquent. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Assets acquired through foreclosure and repossession are recorded at
estimated fair value, net of estimated selling costs at the date of foreclosure
or repossession. The values of assets acquired through foreclosure and
repossession are monitored by the Company continually through sales and rental
activities, and by updated appraisals and other valuation methods when needed.
The allowance for losses on assets acquired through foreclosure and repossession
represents an amount which management believes will be adequate to absorb losses
from the disposition and/or revaluation of these assets. Additions or reversals
of the allowance for losses on assets acquired through foreclosure and
repossession are provided as an expense or a benefit, respectively, through the
provisions for uninsured risks and losses on assets acquired through foreclosure
and repossession in the accompanying Consolidated Statements of Operations. The
allowance for losses is charged or reduced as losses through sales or
revaluations are incurred. At December 31, 1997, the allowance for losses on
assets acquired through foreclosure and repossession amounted to $35,000. See
Note 8 of the Notes to Consolidated Financial Statements.
62
<PAGE>
The following table presents information on the Company's nonperforming
assets at the dates indicated. The Company did not have any troubled debt
restructurings at any of the dates presented.
<TABLE>
<CAPTION>
June 30,
December 31, -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential ............. $413 $ 927 $ 220 $ 329 $ 539 $ 698
Commercial real estate ................ 162 1,977 3,574 2,778 2,785 315
Consumer(1) ........................... 51 604 -- -- 18 18
---- ------- ------- ------- ------- -------
Total ............................. $626 $ 3,508 $ 3,794 $ 3,107 $ 3,342 $ 1,031
---- ------- ------- ------- ------- -------
Accruing loans greater
than 90 days delinquent(2) ............ -- 415 1,548 -- -- --
Foreclosed assets:
Single-family residential ............. 264 236 304 419 116 1,174
Commercial real estate ................ -- 6,170 6,570 7,363 7,503 8,959
Construction .......................... -- -- -- -- -- --
Consumer(1) ........................... 31 2,241 3,969 -- -- --
---- ------- ------- ------- ------- -------
Total foreclosures ................ 295 8,647 10,843 7,782 7,619 10,133
---- ------- ------- ------- ------- -------
Total non-performing assets ............. $921 $12,570 $16,185 $10,889 $10,961 $11,164
==== ======= ======= ======= ======= =======
Total non-performing
assets as a percentage
of total assets ....................... 0.05% 0.48% 0.49% 0.33% 0.33% 0.48%
==== ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Consists primarily of indirect automobile finance receivables.
(2) Consists solely of indirect automobile finance receivables.
The decline in nonperforming assets during the six months ended December
31, 1997 reflected a $2.9 million decline in non-accrual loans (primarily
commercial real estate loans) and a $8.4 million decline in foreclosed assets
(which was primarily due to the transfer of a $6.0 million retail shopping
center from real estate owned to real estate held for investment during the
period).
Classified Assets. The Company adheres to internal procedures and controls
to review and classify its assets. All assets are reviewed on a periodic basis.
If warranted, all or a portion of any assets exhibiting the characteristics of
risk associated with adverse classifications are assigned those classifications.
To monitor loans and to establish loss reserves, the Company classifies its
assets into the following five categories: pass, special mention, substandard,
doubtful, and loss. Under federal regulations, each insured savings institution
must classify its assets on a regular basis. In connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, classify them. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets, with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and
63
<PAGE>
there is a high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. Special mention assets is a category established
and maintained for assets which do not currently expose an insured institution
to a sufficient degree of risk to warrant classification as substandard,
doubtful or loss. Assets classified as substandard or doubtful require the
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital up to certain amounts, while specific valuation allowances
for loan losses do not qualify as regulatory capital. Federal examiners may
disagree with an insured institution's classifications and amounts reserved. As
of December 31, 1997, excluding assets which were classified as a loss and
completely written down, the Company's classified assets consisted of $31.9
million of loans which were classified as special mention and $10.3 million of
loans which were classified as substandard.
Allowance for Loan Losses. The Company has established valuation allowances
for estimated inherent losses in its loan portfolio by charging earnings for
estimated losses on loans, including the related accrued interest, using a
specific and percentage reserve method. The allowance for loan losses is
established and maintained through a periodic review and evaluation of various
factors which affect the loans' collectibility; any additional allowances
required result in provisions for loan losses. The determination of specific
valuation allowances includes a periodic evaluation of the financial status of
individual borrowers or collateral relating to loans specifically identified as
containing elements of potential risk in the loan portfolio. Numerous factors
are considered in the evaluation, including a review of (i) individual
borrowers' financial status, credit standing and available collateral, (ii) loss
experience in relation to outstanding loans and the overall loan portfolio
quality, (iii) management's judgment regarding prevailing and anticipated
economic conditions and (iv) other relevant factors. The general valuation
allowance is based upon a number of factors, including historical loss
experience, composition of the loan portfolio, prevailing and forecasted
economic conditions and management's judgment. It is the Company's policy to
charge off any loan or portion thereof when deemed uncollectible in the ordinary
course of business. Losses and recoveries are charged or credited directly to
the allowance. The OTS and the FDIC, as an integral part of their examination
process, periodically review the Banks' allowances for possible loan losses.
Such agencies may require the Banks to recognize additions to such allowances
based on their judgments about information available to them at the time of
their examination.
64
<PAGE>
The following table provides information on the Company's allowance for
loan losses as of the dates indicated:
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- ------- -------- ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 11,435 $ 3,228 $ 3,228 $ 4,593 $3,689 $2,172 $ 2,746
Loans charged off:
(5) -- (3) (143) (191) (320) (516)
Single-family residential
Commercial real estate ..... (14) -- -- (1,368) (4) (48) (2,677)
Consumer ................... (4) (6) (15) (1) (22) (11) (71)
Autos (indirect) ........... (16,531) (8,077) (20,275) (5,025) (145) -- --
Recoveries:
Single-family residential .. -- 1 2 11 39 27 145
Commercial real estate ..... 2 1 53 3 68 104 881
Consumer ................... 1 -- 1 1 2 1 10
Autos (indirect) ........... 22 594 16 40 -- -- --
Allowance of acquired
institution -- -- -- -- -- -- 84
-------- ------- -------- ------- ------ ------ -------
Net loans charged off ... (16,529) (7,487) (20,221) (6,482) (253) (247) (2,144)
Provision for loan losses ...... 25,578 9,734 28,428 5,117 1,157 1,764 1,570
-------- ------- -------- ------- ------ ------ -------
Balance at end of period ....... $ 20,484 $ 5,475 $ 11,435 $ 3,228 $4,593 $3,689 $ 2,172
======== ======= ======== ======= ====== ====== =======
Allowance for loan losses to
total nonperforming loans at
end of period ................ 3,272.20% 56.22% 291.49% 60.43% 147.82% 110.38% 210.66%
======== ======= ======== ======= ====== ====== =======
Allowance for loan losses to
total loans at end of period.. 2.09% 0.50% 1.10% 0.31% 0.57% 0.52% 0.40%
======== ======= ======== ======= ====== ====== =======
</TABLE>
65
<PAGE>
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
December 31, 1997 1997 1996 1995
------------------ ------------------- ---------------- -------------------
Percent Percent Percent Percent
to Total to Total to Total to Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 412 2.01% $ 427 3.73% $ 407 12.60% $ 411 8.95%
Commercial real estate 10,459 51.06 2,836 24.80 2,624 81.30 3,644 79.34
Consumer 6,203 30.28 8,172 71.47 197 6.10 538 11.71
General unallocated 3,410 16.65 -- -- -- -- -- --
------- ------ ------- ------ ------ ------ ------ ------
Total $20,484 100.00% $11,435 100.00% $3,228 100.00% $4,593 100.00%
======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
June
----------------------------------------
1994 1993
------------------- -------------------
Percent Percent
to Total to Total
Amount Allowance Amount Allowance
------ --------- ------ ---------
Single-family residential $ 467 12.66% $ 453 20.84%
Commercial real estate 3,023 81.95 1,521 70.04
Consumer 199 5.39 198 9.12
General unallocated -- -- -- --
------ ------ ------ ------
Total $3,689 100.00% $2,172 100.00%
====== ====== ====== ======
66
<PAGE>
Investment Activities
The Company's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and administered by the
Company's Investment Committee. All transactions must be approved by the
Investment Committee and reported to the Board of Directors.
The Banks are authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations, certain
time deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt securities
and other specified investments such as mortgage-backed and related securities.
The Company invests in mortgage-backed and related securities, including
mortgage participation certificates, which are insured or guaranteed by U.S.
Government agencies and government sponsored enterprises, and CMOs and real
estate mortgage investment conduits ("REMICs"). Mortgage-backed securities
(which also are known as mortgage participation certificates or pass-through
certificates) represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company. Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, the FNMA and the Government National Mortgage Association
("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus approximates
the term of the underlying mortgages.
The Company's mortgage-backed and related securities include CMOs, which
include securities issued by entities which have qualified under the Internal
Revenue Code of 1986, as amended ("Code"), as REMICs. CMOs and REMICs
(collectively CMOs) have been developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option of
the underlying mortgagor and are typically issued by governmental agencies,
government sponsored enterprises and special purpose entities, such as trusts,
corporations or partnerships, established by financial institutions or other
similar institutions. A CMO can be collateralized by loans or securities which
are insured or guaranteed by FNMA, FHLMC or GNMA. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is segmented
and paid in accordance with a predetermined priority to investors holding
various
67
<PAGE>
CMO classes. By allocating the principal and interest cash flows from
the underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics.
Beginning in 1993, the Company began to implement an investment strategy
whereby it purchased mortgage-backed and related securities and financed those
securities primarily through reverse repurchase agreements and FHLB advances.
The Company predominantly purchased adjustable-rate FNMA and FHLMC CMOs tied to
COFI. As a result, at June 30, 1996, the Company's securities portfolio amounted
to $2.1 billion ($1.9 billion of which consisted of COFI-based CMOs) or 65.1% of
total assets. The COFI is a compilation of the average rates paid by savings
institutions which are members of the 11th District of the FHLB system, and the
COFI generally adjusts more slowly to changes in market rates of interest when
compared to adjustable-rate loans and securities with interest rates based on
other indices. As a result of recent fluctuations in the level of interest rates
as well as the structure of the COFI, the values of the Company's COFI-based
CMOs have declined in recent periods. At June 30, 1996, the Company had $48.5
million of unrealized losses with respect to its securities portfolio (net of
applicable tax benefits).
In late 1996 and in anticipation of the proposed sale of the Company, the
Company began reducing its securities, particularly its CMO holdings, through
periodic bulk sale transactions. During fiscal 1997, the Company sold $743.9
million of securities and recognized $29.6 million of losses with respect to
such sales. At June 30, 1997, the Company's securities portfolio amounted to
$1.4 billion ($1.1 billion of which consisted of COFI-based CMOs) or 53.1% of
total assets. As of such date, the Company had $32.0 million of unrealized
losses with respect to its securities portfolio (net of applicable tax
benefits).
During September 1997 and in connection with the Private Placement and the
Redemption, new management of the Company determined that its CMO portfolio was
"other than temporarily impaired" and, in accordance with GAAP, wrote-down its
remaining CMO portfolio by $54.7 million. In addition, since assuming control of
the Company on September 8, 1997, new management has been accelerating the
disposition of its securities portfolio, particularly its COFI-based CMOs.
During the three months ended September 30, 1997, the Company sold $539.2
million of securities and recognized $17.3 million of losses with respect to
such sales. The market for fixed income securities improved during the
three-month period ended December 31, 1997 and during such period the Company
sold a portion of the remaining COFI-based CMO portfolio for a gain of $12.7
million. The Company has utilized the proceeds of such sales to repay all of its
outstanding reverse repurchase agreements and $451.0 million or 84.9% of its
outstanding FHLB advances. The remaining proceeds were invested in short-term
investments. At December 31, 1997 the Company's securities portfolio amounted to
$518.1 million ($428.6 million of which consisted of COFI-based mortgage-related
securities) or 27.5% of assets. As of such date, all of the Company's securities
were classified as available for sale. Pursuant to SFAS No. 115, securities
classified as available for sale are carried at fair value with any resulting
unrealized gains or losses credited or charged to stockholders' equity. As of
68
<PAGE>
December 31, 1997, the Company had unrealized gains with respect to its
securities portfolio of $2.3 million (net of applicable taxes).
The following table sets forth information regarding the carrying and
market value of the Company's securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
December 31, 1997 1997 1996 1995
------------------- ------------------ ---------------- -------------------
Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value
----- ----- ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale (at
market):
FHLMC ........................... $186,706 $186,706 $473,963 $473,963 $ 884,936 $ 884,936 $ 89,183 $ 89,183
FNMA ............................ 267,826 267,826 483,508 483,508 810,963 810,963 272,219 272,219
GNMA ............................ 386 386 -- -- -- -- -- --
Private ......................... 57,175 57,175 28,046 28,046 41,174 41,174 -- --
U.S. Government agency
securities .................... 6,000 6,000 -- -- -- -- -- --
Equity securities ............... 14 14 -- -- 11,604 11,604 12,287 12,287
Interest rate caps and floors ... -- -- 48 48 4,652 4,652 -- --
-------- -------- -------- -------- ---------- ----------- ---------- ----------
$518,107 $518,107 $985,565 $985,565 $1,753,329 $1,753,329 $ 373,689 $ 373,689
======== ======== ======== ======== ========== =========== ========== ==========
Held to maturity:
FHLMC ........................... $ -- $ -- $206,915 $201,924 $248,006 $ 239,996 $1,173,807 $1,151,783
FNMA ............................ -- -- 88,070 84,552 90,301 86,713 691,313 680,201
GNMA ............................ -- -- 429 417 504 488 607 590
Private ......................... -- -- 38,674 37,805 53,513 51,807 118,029 113,163
U.S. Government agency
securities .................... -- -- 74,119 74,219 -- -- -- --
-------- -------- -------- -------- ---------- ----------- ---------- ----------
$ -- $ -- $408,207 $398,917 $ 392,324 $ 379,004 $1,983,756 $1,945,737
======== ======== ======== ======== ========== =========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the activity in the Company's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
Six Months Ended -------------------------------------------
December 31, 1997 1997 1996 1995
----------------- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Securities at beginning of period ......... $1,393,772 $2,145,653 $2,357,445 $2,469,356
Purchases ................................. 80,441 73,388 9,040 37,708
Loan securitizations ...................... -- -- -- 60,824
Proceeds from securities sales ............ (865,146) (743,943) (50,321) (95,255)
Proceeds from swap terminations ........... -- -- (3,637) --
Loss on termination of options ............ (2,234) -- -- --
Gain (loss) from securities sales ......... (4,610) (29,582) (181) 2,298
Mark-to-market on securities other
than temporarily impaired ............... (54,724) -- -- --
Repayments and prepayments ................ (80,789) (65,406) (80,976) (113,845)
Amortization and accretion ................ (2) (10,355) (11,905) (6,898)
Accretion of deferred (gains) or
losses from swap terminations ........... -- 1,888 1,154 --
Decrease (increase) in unrealized
losses on available-for-sale ............ 52,824 25,408 (74,966) 3,257
securities(1)
Charge-offs and transfers to loans ........ (1,425) (3,279) -- --
--------- ---------- ---------- ----------
Securities at end of period ............... $ 518,107 $1,393,772 $2,145,653 $2,357,445
========= ========== ========== ==========
</TABLE>
- ----------
(1) At December 31, 1997, the cumulative unrealized gains on securities
classified as available-for-sale amounted to $3.6 million.
69
<PAGE>
At December 31, 1997, the Company's securities portfolio had an aggregate
carrying value of $518.1 million, $512.1 million of which consisted of
mortgage-backed and related securities and $6.0 million of which consisted of
U.S. Government agency securities. At December 31, 1997, of the Company's $512.1
million of mortgage-backed and related securities, $43.4 was scheduled to mature
in one year or less (which had a weighted average yield of 5.75%), $1.0 million
was scheduled to mature in between one and five years (which had a weighted
average yield of 7.04%, $6.4 million was scheduled to mature in between five and
ten years (which had a weighted average yield of 6.96%), and $461.3 million was
scheduled to mature after ten years (which had a weighted average yield of
7.00%).
The actual maturity of a mortgage-backed or related security is less than
its stated maturity due to prepayments of the underlying mortgages. Prepayments
that are faster than anticipated may shorten the life of the security and affect
its yield to maturity. The yield to maturity is based upon the interest income
and the amortization of any premium or discount related to the security. In
accordance with GAAP, premiums and discounts are amortized over the estimated
lives of the loans, which decrease and increase interest and dividend income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed or related security, and these assumptions are reviewed
periodically to reflect actual prepayments. Although prepayments of underlying
mortgages depend on many factors, including the type of mortgages, the coupon
rate, the age of mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates, the difference between the interest rates on the underlying mortgages and
the prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security.
All of the $6.0 million of U.S. Government agency securities held by the
Company at December 31, 1997 (which had a weighted average yield of 5.77%) was
scheduled to mature in one year or less.
Sources of Funds
General. Deposits are the primary source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from loan principal repayments and advances from the FHLB of Topeka.
Furthermore, in prior periods, the Company utilized reverse repurchase
agreements in order to fund its lending and investing activities. Loan
repayments are a relatively stable source of funds, while deposit inflows and
70
<PAGE>
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer-term basis for general business purposes.
Deposits. The Banks accept deposits through their 41 branch offices,
consisting of 28 Local Federal branches and 13 Local America branches. See
"--Offices and Other Material Properties." Deposits are solicited on a regular
basis directly through the Banks' customer base and through various advertising
media within its markets. The Banks offer several savings account and checking
account plans to its customers. Among savings account plans, the Banks offer
basic savings, short- and long-term certificates of deposit, a variable rate
IRA/Keogh and regular IRAs and Keoghs. The Banks offer checking account plans
that range from a no-fee, no-interest plan to a variable-fee, bundled product
plan that includes services or products such as personalized checks, ATM cards,
overdraft protection, no annual fee Visa/Mastercard membership, safe deposit box
discounts, and assistance with travelers checks.
According to SNL Securities, as of June 30, 1997, the Company operated on a
consolidated basis the largest thrift institution in terms of total deposits in
the State of Oklahoma. The Banks ranked fourth overall among all depository
institutions as of such date, with 4.5% of the state's deposit market share,
adjusted for pending mergers and acquisitions.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Banks, on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals and federal regulations.
The Banks do not advertise for deposits outside their local market areas or
utilize the services of deposit brokers.
71
<PAGE>
The following table presents the average balance of each deposit type
and the average rate paid on each deposit type of the Company for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
Six Months Ended ----------------------------------------------------------------------------------
December 31, 1997 1997 1996 1995
------------------------- --------------------------- ------------------------- --------------------------
Average Average Average Average
Average Rate Average Rate Average Rate Averag Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid Balance Interest Paid
------- -------- ---- ------- -------- ---- ------- -------- ---- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing deposits $ 57,778 $ -- --% $ 52,087 $ -- --% $ 46,791 $ -- --% $ $ 38,356 --%
Passbook accounts 78,731 1,009 2.56 72,441 2,092 2.89 75,359 2,190 2.91 93,699 2,742 2.93
NOW and money market
accounts 187,381 2,594 2.77 195,606 5,381 2.75 204,752 5,638 2.75 248,752 6,937 2.79
Term certificates 1,301,703 37,069 5.70 1,329,463 75,618 5.69 1,271,079 73,345 5.77 1,149,834 58,556 5.09
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- --------- ------- ----
Total deposits $1,625,593 $40,672 5.00% $1,649,597 $83,091 5.04% $1,597,981 $81,173 5.08% $1,530,641 $68,235 4.46%
========== ======= ==== ========== ======= ==== ========== ======= ==== ========= ======= ====
</TABLE>
<PAGE>
The following table sets forth activity in the Company's deposits during
the periods indicated.
<TABLE>
<CAPTION>
Six Months Years Ended June 30,
Ended December 31, --------------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance ............ $1,644,356 $1,602,460 $1,577,822 $1,474,171
Net increase (decrease)
before interest ............ (82,495) (41,195) (56,535) 35,415
Interest credited ............ 40,672 83,091 81,173 68,235
---------- ---------- ---------- ----------
Net increase (decrease) in
deposits .................... (38,783) 41,896 24,639 103,650
---------- ---------- ---------- ----------
Ending balance ............... $1,602,533 $1,644,356 $1,602,460 $1,577,822
========== ========== ========== ==========
</TABLE>
The following table sets forth by various average interest rate categories
the term certificates with the Company at the dates indicated.
<TABLE>
<CAPTION>
June 30,
December 31, ----------------------------------------------
Average Rate Paid 1997 1997 1996 1995
- ----------------- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
0.00% to 3.99% ........... $ -- $ -- $ 2,860 $ 4,539
4.00% to 4.99% ........... 4,327 21,105 7,039 7,408
5.00% to 5.99% ........... 994,844 1,008,889 1,024,706 877,469
6.00% to 6.99% ........... 286,421 293,583 254,328 351,744
7.00% to 7.99% ........... 740 881 1,290 4,169
---------- ---------- ---------- ----------
$1,286,332 $1,324,458 $1,290,223 $1,245,329
========== ========== ========== ==========
</TABLE>
72
<PAGE>
The following table sets forth the amount and remaining maturities of the
Company's term certificates at December 31, 1997.
<TABLE>
<CAPTION>
Over One Year Over Two Years
Six Months Over Six Months Through Two Through Three Over Three
and Less Through One Year Years Years Years
-------- ---------------- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 3.99% .......... $ 10 $ -- $ -- $ -- $ --
4.00% to 4.99% .......... 27,087 1,345 243 30 --
5.00% to 5.99% .......... 491,487 260,256 161,752 18,883 10,480
6.00% to 6.99% .......... 96,110 91,230 66,500 10,036 6,174
7.00% to 7.99% .......... 8,303 7,331 16,152 11,461 1,311
8.00% to 8.99% .......... 171 10 -- -- --
-------- -------- -------- ------- -------
Total $623,168 $360,172 $244,647 $40,410 $17,935
======== ======== ======== ======= =======
</TABLE>
As of December 31, 1997, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $153.5 million. The following table presents the maturity of these
time certificates of deposit at such dates.
December 31, 1997
-----------------
(In Thousands)
3 months or less ................................ $ 34,360
Over 3 months through 6 months .................. 36,359
Over 6 months through 12 months ................. 43,901
Over 12 months .................................. 38,860
--------
$153,480
========
Borrowings. Other than deposits, the Company's primary sources of funds
have historically consisted of reverse repurchase agreements and advances from
the FHLB of Topeka. Although a substantial portion of the Company's growth in
its securities portfolio in recent periods has been funded through the use of
reverse repurchase agreements and FHLB advances, new management is in the
process of reducing its securities holdings and utilizing the proceeds therefrom
to pay down borrowings. Consequently, reverse repurchase agreements declined
from $1.1 billion at June 30, 1996 to $0 at December 31, 1997. Similarly,
advances from the FHLB of Topeka declined from $439.0 million at June 30, 1996
to $80.1 million at December 31, 1997. For additional information, see Notes 10
and 11 of the Notes to Consolidated Financial Statements.
Prior to the Private Placement and the Redemption, the Company had
outstanding a promissory note payable to Isabel Collier Read, a former
stockholder and the mother of the Selling Shareholders. At June 30, 1997 and
1996, the promissory note had an outstanding principal balance of $7.0 million
and $14.0 million, respectively. The promissory note required annual
installments of $7.0 million plus accrued interest and bore interest at a
specified prime lending rate which could not exceed 8.0% nor fall below 5.7%. On
September 8, 1997 in connection with closing of the Private Placement and the
Redemption, the Company prepaid the promissory note at a price equal to the
principal amount thereof plus accrued and unpaid interest
73
<PAGE>
thereon. For additional information, see Note 12 of the Notes to Consolidated
Financial Statements.
Pursuant to the Private Placement, the Company issued $80.0 million of
Senior Notes which are due in September 2004 and which bear interest at the rate
of 11.0%, payable semi-annually. The Company has established an interest reserve
account with an independent trustee which contains $8.8 million, which is
sufficient to pay the aggregate interest payments scheduled to be made with
respect to the first two interest payment dates on the Senior Notes. Amortized
debt issuance costs of approximately $4.3 million at December 31, 1997 was
capitalized and is included in other assets as of such date. For additional
information, see "Description of the Senior Notes" and Note 13 of the Notes to
Consolidated Financial Statements.
The following table sets forth certain information regarding the short-term
borrowings of the Company at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Six Months
Ended December 31, At or For the Years Ended June 30,
-------------------------- --------------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLB of Topeka advances:
Average balance outstanding $391,711 $ 987,618 $ 848,733 $ 869,568 $ 952,373
Maximum amount outstanding at any
month-end during the period 839,347 1,311,735 1,311,735 1,588,618 1,227,829
Balance outstanding at end of period 80,136 371,612 531,161 439,011 703,202
Average interest rate during the period 7.09% 6.50% 6.77% 6.71% 5.85%
Average interest rate at end of period 6.06% 5.59% 5.73% 5.70% 6.24%
Securities sold under agreements to purchase:
Average balance outstanding $55,235 $ 567,000 $ 418,784 $ 686,558 $ 634,282
Maximum amount outstanding at any
month-end during the period 239,914 942,325 942,315 1,079,194 865,713
Balance outstanding at end of period -- 942,325 310,801 1,079,194 779,626
Average interest rate during the period(1) 7.45% 6.45% 6.73% 6.76% 5.76%
Average interest rate at end of period --% 5.38% 5.55% 5.36% 6.11%
</TABLE>
- ----------
(1) Average interest rate during the period reflects the effect of the Company's
interest rate swaps.
Subsidiaries
The Banks are permitted to invest up to 2% of their assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Banks are
permitted to make an unlimited investment in one or more operating
74
<PAGE>
subsidiaries, which are permitted to engage only in activities that the Banks
may undertake directly. As of December 31, 1997, Local Federal maintained six
direct or indirect subsidiaries, consisting of Local America Inc., Local
America, Local Acceptance, Star, Local Mortgage Corporation, Star Properties,
Inc., Service Corporation of Tulsa, Inc. and Oklahoma Financial Services
Corporation. At December 31, 1997, Local Federal's investment in its
subsidiaries amounted to $149.7 million in the aggregate.
Local America, Inc. is the parent holding company for Local America and
does not conduct any independent operations. Local Acceptance and Star
previously operated as indirect automobile finance subsidiaries. As discussed
under "Risk Factors--Lending and Investment Activities--Sub-prime Automobile
Lending," the loan origination infrastructure of Local Acceptance and Star has
been dismantled and the automobile receivables have been sold.
Local Mortgage Corporation was organized in 1995 as a Connecticut
corporation for the primary purpose of originating commercial real estate loans.
Local Mortgage Corporation is licensed to do business in Connecticut, Illinois
and Texas. Although Local Mortgage Corporation is currently originating loans
out of its Connecticut office, both its Illinois and Texas offices are currently
closed and the Connecticut office is expected to close in February 1998.
Star Properties, Inc. was organized in 1981 as an Oklahoma corporation for
the purpose of acquiring, maintaining and managing real estate to be used for
offices and related facilities of the Banks, as well as other fixed assets. Star
Properties, Inc. leases to the Banks, pursuant to certain written agreements,
office furniture and fixtures at the Banks' branch offices. Star Properties,
Inc. has not made any purchases of real estate or office furniture and fixtures
since 1985.
Service Corporation of Tulsa, Inc. was organized in 1970 as an Oklahoma
corporation for the purpose of engaging in real estate development activities.
This service corporation is currently inactive.
Oklahoma Financial Services Corporation was organized in 1981 as an
Oklahoma corporation in order to engage in real estate development. Oklahoma
Financial Services Corporation has not engaged in any real estate development
since 1984. Annuities, mutual funds and various other insurance products are
marketed to the Bank's customers.
75
<PAGE>
Offices and Other Material Properties
The following table provides information on the Company's consolidated
branch network as of December 31, 1997:
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Location Status Lease Terms (Square Feet) December 31, 1997(1) December 31, 1997
-------- ------ ----------- ------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Corporate Headquarters:
3601 N.W. 63rd Owned -- 70,000 $32,314 $3,565
Oklahoma City, OK 73116
Local Federal Branch Offices:
Downtown Office Leased $1,212.50/mo. 1,164 17,668 9
100 West Park Avenue 5 Years
Oklahoma City, OK 73102 Expires 1/31/99
May Avenue Office Owned -- 14,090 79,458 334
5701 North May Avenue
Oklahoma City, OK 73112
Norman Office Owned -- 5,000 48,328 182
2201 West Main Street
Norman, OK 73069-6499
Midwest City Office Owned -- 94,086 354
414 North Air Depot
Midwest City, OK 73110
Springbrook Office Owned -- 5,200 45,998 264
6233 N.W. Expressway
Oklahoma City, OK 73132
Bethany Office Owned -- 2,650 50,047 75
7723 N.W. 23rd Street
Bethany, OK 73008
Penn South Office Owned -- 2,650 53,070 50
8700 South Pennsylvania
Oklahoma City, OK 73159
Quail Creek Office Owned -- 3,250 34,915 179
12241 North May Avenue
Oklahoma City, OK 73120
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Location Status Lease Terms (Square Feet) December 31, 1997(1) December 31, 1997
-------- ------ ----------- ------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Portland Office Owned -- 1,800 $43,424 $236
1924 North Portland
Oklahoma City, OK 73107
Purcell Office Leased $600/mo. 722 18,652 --
422 West Main 2 Years
Purcell, OK 73080 Expires 7/31/99
Chandler Office Owned --
1804 East First Street
Chandler, OK 74834
Edmond Office Leased $1,530/mo. 2,160 34,847 5
301 South Bryant 10 Years
Edmond, OK 73034 Expires 1/31/08
Shawnee Office Owned -- 2,650 37,025 81
2512 North Harrison
Shawnee, OK 74801
Yukon Office Leased $1,500/mo. 1,500 21,045 7
1203 Cornwell 5 Year
Yukon, OK 73099 Expires 6/30/99
Lindsay Office Owned -- 1,200 21,193 17
420 South Main
Lindsay, OK 73052
Elk City Branch Owned -- 10,300 63,091 202
200 Broadway
Elk City, OK 73644
Moore Office Owned -- 1,500 20,167 62
513 Northeast 12th Street
Moore, OK 73160
Crown Heights Office Owned -- 1,800 21,157 155
4716 North Western
Oklahoma City, OK 73118
Pauls Valley Office Owned -- 2,280 24,082 102
700 West Grant
Pauls Valley, OK 73075
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Location Status Lease Terms (Square Feet) December 31, 1997(1) December 31, 1997
-------- ------ ----------- ------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Weatherford Office Owned -- 3,000 $19,097 $ 87
109 East Franklin
Weatherford, OK 73096
Clinton Office Owned -- 2,000 39,473 37
1002 West Frisco
Clinton, OK 73601
Duncan Downtown Office Owned -- 2,500 57,134 124
1006 West Main Street
Duncan, OK 73533
Duncan North Office Owned -- 3,000 31,576 91
2210 North Highway 81
Duncan, OK 73533
Sulphur Office Owned -- 3,000 19,791 79
2009 West Broadway
Sulphur, OK 73086
Chickasha Office Owned -- 3,143 47,609 100
628 Grand Avenue
Chickasha, OK 73018
Lawton Downtown Office Leased $5,156/mo. Note 6,000 91,480 --
1 S.W. 11th Street 10 Years
Lawton, OK 73501 Expires 3/31/03
Lawton Willow Creek Owned -- 1,500 18,346 173
7210 N.W. Cache Road
Lawton, OK 73505
Ardmore Office Owned -- 7,066 44,004 131
313 W. Broadway
Ardmore, OK 73401
Local America Branch Offices:
Hudson Office Leased $6,676.17/mo. 6,374 5,774 2
5801 East 41st Street Note(2) 29,110 --
Tulsa, OK 74135 5 Years
Expires 6/30/99
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Location Status Lease Terms (Square Feet) December 31, 1997(1) December 31, 1997
-------- ------ ----------- ------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Downtown Office Leased $2,279.75/mo. 3,316 $16,520 $ 6
111 West 5th Street 3 Years
Tulsa, OK 74103 Expires 11/30/98
Harvard Office Leased $2,270.83/mo. 2,500 50,701 1
3332 East 51st Street Note(2)
Tulsa, OK 74135 5 Years
Expires 5/31/98
Yale Office Leased $1,300/mo. 2,400 75,010 --
2118 South Yale 5 Years
Tulsa, OK 74114 Expires 2/28/00
Broken Arrow Office Leased $2,020/mo. 2,424 30,173 7
3359 South Elm Place 3 Years
Broken Arrow, OK 74012 Expires 5/31/99
Sand Springs Office Leased $1,912.50/mo. 3,214 43,953 1
800 East Charles Page Blvd. 10 Years
Sand Springs, OK 74063 Expires 3/31/03
Springs Village Leased $1,368.50/mo 1,642 14,861 3
3973 South Highway 97 3 Years
Sand Springs, OK 74063 Expires 5/31/99
Memorial Office Leased $3,060/mo. 3,060 30,522 2
8202 East 71st Street 5 Years
Tulsa, OK 74133 Expires 5/31/02
Sapulpa Office Owned -- 1,300 26,413 419
911 East Taft
Sapulpa, OK 74066
Lewis Office Leased Rent: See Note(3) 4,685 23,117 3
2250 East 73rd Street 5 Years
Tulsa, OK 74136 Expires 11/30/01
Claremore Office Owned -- 15,100 57,959 910
1050 Lynn Riggs Blvd.
Claremore, OK 74017
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Location Status Lease Terms (Square Feet) December 31, 1997(1) December 31, 1997
-------- ------ ----------- ------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Owasso Office Owned -- 1,100 $18,387 $ 87
201 East 2nd Street
Owasso, OK 74055
Muskogee Office Leased $2,200/mo. 3,400 32,415 2
2401 East Chandler 5 Years
Muskogee, OK 74403 Expires 7/31/98
</TABLE>
- ----------
(1) Deposit accounts totalling $1.9 million cannot be identified with a specific
branch office and are, consequently, not included in this table.
(2) Subject to rent increases each year on July 1.
(3) Monthly rent derived as follows: $3,768 (1st year); $4,003.50 (2nd
year); $4,239 (3rd year); $4,474.50 (4th year); and $4,710 (5th year).
Personnel
As of December 31, 1997, the Company (on a consolidated basis) has 430
full-time employees and 95 part-time employees. The employees are not
represented by a collective bargaining agreement and the Company believes that
it has good relations with its employees.
Legal Proceedings
In conjunction with Local Federal's acquisition of Local America during
1989, Local Federal and Local America entered into an Assistance Agreement with
the Federal Savings and Loan Insurance Corporation ("FSLIC"), the fund which
previously insured all savings institutions' deposits. Under the terms of
theAssistance Agreement, the FSLIC Resolution Fund (the "Fund"), which is
currently managed by the FDIC, is entitled to receive certain portions of the
tax benefits attributable to acquired net operating loss carryforwards and
deductions resulting from certain items for which the Fund has agreed to provide
assistance, provided that such tax benefits are realized by Local Federal on a
consolidated basis.
In connection with the Assistance Agreement, a dispute exists between Local
America and the FDIC regarding certain tax benefits. Management, after
consultation with legal counsel and based on available facts and proceedings to
date, has determined that Local America will
80
<PAGE>
have some liability to the FDIC with respect to such tax benefits. At December
31, 1997, the Company estimated this liability to be approximately $13.0
million, which has been reserved for and is included in other liabilities in the
Consolidated Statements of Financial Condition included elsewhere herein. The
Company believes that as of December 31, 1997, the FDIC's estimate of this
liability was approximately $23.0 million. Pursuant to the terms of the
Redemption Agreement, the Selling Stockholders have agreed to indemnify the
Company with respect to the Assistance Agreement to the extent the Company is
found to be liable for an amount in excess of the amount of the reserve in
respect of such dispute which is reflected on the Company's audited balance
sheet as of December 31, 1997. Upon consummation of the Redemption, the Company
deposited a portion of the amount to be paid to the Selling Stockholders (i.e.,
$10.0 million) into the FDIC Dispute Escrow Account in order to fund any
potential payments which may be required to be made by the Selling Stockholders
to the Company in connection with such indemnification. See "The Private
Placement and the Redemption Transactions--The Redemption Agreement."
For information with respect to a lawsuit filed by the Company against the
Selling Stockholders, see "The Private Placement and the Redemption
Transactions--The Redemption Agreement."
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by management
to be immaterial to the financial condition and results of operation of the
Company.
MANAGEMENT
Directors
Pursuant to the terms of the Purchase Agreement, upon consummation of the
Private Placement, each of the persons then serving as directors of the Company
resigned and Edward A. Townsend, Jan A. Norton and Joseph A. Leone were
appointed as directors of the Company. Following such resignations and
appointments, the new members of the Board of Directors caused Robert A.
Kotecki, George Nigh, and Kenneth W. Townsend to be appointed to the Company's
Board of Directors. Following the reconstitution of the Board of Directors, the
Company elected the persons named below as directors of the Banks.
The following table sets forth information with respect to the directors of
the Company and the Banks. Except as described above, there were and are no
arrangements or understandings between the Company and the Banks and any person
pursuant to which such person has been elected as a director, and no director is
related to any other director or executive officer of the Company or the Banks
by blood, marriage or adoption. At December 31, 1997, all directors and officers
of the Company as a group owned 43,000 shares or 0.2% of the issued and
outstanding Common Stock. For information with respect to the number of shares
held by individual directors and officers, see "Selling Holders."
81
<PAGE>
Director
Name Age(1) Since(2) Term Expires
---- ------ -------- ------------
The Company:
Robert A. Kotecki 33 1997 2000
Joseph A. Leone 64 1973 1999
George Nigh 70 1997 1998
Jan A. Norton 50 1997 1999
Edward A. Townsend 55 1997 2000
Kenneth W. Townsend 54 1997 1998
J. David Rosenberg 48 1998 2000
Local Federal:
Gene C. Howard 71 1996 1999
Robert A. Kotecki 33 1997 2000
Joseph A. Leone 64 1973 1999
George Nigh 70 1997 1998
Jan A. Norton 50 1997 1999
Edward A. Townsend 55 1997 2000
Kenneth W. Townsend 54 1997 1998
Robert L. Vanden 50 1993 1998
Andrew M. Coats 62 1997 2000
Local America:
Gene C. Howard 71 1996 1999
Robert A. Kotecki 33 1997 2000
Joseph A. Leone 64 1973 1999
George Nigh 70 1997 1998
Jan A. Norton 50 1997 1999
Edward A. Townsend 55 1997 2000
Kenneth W. Townsend 54 1997 1998
Robert L. Vanden 50 1993 1998
Andrew M. Coats 62 1997 2000
- ----------
(1) As of December 31, 1997.
(2) Includes service as a director of the Company, Local Federal
and/or Local America.
82
<PAGE>
Biographical Information
Information concerning the principal position and principal occupation of
each director of the Company and the Banks during the past five years is set
forth below.
Andrew M. Coats. Mr. Coats was elected as a director of the Banks in
October 1997. Mr. Coats served as the District Attorney of Oklahoma County from
1976 to 1980. Mr. Coats won the Democratic nomination for U.S. Senate from
Oklahoma in 1980. In 1983, Mr. Coats was elected Mayor of Oklahoma City where he
served until April 1987. Mr. Coats served as President of the law firm of Crowe
& Dunlevy in 1987 and 1988 and served as President of the Oklahoma Bar
Association in 1992. Mr. Coats is currently serving as the President of the
American College of Trial Lawyers. On July 1, 1996, Mr. Coats became the Dean of
the University of Oklahoma College of Law.
Gene C. Howard. Mr. Howard was elected as a director of the Banks
immediately following consummation of the Private Placement. Mr. Howard was
initially elected to the Board of Directors of Local Federal in 1996 and has
served as an attorney and senior partner with the law firm of Howard, Weddows,
Bulogle & Vaughn, P.C., Tulsa, Oklahoma, since 1952.
Robert A. Kotecki. Mr. Kotecki was elected as a director of the Company and
the Banks immediately following consummation of the Private Placement. Mr.
Kotecki has served as Senior Vice President of Friedman, Billings, Ramsey & Co.,
Inc., Arlington, Virginia, which served as the Placement Agent in connection
with the Private Placement, since March 1993. From November 1988 through March
1993, Mr. Kotecki served as an Associate with Trident Financial Corp., an
investment banking firm located in Raleigh, North Carolina.
Joseph A. Leone. Mr. Leone was elected as a director of the Company and the
Banks immediately upon consummation of the Private Placement. Mr. Leone was
initially elected to the Board of Directors of Local Federal in 1973. Since
1987, Mr. Leone has served as managing partner with MBI, Inc., a limited
partnership which owns several commercial real estate properties located within
Oklahoma. From 1978 through 1987, Mr. Leone served as Executive Vice Chancellor
and Chancellor of the Oklahoma State System of Higher Education.
George Nigh. Governor Nigh was elected as a director of the Company and the
Banks immediately following the consummation of the Private Placement. Governor
Nigh is currently retired. From July 1992 through June 1997, Governor Nigh
served as President of the University of Central Oklahoma, where he had served
as Distinguished Statesman in Residence for the previous five years. From
January 1979 through 1987, Governor Nigh served as Governor of the State of
Oklahoma. Prior to 1979, Governor Nigh served 16 years at Lt. Governor and eight
years in the House of Representatives of the State of Oklahoma. Governor Nigh
currently serves on the Board of Directors for J.C. Penney Company and is a
consultant for Express Services Personnel.
83
<PAGE>
Jan A. Norton. Mr. Norton was elected as a director of the Company and the
Banks immediately upon consummation of the Private Placement. In addition, Mr.
Norton became President of the Company and the Banks following consummation of
the Private Placement. Mr. Norton has served as President of Green Country Bank
since May 1994. From May 1992 through April 1994, Mr. Norton served as a
principal with the Thistle Group, a corporate financial consulting firm located
in Dallas, Texas.
J. David Rosenberg. Mr. Rosenberg has been a partner of Keating Muthing &
Klekamp, a law firm engaged in private practice, since prior to 1992. Mr.
Rosenberg is a director of Roses Holding, Inc. formerly Roses Stores, Inc.,
Henderson, North Carolina, which was formerly engaged in the operation of
general merchandise variety stores and which currently conducts no operations.
Mr. Rosenberg was elected as a director of the Company in February 1998.
Edward A. Townsend. Mr. Townsend was elected as a director of the Company
and the Banks immediately upon consummation of the Private Placement. In
addition, Mr. Townsend became Chairman and Chief Executive Officer of the
Company and the Banks following consummation of the Private Placement. Since
April 1994, Mr. Townsend has served as Chairman and Chief Executive Officer of
Green Country Bank and President of Green Country. From January 1993 through
March 1994, Mr. Townsend served as Senior Vice President of Stifel, Nicolaus &
Company, an investment banking firm located in St. Louis, Missouri. From October
1988 through September 1992, Mr. Townsend served as Chairman and President of
Local Federal. From 1967 to 1987, Mr. Townsend was employed in various positions
at InterFirst Corporation.
Kenneth W. Townsend. Mr. Townsend was elected as a director of the Company
and the Banks immediately following consummation of the Private Placement. Mr.
Townsend has served as Executive Director of the National Cowboy Hall of Fame,
Oklahoma City, Oklahoma, since January 1997. From August 1991 through June 1997,
Mr. Townsend served as President of Boatsmen's First National Bank of Oklahoma,
Oklahoma City, Oklahoma.
Robert L. Vanden. Mr. Vanden was elected as a director of the Banks
immediately following consummation of the Private Placement. In addition, Mr.
Vanden began serving as Executive Vice President of the Banks upon consummation
of the Private Placement. From January 1997 until September 1997, Mr. Vanden
served as President and Chief Executive Officer of Local Federal. Since February
1990 through December 1996, Mr. Vanden served as Executive Vice President of
Local Federal in charge of wholesale commercial lending. Prior to joining Local
Federal in February 1990, Mr. Vanden served as Executive Vice President of the
Richard Gill Company and Gill Savings.
Executive Officers Who Are Not Directors
Set forth below is information concerning the executive officers of the
Company and the Banks who do not serve on the Board of Directors of the Company
or the Banks. All executive officers were elected by the Board of Directors of
the Company and/or the Banks following
84
<PAGE>
consummation of the Private Placement and serve until their successors are
elected and qualified. No executive officer is related to any director or other
executive officer of the Company or the Banks by blood, marriage or adoption,
and there are no arrangements or understandings between a director of the
Company or the Banks and any other person pursuant to which such person was
elected an executive officer.
Richard L. Park. Mr. Park, who is 66 years old, began serving as Executive
Vice President and Chief Financial Officer of the Company and the Banks in
charge of finance and operations following consummation of the Private
Placement. Mr. Park has served as Chief Financial Officer of Green Country Bank
since October 1996. From January 1991 through May 1996, Mr. Park was Chief
Financial Officer of Western Farm Credit Bank in Sacramento, California, the
Eleventh District Bank in the Federal Farm Credit System. Mr. Park is a
Certified Public Accountant.
Christopher C. Turner. Mr. Turner, who is 39 years old, has served as
Executive Vice President of the Banks in charge of residential and consumer
lending and branch administration since October 1996. Prior to October 1996, Mr.
Turner held various positions in the Internal Audit Department of the Company
which he joined in November 1980. Prior to November 1980, Mr. Turner served as
an internal auditor with Continental Federal Savings and Loan.
Jana Boren Hand. Ms. Hand, who is 35 years old, has served as Senior Vice
President in charge of finance of the Banks since September 1997 and Senior Vice
President and Chief Financial Officer of the Banks from January 1997 to
September 1997. Prior to January 1997, Ms. Hand served as Vice President and
Controller of the Banks since 1994 and Audit Director since joining the Company
in February 1991. From 1987 to 1990, Ms. Hand held the position of Audit
Supervisor at NCNB Corp., a predecessor to NationsBank Corporation.
Randall K. Day. Mr. Day, who is 45 years old, has served as Executive Vice
President and Treasurer of the Banks since July 1989. Since joining the Company
as a credit analyst in April 1981, Mr. Day has also served as Director of Budget
and Economics and Director of Investments. Prior to April 1981, Mr. Day held
positions with Wichita Mortgage Company and Oklahoma Mortgage Company as a
branch manager.
Alan L. Pollock. Mr. Pollock, who is 49 years old, has served as Senior
Vice President, Secretary and General Counsel of the Banks since February 1980.
Mr. Pollock also served as President and Chief Executive Officer of Local
America from June 1987 until September 1997. Prior to joining the Company in
February 1980, Mr. Pollock was engaged in the practice of law in Oklahoma City
as a sole practitioner since 1975. Prior to 1975, Mr. Pollock served as an
attorney with the law firm of Merson & Campbell.
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<PAGE>
Board of Directors Meetings and Committees of the Company and the Banks
The Board of Directors as newly constituted since consummation of the
Private Placement and the Redemption will hold regular meetings of the Board of
Directors on a quarterly basis and special meetings may be called at any time as
necessary. During the year ended June 30, 1997, the Board of Directors held no
meetings. The Company does not have a standing nominating committee. The full
Board of Directors performs this function.
The Board of Directors as newly constituted since consummation of the
Private Placement and the Redemption will hold regular meetings of the Board of
Directors of the Banks on a monthly basis (except in January) and special
meetings may be called at any time as necessary. During the year ended June 30,
1997, the Boards of Directors of Local Federal and Local America each met six
times.
The Audit Committee of the Board of Directors of the Company is responsible
for examining and reviewing the affairs and reports of the Company, including
its system of internal control, as well as the reports of the independent
auditors. The Audit Committee also monitors the Company's adherence in
accounting and financial reporting to GAAP. The Audit Committee met five times
during fiscal 1997 and currently consists of Messrs. Nigh, Leone and Kenneth
Townsend.
The Retirement Committee of the Board of Directors of Local Federal reviews
executive compensation, investigates new and different forms of compensation and
makes recommendations with respect thereto to the Board of Director of Local
Federal. The Retirement Committee met one time during fiscal 1997 and currently
consists of Messrs. Leone, Coats and Howard.
Board of Directors Fees
As of December 1997, each member of the board of directors of the Company
receives $10,000 per year which is paid quarterly. As of December 1997, each
member of the Boards of Directors of the Banks receives $8,000 per year which is
paid quarterly and $500 per meeting (with one paid absence). In addition, as of
December 1997, members of the Audit Committee and Retirement Committee receive
$300 per meeting. Messrs. Edward Townsend, Norton do not receive compensation
for service on the Boards of Directors of the Company and the Banks.
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Executive Compensation
Summary Compensation Table. The following table includes individual
compensation information with respect to the Chairman of the Board and Chief
Executive Officer of the Company and the four other most highly compensated
officers of the Company and its subsidiaries whose total compensation exceeded
$100,000 for services rendered in all capacities during the fiscal year ended
June 30, 1997.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Long-Term All Other
Name and Principal Position Salary(1) Bonus Compensation Awards Compensation(2)
--------------------------- --------- ----- ------------------- ---------------
<S> <C> <C> <C> <C>
Bruce Sherman,
President and Treasurer
of the Company; Chairman
of Local Federal(3) $ -- $104,350 $ -- $ --
E. Daniel Powers,
President of Local Federal(4) 175,008 140,000 -- 23,944
Robert L. Vanden
Executive Vice President of
the Banks 187,506 95,000 -- 3,467
Robert J. Irvin(5)
Vice President and -- 208,700 -- --
Secretary of the Company;
Chairman of Local Federal
John A. Price,
President of Local America(6) 119,028 26,000 -- 75,000
</TABLE>
- -------------
(1) Does not include amounts attributable to miscellaneous benefits
received by the named officers. The costs to the Company of providing
such benefits to the named officers during the year ended June 30,
1997 did not exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported.
(2) Consists of vacation pay, excess life insurance and, in the case of
Messrs. Powers and Price, severance pay.
(3) Mr. Sherman became Chairman of Local Federal following Mr. Irvin's
resignation. See Note 5 below. In September 1997 and in connection
with the Private Placement and the Redemption, Mr. Edward Townsend
became Chairman and Chief Executive Officer of the Company and the
Banks and Mr. Sherman resigned.
(4) Mr. Powers resigned from Local Federal in December 1996.
(5) Mr. Irvin resigned from the Company in December 1996.
(6) Mr. Price resigned from Local America in June 1997.
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<PAGE>
Benefits
Employment Agreements. The Company and the Banks (the "Employers")
have entered into employment agreements with each of Messrs. Townsend and Norton
(the "Executives"). Under such employment agreements, the Employers have agreed
to employ Messrs. Townsend and Norton for a term of three years, which term
shall be extended each year beginning at the end of the first anniversary of the
effective date for a successive additional one-year period upon approval of the
Employers' Board of Directors, unless either party elects, not less than 60 days
prior to the annual anniversary date, not to extend the employment term. In
addition, the annual base salaries for Messrs. Townsend and Norton will be
$320,000 and $240,000, respectively, which is to be paid in monthly
installments. The employment agreements further provide each of the Executives
with the same employee benefits that are provided by Local Federal to executive
employees generally, provide for vacation and participation in Local Federal
benefit plans, membership in a golf and country club in Oklahoma City, an
automobile of a type and kind comparable to that which Local Federal provides to
its other executive officers, and a one time moving/housing allowance of
$100,000 and $50,000 to Messrs. Townsend and Norton, respectively.
Each of the foregoing employment agreements are terminable with or
without cause by the Employers. The Executives will have no right to
compensation or other benefits pursuant to the employment agreements for any
period after voluntary termination or termination by the Employers for cause.
The employment agreements provide for certain benefits in the event of an
Executives' disability. In the event that either employment agreement is
terminated by the Employers other than for cause, the Executive will be entitled
to receive the benefits he was otherwise entitled to receive under the
employment agreement as if such termination had not occurred.
Mr. Vanden has an employment agreement to serve as President and Chief
Executive Officer of Local Federal, providing for a base salary for the period
July 1, 1997 through June 30, 1998, in the amount of $225,000. He is presently
serving as Executive Vice President of the Banks. Pursuant to its terms, on
August 15, 1997, Mr. Vanden received a bonus of $150,000, and if he remains
employed by Local Federal, pursuant to the agreement and without interruption,
from July 1, 1997 through June 30, 1998, then on August 15, 1998, he is entitled
to a bonus in an amount not less than $175,000. The agreement further provides
that it shall not be terminated by reason of any of the following: (a) the
merger or consolidation of Local Federal or the Company involving more than a
fifty percent (50%) change in ownership; (b) the transfer of all or
substantially all of the assets of Local Federal or the Company; (c) voluntary
or involuntary dissolution of Local Federal or the Company; or (d) change of
control of Local Federal or the
88
<PAGE>
Company, defined to be a change in ownership of more than 50% of the voting
stock of Local Federal or the Company. (The events described in subparagraphs
(a) through (c) above shall hereafter be referred to in this section as the
"Change of Ownership"). The agreement further provides that in the event of a
Change of Ownership, that the new owner shall be bound by the provisions of the
employment agreement. Mr. Vanden, however, is accorded the right to terminate
his employment with Local Federal in the event of a Change of Ownership not
later than thirty (30) days following the completion of such event. If he elects
to so terminate his employment, he shall be paid a severance payment equal to
one-half (1/2) of his then current annualized base salary. If Mr. Vanden is
terminated during the term of his employment agreement, i.e. on or before June
30, 1998, by Local Federal, without cause, he shall be entitled to receive the
base salary and bonus that would have otherwise been payable to him if he had
continued to serve as an employee of Local Federal throughout the term of the
agreement.
Ms. Hand has an employment agreement to serve as the Senior Vice
President and Chief Financial Officer of Local Federal, providing for a base
salary from July 1, 1997 through July 30, 1998, in the amount of $95,000. Ms.
Hand is presently serving as Senior Vice President-Finance of the Banks.
Pursuant to its terms, Ms. Hand received a bonus of $40,000, on August 15, 1997.
If Ms. Hand remains employed pursuant to the agreement and without interruption
from July 1, 1997 through June 30, 1998, then on August 15, 1998, she is
entitled to a bonus of at least $40,000. Ms. Hand's agreement also provides that
a Change of Ownership, as defined above, shall not terminate her agreement but
she shall have the right to resign within thirty (30) days following the
completion of such an event, in which case, she will receive a severance payment
equal to one-half (1/2) of her then current annualized base salary. If Ms. Hand
is terminated during the term of her employment agreement, i.e. on or before
June 30, 1998, by Local Federal, without cause, she shall be entitled to receive
the base salary and bonus that would have otherwise been payable to her if she
had continued to serve as an employee of Local Federal throughout the term of
the agreement.
Mr. Day has an employment agreement to serve as the Executive Vice
President and Treasurer of Local Federal for a base salary payable from July 1,
1997 through July 30, 1998 in the amount of $95,000. Pursuant to its terms, Mr.
Day received a bonus of $40,000 on August 15, 1997, If Mr. Day remains employed
pursuant to the agreement and without interruption from July 1, 1997 through
June 30, 1998, he is entitled to a bonus of at least $45,000. Mr Day's agreement
also provides that it shall not be terminated by a Change of Ownership, as
defined above, and he shall have the right to terminate his employment upon the
occurrence of a Change of Ownership event within thirty (30) days and, in such
event, receive a severance payment equal to one-half (1/2) of his annualized
base salary. If Mr. Day is terminated during the term of his employment
agreement, i.e. on or before June 30, 1998, by Local Federal without cause, he
shall be entitled to receive the base salary and bonus that would have otherwise
been payable to him if he had continued to serve as an employee of Local Federal
throughout the term of the Agreement.
Stock Option Plan. Effective upon consummation of the Private
Placement, the Board of Directors of the Company adopted the Stock Option Plan.
An aggregate of 1,420,370 shares
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<PAGE>
of Common Stock were authorized under the Stock Option Plan. The Stock Option
Plan provides for the grant of incentive stock options intended to comply with
the requirements of Section 422 of the Code ("incentive stock options"),
non-incentive or compensatory stock options and stock appreciation rights
(collectively "Awards"). Unless sooner terminated, the Stock Option Plan will be
in effect for a period of ten years from the earlier of adoption by the Board of
Directors or approval by the Company's stockholders.
The Stock Option Plan will be administered and interpreted by a
committee of the Board or Directors ("Committee"), which will interpret the plan
and determine the number of shares subject to each option, whether such options
may be exercised by delivering other shares of Common Stock and when such
options become exercisable.
Under implementing stock option agreements effective at the
consummation of the Private Placement, Messrs. Edward Townsend and Jan Norton
received incentive options to purchase an aggregate of 811,640 and 304,365
shares of Common Stock, respectively. Such options, which have an exercise price
of $10.00 per share, will expire upon the consummation ten years from the date
of grant and will be exercisable in three equal annual installments, beginning
one-year from the date of grant. In addition, in December 1997, the Company
awarded to certain directors and officers of the Company and the Banks options
to purchase an additional 218,000 shares of Common Stock at an exercise price of
$11.75 per share, which will expire upon the consummation of ten years from the
date of grant and which will be exercisable in five equal annual installments,
beginning one-year from the date of grant. All executive officers of the Company
and the Banks as a group (which did not include Messrs. Edward Townsend and
Norton) received options to purchase 85,000 shares, all non-employee directors
of the Company and the Banks as a group (other than Mr. Kotecki) received
options to purchase 60,000 shares and all employees (not including executive
officers) as a group received options to purchase 73,000 shares.
Retirement Plan
Retirement Plan. Local Federal has a defined benefit pension plan
("Retirement Plan") for all salaried and hourly employees who have completed one
year of service with Local Federal and its subsidiaries. In general, the
Retirement Plan provides a benefit at an employee's "Normal Retirement Age" (age
65) according to the following formula: (a) 1% of Average Monthly Compensation
times Years of Credited Service, plus (b) .65% of Average Monthly Compensation
in excess of Covered Compensation, times years of Credited Service up to 35
years. "Average Monthly Compensation" equals the highest average of an
employee's basic rate of compensation for any five consecutive plan
anniversaries (July 1st) preceding retirement. "Covered Compensation" is the
average annual compensation with respect to which Social Security retirement
benefits would be provided at Social Security retirement age.
During the year ended June 30, 1997, Local Federal did not make a
contribution to the Retirement Plan, as the plan was adequately funded and
subject to the IRS "Full Funding
90
<PAGE>
Limitation." When subject to the Full Funding Limitation, no contribution is
either required or deductible.
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of Credited Service.
<TABLE>
<CAPTION>
Years of Credited Service
----------------------------------------------------------------------------------------
Final Average
Compensation 15 20 25 30 35
- ------------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
$ 80,000 $16,943 $22,590 $28,238 $33,886 $39,533
90,000 19,418 25,890 32,363 38,836 45,308
100,000 21,893 29,190 36,488 43,786 51,083
110,000 24,368 32,490 40,613 48,736 56,858
120,000 26,843 35,790 44,738 53,686 62,633
140,000 31,793 42,390 52,988 63,586 74,183
160,000 36,248 48,495 60,743 72,991 85,238
180,000 40,208 54,105 68,003 81,901 95,798
200,000 44,168 59,715 75,263 90,811 106,358
220,000 48,128 65,325 82,523 99,721 116,918
</TABLE>
<PAGE>
The figures in the above table assume that the Retirement Plan
continues in its present form and that the participants elect a 10-year certain
and life annuity form of benefit.
The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the IRS) for calculating benefits and
contributions under qualified defined benefit plans currently is $160,000 and
the maximum annual benefit permitted under such plans currently is $125,000.
The pension benefits listed in the table are not subject to any
deduction for Social Security or other offset amounts.
At June 30, 1997, Messrs. Vanden and Goss had 7 and 6 years of
Credited Service under the Retirement Plan.
Transactions With Certain Related Persons
The Banks' provide loans to its directors and officers in the ordinary
course of their business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons. Such loans do not involve more than the normal
risk of collectibility or present other unfavorable features. As of December 31,
1997, mortgage and consumer loans to directors and officers in excess of $60,000
aggregated $210,426 or 0.26% of the Company's consolidated stockholders' equity
as of such date.
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<PAGE>
The Company had previously entered into the Merger Agreement with
Green Country, pursuant to which, effective February 16, 1998, Green Country was
merged with and into the Company, with the Company as the surviving corporation,
and in connection therewith, Green Country Bank was merged with and into Local
America. Messrs. Edward A. Townsend and Jan A. Norton, the Chairman and Chief
Executive Officer of the Company and the President and Chief Operating Officer
of the Company, respectively, were two of the three stockholders of Green
Country, each of whom received shares of Common Stock of the Company in
connection with the consummation of the transactions contemplated by the Merger
Agreement. See "Prospectus Summary--The Company--Acquisition of Green Country
Banking Corporation."
The Company has entered into the Post Placement Engagement with FBR,
which acted as the Company's Placement Agent in connection with the Private
Placement and the Redemption. Mr. Robert A. Kotecki, a director of the Company
and the Banks, is a Senior Vice President of FBR. See "The Private Placement and
the Redemption Transactions--The Purchase Agreement."
REGULATION
General
The Banks are federally chartered and insured stock savings banks
subject to extensive regulation and supervision by the OTS, as the primary
federal regulator of savings institutions, and the FDIC, as the administrator of
the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on Local Financial or the Banks, is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
Regulation of Savings and Loan Holding Companies
Holding Company Acquisitions. Local Financial is a registered savings
and loan holding company. The HOLA and OTS regulations generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring,
directly or indirectly, the ownership or control of any other savings
association or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
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<PAGE>
Holding Company Activities. Local Financial currently operates as a
multiple savings and loan holding company by virtue of its direct ownership of
Local Federal and its indirect ownership of Local America. Multiple savings and
loan holding company are subject to substantial restrictions, as described
below, although such restrictions have not limited the Company's operations to
date. The Company intends to consider consolidating Local America into Local
Federal at some time in the future. At such time, the Company will operate as a
unitary savings and loan holding company. Generally, there are limited
restrictions on the activities of a unitary savings and loan holding company and
its non-savings association subsidiaries.
Multiple savings and loan holding companies are subject to
restrictions which do not apply to unitary savings and loan holding companies.
Among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, upon prior notice to, and
no objection by the OTS, other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
In addition, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings institution, the Director may
impose such restrictions, as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates; and (ii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution.
The HOLA requires every savings association subsidiary of a savings
and loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See "--Regulation
of Federal Savings Institutions--Capital Distribution Regulation."
Affiliate Restrictions. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings
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<PAGE>
association's holding company and companies that are under common control with
the savings association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase
ofinvestment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Regulation of Federal Savings Institutions
Regulatory System. As federally insured savings banks, lending
activities and other investments of the Banks must comply with various statutory
and regulatory requirements. The Banks are regularly examined by the OTS and
must file periodic reports concerning its activities and financial condition.
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<PAGE>
Although the OTS is the Banks' primary regulator, the FDIC has "backup
enforcement authority" over the Banks. The Banks' eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Banks are members of the FHLB System.
Among other benefits, FHLB membership provides the Banks with a central credit
facility. The Banks are required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings).
Liquid Assets. Under OTS regulations, for each calendar month, a
savings institution is required to maintain an average daily balance of liquid
assets (including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
4.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. The Banks maintain liquid assets in
compliance with this regulation.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings institutions to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based
capital requirement of total capital (core capital plus supplementary capital)
equal to 8% of risk-weighted assets (which includes the credit risk equivalents
of certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS regulations,
all but the most highly-rated institutions must maintain a minimum leverage
ratio of 4% in order to be adequately capitalized. See "--Prompt Corrective
Action.") A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings institution with a greater than
"normal" level of interest rate exposure must deduct an interest rate risk
("IRR") component in calculating its total capital for purposes of determining
whether it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value that
would result from a 200 basis point increase or decrease in market interest
rates (whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest rate
risk component to be deducted from total capital is equal to one-half of
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<PAGE>
the difference between an institution's measured exposure and "normal" IRR
exposure (which is defined as 2%), multiplied by the estimated economic value of
the institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation.
The following tables set forth for the indicated dates the estimated dollar
and percentage change in the Company's net interest income over a four quarter
period and NPV based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
Net Interest Income Net Interest Income
(next four quarters) (next four quarters)
---------------------------- -------------------------------
Estimated Change Estimated Change
Change (in Basis Points) in from Base % Change from Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
------------------ ------- --------- ------- ---------
<S> <C> <C> <C> <C>
+400 ($4,680) (10)% ($3,215) (7)%
+300 (4,131) (8) (1,985) (4)
+200 (3,841) (8) (947) (2)
+100 (3,263) (7) (341) (1)
0 48,979(2) -- 47,508(2) --
-100 1,925 4 129 0
-200 5,573 11 467 1
-300 13,044 27 2,408 5
-400 14,888 30 873 2
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
(next four quarters) NPV
---------------------------- -------------------------------
Estimated Change Estimated Change
Change (in Basis Points) in from Base % Change from Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
------------------ ------- --------- ------- ---------
<S> <C> <C> <C> <C>
+400 ($6,251) (6)% ($56,518) (37)%
+300 (58,323) (52) (38,218) (25)
+200 (44,681) (40) (20,141) (13)
+100 (18,598) (16) (7,101) (5)
0 112,881 -- 153,545 --
-100 14,867 13 2,606 2
-200 4,851 4 (2,235) (1)
-300 (15,293) (14) (8,469) (6)
-400 (59,769) (53) (25,404) (17)
</TABLE>
- -------------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) "The base net interest income is an estimate made by utilizing yields and
rates on assets and liabilities in the existing balance sheet as of the
dates shown adjusted for assumptions based on, among other things, future
loan and deposit changes and estimated loan prepayment speeds. All
interest-rate risk hedges that existed at June 30, 1997 had been eliminated
as of September 8, 1997. Interest rates were held flat through the next
four quarters."
At June 30, 1997, the rate of change on net interest income is affected by
an increase in loan prepayment speeds, which is reinvested in lower yielding
short-term investments during down shocks. Also, lower rate-paying deposit
accounts such as passbooks, money market and NOW accounts do not drop below 0%
in 300 and 400 basis points down shocks. Conversely, the rate of change in net
interest income in up shocks is affected by a decrease in loan prepayment speeds
while all deposit accounts are able to reprice fully in each 100 basis point
increment. Further, there were off-balance sheet hedges in place at June 30,
1997, which acted to stabilize net interest income after a 200 basis point
increase.
Subsequent to September 8, 1997, the Company no longer had any hedges in
place. However, it did continue to hold a reduced portfolio of COFI-indexed
securities. The Company utilizes a COFI-index forecast available on Bloomberg
L.P. This is a lagging index and the Company understands that the COFI-index is
forecast by a historically-based projection model which keeps the index
relatively flat from the 200 to 300 basis point decrease and then drops in the
400 basis point decrease. The other factors mentioned above as affecting June
30, 1997 would also cause the indicated effect at December 31, 1997.
The differences between June 30, 1997 and December 31, 1997 are mainly due
to the sale of COFI-based CMOs and mortgage backed securities, the elimination
of cap, floor and swap contracts, the addition of the senior notes and the
addition of fixed rate FHLB advances. This balance sheet restructuring is
discussed in more detail in "Risk Factors--Risks Relating to the Company's
Lending and Investment Activities--Investments in Mortgage Related Securities"
and "--Interest Rate Swaps, Floors and Caps." In addition, assumptions related
to the calculation of the duration of non-maturing deposit accounts was changed
after June 30, 1997 to correspond with the OTS decay rates resulting in a longer
duration for these deposits as of December 31, 1997.
The model reflects only the effects of assumptions made by management while
running the different interest rate shocks. The only variables between the
different rate shocks are the interest rates and the prepayment speeds.
The prepayment assumptions used in the model are based on historical and
market estimates. Standard present value calculation methodology is used to
discount the estimated future cash flows of assets and liabilities at
appropriate discount rates. The market value for COFI-based CMOs is obtained
through the Bloomberg calculator designated by the OTS.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and NPV could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based. See "Regulation--Regulation of Federal Savings Institutions--Regulatory
Capital Requirements" for a discussion of a proposed OTS regulation which would
subject an institution with a greater than "normal" level of interest rate
exposure to a deduction of an interest rate risk ("IRR") component in
calculating its total capital for risk-based capital purposes.
The preceding discussion about the Company's risk management activities
includes "forward-looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings institution has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings institution is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
institution may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings institutions with
which it has significant business relationships. The Banks are not subject to
any such individual minimum regulatory capital requirement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings institution's failure to maintain capital at or above
the minimum capital requirements may be deemed an unsafe and unsound practice
and may subject the savings institution to enforcement actions and other
proceedings. Any savings institution not in compliance with all of its capital
requirements is required to submit a capital plan that addresses the
institution's need for additional capital and meets certain additional
requirements. While the capital plan is being reviewed by the OTS, the savings
institution must certify, among other things, that it will not, without the
approval of its appropriate OTS Regional Director, grow beyond net interest
credited or make capital distributions. If a savings institution's capital plan
is not approved, the institution will become subject to additional growth and
other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings institution not in compliance
with the capital requirements to pay dividends and compensation, and may require
such a bank to take one or more of certain corrective actions, including,
without limitation: (i) increasing its capital to specified levels, (ii)
reducing the rate of interest that may be paid on savings accounts, (iii)
limiting receipt of deposits to those made to existing accounts, (iv) ceasing
issuance of new accounts of any or all classes or categories except in exchange
for existing accounts, (v) ceasing or limiting the purchase of loans or the
making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
The HOLA permits savings institutions not in compliance with the OTS
capital standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain
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circumstances. If an exemption is granted by the OTS, the savings institution
still may be subject to enforcement actions for other violations of law or
unsafe or unsound practices or conditions.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
institution that falls within certain undercapitalized capital categories
specified in the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1997, each of the Banks met the capital
requirements of a "well capitalized" institution under applicable OTS
regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring
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the institution to reduce its assets, (v) requiring replacement of senior
executive officers and directors, (vi) requiring the institution to alter or
terminate any activity deemed to pose excessive risk to the institution, (vii)
prohibiting capital distributions, (viii) requiring the institution to divest
certain subsidiaries, or requiring the institution's holding company to divest
the institution or certain affiliates of the institution, and (ix) taking any
other supervisory action that the agency believes would better carry out the
purposes of the prompt corrective action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The regulation
also makes mandatory for significantly undercapitalized institutions certain of
the supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth quarter
after the institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to
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undercapitalized institutions; and, if the institution is undercapitalized,
require it to comply with certain restrictions applicable to significantly
undercapitalized institutions.
Enforcement Powers. The OTS and, under certain circumstances, the
FDIC, have substantial enforcement authority with respect to savings
institutions, including authority to bring various enforcement actions against a
savings institution and any of its "institution-affiliated parties" (a term
defined to include, among other persons, directors, officers, employees,
controlling stockholders, agents and stockholders who participate in the conduct
of the affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings institution's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings institution or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings institutions. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
Under the regulation, an institution that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 institution") may, after prior notice to but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 institution may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings institution that meets its regulatory capital
requirements both before and after a proposed distribution but does not meet its
fully phased-in capital requirement (a "Tier 2 institution") is authorized,
after prior notice to the OTS but without OTS approval, to make capital
distributions in an amount up to 75% of its net income over the most recent
four-quarter period, taking into account all prior distributions during the same
period. Any distribution in excess of this amount must be approved in advance by
the OTS. A savings institution that does not meet its current regulatory capital
requirements (a "Tier 3 institution") cannot make any capital distribution
without prior approval from the OTS, unless the capital distribution is
consistent with the terms of a capital plan approved by the OTS.
In connection with the OTS' most recent regulatory examination of
Local Federal, the OTS informed Local Federal that as a result of Local
Federal's recent financial condition and operating results, it was being deemed
an institution in need of more than normal supervision and, consequently, was
being designated as a Tier 3 institution for purposes of the OTS' capital
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distribution regulation. Tier 3 institutions may not make capital distributions
without obtaining the prior approval of the OTS. In addition, the OTS can impose
growth restrictions on savings institutions which are in need of more than
normal supervision. However, as a result of, among other things, the capital
raised in the Private Placement and the initiatives undertaken by new management
in connection with the Private Placement and the Redemption, the Midwest
Regional Office of the OTS forwarded a letter to Local Federal, dated as of
December 8, 1997, indicating that the OTS was removing its designation of Local
Federal as an institution in need of more than normal supervision and upgrading
Local Federal's status from a Tier 3 institution to a Tier 1 institution.
A Tier 1 institution is authorized to make capital distributions
without OTS approval during a calendar year of up to the higher of (i) 100
percent of its net income to the date of such distribution during the calendar
year plus the amount that would reduce by one-half its surplus capital ratio, as
defined, at the beginning of the calendar year; or (ii) 75% of its net income
over the most recent four-quarter period. Applicable regulations require,
however, that all savings institutions give the OTS at least 30 days advance
notice of any capital distributions, and the OTS may prohibit any capital
distribution that it determines would constitute an unsafe or unsound practice.
As of January 1, 1998, under applicable regulations of the OTS, the total
capital available for the payment of dividends by Local Federal to the Company
was $27.5 million, assuming application of the OTS' safe harbor for capital
distributions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" institutions and undercapitalized institutions
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
Qualified Thrift Lender Test. In general, savings institutions are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
institution that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Banks are domestic building and loan associations as defined in the Code.
Recent legislation also expands the QTL test to provide savings
institutions with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional
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10 percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At December 31, 1997, the Banks met the QTL test.
FDIC Assessments. The deposits of the Banks are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three
capital groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and undercapitalized"--which are defined in the same manner as the
regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an addition
assessment of 6.4 basis points and 1.3 basis points is added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, until December 31,
1999 in order to cover Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the
required reserve ratio, and as a result, the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below the
average premium previously paid by savings institutions. Banking legislation was
enacted on September 30, 1996 to eliminate the premium differential between
SAIF-insured institutions and BIF-insured institutions. The legislation provided
that all insured depository institutions with SAIF-assessable deposits as of
March 31, 1995 pay a special one-time assessment to recapitalize the SAIF.
Pursuant to this legislation, the FDIC promulgated a rule that established the
special assessment necessary to recapitalize the SAIF at 65.7 basis points of
SAIF-assessable deposits held by affected institutions as of March 31, 1995.
Based upon their level of SAIF deposits as of March 31, 1995, the Banks paid a
special assessment of $10.3 million. The assessment was accrued in the quarter
ended September 30, 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Banks, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the
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permanent termination of insurance, if the institution has no tangible capital.
If insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the FDIC.
There are no pending proceedings to terminate the deposit insurance of the
Banks.
Conservatorship/Receivership. In addition to the grounds discussed
under "--Prompt Corrective Action," the OTS (and, under certain circumstances,
the FDIC) may appoint a conservator or receiver for a savings institution if any
one or more of a number of circumstances exist, including, without limitation,
the following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the institution's condition, or otherwise seriously prejudice the
interests of the institution's depositors or the federal deposit insurance fund,
(ix) the institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted capital
restoration plan, (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital, or (xi) the institution is
found guilty of certain criminal offenses related to money laundering.
Cross-Guarantee Liability and Effect of a Resolution of the Banks.
Depository institutions insured by the FDIC, such as the Banks, can be held
liable for any loss incurred, or reasonably expected to be incurred, by the FDIC
in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled depository institution in danger of default. "Default" is defined
generally as the appointment of a conservator or receiver and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a "default" is likely to occur in the absence of regulatory assistance.
Accordingly, to the extent that the FDIC incurs or anticipates incurring any
loss in connection with either of the Banks, the other Bank could be required to
compensate the FDIC by reimbursing it for the amount of such loss. Such
cross-guarantee liability can result in the ultimate failure or insolvency of
all insured depository institutions in a holding company structure. Any
obligation or liability owed by a banking subsidiary to its parent company, any
other shareholder or any of the banking subsidiary's other affiliates is
subordinate to the banking subsidiary's cross-guarantee liability.
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Because the Company is a legal entity separate and distinct from the
Banks and its other subsidiaries, the Company's right to participate in the
distribution of assets of any subsidiary upon the subsidiary's liquidation or
reorganization will be subject to the prior claims of the subsidiary's
creditors. In the event of a liquidation or other resolution of either of the
Banks, the claims of depositors and other general or subordinated creditors of
such Bank would be entitled to a priority of payment over the claims of holders
of any obligation of the Bank to its shareholders, including any depository
institution holding company (such as the Company) or any shareholder or creditor
of such holding company.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Banks, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings associations and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. The Banks cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would contain adequate grandfather rights for the
Banks and their parent holding companies.
Community Reinvestment Act and the Fair Lending Laws. Savings
institutions have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low-and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
New Safety and Soundness Guidelines. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other
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things, a person acquires more than 10% of any class of a savings association or
savings and loan holding company's voting stock (or 25% of any class of stock)
and, in either case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding
Company Act that acquire or own savings associations are no longer defined as
savings and loan holding companies under the HOLA and, therefore, are not
generally subject to supervision and regulation by the OTS. OTS approval is no
longer required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the Federal Reserve
Board in examination, enforcement and acquisition matters.
TAXATION
Federal Taxation
General. The Company and its subsidiaries, including the Banks, are
subject to federal income taxation under the Code in the same general manner as
other corporations with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Banks. The Company's and its subsidiaries' consolidated
federal income tax returns have been audited or closed without audit by the
Internal Revenue Service ("IRS") through 1993.
Method of Accounting. For federal income tax purposes, the Company and
its subsidiaries, including the Banks, currently report their income and
expenses on the accrual method of accounting and use a tax year ending June 30
for filing their consolidated federal income tax returns. The Small Business
Protection Act of 1996 (the "1996 Act") eliminated the use of the reserve method
of accounting for bad debt reserves by savings institutions, effective for
taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Banks were permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Banks' taxable income. As a result of the 1996 Act, the Banks must use
the specific chargeoff method in computing their bad debt deduction beginning
with their 1996 Federal tax return. In addition, the 1996 Act requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
June 30, 1996 over those established as of June 30, 1988. The amounts of such
reserves subject to recapture as of December 31, 1997 are approximately $11.5
million and $5.7 million for Local Federal and Local America, respectively.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to July 1, 1988 were subject to recapture into taxable
income should the Banks fail to meet certain thrift asset and definitional
tests. Federal legislation eliminated these thrift related
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recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Banks make certain non-dividend distributions or cease to
maintain a bank charter.
At December 31, 1997, the total federal pre-1988 reserves were
approximately $11.6 million and $1.7 million for Local Federal and Local
America, respectively. This reserve reflects the cumulative effects of federal
tax deductions by the Banks for which no Federal income tax provision has been
made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Banks
have not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A corporation may carry back net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1997, the Company and its
subsidiaries had $40.8 million of net operating loss carryforwards for federal
income tax purposes which expire in 2013. For taxable years beginning after
August 5, 1997, a corporation may carry back net operating losses to the two
preceding taxable years and carry forward and deduct from taxable income for the
20 succeeding taxable years.
Consummation of the Private Placement and the transactions
contemplated by the Redemption Agreement caused an "ownership change" with
respect to the Company for federal income tax purposes. As a result, the Company
is subject to certain limitations in its ability to use any unrealized built-in
losses and anynet operating losses it may have had immediately prior to the
ownership change to offset taxable income generated in taxable periods ending
after the ownership change. Specifically, the Company's ability to use (i) any
net unrealized built-in-losses possessed by the Company immediately before the
ownership change to offset taxable income generated in taxable periods ending
after the ownership change will be subject to an annual limitation (as described
below) (the "Annual Limitation"), and (ii) any net operating losses, tax
credits, or certain other losses and deductions possessed by the Company
immediately before the ownership change to offset taxable income generated in
taxable periods ending after the ownership change will be similarly subject to
the Annual Limitation. The Annual Limitation is generally equal to the product
of the value of the Company's outstanding stock immediately before the Private
Placement (less certain capital contributions and after taking into account the
value of certain redemptions or other corporate contractions that occur in
connection with the ownership change) and the "long-term tax-exempt rate" (as
defined in Section 382(f) of the Code).
At the present time, the Company believes that it will be able to
apply any tax attributes described in (i) and (ii) above that were possessed by
the Company immediately before the
105
<PAGE>
ownership change in their entirety against taxable income in the preceding
taxable years. As such, the Company does not believe it will be subject to the
Annual Limitation.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from its subsidiaries, including the
Banks, as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
State and Local Taxation
Oklahoma State Taxation. The Company and its subsidiaries, including
the Banks, are subject to an annual Oklahoma corporate income tax of 6% of their
federal taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition to the Oklahoma corporate income tax, the Company and
its subsidiaries are subject to an annual Oklahoma franchise tax, which is
imposed at a rate of .125% on the capital used, invested or employed in
Oklahoma, with a maximum franchise tax equal to $20,000 per annum. At December
31, 1997, the Company had approximately $190.4 million of net operating loss
carryforwards available for Oklahoma state income tax purposes. The state net
operating loss carryforwards expire in varying amounts between 2006 and 2013.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The Delaware franchise tax based on the Company's authorized
capital stock or on its assumed par and no-par capital, whichever yields a lower
result. Under the authorized capital method, each share is taxed at a graduated
rate based on the number of authorized shares with a maximum aggregate tax of
$150,000 per year. Under the assumed par value capital method, Delaware taxes
each $1,000,000 of assumed par-capital at the rate of $200.
SELLING HOLDERS
The Local Securities were originally issued and sold by the Company in
the Private Placement in transactions exempt from the registration requirements
of the Securities Act, to persons reasonably believed by the Company to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) or other "accredited investors" (as defined in Rule 501(a) under the
Securities Act). The Local Securities issued to the Green Country stockholders
are also persons reasonably believed by the Company to be "accredited
investors." The Selling Holders (which term includes their transferees,
pledgees, donees or their successors) may from time to time offer and sell
pursuant to this Prospectus any or all of the Local Securities owned by each of
them.
106
<PAGE>
The following table sets forth information with respect to the Selling
Holders named herein and the shares of Common Stock and/or Senior Notes
beneficially owned and offered hereby by such Selling Holders. Such information
has been obtained from such Selling Holders. Except as otherwise disclosed
herein, such Selling Holders do not have, or within the past three years have
not had, any position, office or other material relationship with the Company or
affiliates. Because such Selling Holders may offer all or some portion of the
Common Stock or Senior Notes pursuant to this Prospectus, no estimate can
begiven as to the amount of the Common Stock or Senior Notes that will be held
by such Selling Holders upon termination of any such sales. In addition, the
Selling Holders identified below may have sold, transferred or otherwise
disposed of all or a portion of their Common Stock and/or Senior Notes since the
date on which it provided the information regarding their Common Stock and/or
Senior Notes in transactions exempt from the registration requirements of the
Securities Act. Finally, if required, additional Selling Holders may from time
to time be identified and information with respect to such Selling Holders be
provided in a Prospectus Supplement.
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Albert Abramson 100,000 $ --
Jay B. Abramson 15,000 --
American Express Company 52,600 --
Angelo Gordon & Co., L.P. 750,000 --
Acamas Anstalt 40,000 --
Antin & Haas Partnership(1) 15,000 --
Acqua Fund L.P. 10,000 --
Bank West Financial 20,000 --
Corporation
Bausch & Lomb, Inc. 5,200 --
Roger Benson IRA 5,000 --
Paul Berger 10,000 --
Robert F. Berish 1,000 --
Phoebe Berman -- 25,000
Philip R. Bevan(1) 1,500 --
Boston Partners Asset 1,900,000 --
Management, L.P., as
investment advisor for
various clients
Boston Provident Partners, L.P. 93,400 --
BP Institutional Partners, L.P. 14,400 --
BP Overseas Partners, Ltd. 18,900 --
Brown & Williamson Master -- 500,000
Retirement Trust
Robert L. Bunnen Jr. 3,500 30,000
Butterfield Trust -- 500,000
Charles H. Byrd -- 100,000
Alfred R. Camner 10,000 --
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Capra Global Managed -- 350,000
Assets Lt
CGMA Special Accounts LLC -- 150,000
Bill Cline 5,000 --
Stanley Cohen 20,000 --
College Retirement Equities 20,000 --
Fund
Commonwealth Edison Pooled 92,600 --
Fund
Community Interests 8,800 --
Consumers Energy Company 31,200 --
Continental Casualty Company 1,600,000 6,000,000
Gerald B. Cramer 45,000 --
Cramer Rosenthal 449 7,000
McGlynn, Inc.
William W. Crawford Jr. 5,000 --
CRM 1997 Enterprise Fund LP 50,000 --
CRM EFO Partners, L.P. 20,000 400,000
CRM Eurycleia Partners, L.P. 20,000 350,000
CRM Madison Partners, L.P. 50,000 --
CRM Partners, L.P. 200,000 --
CRM Retirement Partners, L.P. 150,000 --
CRM US Value Fund, Ltd. 20,000 250,000
Dan Equity Partners, L.P. 25,000 --
David S. Croyder 1,000 25,000
Daystar LLC, as agent 400,000 --
Daystar Special Situations 777,000 --
Fund L.P.
The Demoss Foundation 25,000 --
Diversified Long Term Growth 10,000 --
Fund L.P.
Dolphin Offshore Partners, 400,000 --
L.P.
Drake Associates, L.P. 35,000 --
EBS Microcap Partners, L.P. 4,000 --
EBS Partners, L.P. 11,000 --
Edgewater Private Equity 400,000 --
Fund, L.P.
Elsa Benson, Inc. 5,000 --
Emerson Electric Co. 102,700 --
Employees' Retirement System 49,200 --
of the State of Hawaii
Encinal Partners 8,000 --
Endicott Partners LP 20,000 --
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Eos Partners, L.P. 100,000 --
Ernst Equities 10,000 --
Eurycleia Partners, L.P. 50,000 314,000
Fall Creek Management 10,000 --
Manuel V. Fernandez 20,000 --
Fred M. Filoon 5,000 --
Financial Stocks, L.P. 285,000 --
First Security Fed Financial, Inc. 10,000 --
Eileen Fitzsimons 2,500 --
FMI Focus Fund 10,000 --
Frances R. Ford Family -- 200,000
Ltd. Partnership
FPA Crescent Portfolio -- 1,000,000
Frank Russell Investment 129,300 --
Management Company
Diversified Equity Fund
Frank Russell Investment 157,900 --
Management Company
Equity Fund I
Friedman, Billings, Ramsey & 142,209 --
Co., Inc.(2)
FBR Private Equity Fund, L.P. 325,200 --
Victor J. Galan 5,000 --
Sidney Greenberg 10,000 --
Georgia Pacific 302,500 --
Gross Foundation, Inc. 20,000 --
Rodney L. Hale -- 10,000
Hall Family Foundation -- 500,000
Arthur E. Hall, Trustee for -- 500,000
Arthur E. Hall Money
Purchase Plan
John Hancock Advisors, Inc. 400,000 --
Hartford Capital Appreciation 100,000 --
Fund
Heartland Value Plus Fund, a -- 3,100,000
Series of Heartland Group,
Inc.
Heritage Interests 8,800 --
Highbridge Capital Corporation -- 175,000
Highbridge International LLC 425,000 --
Richard A. Horstmann 100,000 --
John H.F. Hoving 1,000 25,000
Ingleside & Company 100,000 --
Inland Steel Industries, Inc. 124,100 --
Interfin Group, Inc. 1,150 --
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Interfund Invest Ltd. 1,150 --
International Charitable 11,900 --
Interests II Trust
International Paper 135,000 --
John Colquitt Jackson 20,000 --
Janus Aspen Series -- 75,000
High Yield Portfolio
Janus Aspen Series Flexible -- 350,000
Income Portfolio
Janus High-Yield Fund -- 4,500,000
Gloria Jean Jones 2,500 --
Evan L. Julbert 10,000 --
Kaplan Nathan & Co. -- 250,000
Karfunkel Family Foundation -- 500,000
Lena Khatcherian 2,500 --
King Street Capital 50,000 --
Management, LLC
Jeffrey A. and April R. 1,000 --
Koeppel(1)
Robert A. Kotecki(3) 30,000 --
Kuwait Financial Center 9,900 --
S.A.K.
Lad Equity Partners, L.P. 54,156 29,000
Lakeshore Harbor Fund L.P. 5,000 --
Lakeview Partners 7,500 --
Lancaster Investment Partners 25,000 --
Landmark Bancshares, Inc. 20,000 50,000
Joe A. Leone 5,000 --
Eli Levitan 10,000 --
Lorraine-Urethane Employees 10,000 100,000
Pension Plan
Arthur Luxenberg 5,000 --
Lyonshare Venture Capital 10,000 --
Mafco Holdings, Inc. 59,900 --
Master Trust
The Mainstay Funds on -- 15,095,000
behalf of its Highyield
Corporate Bond Fund
The Mainstay Funds on -- 135,000
behalf of its Strategic
Income Fund
Mainstay VP Series Fund on -- 3,400,000
behalf of its Highyield
Corporate Bond Fund
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Greg Manocherian 50,000 --
Timothy B. and Jane E. Matz(1) 10,000 --
Maverick Fund LDC 447,300 --
Maverick Fund USA, Ltd. 252,700 --
McColl Partners Limited 75,000 --
Partnership
Cramer Rosenthal McGlynn, 5,000 --
LLC
Clement C. Moore II 10,000 --
Morgan Guaranty Trust 81,000 180,000
Company of New York, as
Investment Manager and
Agent for the Alfred P.
Sloan Foundation
Morgan Guaranty Trust 360,000 800,000
Company of New York, as
Trustee of the Commingled
Pension Trust Fund (Multi-
Market Special Investment
Fund I) of Morgan Guaranty
Trust Company of New York
Morgan Guaranty Trust 378,000 840,000
Company of New York, as
Trustee of the Commingled
Pension Trust Fund (Multi-
Market Special Investment
Fund II) of Morgan Guaranty
Trust Company of New York
Morgan Guaranty Trust 81,000 180,000
Company of New York, as
Trustee of the Multi-
Market Special Investment
Fund of Morgan Guaranty
Trust Company of New York
Mutual Beacon Fund (a -- 1,400,000
Franklin Mutual Series Fund)
Mutual Discovery Fund -- 1,000,000
(a Franklin Mutual
Series Fund)
Mutual Financial Services -- 750,000
Fund (a Franklin Mutual
Series Fund)
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Mutual Qualified Fund -- 1,000,000
(a Franklin Mutual
Series Fund)
Mutual Shares Fund -- 1,850,000
(a Franklin Mutual
Series Fund)
New South Capital 155,000 2,000,000
Management, Inc.
George Nigh 2,500 --
Northavan Partners, L.P. 60,000 --
Northavan Partners, II, L.P. 96,000 --
Northavan Partners, III, L.P. 44,000 --
Jan A. Norton(2)(3) 25,000 --
Oppenheimer Strategic Income -- 10,000,000
Fund
Oppenheimer Total Return 400,000 --
Fund, Inc.
Oppenheimer VA High Income -- 800,000
Fund
Oppenheimer VA Strategic -- 150,000
Bond Fund
Ratnam A. and Amita Oza 5,000 --
Pamela Equities Corp. 200,000 --
Paribas Corporation 100,000 --
Richard L. Park(3) 3,000 --
Pequot Offshore Private Equity 33,715 --
Fund, Inc.
Pequot Private Equity Fund, 266,285 --
L.P.
Martin Perlmutter 7,500 --
Pfizer Retirement Annunity 60,100 --
Plan
Pine Boston Partners, LP 8,400 --
Joseph R. Piselli 2,000 25,000
Pneumo Abex Corp. 16,300 --
Retirement Income Plan
Police Officers Pension System -- 450,000
of the City of Houston
Portrush, Ltd. -- 40,000
Presidential Life 10,800 --
Insurance Company
Glen Presley 6,000 --
Michael Prober 2,500 --
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Prospect Street High Income 25,000 500,000
Portfolio Inc.
Putnam High Yield Trust -- 6,700,000
Putnam High Yield -- 5,500,000
Advantage Fund
Putnam Diversified Income -- 2,800,000
Trust
R & D Investment Partnership 11,000 --
RJR Nabisco Defined 162,800 --
Benefit Master Trust
The Raptor Global Fund Ltd. 324,800 --
The Raptor Global Fund L.P. 124,800 --
Reams Equity Fund, L.P. 100,000 --
Rising Stars Offshore Fund 15,000 --
Ernest M. Rochester 7,500 --
Mark L. Rochester 7,500 --
Rose Foundation -- 575,000
J. David Rosenberg(3) 80,000 --
Edward J. Rosenthal Keogh 10,000 --
Peter Rozema IRA 12,500 --
Sabah Al Salem Al Mubarak 7,400 --
Al Sabah Foundation
Jacob Safren 10,000 --
Wayne Saken 20,000 --
Charla Sasha Foundation 10,000 --
Scott Scher 2,500 --
Jeff A. Schugart 20,000 --
Kathryn Sue Schugart 5,000 --
Irene Sinclair -- 25,000
Robert S. Sinclair 1,000 --
Skat Capital, L.P. 20,000 --
Donald C. Smith -- 50,000
Gordon V. and Helen C. 25,000 1,000,000
Smith Foundation
Tildon W. Smith -- 200,000
John P. Soukenik(1) 5,000 --
South Ferry #2, L.P. 250,000 --
Jay Spellman -- 1,000,000
Spring Street Partners, LP 25,000 500,000
Star Creations, Ltd. 40,000 --
John W. Tabnor 1,000 --
David Thalheim Rev Living 25,000 --
Trust
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Third Point Management 850,000 --
Company, L.L.C.
Raymond A. Tiernan(1) 10,000 --
Philip E. Timyan, Trustee 40,000 --
for the Philip E.
Timyan Trust
Philip J. and Nancy L. 60,000 --
Timyan
Jack Thompson High Yield -- 20,000
Jack Thompson IRA -- 20,000
Tontine Financial Partners, 275,000 --
L.P.
Edward A. Townsend(2)(3) 300,000 --
Kenneth W. Townsend(2) 2,500 --
Eugene Trainor III 2,500 --
Tudor Arbitrage Partners L.P. 99,900 --
Tudor BVI Futures, Ltd. 313,600 --
Chaya Unger 20,000 --
University of Notre Dame 20,600 --
The Upper Mill Capital 289,000 --
Appreciation Fund Ltd.
Valarian Associates, L.P. 200,000 --
The Vine Street Exchange 300,000 --
Fund, L.P.
DeWayne R. Von Feldt(2) 120,000 --
Vulcan Materials Company -- 70,000
Highyield Account
Weaver Capital Partners LP 32,700 --
George N. Wehrlin -- 20,000
Perry Weitz 30,000 --
Weitz Series Fund, Inc. - -- 250,000
Fired Income Portfolio
Weitz Series Fund, Inc. - -- 750,000
Value Portfolio
Daniel P. and Georgia H. 2,800 --
Weitzel(1)
West Broadway Partners, LP 140,000 250,000
West Broadway Securities 160,000 --
Whitehall Properties, LLC 100,000 --
Shelby G. Wilcox(4) 4,000 50,000
Hugh T. Wilkinson(1) 2,000 --
Aaron Wolfson 10,000 --
Ziff Asset Management, L.P. 900,000 --
Harold Zirkin 10,000 --
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Principal Amount of Senior Notes
Beneficially Owned and Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
---------------------- -------------- --------------
<S> <C> <C>
Zweig-DiMenna Partners, L.P. 349,000 --
Zweig-DiMenna Special 220,000 --
Opportunities, LPC
</TABLE>
(1) Norman B. Antin and Jeffrey D. Haas, the general partners of the Antin &
Haas Partnership, and Philip R. Bevan, Jeffrey A. Koeppel, Timothy B.
Matz, John P. Soukenik, Raymond A. Tiernan, Daniel P. Weitzel and Hugh T.
Wilkinson are partners in Elias, Matz, Tiernan & Herrick L.L.P., which
serves as special counsel to the Company and served as special counsel to
the Company in connection with the Private Placement and this offering.
(2) Pursuant to the terms of a Stock Purchase and Sale Agreement, dated as of
February 4, 1998, and in connection with the Company's acquisition of
Green Country, effective February 17, 1998, FBR purchased 115,027, 4,052
and 273,130 shares of Common Stock from Messrs. Townsend, Norton and Von
Feldt, respectively.
(3) Consists of a director and/or executive officer of the Company.
(4) Includes 1,000 shares of Common Stock as co-trustee with Lawrence Willcox.
The Company has agreed to indemnify the Selling Holders against
certain liabilities arising out of any actual or alleged material misstatements
or omissions in the Registration Statement, other than liabilities arising from
information supplied by the Selling Holders for use in the Registration
Statement. Each Selling Holder, severally but not jointly, has agreed to
indemnify the Company against liabilities arising out of any actual or alleged
material misstatements or omissions in the Registration Statement insofar as
such misstatements or omissions were made in reliance upon written information
furnished to the Company by such Selling Holder expressly for use in the
Registration Statement.
DESCRIPTION OF SENIOR NOTES
General
The Senior Notes have been issued pursuant to the Indenture between
the Company and The Bank of New York, as trustee (the "Trustee"). The Indenture
will be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), upon effectiveness of the Registration Statement of which this
Prospectus forms a part. This summary of certain terms and provisions of the
Senior Notes and the Indenture does not purport to be complete, and where
reference is made to particular provisions of the Indenture, such provisions,
including the
115
<PAGE>
definitions of certain terms, some of which are not otherwise defined herein,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act. See "Additional Information." Capitalized terms not otherwise defined
herein have the meanings specified in the Indenture. The Indenture has been
filed as in exhibit to the Registration Statement.
The Senior Notes will mature on September 8, 2004. The Senior Notes
are general unsecured obligations of the Company and rank senior to such other
Indebtedness as the Company may incur that is not expressly subordinated to the
Senior Notes. The Indenture generally restricts the incurrence of additional
Indebtedness by the Company, except for certain Junior Indebtedness. See
"--Certain Covenants--Limitations on Indebtedness."
The Senior Notes are issuable and transferable only in registered form
without coupons and only in denominations of $1,000 and any integral multiple
above that amount.
The Senior Notes bear interest from the date of their initial
issuance, September 8, 1997, at the rate of 11.0% per annum, payable
semi-annually in arrears on March 1 and September 1 of each year (each an
"Interest Payment Date"), commencing March 1, 1998, to the holders of record at
the close of business on the February 15 or August 15 (whether or not a business
day), as the case may be, next preceding such Interest Payment Date (each, a
"Regular Record Date"). Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
The Senior Notes are not savings accounts or deposits and are not
insured by the FDIC or by the United States or any agency or fund thereof. The
Senior Notes are not secured by the assets of the Company or any of its
Subsidiaries, including the Banks, or otherwise and do not have the benefit of a
sinking fund for the retirement of principal or interest. Because the Company is
a holding company that currently conducts substantially all of its operations
through the Banks, the right of the Company to participate in any distribution
of assets of the Banks, upon their liquidation or reorganization or otherwise
(and thus the ability of Holders to benefit indirectly from such distribution),
are subject to the prior claims of creditors of the Banks, including claims of
depositors of the Banks. See "Regulation--Regulation of Federal Savings
Institutions--Cross-Guarantee Liability and Effect of a Resolution of the
Banks." Additionally, distributions to the Company by the Banks, whether in
liquidation, reorganization or otherwise, are subject to regulatory restrictions
and, under certain circumstances, may be prohibited.
No Sinking Fund, Mandatory Redemption or Optional Redemption
The Senior Notes are not entitled to the benefit of any sinking fund,
mandatory redemption or optional redemption.
Interest Reserve Account
In connection with the issuance of the Senior Notes, the Company
established the Interest Reserve Account, which consists of a segregated deposit
account and segregated Permitted
116
<PAGE>
Investments in a bank or trust company, which currently is the Trustee, which is
unaffiliated with the Company and which meets specified requirements. The
arrangements relating to the Interest Reserve Account have been set forth in a
Security Agreement between the Company and the Trustee (the "Security
Agreement").
Any funds or other assets in the Interest Reserve Account from time to
time shall not be commingled with any other funds or assets of the Company or
any of the Company's subsidiaries or affiliates, provided, however, that if on
any Interest Payment Date, the amount of funds and the Fair Market Value of any
Permitted Investments in the Interest Reserve Account shall exceed the amount
required to be maintained therein in accordance with the Indenture, the Company
shall be entitled to withdraw all or any portion of such excess.
The Company is required to carry in the Interest Reserve Account an
aggregate amount of cash and Fair Market Value of Permitted Investments
(determined not less frequently than on each Interest Payment Date) sufficient
to pay at all times during the period commencing on the date of issuance of the
Senior Notes through the next two succeeding Interest Payment Dates. The Company
intends to use funds and Permitted Investments in the Interest Reserve Account
to pay the first two semi-annual interest payments due on the Senior Notes or as
otherwise required pursuant to the Security Agreement.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitations on Indebtedness. The Company may not create, incur, issue,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for or with respect to, or otherwise permit to exist any Indebtedness,
except: (i) Indebtedness represented by the Senior Notes; (ii) Junior
Indebtedness with a Stated Maturity of principal (or any required repurchase,
redemption, defeasance or sinking fund payments) which is after the final Stated
Maturity of the Senior Notes; (iii) Indebtedness the proceeds of which are
immediately applied to redeem or repurchase Senior Notes and provided that if
such Indebtedness is used to redeem or repurchase only a portion of the Senior
Notes, such Indebtedness has a Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) which is after the
final Stated Maturity of the Senior Notes and (iv) Indebtedness specified in
paragraph (b) of the definition of "Permitted Payment."
The Company may not create, incur, assume, guarantee or otherwise in
any manner become directly or indirectly liable for or with respect to, or
otherwise permit to exist, any Indebtedness (including any Indebtedness assumed
in connection with the acquisition of assets from another Person or as a result
of the merger of any Person with or into the Company) unless, at the time of
such event, the principal amount of total Indebtedness of the Company would not
exceed 100% of the Company's Consolidated Tangible Net Worth; provided that for
purposes of this requirement, Indebtedness shall be net of any fund or interest
reserve account which has been established to fund the payment of principal
and/or interest on Indebtedness.
117
<PAGE>
Limitations on Restricted Payments. The Company may not, and may not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment
if, at the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be
continuing; or
(b) the Company would fail to maintain sufficient Liquid Assets to
comply with the terms of the covenant described below under "--Liquidity
Maintenance;"
(c) either of the Banks would fail to meet any of their respective
applicable minimum capital requirements under the regulations of the OTS which
are necessary to enable either of the Banks to qualify as an "adequately
capitalized" institution under such regulations; or
(d) the aggregate amount of all Restricted Payments (the amount of
such payments, if other than in cash, having been determined in good faith by
the Board of Directors, whose determination shall be conclusive and evidenced by
a Board Resolution filed with the Trustee) declared and made after the Issue
Date would exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the
Company accrued on a cumulative basis during the period beginning on
the first day of the fiscal quarter during which the Issue Date
occurred and ending on the last day of the Company's last fiscal
quarter ending prior to the date of such proposed Restricted Payment,
plus
(ii) the aggregate Net Cash Proceeds received by the Company as
capital contributions (other than from a Subsidiary) after the Issue
Date, plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value
of property not constituting Net Cash Proceeds received by the Company
from the issuance or sale (other than to a Subsidiary) of Qualified
Capital Stock after the Issue Date; plus
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is converted into or exchanged for Qualified Capital
Stock of the Company after the Issue Date;
provided, however, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at the
date of declaration such payment was permitted by the foregoing provisions, (y)
any Permitted Payment; or (z) the redemption of all of the shares of Common
Stock of the Company which are issued and outstanding immediately prior to the
date of the Indenture.
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Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company may not, and may not permit any of its Subsidiaries
to, create, assume or otherwise cause or suffer to exist or to become effective
any consensual encumbrance or restriction on the ability of any such Subsidiary
to:
(a) pay any dividends or make any other distribution on its Capital
Stock;
(b) make payments in respect of any Indebtedness owed to the Company
or any other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to
guarantee Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable laws and regulations;
(2) restrictions existing under agreements in effect on the date of
the Indenture;
(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions on the transfer of assets which are subject to Liens;
(5) restrictions existing under agreements evidencing Indebtedness
which is incurred after the date of the Indenture as permitted by the covenants
described above under "--Limitations on Indebtedness," provided that the terms
and conditions of any such restrictions are no more restrictive than those
contained in the Indenture; and
(6) restrictions existing under any agreement which refinances or
replaces any of the agreements containing the restrictions in clauses (2), (3)
and (5); provided that the terms and conditions of any such restrictions are not
less favorable to the Holders than those under the agreement evidencing or
relating to the Indebtedness refinanced.
Restrictions on Issuance and Sale or Disposition of Capital Stock of
Subsidiaries. The Company (a) may not permit any Subsidiary to issue or sell any
shares of its Capital Stock (other than to the Company or a Wholly Owned
Subsidiary) and (b) except pursuant to existing agreements, options or option
plans, may not permit any Person to own any shares of Capital Stock of any
Subsidiary.
Limitations on Transactions with Affiliates. The Company may not, and
may not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including without limitation,
the sale, purchase, exchange or lease of assets, property
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or services) with any Affiliate of the Company (except that the Company and any
of its Subsidiaries may enter into any transaction or series of related
transactions with any Subsidiary of the Company without limitation under this
covenant) unless: such transactions or series of related transactions is on
terms that are no less favorable to the Company or such Subsidiary, as the case
may be, than would be available in a comparable transaction in an arm's length
dealing with a Person that is not such an Affiliate; with respect to any
transaction or series of related transactions involving aggregate payments in
excess of $500,000, the Company delivers an Officers' Certificate to the Trustee
certifying that such transaction or series of transactions complies with clause
(i) above and has been approved by a majority of the Board of Directors of the
Company; and with respect to any transaction or series of related transaction
involving aggregate payments in excess of $2 million, the Company delivers to
the Trustee a written opinion of a nationally-recognized investment banking firm
to the effect that the transaction or series of transactions are fair to the
Company or such Subsidiary from a financial point of view. The limitations set
forth in this paragraph will not apply to (a) transactions entered into pursuant
to any agreement already in effect on the date of the Indenture, (b) any
employment agreement, stock option, employee benefit, indemnification,
compensation, business expense reimbursement or other employment-related
agreement, arrangement or plan entered into by the Company or any of its
Subsidiaries either (A) in the ordinary course of business and consistent with
the past practice of the Company or such Subsidiary or (B) which agreement,
arrangement or plan was adopted by the Board of Directors of the Company or such
Subsidiary, as the case may be, (c) residential mortgage, credit card and other
consumer loans to an Affiliate who is an officer, director or employee of the
Company or any of its Subsidiaries and which comply with the applicable
provisions of 12 U.S.C. ss. 1468(b) and any rules and regulations of the OTS
thereunder, (d) any Restricted Payments, (e) any issuance of capital stock to
Messrs. Townsend and Norton in connection with the acquisition by the Company of
Green Country, or (f) any transaction or series of transactions in which the
total amount involved does not exceed $250,000.
Limitations on Liens and Guarantees. The Company may not create,
assume, incur or suffer to exist any Lien upon (i) the Capital Stock of the
Banks or (ii) any of the Company's property or assets (other than the Capital
Stock of the Banks) now owned, or acquired after the date of the Indenture, or
any income or profits from any such property or assets, as security for
Indebtedness which may be incurred by the Company under the Indenture and having
a contractual time to maturity greater than one year (other than the Senior
Notes), without, in the case of either (i) or (ii), effectively providing that
the Senior Notes will be equally and ratably secured with (or prior to) such
Indebtedness, provided that if such Indebtedness is Junior Indebtedness, any
security interest with respect to such Junior Indebtedness shall be subordinated
to the security interest with respect to the Senior Notes to the same extent as
such Junior Indebtedness is subordinated to the Senior Notes.
The Company may not permit any Subsidiary of the Company, directly or
indirectly, to guarantee or assume, or subject any of its assets to a Lien to
secure, any Indebtedness which may be incurred by the Company under the
Indenture (other than the Senior Notes) unless (i) such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of, or pledge of assets to secure, the Senior Notes by
such Subsidiary
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on terms at least as favorable to the Holders as such guarantee or security
interest in such assets is to the holders of such Indebtedness, except that in
the event of a guarantee or security interest in such assets with respect to
Junior Indebtedness, any such guarantee or security interest in such assets with
respect to such Junior Indebtedness shall be subordinated to such Subsidiary's
guarantee or security interest in such assets with respect to the Senior Notes
to the same extent as such Junior Indebtedness is subordinated to the Senior
Notes and (ii) such Subsidiary waives, and agrees that it and will not in any
manner whatsoever claim, or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Subsidiary of the Company as a result of any payment by such
Subsidiary under its guarantees.
Liquidity Maintenance. The Company will, at all times when the Senior
Notes are not rated in an investment grade category by one or more nationally
recognized statistical rating organizations, maintain Liquid Assets with a value
equal to at least 100% of the required interest payments due on the Senior Notes
on the next succeeding semi-annual Interest Payment Date.
Offer to Purchase upon a Change of Control. The Company will, upon the
occurrence of a Change of Control, make an offer to purchase (an "Offer to
Purchase"), and will, subject to the provisions described below, purchase, on a
Business Day (the "Change of Control Purchase Date") not more than 60 days nor
less than 30 days following the occurrence of the Change of Control, all of the
then outstanding Senior Notes at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to (but excluding) the Change of Control Purchase Date.
The Company will, subject to the provisions described below, purchase all Senior
Notes properly tendered in the Offer to Purchase and not withdrawn. Prior to the
mailing of the notice to Holders provided for, as described below, the Company
must (i) offer to repay in full all Indebtedness which by its terms requires
repayment by the Company prior to any repurchase by the Company of the Senior
Notes and repay the Indebtedness of each lender who has accepted such offer or
(ii) obtain the requisite consent under such Indebtedness to permit the
repurchase of the Senior Notes. If a notice has been mailed when such condition
precedent has not been satisfied, the Company will have no obligation to (and
shall not) effect the purchase of Senior Notes until such time as such condition
precedent is satisfied. Failure to mail the notice on the date specified below
or to have satisfied the foregoing condition precedent by the date that the
notice is required to be mailed shall in any event constitute a covenant Default
under the Indenture. The Offer to Purchase is required to remain open for at
least 20 Business Days and until the close of business on the Change of Control
Purchase Date.
In order to effect such Offer to Purchase, the Company will, not later
than the 30th day after the Change of Control, mail to each Holder a notice,
which shall govern the terms of the Offer to Purchase and shall state, among
other things: (i) that a Change of Control has occurred and an Offer to Purchase
is being made, and that, although Holders are not required to tender their
Senior Notes, all Senior Notes that are timely tendered will be accepted for
payment; (ii) the purchase price and the Change of Control Purchase Date, which
will be no earlier than 30 days nor later than 60 days from the date such notice
is mailed; (iii) that any Senior Note not
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tendered will continue to accrue interest; (iv) that any Senior Note accepted
for payment pursuant to the Offer to Purchase will cease to accrue interest on
and after the Change of Control Purchase Date; (v) the instructions that Holders
will be required to follow in order to have such Holders' Senior Notes
repurchased; (vi) that Holders will be entitled to withdraw their election not
later than the close of business on the third Business Day preceding the Change
of Control Purchase Date and the instructions that Holders must follow in order
to withdraw such election; and (vii) any other information necessary to enable
Holders to tender their Senior Notes and to have such Senior Notes repurchased.
On the Change of Control Purchase Date, the Company will (i) accept
for payment Senior Notes tendered pursuant to the Offer to Purchase, (ii)
deposit with the Paying Agent money sufficient to pay the purchase price of all
Senior Notes so tendered and (iii) deliver to the Trustee all Senior Notes so
accepted together with an Officers' Certificate stating the principal amount of
Senior Notes tendered to and accepted for payment by the Company. The Company
will publicly announce the results of the Offer to Purchase on or as soon as
practicable after the Change of Control Purchase Date. There can be no assurance
that the Company will have sufficient financial resources to repurchase any or
all of the Senior Notes at such time as it might be required to do so.
Notwithstanding the foregoing, if any Senior Note accepted for payment
is not so paid pursuant to the foregoing provisions of the Indenture, then, from
the Change of Control Purchase Date until the principal and interest on such
Senior Note is paid, interest will be paid on the unpaid principal and, to the
extent permitted by law, on any accrued but unpaid interest thereon, in each
case at the rate or rates prescribed therefor in the Senior Notes.
Maintenance of Depository Institution Subsidiary. The Company will,
subject to requirements governing consolidations, merges and conveyances,
maintain at all times as a Wholly Owned Subsidiary an entity that is a bank or
thrift or substantially similar institution subject to regulation by federal or
state authorities and do all things necessary to ensure that savings accounts of
the Banks or such other institution are insured by the FDIC or any successor
organization up to the maximum amount permitted by the Federal Deposit Insurance
Act and regulations thereunder or any succeeding federal law hereinafter
enacted.
Additional Covenants. The Indenture also contains covenants with
respect to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment of
taxes and other claims; (iv) maintenance of properties; (v) maintenance of
insurance; and (vi) maintenance of books and records.
Merger and Consolidation
The Indenture provides that the Company will not, in a single
transaction or a series of transactions, consolidate or merge with or into or
transfer, sell, lease or convey all or substantially all of its assets to
another Person unless: (i) either the Company will be the entity surviving such
merger or consolidation or the corporation formed by or surviving such
consolidation or merger,
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or the Person to which such transfer, sale, lease or conveyance shall have been
made, shall be a corporation duly organized and existing under the laws of the
United States, any state thereof or the District of Columbia and will
unconditionally expressly assume by a supplemental indenture hereto, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Senior Notes and the Indenture; (ii)
immediately before and immediately after giving effect to the transaction or
series of transactions, no Default or Event of Default shall have occurred and
be continuing; (iii) immediately after giving effect to the transaction or
series of transactions, the Company or the surviving entity, as applicable, and
their respective banking and thrift subsidiaries, as applicable, will be in
compliance with all applicable regulatory capital requirements; (iv) immediately
after giving effect to the transaction or series of transactions, the Company or
the surviving entity, as applicable, could incur at least $1.00 of additional
Indebtedness without violating the limitations on Indebtedness provisions of the
Indenture; and (v) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that such consolidation,
merger, business combination, transfer, sale, lease or conveyance and such
supplemental indenture complies with the Indenture and that all conditions
precedent therein relating to such transaction have been complied with.
Modification of the Indenture; Waiver of Covenants
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of greater than 50% in
aggregate principal amount of the Senior Notes then Outstanding; provided,
however, that no such modification or amendment may, without the consent of the
Holder of each outstanding Senior Note affected thereby, (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Senior Note
or reduce the principal amount thereof, premium, if any, or the rate of interest
thereon or change any Place of Payment, or change the coin or currency in which
any Senior Note or any premium or the interest thereon is payable or impair the
right to institute suit for the enforcement of any such payment after the Stated
Maturity thereof; (ii) reduce the percentage in principal amount of the
outstanding Senior Notes, the consent of whose Holders is required for any such
amendment or modification, or the consent of whose Holders is required for any
waiver of compliance with the Indenture or certain defaults thereunder; and
(iii) modify any of the provisions relating to supplemental indentures requiring
the consent of Holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage in principal
amount of outstanding Senior Notes required for such action or to provide that
certain other provisions of the Indenture may not be modified or waived without
the consent of the Holder of each Senior Note affected thereby.
Notwithstanding the foregoing, without the consent of any Holders, the
Company and the Trustee may modify or amend the Indenture (i) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Senior
Notes in accordance with the provisions of the Indenture described above under
"--Merger and Consolidation;" (ii) to add any additional covenants of the
Company for the benefit of the Holders, or to surrender any right or power
conferred upon the Company in the Indenture or in the Senior Notes; (iii) to
secure the Senior Notes or to add a guarantor; (iv)
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to comply with any requirements of the Commission in order to effect and
maintain the qualification of the Indenture under the Trust Indenture Act; or
(v) to cure any ambiguity, to correct or supplement any provision of the
Indenture which may be defective or inconsistent with any other provision of the
Indenture, or to make any other provisions with respect to matters or questions
arising under the Indenture which shall not be inconsistent with the provisions
of the Indenture, provided such action pursuant to clause (v) shall not
adversely affect the interests of the Holders in any material respect.
The Holders of greater than 50% in aggregate principal amount of the
Senior Notes outstanding may waive compliance with certain restrictive covenants
and provisions of the Indenture.
Events of Default
An Event of Default is defined in the Indenture to include:
(i) failure by the Company to pay the principal of, or premium,
if any, on any Senior Note when due and payable at maturity or upon
redemption, acceleration or otherwise;
(ii) failure by the Company to pay interest on any Senior Note
when due and payable, if such failure continues for a period of 30
days;
(iii) default in the performance, or breach, of the provisions
described above under "--Merger and Consolidation;"
(iv) default, on the Change of Control Purchase Date, in the
purchase of Senior Notes required to be purchased by the Company
pursuant to an Offer to Purchase;
(v) failure by the Company to comply with any other agreement or
covenant contained in the Indenture if such failure continues for a
period of 30 days after notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in principal
amount of the Senior Notes then Outstanding;
(vi) default by the Company or any Subsidiary of the Company in
the payment of any Indebtedness of the Company or any Subsidiary of
the Company after any applicable grace period after final maturity or
in the event that final maturity is accelerated because of a default,
which default is not cured, waived or consented to for 30 days and the
total amount of such Indebtedness unpaid or accelerated is equal to or
greater than 5% of the Company's Consolidated Tangible Net Worth;
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(vii) the existence of certain events of bankruptcy or
insolvency of the Company or either of the Banks;
(viii) one or more final judgments, decrees or orders has been
rendered against the Company or any Subsidiary for the payment of an
amount of money which, individually or in the aggregate, is equal to
or greater than 5% of the Company's Consolidated Tangible Net Worth
and which remains unsatisfied for a period of 60 days without a stay
of execution of any such judgment, decree or order; and
(ix) failure by either of the Banks to comply with any of their
respective Regulatory Capital Requirements; provided, that an Event of
Default under this paragraph (ix) shall not be deemed to have occurred
(a) during the 45-day period following the first day on which either
of the Banks fails to comply with any of its Regulatory Capital
Requirements, if within such 45-day period such Bank files a capital
plan with the OTS, (b) during the 60-day period following the initial
submission of a capital plan to the OTS by such Bank (or, if the OTS
notifies such Bank in writing that it needs a longer period of time to
determine whether to approve such capital plan, such longer period as
is so specified by the OTS), unless prior to such date the OTS shall
have notified such Bank of its determination not to approve such
capital plan, or (c) during the period that such Bank is operating in
material compliance with a capital plan approved by the OTS; provided,
further, that if such Bank meets the minimum amount of capital
required to meet each of the industry-wide regulatory capital
requirements pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R. Part
567 (and any amendment to either thereof) or any successor law or
regulation, notwithstanding such Bank's failure to meet an individual
minimum capital requirement pursuant to 12 U.S.C. Section 1464(s) and
12 C.F.R. Section 567.3 (and any amendment to either thereof) or any
successor law or regulation, no Event of Default shall have occurred
pursuant to this clause unless written notice thereof shall have been
given (x) to the Company by the Trustee or (y) to the Company and the
Trustee by the Holders of 25% in aggregate principal amount of the
Senior Notes then outstanding.
The Company has covenanted in the Indenture to file annually with the
Trustee a statement regarding compliance by the Company with the terms of the
Indenture and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of not less than 25% in principal amount of the Senior Notes then
outstanding may declare all the Senior Notes to be immediately due and payable
by notice to the Company (and to the Trustee if given by the Holders). Under
certain circumstances, the Holders of a majority in principal amount of the
Senior Notes then Outstanding may rescind such a declaration.
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Defeasance
The Indenture provides that (A) if applicable, the Company will be
discharged from any and all obligations in respect of then Outstanding Senior
Notes, other than the obligation to duly and punctually pay the principal of,
premium, if any, and interest on, the Senior Notes in accordance with the terms
of the Senior Notes and the Indenture, or (B) if applicable, the Company may
omit to comply with certain restrictive covenants, and that such omission shall
not be deemed to be an Event of Default under the Indenture or the Senior Notes,
in either case (A) or (B); upon irrevocable deposit with the Trustee, in trust,
of money and/or U.S. Government Obligations which will provide money in an
amount sufficient in the opinion of a nationally-recognized accounting firm to
pay the principal of and premium, if any, and each installment of interest, if
any, on the Outstanding Senior Notes. With respect to clause (B), the
obligations under the Indenture other than with respect to such covenants shall
remain in full force and effect. Such trust may only be established if, among
other things, (i) with respect to clause (A), the Company has received from, or
there has been published by, the IRS a ruling or there has been a change in law,
which in an Opinion of Counsel provides that Holders of the Senior Notes will
not recognize gain or loss for federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to federal income tax on
the same amount, in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred; or with respect
to clause (B), the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Senior Note will not recognize gain or loss
for Federal income tax purposes as a result of such deposit and defeasance and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred; (ii) no Event of Default or event that with the passing of time or
the giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing; and (iii) certain other customary conditions
precedent are satisfied.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to
surviving rights of registration of transfer or exchange of the Senior Notes, as
expressly provided for in the Indenture) as to all outstanding Senior Notes when
(i) either (a) all the Senior Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Senior Notes which have been replaced or paid)
have been delivered to the Trustee for cancellation or (b) all Senior Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable, or will become due and payable or are to be called for redemption
within one year, and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the Senior Notes not theretofore delivered to the
Trustee for cancellation, for principal of, and premium, if any, and interest on
the Senior Notes to the date of deposit together with irrevocable instructions
to the Trustee from the Company directing the Trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be; (ii) the Company
has paid all other sums payable under the Indenture by the Company; and (iii)
the Company has delivered to the Trustee an Officers'
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Certificate and an Opinion of Counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
The Indenture, and provisions of the Trust Indenture Act incorporated
by reference, contain limitations on the rights of the Trustee, should it become
a creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
Governing Law
The Indenture provides that it and the Senior Notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
Certain Definitions
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings corresponding to the
foregoing.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of this Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents in the equity (however designated) of such
Person and any rights (other than debt
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securities convertible into an equity interest), warrants or options to acquire
an equity interest in such Person.
"Change of Control" means the occurrence of any of the following
events: (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 25% of the total
Voting Stock of the Company, (ii) the Company consolidates with, or merges into,
another person, or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any person, or any person
consolidates with, or merges into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction between the Company and a Wholly Owned Subsidiary, or (iii) during
any period of two consecutive years, individuals who at the beginning of such
period constituted the Company's Board of Directors (together with any new
directors whose elections by the Company's Board of Directors or whose
nomination for elections by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the directors then in office.
"Consolidated Net Income (Loss)" of any Person means, for any period,
the consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward), less all
fees and expenses relating thereto, net of taxes, (ii) the portion of net income
(or loss) of any other Person (other than any of such Person's consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan or (v) the net income of any consolidated Subsidiary of such Person
to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; provided that,
upon the termination or expiration of such dividend or distribution
restrictions, the portion of net income (or loss) of such consolidated
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income (Loss) of such Person to the extent of the amount of
dividends or other distributions available to be paid to such Person in cash by
such Subsidiary.
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"Consolidated Tangible Net Worth" of any Person and its Subsidiaries
means as of the date of determination all amounts that would be included under
stockholders' equity on a consolidated balance sheet of such Person and its
Subsidiaries determined in accordance with GAAP, less an amount equal to the
consolidated intangible assets (other than capitalized mortgage servicing
rights) of such Person and its Subsidiaries determined in accordance with GAAP.
"Default" means any event that upon notice or the passage of time or
both would be an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part on, or prior to, or is
exchangeable for debt securities of the Company or its Subsidiaries prior to,
the final Stated Maturity of principal of the Senior Notes; provided that only
the amount of such Capital Stock that matures or is redeemable prior to the
Stated Maturity of principal of the Senior Notes shall be deemed to be
Disqualified Capital Stock.
"Fair Market Value" means, with respect to any asset, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of which is under
compulsion to complete the transaction as determined by the Board of Directors
of the Company, acting in good faith, and shall be evidenced by a Board
Resolution delivered to the Trustee.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication,
all Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness; (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against loss;
(iii) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without requiring that
such property be received or such services be rendered); (iv) to maintain
working capital or equity capital of the debtor, or otherwise to maintain the
net worth, solvency or other financial condition of the debtor; or (v) otherwise
to assure a creditor with respect to Indebtedness against loss; provided that
the term "guarantee" shall not include endorsements for collection of deposit,
in the ordinary course of business.
"Holder" when used with respect to any Senior Note means a Noteholder.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services,
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excluding any trade payables and other accrued current liabilities arising in
the ordinary course of business, but including, without limitation, all
obligations, contingent or otherwise, of such Person in connection with any
letters of credit issued under letter of credit facilities, and in connection
with any agreement by such Person to purchase, redeem, exchange, convert or
otherwise acquire for value any Capital Stock of such Person now or hereafter
outstanding; (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments; (iii) all indebtedness of such Person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), but excluding trade
payables arising in the ordinary course of business; (iv) all obligations under
interest rate agreements of such Person; (v) all Capital Lease Obligations of
such Person; (vi) all Indebtedness referred to in clauses (i) through (v) above
of other Persons and all dividends payable by other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness (the amount of such obligations
being deemed to be the lesser of the value of such property or asset or the
amount of the obligations so secured); (vii) all guarantees by such Person of
Guaranteed Indebtedness; (viii) all Disqualified Capital Stock (valued at the
greater of book value and voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends) of such Person; and (ix) any amendment,
supplement, modification, deferral, renewal, extension, refunding or refinancing
or any liability of the types referred to in clauses (i) through (viii) above.
For purposes hereof, (x) the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value is to be determined in good faith by the
board of directors (or any duly authorized committee thereof) of the issuer of
such Disqualified Capital Stock, and (y) Indebtedness is deemed to be incurred
pursuant to a revolving credit facility each time an advance is made thereunder.
"Issue Date" means September 8, 1997.
"Junior Indebtedness" means any Indebtedness of the Company
subordinated in right of payment of either principal, premium (if any) or
interest thereon to the Senior Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days from
the determination date: (a) repurchase
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agreements on obligations of, or are guaranteed as to timely receipt of
principal and interest by, the United States or any agency or instrumentality
thereof when such obligations are backed by the full faith and credit of the
United States, provided that the party agreeing to repurchase such obligations
is a primary dealer in U.S. government securities, (b) federal funds and deposit
accounts, including but not limited to certificates of deposit, time deposits
and bankers' acceptances of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state, provided that the
debt of such depository institution or trust company at the date of acquisition
thereof has been rated by Standard & Poor's Corporation in the highest
short-term rating category or has an equivalent rating from another nationally
recognized rating agency, or (c) commercial paper of any corporation
incorporated under the laws of the United States or any state thereof that on
the date of acquisition is rated investment grade by Standard & Poor's
Corporation or has an equivalent rating from another nationally recognized
rating agency; (iii) any debt instrument which is an obligation of, or is
guaranteed as to the receipt of principal and interest by the United States, its
agencies or any U.S. government sponsored enterprise, or (iv) any
mortgage-backed or mortgage-related security issued by the United States, its
agencies, or any U.S. government sponsored enterprise, as to which the payment
of principal and interest from the mortgages underlying such securities will be
passed through to the holder thereof and which has a remaining weighted average
maturity of 15 years or less. Notwithstanding the forgoing, Liquid Assets shall
not include any debt instruments, securities or collateralized mortgage
obligations (real estate mortgage investment conduits) that would be classified
as a "High-Risk Mortgage Security" pursuant to the policy statement adopted by
the Federal Financial Institutions Examination Counsel on February 10, 1992, as
reflected in Volume I of the Federal Reserve Report Service, Part 3-1562.
"Net Cash Proceeds" means, with respect to any issuance or sale of
Capital Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, the
proceeds of such issuance or sale or capital contribution in the form of cash or
cash equivalents, including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed for, cash
or cash equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary of the Company), net of
attorney's fees, accountant's fees and brokerage, consulting, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale or capital contribution and net of taxes paid or payable by the Company as
a result thereof.
"Noteholder" means a Person is whose name a Senior Note is registered
in the Note Register.
"Permitted Investments" means one or more of the following types of
investments:
(i) interest-bearing deposit accounts of any "insured depository
institution," as defined in Section 3(c) of the Federal Deposit
Insurance Act, as amended;
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(ii) direct obligations of, or obligations the principal and
interest on which are unconditionally guaranteed by, the United States
of America or any agency or instrumentality thereof;
(iii) obligations of any corporate issuer which are rated in one
of the two highest rating categories of any nationally-recognized
statistical rating organization;
(iv) repurchase agreements with banks, brokers or dealers
involving any of the foregoing types of securities; and
(v) money market mutual funds;
provided that, notwithstanding anything to the contrary contained herein,
Permitted Investments shall not include any of the foregoing investments to the
extent that any such investment, in the good faith business judgment of the
Board of Directors of the Company, involves at the time of acquisition or
thereafter a reasonable likelihood of a loss of principal.
"Permitted Payment" means, so long as no Default or Event of Default
is continuing,
(a) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Capital Stock of the Company or any Affiliate (other
than a Wholly-Owned Subsidiary, which is unrestricted) of the Company, or any
Junior Indebtedness of the Company which may be incurred pursuant to the
covenant described above under "--Certain Covenants--Limitations of
Indebtedness" in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege where, in connection therewith, cash
is paid in lieu of the issuance of fractional shares or scrip), or out of the
Net Cash Proceeds or Fair Market Value of property not constituting Net Cash
Proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company or to an employee benefit plan of the Company or any
of its Subsidiaries) of Qualified Capital Stock of the Company; provided that
the Net Cash Proceeds or Fair Market Value of such property received by the
Company from the issuance of such shares of Qualified Capital Stock, to the
extent so utilized, shall be excluded from clause (c)(iii) of the covenant
described above under "--Certain Covenants--Limitations on Restricted
Payments;" and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness of the Company which may be
incurred pursuant to the covenant described under "--Certain Covenants
- --Limitations on Indebtedness" above in exchange for, or out of the Net Cash
Proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of new Indebtedness to the Company (such a
transaction, a "refinancing"); provided, that any such new Indebtedness of the
Company (i) shall be in a principal amount that does not exceed an amount equal
to the sum of (A) the principal amount of the Junior Indebtedness so refinanced
less any discount from the face amount of such Junior Indebtedness to be
refinanced expected to be deducted from the amount payable to the holders of
such Junior Indebtedness in connection with such refinancing, (B) the amount of
any premium
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expected to be paid in connection with such refinancing pursuant to the terms of
any Junior Indebtedness of the Company which may be incurred pursuant to the
covenant described above under "--Certain Covenants--Limitations on
Indebtedness" refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a tender
offer, privately negotiated repurchase or otherwise and (C) the amount of legal,
accounting, printing and other similar expenses of the Company incurred in
connection with such refinancing; provided, further, that for purposes of this
clause (i), the principal amount of any Indebtedness shall be deemed to mean the
principal amount thereof or, if such Indebtedness provides for an amount less
than the principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination; (ii)
each Stated Maturity of principal (or any required repurchase, redemption,
defeasance or sinking fund payments) of such new Indebtedness shall be after the
final Stated Maturity of principal of the Senior Notes then outstanding; and
(iii) is made expressly subordinated to the Senior Notes to substantially the
same extent as the Junior Indebtedness being refinanced or expressly subordinate
to such refinanced Indebtedness.
"Person" means any natural person, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means (i) the minimum amount of
capital required to meet each of the industry-wide regulatory capital
requirements applicable to the Banks pursuant to 12 U.S.C. Section 1464(t) and
12 C.F.R. Part 567 (and any amendment to either thereof) or any successor law or
regulation, and (ii) such higher amount of capital as the Banks, individually,
are required to maintain in order to meet any individual minimum capital
standard applicable to the Banks pursuant to 12 U.S.C. Section 1464(s) and 12
C.F.R. Section 567.3 (and any amendment to either thereof) or any successor law
or regulation.
"Restricted Payment" means:
(a) the declaration, payment or setting apart of any funds for the
payment of any dividend on, or making of any distribution to holders of, the
Capital Stock of the Company or any Subsidiary of the Company (other than (i)
dividends or distributions in Qualified Capital Stock of the Company and, and
(ii) dividends or distributions payable on or in respect of any class or series
of Capital Stock of a Subsidiary of the Company as long as the Company receives
at least its pro rata share of such dividends or distributions in accordance
with its ownership interests in such class or series of Capital Stock);
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any Capital Stock of the Company or any
Affiliate of the Company (other than a Wholly Owned Subsidiary); or
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(c) the making of any principal payments on, or repurchase,
redemption, defeasance, retirement or other acquisition for value, directly or
indirectly, of any Junior Indebtedness, prior to the Stated Maturity of
principal or scheduled redemption or defeasance of, or any scheduled sinking
fund payment on, such Junior Indebtedness.
"Stated Maturity" when used with respect to any Senior Note or any
installment of interest thereon means the date specified in such Senior Note as
the fixed date on which the principal of such Senior Note or such installment of
interest is due and payable.
"Subsidiary" means any corporation of which at least a majority of the
outstanding stock having ordinary voting power to elect a majority of the
directors of such corporation, irrespective of whether or not at the time stock
of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency, is at the time
directly or indirectly owned by the Company, by one or more Subsidiaries of the
Company, or by the Company and one or more Subsidiaries.
"Voting Stock" means Capital Stock of any class or classes, however
designated, having ordinary voting power for the election of a majority of the
board of directors, other than stock having such power only by reason of the
occurrence of a contingency.
"Wholly Owned Subsidiary" means a Subsidiary of which all of the
outstanding Capital Stock (other than directors' qualifying shares) is at the
time directly or indirectly owned by the Company, or by one or more Wholly Owned
Subsidiaries or by the Company and one or more Wholly Owned Subsidiaries.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 30,000,000 shares of capital stock,
of which 25,000,000 are shares of Common Stock, par value $.01 per share, and
5,000,000 are shares of preferred stock, par value $.01 per share. As of
February 16, 1998, an aggregate of 20,537,209 shares of Common Stock were
outstanding and no shares of preferred stock were outstanding. Each share of
Common Stock has the same relative rights as, and is identical in all respects
with, each other share of Common Stock. The Common Stock is not subject to call
for redemption.
The capital stock of the Company does not represent nonwithdrawable
capital, is not an account of an insurable type, and is not insured by the FDIC.
Common Stock
Dividends. Although there are no present plans to do so, the Company
can pay dividends if, as and when declared by its Board of Directors, subject to
compliance with limitations which
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are imposed by law. See "Dividends and Market for Common Stock" and
"Regulation--Regulation of Federal Savings Institutions--Capital Distribution
Regulation." The holders of Common Stock of the Company are entitled to receive
and share equally in such dividends as may be declared by the Board of Directors
of the Company out of funds legally available therefor. If the Company issues
preferred stock, the holders thereof may have a priority over the holders of the
Common Stock with respect to dividends.
Voting Rights. The holders of Common Stock of the Company possess
exclusive voting rights in the Company. They elect the Company's Board of
Directors and act on such other matters as are required to be presented to them
under Delaware law or the Company's Certificate of Incorporation or as are
otherwise presented to them by the Board of Directors. Each holder of Common
Stock is entitled to one vote per share and does not have any right to cumulate
votes in the election of directors. Although there are no present plans to do
so, if the Company issues preferred stock, holders of the preferred stock may
also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Banks, the Company, as the sole holder of the Banks' capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Banks (including all deposit accounts and accrued
interest thereon), all assets of the Banks available for distribution. In the
event of any liquidation, dissolution or winding up of the Company, the holders
of its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, including the Senior Notes, all of the
assets of the Company available for distribution. If preferred stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company
generally are not entitled to preemptive rights with respect to any shares which
may be issued in the future. However, pursuant to the terms of the Purchase
Agreement, the Company has agreed not to issue any capital securities or permit
the Banks to issue any capital securities to any person without first offering
to purchasers of the Common Stock in the Private Placement who continue to hold
such Common Stock the opportunity to purchase all or part of such capital
securities being issued at the same purchase price and on the same terms as are
proposed to be offered to such third party purchaser. This right does not apply
to the issuance of capital securities pursuant to or in connection with (i) a
reorganization, merger or consolidation of the Company or the Banks or a sale,
disposition or other transfer of all or substantially all of the assets of the
Company or the Banks, (ii) any conversion or exchange of any capital securities
in accordance with the terms of such securities, (iii) any employee benefit
plans of the Company, (iv) any stock dividends, or pro rata (as to any class)
split-ups, combinations or exchanges of or similar transactions involving
capital securities, (v) any bona fide public offering of capital securities
which is registered under the Securities Act, and (vi) any issuance of capital
securities to Edward A. Townsend or Jan A. Norton pursuant to the acquisition by
the Company of Green Country.
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Preferred Stock
None of the shares of the Company's authorized preferred stock has
been issued. The Board of Directors of the Company is authorized to issue
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The preferred stock may be issued in distinctly designated
series, may be convertible into Common Stock and may rank prior to the Common
Stock as to dividend rights, liquidation preferences, or both.
The authorized but unissued shares of preferred stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available for
issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in which the additional authorized shares of
preferred stock would be issued, stockholder approval generally would not be
required for the issuance of these shares. Depending on the circumstances,
however, stockholder approval may be required pursuant to the requirements for
listing the Common Stock on the Nasdaq Stock Market or any exchange on which the
Common Stock may then be listed, if any.
Restrictions on Acquisition of the Company
Restrictions in the Company's Certificate of Incorporation and Bylaws.
A number of provisions of the Company's Certificate of Incorporation, as amended
("Certificate of Incorporation"), and Bylaws ("Bylaws") deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of the Company's
Certificate of Incorporation and Bylaws which might be deemed to have a
potential "anti-takeover" effect. Reference should be made in each case to such
Certificate of Incorporation and Bylaws. See "Additional Information."
Board of Directors. Article 6 of the Certificate of Incorporation and
Article III of the Bylaws of the Company contain provisions relating to the
Board of Directors and provides, among other things, that the Board of Directors
shall be divided into three classes as nearly equal in number as possible with
the term of office of one class expiring each year. See "Management." Cumulative
voting in the election of directors is prohibited by Article 4 of the
Certificate of Incorporation. Directors may be removed only with cause at a duly
constituted meeting of stockholders called expressly for that purpose. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the concurring
vote of a majority of the Directors then in office, though less than a quorum of
the Board, and a director appointed to fill a vacancy shall serve for the
remainder of the term to which the director has been elected, and until his
successor has been elected and qualified.
The Bylaws govern nominations for election to the Board, and provide
that nominations for election to the Board of Directors may be made at a meeting
of stockholders by or at the
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direction of the Board of Directors or by any stockholder eligible to vote at an
annual meeting of stockholders who has complied with specified notice
requirements. Written notice of a stockholder nomination must be delivered to,
or mailed to and received at, the Company's principal executive offices not less
than forty-five days or more than ninety days prior to the meeting. In the event
that less than sixty days' notice of the date of the meeting is given to
stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made.
Limitation of Liability. The Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable for
monetary damages for any breach of fiduciary duty by such director as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law ("DGCL")
for approval of an unlawful dividend or an unlawful stock purchase or
redemption, or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification of Directors, Officers, Employees and Agents. The
Company's Bylaws provide that the Company shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, except actions by or in right of the
Company, whether civil, criminal, administrative or investigative, by reason of
the fact that such person is or was a director, officer, employee or agent of
the Company against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The Company's Bylaws also provide that reasonable expenses incurred by
a director, officer, employee or agent of the Company in defending any civil,
criminal, suit or proceeding described above shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding to the
fullest extent permitted under Delaware law.
Special Meetings of Stockholders and Stockholder Proposals. The
Company's Certificate of Incorporation provides that special meetings of the
Company's stockholders, for any purpose or purposes, may be called by the
Chairman of the Board, the President, the affirmative vote of a majority of the
Board of Directors then in office at a duly constituted meeting of the Board of
Directors of the Company called for such purpose, or by the President of the
Company upon written request of the holders of at least a majority of the shares
of any class of capital stock then outstanding. The Company's Bylaws provide
that only such business as shall have been properly brought before an annual
meeting of stockholders shall be conducted at the annual meeting. In order to be
properly brought before an annual meeting, business must be (a) specified in the
notice given by or at the direction of the Board of Directors, (b) otherwise
properly brought
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before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. For stockholder
proposals to be included in the Company's proxy materials, the stockholder must
comply with all the timing and informational requirements of Rule 14a-8 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). With respect to
stockholder proposals to be considered at the annual meeting of stockholders but
not included in the Company's proxy materials, the stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 45 days or more than 90 days prior to the meeting. In the
event that less than 60 days' notice of the date of the meeting is given to
stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made.
Amendment of Certificate of Incorporation and Bylaws. The Company's
Certificate of Incorporation generally provides that any amendment of the
Certificate of Incorporation must be first approved by a majority of the Board
of Directors and, to the extent required by law, then by the holders of a
majority of the shares of the Company entitled to vote in an election of
directors. The Company's Bylaws may be amended either by a vote of at least
two-thirds of the Board of Directors then in office or by the vote of at least a
majority of the shares eligible to be voted at a duly constituted meeting of
stockholders for such purpose.
Other Restrictions on Acquisition of the Company. Several provisions
of the DGCL could affect the acquisition of Common Stock or control of the
Company. Section 203 of the DGCL generally provides that a Delaware corporation
shall not engage in any "business combination" with an "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder unless (1) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or (2)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for this purpose, shares owned by persons who are directors
and also officers and shares owned by employee stock ownership plans in which
employee participants do not have the right to determine confidentially whether
the shares held subject to the plan will be tendered in a tender offer or
exchange offer; or (3) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. The
three-year prohibition on business combinations with an interested stockholder
does not apply under certain circumstances, including business combinations with
a corporation which does not have a class of voting stock that is (i) listed on
a national securities exchange, (ii) authorized for quotation on an inter-dealer
quotation system of a registered national securities association, or (iii) held
of record by more than 2,000 stockholders, unless in each case this result was
directly or indirectly caused by the interested stockholder.
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An "interested stockholder" generally means any person that (i) is the
owner of 15% of more of the outstanding voting stock of the corporation or (ii)
is an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various other
transactions which may benefit an interested stockholder.
The Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings association unless the OTS has been given 60
days' prior written notice. The HOLA provides that no company may acquire
"control" of a savings association without the prior approval of the OTS. Any
company that acquires such control becomes a savings and loan holding company
subject to registration, examination and regulation by the OTS. See
"Regulation--Regulation of Savings and Loan Holding Companies--Holding Company
Acquisitions."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company, New York, New York.
REGISTRATION RIGHTS
In connection with the Private Placement, the Company on September 8,
1997 entered into the Registration Rights Agreement with the initial purchasers
of the Local Securities and with FBR, the Placement Agent in the Private
Placement, pursuant to which the Company agreed to (i) cause to be filed with
the Commission within 120 days after the original issuance of the Local
Securities pursuant to the Purchase Agreement, a shelf registration statement
providing for the offer and sale of the Local Securities issued in the Private
Placement, including Common Stock which is issuable pursuant to the exercise of
warrants granted to the Placement Agent, (ii) use its best efforts to cause the
shelf registration statement to be declared effective under the Securities Act
as promptly as possible and (iii) use its best efforts to keep effective the
shelf registration statement until the earlier of the second anniversary of the
date such shelf registration statement is declared effective by the Commission
or such time as all of the Local Securities and the Placement Agent's warrants
have been sold thereunder or otherwise may be sold without the need for the
shelf registration statement, as set forth in the Registration Rights Agreement.
In addition, pursuant to the Merger Agreement with Green Country, the Company
has agreed to register under the Securities Act the Common Stock to be issued in
connection with the Merger pursuant to the same terms and conditions as are set
forth in the Registration Rights Agreement. The Company agreed to bear the
expenses arising out of the filing of such shelf registration statement. The
Registration Statement of which this Prospectus forms a part has been filed to
139
<PAGE>
satisfy the Company's obligations under the Registration Rights Agreement and
the Merger Agreement.
Pursuant to the terms of the Registration Rights Agreement, a holder
of Local Securities and the Placement Agent desiring to sell some or all of such
securities pursuant to the shelf registration statement shall give the Company
not less than five days' prior written notice, and the Company will use its best
efforts to promptly file any required amendment(s) to the shelf registration
statement in order to facilitate such sales. Initiating Holders, as defined in
the Registration Rights Agreement to mean one or more holders of either not less
than 35% in aggregate principal amount of Senior Notes or not less than 25% of
the then-outstanding Common Stock, may elect that the offering of Local
Securities be in the form of an underwritten offering. Under such circumstances,
the Company will provide written notice to all holders of the Local Securities
and the Placement Agent of such underwritten offering and will provide them with
an opportunity to participate in such underwritten offering, under terms and
with such conditions as set forth in the Registration Rights Agreement.
Under the Registration Rights Agreement, a holder that sells Local
Securities pursuant to the shelf registration statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification rights and
obligations). Each holder of Local Securities may be required to deliver
information to be used in connection with the shelf registration statement in
order to have such holder's Local Securities included in the shelf registration
statement and to benefit from the provisions of the succeeding paragraph.
Each of the Local Securities and the Placement Agent's warrants
contain a legend to the effect that the holder thereof, by its acceptance
thereof, is deemed to have agreed to be bound by the provisions of the
Registration Rights Agreement. In that regard, each holder is deemed to have
agreed that, upon receipt of notice from the Company of the occurrence of any
event which makes a statement in the prospectus which is part of the shelf
registration statement untrue in any material respect or which requires the
making of any changes in such prospectus in order to make the statements therein
not misleading, such holder will suspend the sale of Local Securities pursuant
to such prospectus until the Company has amended or supplemented such prospectus
to correct such misstatement or omission and has furnished copies of the amended
or supplemented prospectus to such holder or the Company has given notice that
the sale of the Local Securities may be resumed.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of Delaware. The summary herein of
certain provisions of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement.
140
<PAGE>
PLAN OF DISTRIBUTION
The Local Securities offered hereby may be sold from time to time to
purchasers directly by the Selling Holders at market prices or at negotiated
prices. Alternatively, the Selling Holders may from time to time offer the Local
Securities to or through underwriters, dealers or agents who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Holders or the purchasers of Local Securities, for whom they
may act as agents. The Selling Holders and any underwriters, dealers or agents
which participate in the distribution of Local Securities may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Local Securities by them and any discounts, commissions, concessions or
other compensation received by any such underwriter, dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Local Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Local Securities may be effected in transactions (which may involve
crosses or block transactions) (i) on any national securities exchange or
quotation service on which the Local Securities may be listed or quoted at the
time of sale, (ii) in the over-the-counter market or (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market. At the time
a particular offering of the Local Securities is made, a Prospectus Supplement,
if required, will be distributed which will set forth the aggregate amount and
type of Local Securities being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, any discounts,
commissions and other terms constituting compensation from the Selling Holders
and any discounts, commissions or concessions allowed or reallowed or paid to
dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the Local Securities will be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Local Securities may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Local Securities may not simultaneously
engage in market-making activities with respect to such securities for a
restricted period prior to the commencement of such distribution. In addition to
and without limiting the foregoing, each Selling Holder and any other person
participating in a distribution will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Rules 102, 103 and 104, which provisions may limit the timing of
purchases and sales of any of the securities by the Selling Holders or any such
other person. All of the foregoing may affect the marketability of the Local
Securities and brokers' and dealers' ability to engage in market-making
activities with respect to these securities.
141
<PAGE>
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Local Securities will be paid by the Company, including,
without limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts and selling commissions, if any. The Selling
Holders will be indemnified by the Company against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith. The Company will indemnified by the
Selling Holders against certain civil liabilities, including certain liabilities
under the Securities Act, or will be entitled to contribution in connection
therewith.
SHARES ELIGIBLE FOR FUTURE SALE
As of February 16, 1998, there were 20,537,209 shares of Common Stock
of the Company outstanding (not including 60 shares held in the Company's
treasury). All shares of Common Stock sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by affiliates of the Company, as that term is
defined in Rule 144 under the Securities Act, may generally only be resold in
compliance with applicable provisions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year is entitled to sell, within any three-month period,
a number of such shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the date of the notice
filed pursuant to Rule 144. Sales under Rule 144 are also subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is
deemed an "affiliate" of the Company must comply with Rule 144 in any sale of
shares of Common Stock not covered by a registration statement (except, in the
case of registered shares acquired by the affiliate on the open market, for the
holding period requirement). A person (or person whose shares are aggregated)
who is not deemed an "affiliate" of the Company and who has beneficially owned
restricted shares for at least two years is entitled to sell such shares under
Rule 144(k) without regard to the volume, notice and other limitations of Rule
144. In meeting the one and two year holding periods described above, a holder
of restricted shares can include the holding periods of a prior owner who was
not an affiliate.
The Company has reserved 1,420,370 shares for grants under its
existing Stock Option Plan. As of September 30, 1997, the Company had options
outstanding to purchase up to 1,116,005 shares of Common Stock. In December
1997, the Company granted options to officers and directors to purchase up to an
additional 218,000 shares of Common Stock. See "Management--Stock Option Plan."
The Company intends to file a registration statement under the Securities Act to
register all shares of Common Stock issuable under such Stock Option Plan.
Shares covered by this registration statement will be eligible for sale in the
public market after the effective date of such registration statement.
142
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December
31, 1997 and for the six month period ended December 31, 1997, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of the Company as of June 30,
1997 and 1996, and for each of the years in the three-year period ended June 30,
1997, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report, with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
CHANGE IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On October 8, 1997, pursuant to authorization of its Board of
Directors, the Company dismissed the firm of Arthur Andersen LLP (Arthur
Andersen) as its auditors and retained KPMG Peat Marwick LLP. Arthur Andersen's
report for each of the three fiscal years ended June 30, 1997 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to audit scope or accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim period immediately preceding the change in accountants, there were no
disagreements with Arthur Andersen on any matter of accounting principles or
practice, financial statement disclosure, or auditing scope or procedure, which
if not resolved to the satisfaction of Arthur Andersen would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports on the Company's financial statements. During the Company's two
most recent fiscal years and the subsequent interim period immediately preceding
the change in accountants, there was one reportable event (as that term is used
in Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the Exchange Act), as
discussed in the next paragraph.
In connection with its audit of the Company's consolidated financial
statements as of and for the year ended June 30, 1997, Arthur Andersen reported
to the audit committee of the Company's board of directors that a material
weakness existed in the system of internal control, specifically that an
adequate system of control was not in effect at June 30, 1997, to provide
reasonable assurance that Local Federal was able to estimate and establish an
adequate allowance for loan losses with respect to its indirect automobile loan
portfolio. Management reported and Arthur Andersen concurred with management's
assertion in the reports required by the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) that Local Federal maintained an effective internal
control structure over financial reporting as of June 30, 1997, except for the
internal control structure over estimating and establishing an adequate
allowance for loan losses with respect to its indirect automobile loan
portfolio.
During fiscal 1997 and 1996, prior to their appointment as certifying
accountants, the Company did not consult KPMG Peat Marwick LLP regarding any of
the matters of events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
CERTAIN LEGAL MATTERS
The validity of the Local Securities offered hereby will be passed
upon for the Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
Certain members of Elias, Matz, Tiernan & Herrick L.L.P. beneficially own shares
of the Company's Common Stock and Senior Notes. The aggregate amount of such
holdings of Common Stock and Senior Notes do not exceed 432,000 shares and
$25,000, respectively.
143
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part) on Form S-1 (the "Registration Statement")
under the Securities Act, with respect to the Local Securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. The terms of all material
contracts or other documents with respect to the Company are discussed in all
material respects herein. For further information regarding the Company and the
Local Securities offered hereby, reference is made to the Registration Statement
and the exhibits thereto.
As a result of the Offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith, will
file reports and other information with the Commission. The Registration
Statement and the exhibits forming a part thereof filed by the Company with the
Commission, and reports and other information filed by the Company with the
Commission, can be inspected without charge at, and copies can be obtained from
the Commission, at prescribed rates, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
144
<PAGE>
LOCAL FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ...................................... F-1
Report of Independent Public Accountants .......................... F-2
Audited Consolidated Financial Statements:
Consolidated Statements of Financial Condition ........... F-3
Consolidated Statements of Operations .................... F-4
Consolidated Statements of Stockholders' Equity .......... F-5
Consolidated Statements of Cash Flows .................... F-6
Notes to Consolidated Financial Statements ............... F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Local Financial Corporation:
We have audited the accompanying consolidated statement of financial condition
of Local Financial Corporation and subsidiary (the Company) as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the six months ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Local Financial
Corporation and subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for the six months ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
February 6, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Local Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Local Financial Corporation and subsidiary (the "Company"), as of June 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Local Financial
Corporation and subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
August 27, 1997 (except with
respect to the matter discussed
in Note 2, as to which the date
is September 8, 1997)
F-2
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------------------------
ASSETS 1997 1997 1996
------ ---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 34,152 $ 15,904 $ 13,640
Interest bearing deposits with other banks 20,000 89,500 --
Securities purchased under agreements to resell 178,000 -- --
Securities available for sale 518,107 985,565 1,741,725
Securities held to maturity -- 408,207 392,324
Equity securities available for sale -- -- 11,604
Loans receivable, net of allowance for loan losses of $20,484
at December 31, 1997, $11,435 at June 30, 1997, and $3,228 at
June 30, 1996 953,470 1,013,824 1,018,135
Federal Home Loan Bank of Topeka stock, at cost 45,147 40,046 23,421
Premises and equipment, net 10,646 11,060 11,035
Assets acquired through foreclosure and repossession, net 260 8,399 10,582
Intangible assets, net 1,779 2,398 3,636
Deferred tax asset, net 26,058 16,976 24,439
Current income taxes receivable 28,427 13,568 6,281
Other assets 65,319 19,734 21,689
----------- ----------- -----------
Total assets $ 1,881,365 $ 2,625,181 $ 3,278,511
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 247,264 $ 248,322 $ 238,511
Savings 68,937 71,576 73,726
Time 1,286,332 1,324,458 1,290,223
----------- ----------- -----------
Total deposits 1,602,533 1,644,356 1,602,460
Advances from borrowers for taxes and insurance 5,046 7,481 6,939
Securities sold under agreements to repurchase -- 310,801 1,079,194
Advances from the Federal Home Loan Bank of Topeka 80,136 531,161 439,011
Senior notes 80,000 -- --
Note payable -- 7,010 14,020
Other liabilities 31,025 21,743 28,828
----------- ----------- -----------
Total liabilities 1,798,740 2,522,552 3,170,452
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
19,700,060 shares issued and 19,700,000 shares outstanding at
December 31, 1997; 2,000 shares authorized; 60 shares issued
and outstanding at June 30, 1997 and 1996 197 -- --
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- -- --
Additional paid-in capital 197,766 16,896 8,797
Retained earnings 31,760 117,716 147,761
Treasury stock, 60 shares, at cost (149,436) -- --
Unrealized gains (losses) on securities available for
sale, net of income tax provision (benefit) of
$1,259, ($17,222) and ($26,114), respectively 2,338 (31,983) (48,499)
----------- ----------- -----------
Total stockholders' equity 82,625 102,629 108,059
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,881,365 $ 2,625,181 $ 3,278,511
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
------------------ --------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 49,788 $ 53,179 $ 107,715 $ 95,839 $ 74,791
Securities available for sale 28,113 51,158 81,861 61,939 19,767
Securities held to maturity 3,193 11,018 27,363 72,822 114,284
Federal Home Loan Bank of Topeka stock 1,677 2,265 3,658 3,220 3,719
Other investments 2,433 1,480 2,067 2,336 1,997
--------- --------- --------- --------- ---------
Total interest and dividend
income 85,204 119,100 222,664 236,156 214,558
--------- --------- --------- --------- ---------
Interest expense:
Deposit accounts 40,672 41,219 83,091 81,173 68,235
Advances from the Federal Home Loan
Bank of Topeka 14,005 32,353 57,442 58,309 55,747
Securities sold under agreements to
repurchase 2,073 18,426 28,202 46,400 36,503
Notes payable 3,073 564 1,026 1,606 2,105
--------- --------- --------- --------- ---------
Total interest expense 59,823 92,562 169,761 187,488 162,590
--------- --------- --------- --------- ---------
Net interest and dividend income 25,381 26,538 52,903 48,668 51,968
Provision for loan losses (25,578) (9,734) (28,428) (5,117) (1,157)
--------- --------- --------- --------- ---------
Net interest and dividend income (loss)
after provision for loan losses (197) 16,804 24,475 43,551 50,811
--------- --------- --------- --------- ---------
Noninterest income:
Deposit related income 4,105 3,665 7,410 5,800 5,507
Loan fees and loan service charges 981 1,029 2,730 2,197 2,010
Net gains (losses) on sale of assets (112,669) (3,024) (29,183) 1,248 8,145
Other 434 515 1,919 1,071 970
--------- --------- --------- --------- ---------
Total noninterest income (loss) (107,149) 2,185 (17,124) 10,316 16,632
--------- --------- --------- --------- ---------
Noninterest expense:
Compensation and employee benefits 7,731 7,160 14,588 14,177 23,776
Deposit insurance premiums 522 11,942 12,470 3,617 3,535
Provision for uninsured risk -- 600 3,300 1,372 5,728
Equipment and data processing 1,485 1,530 3,080 2,847 2,600
Occupancy 1,416 1,480 2,873 2,595 2,361
Advertising 522 875 1,556 1,131 1,310
Professional fees 984 575 1,152 825 970
Other 10,025 5,210 10,237 8,863 6,180
--------- --------- --------- --------- ---------
Total noninterest expense 22,685 29,372 49,256 35,427 46,460
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes (130,031) (10,383) (41,905) 18,440 20,983
Provision (benefit) for income taxes (44,075) (3,573) (11,860) 4,872 6,568
--------- --------- --------- --------- ---------
Net income (loss) $ (85,956) $ (6,810) $ (30,045) $ 13,568 $ 14,415
========= ========= ========= ========= =========
Historical basic and diluted not income (loss)
per share $ (4.76) $ (.44) $ (1.95) $ 0.88 $ 0.94
--------- --------- --------- --------- ---------
Pro forma basic and diluted net income (loss)
per share $ (4.36) $ N/A $ (1.53) $ N/A $ N/A
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Additional on Securities Total
Common Paid-in Retained Treasury Available for Stockolders'
Stock Capital Earnings Stock Sale, Net Equity
----- ------- -------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $ -- $ 8,797 $ 119,778 $ -- $ (1,887) $ 126,688
Net income -- -- 14,415 -- -- 14,415
Net change in unrealized gains
on securities available for sale,
net of income tax of $1,141 -- -- -- -- 2,116 2,116
-------- -------- --------- --------- -------- --------
Balance, June 30, 1995 -- 8,797 134,193 -- 229 143,219
Net income -- -- 13,568 -- -- 13,568
Unrealized losses on securities
transferred from held to
maturity to available for sale,
net of income tax benefit of ($5,832) -- -- -- -- (10,831) (10,831)
Net change in unrealized
losses on securities available
or sale, net of income tax
benefit of -- -- -- -- (37,897) (37,897)
-------- -------- --------- --------- -------- --------
Balance, June 30, 1996 -- 8,797 147,761 -- (48,499) 108,059
Net loss -- -- (30,045) -- -- (30,045)
Net change in unrealized gains
on securities available for
sale, net of income -- -- -- -- 16,516 16,516
tax of $8,892
Capital contribution -- 8,099 -- -- -- 8,099
-------- -------- --------- --------- -------- --------
Balance, June 30, 1997 -- 16,896 117,716 -- (31,983) 102,629
-------- -------- --------- --------- -------- --------
Net loss -- -- (85,956) -- -- (85,956)
Net change in unrealized gains
on securities available for
sale, net of income -- -- -- -- 34,321 34,321
tax of $18,481
Issuance of common stock 197 180,870 -- -- -- 181,067
Purchase of treasury stock -- -- -- (149,436) -- (149,436)
-------- -------- --------- --------- -------- --------
Balance, December 31, 1997 $ 197 $ 197,766 $ 31,760 $(149,436) $ 2,338 $ 82,625
======== ========= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
-------------------- ----------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (85,956) $ (6,810) $ (30,045) $ 13,568 $ 14,415
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provisions for loan losses and uninsured
risk and losses on assets acquired
through foreclosure and repossession 25,641 10,390 31,804 6,673 6,821
Deferred income tax expense (benefit) (27,585) (2,354) (1,429) 1,961 (6,033)
Accretion of discounts on loans acquired (2,963) (2,263) (6,019) (4,281) (5,169)
Amortization of deferred (gains) losses on
interest rate swaps 806 (250) 73 (671) (11)
Net amortization (accretion) of premium on
securities available for sale (95) 4,506 8,265 11,905 6,898
Net amortization (accretion) of premium on
securities held to maturity 97 898 2,090 -- --
Depreciation and amortization 1,347 1,695 2,688 2,450 2,392
Proceeds from the sales of loans 11,416 1,411 12,132 15,155 27,861
(Gain) loss on sale of assets 112,669 3,024 29,183 (1,248) (8,145)
Stock dividends received from Federal Home
Loan Bank stock (1,677) (2,265) (3,658) -- --
Change in other assets (15,299) (2,460) (5,332) (1,504) (7,341)
Change in other liabilities 9,282 (2,855) (9,296) (3,013) 10,455
-------- ------- ------- ------ -------
Net cash provided by operating
activities 27,683 2,667 30,456 40,995 42,143
-------- ------- ------- ------ -------
CASH PROVIDED (ABSORBED) BY INVESTING
ACTIVITIES:
Proceeds from sales of securities available
for sale 865,146 131,388 730,957 50,321 70,243
Proceeds from principal collections on
securities available for sale 52,735 9,210 13,245 80,977 113,845
Proceeds from principal collections on
securities held to maturity 28,054 26,523 52,161 -- --
Purchases of securities available for sale (6,001) -- -- (5,320) (17,715)
Purchases of securities held to maturity (74,440) -- (73,389) -- (15,058)
Purchases of interest rate caps -- -- -- (3,720) (4,935)
Payments on termination of interest rate
swap agreements (47,283) -- -- (3,344) --
Proceeds from termination of interest rate
swap agreements -- -- -- 3,637 --
Proceeds from sales of equity securities
available for sale -- 12,986 12,986 -- 5,017
Proceeds from sales of securities held to
maturity -- -- -- -- 19,995
Purchases of securities under agreements to
resell (424,000) -- -- -- --
Proceeds from maturity of securities
purchased under agreements to resell 246,000 -- -- -- --
Purchases of Federal Home Loan Bank stock (3,424) (53,085) (80,850) (71,425) (7,564)
</TABLE>
F-6
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
------------------- -------------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds from the sale of Federal Home Loan
Bank stock $ -- 58,924 $ 67,883 $ 83,400 $ 61,105
Loans made by non-bank subsidiary (26) (27,627) (29,213) (133,914) (20,746)
Repayments of loans made by non-bank subsidiary 13,710 30,821 49,755 39,411 1,964
Change in loans receivable, net (24,814) (88,745) (63,247) (142,412)
(158,875)
Proceeds from disposal of assets acquired
through foreclosure and repossession 6,381 27,544 18,257 5,806 2,516
Purchases of premises and equipment (465) (938) (1,480) (1,649) (622)
Proceeds from sales of premises and equipment 25 5 9 72 230
-------- ------- ------- --------- ---------
Net cash provided (absorbed) by investing
activities 631,598 127,006 697,074 (98,160) 49,400
-------- ------ ------- --------- ---------
CASH PROVIDED (ABSORBED) BY FINANCING
ACTIVITIES:
Change in transaction accounts (3,697) 11,645 7,635 (20,256) (95,139)
Change in time deposits (38,126) 69,554 34,261 44,894 198,790
Change in securities sold under agreements to
repurchase (312,774) (136,868) (770,223) 299,568 397,797
Proceeds from advances from the Federal
Home Loan Bank 1,303,599 5,807,316 9,978,290 4,679,967 1,399,513
Repayments of advances from the Federal
Home Loan Bank (1,757,377) (5,877,576) (9,886,271) 4,941,297 1,983,677
Proceeds from issuance of common stock 181,067 -- -- -- --
Proceeds from issuance of senior notes 80,000 -- -- -- --
Payments of debt issuance costs (4,344) -- -- -- --
Repayments of note payable (7,010) -- -- (7,010) (7,010)
Purchase of treasury stock (149,436) -- -- -- --
Change in advances by borrowers for taxes
and insurance (2,435) (1,262) 542 442 1,002
----------- ----------- ----------- ----------- --------
Net cash provided (absorbed) by
financing activities (710,533) (127,191) (635,766) 56,308 (88,724)
----------- ----------- ----------- ----------- --------
Net change in cash and cash equivalents (51,252) 2,482 91,764 (857) 2,819
Cash and cash equivalents at beginning of period 105,404 13,640 13,640 14,497 11,678
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 54,152 $ 16,122 $ 105,404 $ 13,640 $ 14,497
=========== =========== =========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 60,190 $ 89,847 $ 173,920 $ 186,052 $ 169,313
----------- ----------- ----------- ----------- -----------
Income taxes $ (1,631) $ -- $ -- $ 9,250 $ 14,000
----------- ----------- ----------- ----------- -----------
Supplemental schedule of noncash investing
and financing activities:
Loans made to facilitate the sale of assets
acquired through foreclosure and repossession $ -- $ -- $ 79 $ 592 $ 652
=========== =========== =========== =========== ===========
Transfers of loans to assets acquired through
foreclosure and repossession $ 4,273 $ 13,891 $ 16,000 $ 8,137 $ 1,204
=========== =========== =========== =========== ===========
</TABLE>
F-7
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
---------------- --------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Transfer of investments from held to maturity to
available for sale at estimated market value
(amortized cost of $454,496 for the six months
ended December 31, 1997 and $1,500,793 for
the year ended June 30, 1996) $448,180 $ -- $ -- $1,484,130 $ --
======== ====== ====== ========== ========
Transfer of loans to mortgage-backed
certificates available for sale $ -- $ -- $ -- $ -- $60,824
======== ====== ====== ========== ========
Transfer of debt securities to available for
sale loans $ 1,425 $ -- $ -- $ -- $ --
======== ====== ====== ========== ========
Repayment of note payable and accrued interest
by shareholders $ -- $ -- $8,099 $ -- $ --
======== ====== ====== ========== ========
Transfer of assets acquired through foreclosure
and repossession to other assets $ 6,045 $ -- $ -- $ -- $ --
======== ====== ====== ========== ========
Receivable on loans sold in other assets $ 34,594 $ -- $ -- $ -- $ --
======== ====== ====== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, JUNE 30, 1997, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Local Financial Corporation ("Local Financial") is a thrift holding company
which owns 100% of the outstanding common stock of Local Federal Bank, a Federal
Savings Bank ("Local"). The accounting and reporting practices of the Company
reflect industry practices and are in accordance with generally accepted
accounting principles. The consolidated financial statements for the six months
ended December 31, 1996 are unaudited and, in the opinion of management, include
all adjustments necessary (which consist of only normal recurring adjustments)
for a fair presentation of the financial position, results of operations and
cash flows for the interim period. The financial information and results of
operations of the interim periods are not necessarily indicative of the
financial position and results of operations that may be obtained for a full
fiscal year. The more significant policies are described below.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Local
Financial, and its wholly owned subsidiary, Local, as well as Local's
subsidiaries, Local America Bank of Tulsa, a Federal Savings Bank ("LAB"), Local
Acceptance Company ("Local Acceptance"), Star Financial Services Corporation
("Star Financial"), Local Mortgage Corporation ("Local Mortgage"), Oklahoma
Financial Services Corporation, and Star Properties, Incorporated ("Star
Properties"). Local and LAB are insured depository institutions which obtain
deposit funds primarily through retail branches throughout the State of Oklahoma
and lend those funds throughout the United States. Local Acceptance's and Star
Financial's principal activities were originating auto loan contracts through
dealerships in Florida and Oklahoma, respectively (operations ceased as of
December 31, 1997). Local Mortgage's principal activity is originating
commercial real estate loans. Oklahoma Financial Services Corporation has an
ownership interest in a credit life insurance company through which Local writes
credit life insurance. Star Properties' principal activities are the ownership
and leasing of certain office properties and related equipment to Local. Local
Financial and its subsidiary, Local, are collectively referred to as the
Company. All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions. Those estimates and assumptions relate
principally to the determination of the allowance for loan losses, income taxes,
the valuation of assets acquired through foreclosure and repossession and the
fair value of financial instruments. Actual results could differ from those
estimates. The accounting policies for these items and other significant
accounting policies are presented below. Certain reclassifications to 1996 and
1995 balances have been made to provide consistent financial statement
classifications in the periods presented herein. Such reclassifications had no
effect on net income (loss) and no material effect on total assets.
Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, the Company
defines cash and cash equivalents as cash and due from banks and interest
bearing deposits with other banks.
F-9
<PAGE>
Securities
Federal regulations require the Company to maintain average monthly liquid
assets, primarily cash and U. S. Government and other approved securities, in an
amount at least equal to 5% of deposit accounts (net of loans on deposit
accounts) plus short-term borrowings. For the six months ended and month ended
December 31, 1997, the Company's average liquidity totaled approximately 10% and
16%, respectively. For the year and month ended June 30, 1997, the Company's
average liquidity totaled approximately 5% and 8%, respectively.
The Company's securities consist primarily of mortgage-backed certificates and
U. S. Government and agencies securities. Mortgage-backed certificates consist
of mortgage-backed pass-through certificates ("MBS") and mortgage-derivative
securities ("MDS") such as collateralized mortgage obligations and real estate
mortgage investment conduits. The Company does not own any principal only,
interest only or residual tranches of mortgage-backed certificates. The Company
classifies its securities as held to maturity, available for sale and held for
trading, as applicable. The Company did not hold any trading securities during
the six months ended December 31, 1997 or the fiscal years ended June 30, 1997,
1996 and 1995.
Held to Maturity Securities
The Company classified certain mortgage-backed securities and agencies
securities as held to maturity. Management had the positive intent and the
Company had the ability to hold to maturity these securities at June 30, 1997,
as part of its portfolio of long-term interest-earning assets. (See Note 2 for
events occurring subsequent to June 30, 1997.) Held to maturity securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Premiums and discounts are amortized or accreted in the consolidated
statements of operations to approximate a level yield over the life of the
related security.
Available for Sale Securities
The Company has classified certain mortgage-backed securities and equity
securities as available for sale. At the time of purchase, the Company
classifies securities as available for sale when such securities may be sold at
a future date or if there are foreseeable circumstances under which the Company
would sell such securities prior to maturity.
Securities classified as available for sale are recorded at their estimated
market value. Changes in the estimated market value of securities available for
sale are included in stockholders' equity as unrealized gains or losses, net of
the related income tax effect. Unrealized losses on available for sale
securities, which are judged to be other than temporary, are charged to earnings
in the consolidated statements of operations (see Note 5). Gains and losses on
available for sale securities are computed on a specific identification basis.
Premiums and discounts are amortized or accreted in the consolidated statements
of operations to approximate a level yield over the life of the related
security.
Loans Receivable
Loans receivable are recorded at the contractual amounts owed by borrowers, less
deferred income, unearned interest, the allowance for loan losses, undisbursed
funds, and discounts on loans acquired or originated. Interest on loans is
credited to income as earned, to the extent deemed collectible. Discounts on
loans and unearned interest on consumer loans are accreted into interest income
to approximate a level yield over the contractual lives of the loans, adjusted
for actual prepayments.
Loans are placed on nonaccrual status when they become 90 days past due.
Previously accrued but uncollected interest on loans placed on nonaccrual status
is reversed unless determined to be fully collectible. Payments received on
nonaccrual loans are generally applied to principal as they are received. Upon
F-10
<PAGE>
full collection of the principal balance or determination that future collection
of principal is probable, interest income is recognized as received.
Provision and Allowance for Loan Losses
Each period the provision for loan losses in the consolidated statements of
operations results from the combination of a) an estimate by management of loan
losses that occurred during the current period and b) the ongoing adjustment of
prior estimates of losses occurring in prior periods.
To serve as a basis for making this provision each quarter, the Company
maintains an extensive credit risk monitoring process that considers several
factors including: current economic conditions affecting the Company's
customers, the payment performance of individual large loans and pools of
homogeneous small loans, portfolio seasoning, changes in collateral values, and
detailed reviews of specific large loan relationships. For large loans deemed to
be impaired due to an expectation that all contractual payments will probably
not be received, impairment is measured by comparing the Company's recorded
investment in the loan to the present value of expected cash flows discounted at
the loan's effective interest rate, the fair value of the collateral or the
loan's observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the consolidated statements
of financial condition. As the specific customer and amount of a loan loss is
confirmed by gathering additional information, taking collateral in full or
partial settlement of the loan, bankruptcy of the borrower, etc., the loan is
written down, reducing the allowance for loan losses. If, subsequent to a
writedown, the Company is able to collect additional amounts from the customer
or obtain control of collateral worth more than previously estimated, a recovery
is recorded, thus increasing the allowance for loan losses.
Loan Origination Fees, Loan Commitment Fees and Related Costs
The Company defers loan origination fees, loan commitment fees and the
incremental direct costs (principally compensation and benefits relating to
successful underwriting efforts) relative to loans originated. These deferred
fees and costs are amortized into interest income to approximate a level yield
over the life of the related loans, adjusted for actual prepayments. Other loan
fees such as loan servicing fees, late payment fees and prepayment penalties are
included as a component of noninterest income in the accompanying consolidated
statements of operations.
Loans Held for Sale and Gains and Losses from the Sale of Loans
Loans originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income. There were no loans other
than student loans held for sale at December 31, 1997, June 30, 1997 and 1996.
Gains and losses resulting from the sale of loans are determined by the specific
identification method and reflect the extent that sales proceeds exceed or are
less than the carrying value of the loans sold. In some cases, the Company sells
loans and continues to service such loans for the investor. In these cases, the
Company recognizes either a servicing asset, at its allocated previous carrying
amount based on relative fair value, or a servicing liability at fair value. Any
servicing assets recognized as part of the sale are amortized as a deduction
from servicing income in proportion to and over the period of estimated net
servicing income. To the extent sales of loans involve the sale of part of a
loan or a pool of loans, the cost basis is allocated based upon the relative
fair value of the portion sold and the portion retained. Impairment of servicing
assets is assessed based on the fair value of those assets. Fair values are
estimated using discounted cash flows based on a current market interest rate.
At December 31, 1997, June 30, 1997 and June 30, 1996, the carrying value of
servicing assets was not impaired.
F-11
<PAGE>
Loan Servicing
Loans serviced by the Company for others are primarily the result of the Company
selling loans while retaining the servicing of those loans. These loans are not
included with loans receivable or any other asset in the accompanying
consolidated statements of financial condition. Fees earned for servicing loans
owned by investors are reported as income when the related loan payments are
collected. Loan servicing costs are charged to expense as incurred. Loans
serviced for others totaled approximately $124,525,000, $144,498,000 and
$178,836,000 at December 31, 1997, June 30, 1997, and June 30, 1996,
respectively. Servicing fees earned totaled approximately $291,000, $521,000,
$581,000 and $821,000 for the six months ended December 31, 1997, and for the
years ended June 30, 1997, 1996, and 1995, respectively, and are included as a
component of loan fees and loan service charges in the accompanying consolidated
statements of operations.
Premises and Equipment
Buildings, building improvements, furniture, fixtures and equipment are stated
at cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the related assets. Estimated lives range from 25 to 30 years
for buildings and building improvements and 3 to 10 years for furniture,
fixtures and equipment.
Maintenance and repairs are charged to expense as incurred and building
improvements are capitalized. The costs and accumulated depreciation relating to
premises and equipment retired or otherwise disposed of are eliminated from the
accounts and any resulting gains or losses are credited or charged to income.
Assets Acquired Through Foreclosure and Repossession
Assets acquired through foreclosure and repossession are recorded at estimated
fair value, net of estimated selling costs at the date of foreclosure or
repossession. The values of assets acquired through foreclosure and repossession
are monitored by the Company continually through sales and rental activities,
and by updated appraisals and other valuation methods when needed. The allowance
for losses on assets acquired through foreclosure and repossession is an amount
which management believes will be adequate to absorb losses from the disposition
and/or revaluation of these assets. Additions or reversals of the allowance for
losses on assets acquired through foreclosure and repossession are provided as
an expense or a benefit, respectively, through other expense in the accompanying
consolidated statements of operations. The allowance for losses is charged or
reduced as losses through sales or revaluations are incurred.
Debt Issuance Costs
Debt issuance costs of approximately $4,344,000 at December 31, 1997, were
capitalized and are included in other assets in the consolidated statements of
financial condition. Debt issuance costs are amortized over the life of the
senior notes as a yield adjustment to notes payable interest expense in the
consolidated statements of operations.
Intangible Assets
Intangible assets consist of core deposit premiums paid in the acquisitions of
other depository institutions. These premiums are capitalized and amortized over
the expected lives of the core deposits, estimated to be eight to ten years,
using the straight-line method. Amortization expense totaled approximately
$619,000 for the six months ended December 31, 1997, and $1,238,000 for each of
the years ended June 30, 1997, 1996 and 1995. Accumulated amortization of core
deposit premiums at December 31, 1997, and June 30, 1997 and 1996, totaled
approximately $9,539,000, $8,920,000 and $7,682,000, respectively.
F-12
<PAGE>
Interest Rate Swap, Cap and Floor Agreements
Interest rate swap, cap and floor agreements are entered into as a hedge to
stabilize the Company's funding cost and to stabilize the Company's yield on
floating rate debt securities, and as part of the Company's overall
asset/liability management program. The most frequently used derivative products
are various types of interest rate swaps. However, interest rate caps and floors
are also utilized. These derivatives are typically classified as either hedges
or synthetic alterations. The criteria that must be satisfied for each of these
classifications are as follows: (i) Hedge - the asset or liability to be hedged
exposes the Company, as a whole, to interest rate risk; (ii) Synthetic
alteration - the asset or liability converted exposes the Company, as a whole,
to interest rate risk and the derivative is designed and effective as a
synthetic alteration of a statement of financial condition item. Net interest
income or expense from the interest rate swap, cap and floor agreements is
recorded as an adjustment to the interest income/expense of the hedged
asset/liability, respectively. Premiums paid for caps and floors are amortized
over their contractual lives using the straight-line method. When interest rate
swap agreements are sold or settled without the simultaneous disposition of a
hedged item, any gain or loss is deferred and amortized into interest income or
expense over the remaining term of the swap agreement or until disposition of
the hedged item. As the assets or liabilities being hedged are sold or
liquidated, a proportionate amount of the deferred gain or loss and unamortized
premiums is also recognized. Deferred gains or losses and unamortized premiums
are reflected as an adjustment to the carrying value of the hedged item in the
accompanying consolidated statements of financial condition.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted average number of
shares outstanding during the period. Stock options and warrants to purchase
common stock are considered in diluted income per share calculations, if
dilutive, and are computed using the treasury stock method. As a result of the
recapitalization discussed in Note 2, the weighted average number of shares used
in the computation of income (loss) per share is 15,400,000 for each of the
years in the three-year period ended June 30, 1997 (based on an equivalent
number of shares for the 60 shares outstanding prior to the recapitalization).
For the six months ended December 31, 1997 the weighted average number of shares
is 18,066,000. Stock options and warrants to purchase common stock discussed in
Notes 2 and 18 were outstanding during the six months ended December 31, 1997,
but were not included in the computation of diluted income (loss) per share
because of the net loss for the six months ended December 31, 1997.
Pro forma net income (loss) per share assumes that the 19,700,000 shares issued
in the recapitalization were outstanding for the six months ended December 31,
1997 and for the year ended June 30, 1997.
New Accounting Pronouncements
During 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under this statement, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
which are sales from transfers that are secured borrowings. This statement is
effective for transactions entered into after December 31, 1996. There was not a
material adverse impact on the consolidated financial position or the results of
operations of the Company due to the adoption of this new accounting
pronouncement.
During 1997, the FASB issued SFAS No. 128, "Earnings per Share." This statement
establishes standards for computing and presenting earnings per share. This
statement requires all previously reported financial statements to be restated
to report earnings per share as calculated under SFAS
F-13
<PAGE>
No. 128. The Company adopted this statement effective December 31, 1997, and it
did not have an impact on the consolidated financial position of the Company, or
the net income (loss) per share as reported herein.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About
Capital Structure." SFAS No. 129 continues the existing requirements to disclose
the pertinent rights and privileges of all securities other than ordinary common
stock but expands the number of companies subject to portions of its
requirements. Specifically, the Statement requires all entities to provide the
capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provisions of APB Opinion No. 15 will now
need to make those disclosures. This Statement had no impact on the Company's
disclosures.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive Income." This
statement is required to be adopted by the Company in fiscal 1999. Management
does not anticipate this statement to have a material adverse impact on the
consolidated financial position or the future results of operations of the
Company.
In July 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement requires disclosure for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. The statement is required to be
adopted by the Company in fiscal 1999. Management does not anticipate this
statement to have a material adverse impact on the consolidated financial
position or the future results of operations of the Company.
2. CHANGE IN OWNERSHIP AND MANAGEMENT:
On September 8, 1997, the Company completed a securities offering in which,
after increasing the number of authorized shares from 2,000 to 25,000,000,
19,700,000 shares of common stock totaling $197,000,000 and $80,000,000 of 11%
Senior Notes were issued to individual investors. Of the total net proceeds
received in the offering ($257,300,000), $7,200,000 was used to repay the note
payable and associated accrued interest to Isabel Collier Read (see Note 12) and
approximately $154,000,000 was used to redeem all of the previously issued and
outstanding shares of the Company's common stock. The redemption amount is
subject to adjustment under terms set forth in the Redemption Agreement, as
defined. Subsequent to September 8, 1997, adjustments totaling $5,000,000 were
assessed against shareholders and were reflected as a reduction to the cost of
treasury stock with a corresponding receivable from the Selling Shareholders of
approximately $5,000,000 recorded in other assets in the consolidated statements
of financial condition. The remainder of the proceeds was used to make capital
contributions to Local of approximately $83,839,000, as well as establish an
interest reserve account for the Senior Notes of approximately $8,800,000 and an
other reserve account of approximately $3,000,000.
In connection with the securities offering and redemption, the existing board of
directors resigned and a new board of directors was appointed. In addition, a
new chief executive officer and a new president of the Company were appointed.
Prior to the securities offering and change in management, the Company's
strategy had been to operate a low cost institution structured around the
following areas: (i) a nationally diversified wholesale commercial real estate
mortgage portfolio; (ii) a retail deposit franchise within Oklahoma operated on
a low-overhead basis delivering a traditional set of thrift products and
services, including conforming single-family residential home loans, equity,
student guaranteed, direct automobile and installment loans through its branch
network; (iii) a wholesale securities portfolio involving derivative mortgage
securities funded both by retail, as well as, wholesale funding through advances
from the Federal Home Loan Bank of Topeka ("FHLB") and securities sold under
agreements to repurchase; and (iv) origination of indirect subprime automobile
finance contracts through dealerships in Oklahoma and Florida (originations
ceased in fiscal 1997). New management has indicated that, among other things,
they intend to (i) cease the wholesale securities strategy previously employed
by the Company and cause
F-14
<PAGE>
the Company to sell all or a substantial portion of its derivative mortgage
portfolio and (ii) utilize the proceeds to repay outstanding advances from the
FHLB and securities sold under agreements to repurchase, as well as terminate
and liquidate the Company's interest rate contracts associated with the
derivative mortgage portfolio and the advances from the FHLB and securities sold
under agreements to repurchase.
At June 30, 1997, the carrying value of the Company's mortgaged-backed
securities and associated interest rate contracts (see Notes 5 and 20) totaled
approximately $1,393,772,000 with an estimated market value of $1,384,482,000.
The carrying value of the Company's advances from the FHLB and securities sold
under agreements to repurchase and associated interest rate contracts (see Notes
10, 11 and 20) totaled approximately $841,962,000 at June 30, 1997, with an
estimated market value of $884,059,000.
Since the events described above occurred subsequent to June 30, 1997, no
adjustments have been made to the accompanying June 30, 1997, consolidated
financial statements to reflect assets and liabilities at amounts that may
ultimately be recovered or settled by the Company as a result of changes in
operations or strategies intended by new management. All such adjustments have
been recorded in the consolidated statement of operations for the six months
ended December 31, 1997.
In connection with the securities offering, warrants to buy 591,000 shares of
common stock of the Company were issued to the placement agent. The warrants
will be exercisable for a five year period commencing upon the date of
consummation, September 8, 1997, at an exercise price of $10 per share.
The issuance of new shares of common stock and Senior Notes and redemption of
all previously issued common stock have been accounted for as a recapitalization
with no adjustments to the carrying amounts of assets and liabilities since none
of the new investors individually or in concert control the Company. Regulatory
approval of the change in ownership was not required as the Office of Thrift
Supervision (OTS) does not require regulatory approval unless an investor or
group of investors in concert own more than 9.9% of the voting common stock.
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell at December 31, 1997, are
summarized as follows (in thousands):
Average outstanding balance $ 60,000
Maximum month-end balance 178,000
Mortgage-backed securities securing the
agreements at period-end:
Carrying value 178,000
Estimated market value 184,000
Securities purchased under agreements to resell are held by the broker-dealers
who arranged the transactions. The agreements generally mature within one month.
4. EQUITY SECURITIES:
A summary of equity securities available for sale as of June 30, 1996, is as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Student Loan Marketing Association
Preferred stock $12,679 $ -- $1,075 $11,604
======== ===== ======== ========
</TABLE>
F-15
<PAGE>
Proceeds from the sale of equity securities during 1997 were approximately
$12,986,000. Gross gains of $307,000 were realized in 1997. There were no sales
of equity securities in 1996. Proceeds from the sale of equity securities during
1995 were approximately $5,017,000. Gross gains of $228,000 were realized in
1995.
5. SECURITIES:
A comparative summary of securities available for sale is as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Government and agency securities $ 6,001 $ -- $ 1 $ 6,000
Collateralized mortgage obligations:
FNMA 265,088 2,199 1,088 266,199
FHLMC 140,781 1,773 61 142,493
Private Issuer 19,966 249 31 20,184
Mortgage-backed securities:
FHLMC 44,085 143 1 44,227
Private Issuer 36,584 407 -- 36,991
FNMA 1,619 8 -- 1,627
GNMA 386 1 1 386
---------- -------- ------- ----------
$ 514,510 $ 4,780 $ 1,183 $ 518,107
========== ======== ======= ==========
June 30, 1997:
Collateralized mortgage obligations:
FNMA $ 506,249 $ -- $22,741 $ 483,508
FHLMC 496,695 -- 22,732 473,963
Mortgage-backed securities:
Private Issuer 28,798 -- 752 28,046
Interest rate caps and floors 3,051 -- 3,003 48
---------- --------- ------- ----------
$1,034,793 $ -- $49,228 $ 985,565
========== ========= ======= ==========
June 30, 1996:
Collateralized mortgage obligations:
FHLMC $ 915,781 $ -- $30,845 $ 884,936
FNMA 844,549 -- 33,586 810,963
Mortgage-backed securities:
Private Issuer 42,190 -- 1,016 41,174
Interest rate caps and floors 12,742 -- 8,090 4,652
---------- --------- ------- ----------
$1,815,262 $ -- $73,537 $1,741,725
========== ========= ======= ==========
</TABLE>
F-16
<PAGE>
A comparative summary of securities held to maturity at June 30 is as follows
(in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
June 30, 1997:
U.S. Government and agency securities
$ 74,119 $ 100 $ -- $ 74,219
Collateralized mortgage obligations -
FNMA 77,759 -- 3,314 74,445
FHLMC 53,077 -- 2,733 50,344
Private Issuer 24,502 -- 640 23,862
Mortgage-backed securities -
FHLMC 153,838 10 2,268 151,580
Private Issuer 14,172 5 234 13,943
FNMA 10,311 62 266 10,107
GNMA 429 -- 12 417
--------- --------- --------- ---------
$ 408,207 $ 177 $ 9,467 $ 398,917
========= ========= ========= =========
June 30, 1996:
Collateralized mortgage obligations -
FNMA $ 77,794 $ -- $ 3,244 $ 74,550
FHLMC 53,082 -- 1,643 51,439
Private Issuer 31,950 -- 1,105 30,845
Mortgage-backed securities -
FHLMC 194,924 -- 6,367 188,557
Private Issuer 21,563 95 696 20,962
FNMA 12,507 74 418 12,163
GNMA 504 -- 16 488
--------- --------- --------- ---------
$ 392,324 $ 169 $ 13,489 $ 379,004
========= ========= ========= =========
</TABLE>
During the period following June 30, 1997, and prior to the change in ownership
of the Company on September 8, 1997, the Company purchased approximately
$74,440,000 in agency securities for the held to maturity portfolio. These
short-term securities were purchased to meet liquidity requirements. Subsequent
to the change in ownership of the Company, new management elected to classify
the held to maturity portfolio as available for sale. The amortized cost of
securities held to maturity transferred to securities available for sale was
approximately $454,496,000 with an unrealized loss of approximately $6,316,000.
Also, soon after the change in ownership, the Company sold approximately
$118,480,000 in agency securities, approximately $75,482,000 in mortgage backed
certificates and approximately $345,176,000 in floating rate securities for a
gross loss of approximately $17,336,000. Management also has the intent to sell
the remaining floating rate securities portfolio in the near future. Management
is of the opinion that the fair value of the floating rate security portfolio
will not recover to approximately the amortized cost of the portfolio prior to
the expected time of sale. As a result, the Company recognized through earnings
the unrealized loss on the remaining floating rate portfolio of $54,724,000
which is included in net gains (losses) on sale of assets in the accompanying
consolidated statement of operations for the six months ended December 31, 1997.
F-17
<PAGE>
At December 31, 1997, June 30, 1997 and 1996, securities held to maturity and
available for sale included floating rate securities with an amortized cost of
approximately $425,491,000, $1,158,988,000 and $1,918,886,000, respectively, and
fixed-rate securities of approximately $83,018,000, $206,842,000 and
$275,961,000, respectively. The floating-rate securities' weighted average yield
was 6.51%, 5.60% and 5.70% at December 31, 1997, June 30, 1997 and 1996,
respectively, including the effects of interest rate caps and floors hedging
these securities. The fixed rate securities' weighted average yield was 6.97%,
6.05% and 6.10% at December 31, 1997, June 30, 1997 and 1996, respectively. The
overall weighted average yield of securities was 6.83%, 5.66% and 5.75% at June
30, 1997 and 1996, respectively.
The remaining contractual maturity of substantially all mortgage-backed
certificates at December 31, 1997, was more than ten years. Management expects
the actual maturities to be considerably shorter than their contractual
maturities, as borrowers may prepay obligations without prepayment penalties.
During fiscal 1997, the Company purchased approximately $73,389,000 in agency
securities held to maturity having a weighted average yield of 5.83% and
maturity dates of one year or less.
At December 31, 1997 and June 30, 1997, securities with a total par amount of
$73,957,000 and $1,250,299,000, respectively, were pledged to secure various
deposits, borrowings, interest rate swaps and securitization transactions.
Accrued interest receivable on securities of approximately $2,842,000,
$7,427,000 and $11,250,000 was included in other assets at December 31, 1997,
June 30, 1997 and 1996, respectively.
Proceeds from sales of securities available for sale for the six months ended
December 31, 1997, and for the years ended June 30, 1997, 1996 and 1995, were
approximately $865,146,000, $730,957,000, $50,321,000 and $70,243,000,
respectively. Gross gains of approximately $12,788,000, $1,000 and $2,185,000
were realized for the six months ended December 31, 1997, and for the years
ended June 30, 1996 and 1995, respectively. No gross gains were realized for the
year ended June 30, 1997. Gross losses of $17,398,000, $29,889,000, $182,000 and
$110,000 were realized for the six months ended December 31, 1997, and for the
years ended June 30, 1997, 1996 and 1995, respectively, and are included in net
gains (losses) on sale of assets in the accompanying consolidated statements of
operations. No sales of securities held to maturity occurred for the six months
ended December 31, 1997, and for the years ended June 30, 1997, 1996 and 1995.
In December 1995, concurrent with the adoption of its implementation guide on
SFAS No. 115, the FASB allowed a one-time reassessment of the SFAS No. 115
classifications of all securities currently held. Any reclassifications would be
accounted for at estimated market value in accordance with SFAS No. 115 and any
reclassifications from the held to maturity portfolio that resulted from this
one-time reassessment would not call into question the Company's intent to hold
other securities to maturity in the future. The Company used the opportunity
under this one-time reassessment to reclassify $1,500,793,000 in securities from
held to maturity to the available for sale portfolio. In connection with this
reclassification, gross unrealized losses of $16,663,000 were recorded in
available for sale securities. This reclassification resulted in a reduction of
stockholders' equity of $10,831,000 (net of tax).
F-18
<PAGE>
6. LOANS RECEIVABLE:
Loans receivable are summarized below (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------- ---------------------
1997 1997 1996
------- ----- -----
<S> <C> <C> <C>
Residential real estate loans $287,262 $ 282,034 $ 280,173
Commercial real estate loans 645,240 638,091 606,811
Commercial business loans 4,043 -- --
Consumer loans 45,751 122,908 165,380
-------- ---------- ----------
Total gross loans 982,296 1,043,033 1,052,364
Less:
Unaccreted discounts (7,824) (12,522) (16,163)
Unearned interest -- (4,479) (13,959)
Allowance for loan losses (20,484) (11,435) (3,228)
Deferred income (518) (773) (879)
-------- ---------- ----------
Loans receivable, net $953,470 $1,013,824 $1,018,135
======== ========== ===========
</TABLE>
Accrued interest receivable on loans of approximately $7,129,000, $7,107,000 and
$7,049,000 was included in other assets at December 31, 1997, and June 30, 1997
and 1996, respectively.
The Company acquires commercial real estate loans from various sources. These
loans are secured primarily by multi-family residential and nonresidential real
estate. The purchased loans are geographically diverse and have no significant
concentrations of credit with any single borrower.
During the six months ended December 31, 1997 and the years ended June 30, 1997,
1996 and 1995, approximately $1,735,000, $11,974,000, $15,009,000, and
$27,537,000, respectively, in guaranteed student loans were sold resulting in
gains of $24,000, $158,000, $146,000, and $324,000, respectively. The Company
continues to market student loans throughout the State of Oklahoma. The Student
Loan Marketing Association ("Sallie Mae") handles the application processing,
disbursement and servicing responsibilities on behalf of the Company. The
Company sells student loans to Sallie Mae approximately 60 days after the loans
are fully funded. At December 31, 1997, June 30, 1997 and 1996, student loans
totaling approximately $7,133,000, $1,433,000 and $841,000, respectively, were
held for sale and are included as a component of loans receivable in the
accompanying consolidated statements of financial condition.
F-19
<PAGE>
An analysis of the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
------------------ -------------------------------
1997 1996 1997 1996 1995
---- ----- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 11,435 $ 3,228 $ 3,228 $ 4,593 $3,689
Loans charged off (16,554) (8,083) (20,293) (6,537) (362)
Recoveries 25 596 72 55 109
-------- ------- -------- ------- ------
Net loans charged off (16,529) (7,487) (20,221) (6,482) (253)
Provision for loan losses, primarily
related to indirect automobile loans 25,578 9,734 28,428 5,117 1,157
-------- ------- -------- ------- ------
Balance at end of period $ 20,484 $ 5,475 $ 11,435 $ 3,228 $4,593
======== ======= ======== ======= ======
</TABLE>
Beginning in fiscal 1994, the Company initiated a subprime indirect automobile
financing program, through dealerships in Oklahoma and Florida. Loans were
generated through a network of principally used automobile dealers and were
extended to borrowers who typically were not eligible for traditional bank
financing, due to past credit problems or inadequate credit history. Loans were
typically extended in amounts to include the purchase price of the automobile,
tag, tax and license fees and optional credit life and vehicle maintenance
warranty insurance coverage. Loan terms included interest rates ranging from
13.9% to 30.9% and payment periods ranging from 12 months to 60 months. Due to
the nature of the borrowers involved, a higher than normal risk of borrower
default and inability to collect all amounts due was likely. During fiscal 1997,
the Company experienced greater than expected borrower defaults and resultant
losses and chose to cease all further origination activities. At June 30, 1997,
the subprime loan portfolio totaled approximately $75,545,000, net of discounts
and unearned interest, in which an allowance for loan losses of approximately
$7,684,000, or 10%, of the carrying value of the subprime loan portfolio had
been established. From inception of the program through December 31, 1997, loan
originations totaled approximately $187,832,000 with associated charge offs of
approximately $28,650,000 or 15%. The allowance for loan losses has been
established for estimated inherent losses that exist in the auto loan portfolio
at June 30, 1997, based primarily on the delinquency status of the loan
portfolio, the estimated value of the underlying collateral and historical loss
experience. Based on losses experienced to date, additional provisions for loan
losses are likely to be made in future periods as such losses become known. Such
future losses may be greater than losses experienced to date, due to the recent
cessation of indirect auto loan origination, as well as the dependence upon the
Company's collection efforts to ultimately realize the value of the underlying
collateral of defaulted loans.
Additional losses were recognized subsequent to the change in ownership on
September 8, 1997, due to a decision by management to classify the subprime loan
portfolio as held for sale and reflect the portfolio balance at the lower of
cost or market. In December 1997, the Company sold the subprime loan portfolio
for approximately $43,968,000 which approximated the Company's book value less
the valuation allowance. Included in other assets in the consolidated statements
of financial condition at December 31, 1997 was a receivable from the sale of
loans of approximately $34,594,000, which was subsequently collected.
At December 31, 1997, and June 30, 1997, the Company classified approximately
$655,000 and $2,770,000, respectively, of loans as impaired, as defined by SFAS
No. 114, AAccounting by Creditors for Impairment of a Loan." The average
recorded investment in impaired loans for the six months ended December 31,
1997, and the year ended June 30, 1997, was approximately $655,000 and
$6,315,000, respectively. Interest payments received on impaired loans are
recorded as interest income, unless collection of the remaining recorded
investment is doubtful, at which time the loan is placed on nonaccrual status
and payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of approximately $52,000 and
$383,000 for the six months ended December 31, 1997, and year ended June 30,
1997, respectively.
F-20
<PAGE>
During 1995, the Company securitized and sold approximately $62,147,000 of fixed
rate multi-family commercial real estate loans. The Company received mortgage
participation certificates collateralized by the loans securitized in fiscal
1995. As a result of the securitization, a servicing asset was recognized
totaling approximately $3,309,000. At December 31, 1997, and June 30, 1997 and
1996, unamortized servicing assets were approximately $1,363,000, $1,726,000 and
$2,732,000, respectively, and are included in other assets. Amortization of
these assets totaling approximately $363,000, $1,006,000, $1,262,000, and
$247,000 was charged against loan servicing income for the six months ended
December 31, 1997 and the years ended June 30, 1997, 1996, and 1995,
respectively.
At December 31, 1997, and June 30, 1997 and 1996, loans to directors, officers
and employees of the Company aggregated approximately $1,500,000, $1,802,000 and
$1,974,000, respectively. During the six months ended December 31, 1997 and the
year ended June 30, 1997, approximately $392,000 and $931,000, respectively, of
loan advances were made and repayments totaled approximately $694,000 and
$1,103,000, respectively. In management's opinion, such transactions were made
on substantially the same terms as those prevailing at the time for comparable
transactions with other persons and did not involve more than normal risk.
7. PREMISES AND EQUIPMENT:
Premises and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------- -----------------------
1997 1997 1996
----- ----- ----
<S> <C> <C> <C>
Land $ 3,033 $ 3,057 $ 3,057
Buildings and building improvements 11,920 11,865 11,520
Furniture, fixtures and equipment 10,938 10,870 9,764
-------- ------- --------
25,891 25,792 24,341
Less accumulated depreciation and
amortization (15,245) (14,732) (13,306)
-------- -------- ---------
$ 10,646 $11,060 $ 11,035
======== ======== =========
</TABLE>
Depreciation and amortization expense relating to premises and equipment for the
six months ended December 31, 1997 and the years ended June 30, 1997, 1996, and
1995 was approximately $692,000, $1,450,000, $1,213,000, and $1,155,000,
respectively.
F-21
<PAGE>
8. ASSETS ACQUIRED THROUGH FORECLOSURE AND REPOSSESSION:
Assets acquired through foreclosure and repossession are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
----------- --------------------------
1997 1997 1996
------ ------ ------
<S> <C> <C> <C>
Commercial property $ -- $ 6,170 $ 6,570
Repossessed automobiles 31 2,241 3,969
Residential property 264 236 304
------ ------- --------
295 8,647 10,843
Less allowance for losses (35) (248) (261)
------ ------- --------
$ 260 $ 8,399 $ 10,582
====== ======= ========
</TABLE>
On July 1, 1997, real estate held for investment with a book value of
approximately $6,045,000 was transferred from assets acquired through
foreclosure and repossession to other assets in the consolidated statements of
financial condition as required by the OTS.
For the six months ended December 31, 1997, and for the years ended June 30,
1997, 1996, and 1995, income from assets acquired through foreclosure and
repossession totaled approximately $69,000, $873,000, $1,902,000, and
$3,060,000, respectively, which includes approximately $77,000, $320,000,
$1,273,000, and $2,200,000 of gains from dispositions, respectively. Income from
assets acquired through foreclosure and repossessions is included in other
noninterest income, while the gain portion is included in net gains (losses) on
sale of assets.
An analysis of the allowance for losses on assets acquired through foreclosure
and repossession is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years Ended June 30,
------------------ ---------------------
1997 1996 1997 1996 1995
----- ---- ---- ----- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 248 $261 $ 261 $ 29 $ 5
Provision charged (credited) to
expense 63 56 76 184 (64)
Net amounts credited (charged)
to allowance (276) (48) (89) 48 88
----- ---- ---- ---- ----
Balance at end of period $ 35 $269 $248 $261 $ 29
===== ==== ==== ==== ====
</TABLE>
F-22
<PAGE>
9. DEPOSIT ACCOUNTS:
Deposits and the related interest expense are summarized below (in thousands):
<TABLE>
<CAPTION>
Deposits Interest Expense
---------------------------------- ----------------------------------------------
Six Months
Ended
December 31, June 30, December 31, Years Ended June 30,
------------- -------------------- ------------- -----------------------------
1997 1997 1996 1997 1997 1996 1995
----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NOW and MMDA $ 247,264 $ 248,322 $ 238,511 $ 2,594 $ 5,381 $ 5,638 $ 6,937
---------- ---------- ---------- ------- ------- ------- -------
Savings 68,937 71,576 73,726 1,009 2,092 2,190 2,742
---------- ---------- ---------- ------- ------- ------- -------
Time:
Less than 4.00% -- -- 2,860
4.00% to 4.99% 4,327 21,105 7,039
5.00% to 5.99% 994,844 1,008,889 1,024,706
6.00% to 6.99% 286,421 293,583 254,328
7.00% to 7.99% 740 881 1,290
---------- ---------- ----------
Total Time 1,286,332 1,324,458 1,290,223 37,069 75,618 73,345 58,556
---------- ---------- ---------- ------- ------- ------- -------
$1,602,533 $1,644,356 $1,602,460 $40,672 $83,091 $81,173 $68,235
========== ========== ========== ======= ======= ======= =======
</TABLE>
Accrued interest on deposit accounts of approximately $3,865,000, $4,314,000 and
$3,459,000 was included in other liabilities in the accompanying consolidated
statements of financial condition at December 31, 1997, and June 30, 1997 and
1996, respectively.
The aggregate amount of certificates of deposits with a denomination greater
than $100,000 was approximately $86,000,000, $74,000,000 and $65,000,000 at
December 31, 1997 and June 30, 1997 and 1996, respectively.
Contractual maturities of time deposits at December 31, 1997, are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted Average
Contractual
Year ending June 30, Amount Rate
-------------------- --------- ----------------
<S> <C> <C>
1998 $ 623,168 5.48%
1999 493,671 5.69
2000 138,831 6.20
2001 17,504 5.79
2002 and thereafter 13,158 6.08
---------- -----
$1,286,332 5.65%
========== ======
</TABLE>
Legislation was enacted in fiscal 1997 which required institutions holding
deposits insured by the Savings Association Insurance Fund ("SAIF") to pay a
one-time fee of approximately 65 cents for each $100 of SAIF insured deposits.
The Company accrued its one-time assessment of approximately $10,311,000 during
September 1996.
F-23
<PAGE>
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------- ----------------------------------------
1997 1997 1996 1995
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Average outstanding balance $ 57,579 $421,706 $ 685,601 $634,281
Weighted average interest rate during the period 5.61% 5.45% 5.83% 5.76%
Maximum month-end balance $239,914 $942,315 $1,079,194 $865,713
Outstanding balance at the end of the period -- 310,801 1,079,194 779,626
Weighted average rate at the end of the period -- 5.55% 5.36% 6.11%
Mortgage-backed securities securing the
agreements at period-end:
Carrying value $ -- $335,202 $1,171,395 $860,323
Estimated market value -- 322,451 1,115,428 813,796
Accrued interest payable at the end of the period -- 1,327 5,799 6,877
</TABLE>
Securities sold under agreements to repurchase were delivered to the
broker-dealers who arranged the transactions. The agreements generally matured
within one month.
Additional interest expense incurred on interest rate swaps not included in the
above average rates totaled approximately $444,000, $5,227,000, $6,428,000, and
$1,448,000 for the six months ended December 31, 1997, and the years ended June
30, 1997, 1996, and 1995, respectively.
There are no securities sold under agreements to repurchase at December 31,
1997. All agreements outstanding at June 30, 1997, were either retired or
replaced with FHLB advances as part of the Company's ongoing asset/liability
management strategy.
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA:
Advances from the FHLB are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------------------- -------------------------------------------------------
1997 1997 1996
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Contractual Contractual Contractual
Balance Rate Balance Rate Balance Rate
-------- --------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Variable rate $30,100 5.75% $224,324 5.61% $374,671 5.41%
Fixed rate 50,036 6.26 306,837 5.77 64,340 7.22
------- -------- --------
$80,136 6.06% $531,161 5.73% $439,011 5.70%
======= ===== ======== ====== ======== =====
</TABLE>
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 mortgage loans, investment
securities, federal funds sold and interest bearing deposits, which are not
already pledged or encumbered.
F-24
<PAGE>
Scheduled principal repayments of advances from the FHLB at December 31, 1997,
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Contractual
Year ending June 30, Amount Rate
------------------- ------- -------------
<S> <C> <C>
1998 $ -- --%
1999 4,100 5.15
2000 -- --
2001 -- --
2002 and thereafter 76,036 6.11
-------
$80,136 6.06%
======= ====
</TABLE>
Additional interest expense incurred on interest rate swaps not included in the
above average rates totaled approximately $2,547,000, $10,186,000 and $8,146,000
for the six months ended December 31, 1997, and for the years ended June 30,
1997 and 1996, respectively.
12. NOTE PAYABLE:
Local Financial had a note payable to Isabel Collier Read, a former stockholder
and the mother of the stockholders of the Company prior to September 8, 1997.
The note required annual installments of $7,010,000 plus accrued interest.
During 1997, the stockholders of the Company made the required annual payment of
interest and principal on the note payable on behalf of the Company. The payment
has been reflected as a capital contribution in the accompanying consolidated
statement of stockholders' equity. The note bore interest equal to the prime
lending rate set by Morgan Guaranty Trust. The rate of the note was not to
exceed 8.0% nor fall below 5.7%. During the years ended June 30, 1997 and 1996,
the average note rate was 8.0%. During the year ended June 30, 1995, the average
note rate was 7.84%. The note was secured by the common stock of Local. Accrued
interest payable on the note of approximately $94,000 and $202,000 was included
in other liabilities in the accompanying consolidated statements of financial
condition at June 30, 1997 and 1996, respectively.
On September 8, 1997, principal and interest on the note payable from Local
Financial to Isabel Collier Read were paid in full.
13. SENIOR NOTES:
Senior notes of $80,000,000 at 11% and issued to individual investors were
outstanding at December 31, 1997. Senior notes are due September 8, 2004 and pay
interest semiannually. Senior notes are general unsecured obligations of Local
Financial and will rank senior to such other indebtedness as the Company may
incur that is not expressly subordinated to the senior notes. The indenture
generally restricts the incurrence of additional indebtedness by the Company,
except for certain junior indebtedness. An interest reserve account in the
amount of approximately $8,800,000, representing an annual amount of interest on
the senior notes, was established in the event dividends from Local are not
sufficient to pay interest and is included as a component of cash and due from
banks in the accompanying consolidated statements of financial condition.
14. INTEREST RATE SWAP, CAP AND FLOOR AGREEMENTS:
The Company is a party to financial instruments with off-balance sheet risk, in
the normal course of business, to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest rate caps and floors
written, interest rate swaps, and forward and futures contracts. Those
instruments involve, to varying degrees, elements
F-25
<PAGE>
of credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or notional amounts
of those instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. For interest rate caps, floors, and swap
transactions, forward and futures contracts, and options written, the contract
or notional amounts do not represent exposure to credit loss. The Company
controls the credit risk of its interest rate swap, cap and floor agreements,
and forward and futures contracts through credit approvals, limits, and
monitoring procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
The Company enters into a variety of interest-rate swap transactions in managing
its interest rate exposure. Interest rate swap transactions generally involve
the exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. The Company minimizes its credit
exposure to interest rate counterparties by entering into the transactions with
counterparties that have been rated in one of the top three investment ratings
by at least two nationally recognized credit rating agencies. The Company also
utilized interest rate caps and floors to manage its interest rate exposure
through the use of these instruments.
Effective with the change in ownership on September 8, 1997, all outstanding
interest rate swap, cap and floor agreements were terminated and are included in
net gains (losses) on sale of assets in the consolidated statements of
operations. The termination of the interest rate swap agreements, totaling
approximately $500,000,000 notional principal amount, resulted in realized gross
losses of approximately $47,283,000. The termination of cap and floor agreements
totaling approximately $2,350,000,000 notional principal amount resulted in
realized gross losses of $2,234,000. Upon termination of the interest rate swap,
cap and floor agreements, and the corresponding liquidation of the underlying
hedged items, the Company recognized all remaining deferred gains and losses
which resulted in an additional loss of approximately $3,920,000. The above
losses resulted in a net tax benefit of approximately $18,703,000.
Interest rate swap, cap and floor agreements outstanding at June 30 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Notional Interest Rate Variable
Maturity Date Balance Pay Receive Rate Index
--------------- -------- ---- -------- ----------
<S> <C> <C> <C> <C>
1997
Interest Rate Swaps
Fixed Variable
January 8, 2005 $ 200,000 7.848% 5.563% 3 month LIBOR
February 14, 2005 100,000 7.880 5.813 3 month LIBOR
March 22, 2005 100,000 8.027 5.781 3 month LIBOR
May 8, 2005 50,000 8.463 5.816 3 month LIBOR
May 18, 2005 50,000 8.439 5.813 3 month LIBOR
Interest Rate Floors
Index Floor
February 19, 1998 $ 100,000 5.813% 5.678% 3 month LIBOR
March 22, 1998 100,000 5.781 5.404 3 month LIBOR
May 19, 1998 100,000 5.813 5.455 3 month LIBOR
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
Notional Interest Rate Variable
Maturity Date Balance Pay Receive Rate Index
-------------- --------- ---- -------- -----------
<S> <C> <C> <C> <C>
1997 Cont.
Interest Rate Caps
Cap Index
July 1, 1998 $ 450,000 7.000% 5.762% 3 month LIBOR
October 27, 1997 800,000 9.500 6.510 10 year CMT
November 5, 1997 800,000 10.000 6.510 10 year CMT
1996
Interest Rate Swaps
Fixed Variable
January 8, 2005 $ 300,000 7.848% 5.461% 3 month LIBOR
February 14, 2005 100,000 7.880 5.500 3 month LIBOR
March 22, 2005 100,000 8.027 5.563 3 month LIBOR
May 8, 2005 50,000 8.463 5.500 3 month LIBOR
May 18, 2005 50,000 8.439 5.488 3 month LIBOR
Interest Rate Floors
Index Floor
February 19, 1998 $ 100,000 5.563% 5.678% 3 month LIBOR
March 22, 1998 100,000 5.488 5.404 3 month LIBOR
May 19, 1998 100,000 5.488 5.455 3 month LIBOR
Interest Rate Caps
Cap Index
July 1, 1998 $ 450,000 7.000% 5.469% 3 month LIBOR
September 16, 1996 300,000 8.360 6.730 10 year CMT
October 27, 1997 800,000 9.500 6.730 10 year CMT
November 5, 1997 800,000 10.000 6.730 10 year CMT
</TABLE>
The notional principal amounts shown represent an agreed upon amount on which
calculations of amounts to be exchanged are based. They do not represent direct
credit exposures. The Company's credit exposure is limited to the net difference
between the calculated pay and receive amounts on each transaction, which is
generally netted and paid at least quarterly.
The interest rate swaps are utilized to hedge the FHLB advance borrowings and
the securities sold under agreements to repurchase, each of which have
short-term maturities. As of June 30, 1997, management intended to continue to
renew these borrowings to support the interest rate swaps hedging such
borrowings (see Note 2 for events occurring subsequent to June 30, 1997). The
interest rate caps and floors are utilized to hedge the available for sale
mortgage-backed floating rate securities.
During fiscal 1997, the Company terminated interest rate swaps used to hedge
securities sold under agreements to repurchase and FHLB advances with a notional
principal amount of $100,000,000 resulting in a loss of approximately $3,825,000
which is being amortized over the life of the original swap agreement of
approximately 7 years. (See discussion above on termination of interest rate
swaps in connection with the change in ownership on September 8, 1997.) During
fiscal 1996, the Company terminated interest rate swaps used to hedge a portion
of the available for sale portfolio with a notional principal of $300,000,000
resulting in a gain of $3,637,000 which is being amortized over the original
swap agreement of approximately 3 years. The Company also terminated interest
rate swaps during fiscal 1996 used to hedge a portion of the securities sold
under agreements to repurchase and FHLB advances with a notional principal
amount of $200,000,000 resulting in a loss of approximately $3,344,000 which is
being amortized over the original swap agreement of
F-27
<PAGE>
approximately 2 years. As a result of interest rate swap terminations,
amortization of deferred gains and losses resulted in the recognition of
approximately $73,000 in net losses during fiscal year 1997 and $671,000 and
$11,000 in net gains during fiscal years 1996 and 1995, respectively. At June
30, 1997 and 1996, net unamortized deferred losses from interest rate swap
terminations were approximately $4,130,000 and $378,000, respectively. There
were no deferred gains or losses at June 30, 1995.
At June 30, 1997 and 1996, net accrued interest on interest rate swaps, caps and
floors totaled a net payable of approximately $1,504,000 and $2,282,000,
respectively, and is included in other assets and other liabilities in the
accompanying consolidated statements of financial condition, dependent upon the
asset or liability to which the hedge is related. Unamortized interest rate cap
and floor premiums were approximately $3,051,000 and $12,741,000 at June 30,
1997 and 1996, respectively, and are included in the carrying amount of the
assets hedged.
The swaps, caps and floors are secured by mortgaged-backed securities with an
estimated market value of approximately $74,330,000 and $68,757,000 at June 30,
1997 and 1996, respectively.
The net effect of the interest rate swaps, caps and floors on net interest
income was a decrease of approximately $21,148,000 ($13,746,000 net of income
tax), $21,509,000 ($14,772,000 net of income tax) and $7,782,000 ($5,345,000 net
of income tax) for the years ended June 30, 1997, 1996, and 1995, respectively.
Such decrease was attributable primarily to interest rate swaps used to hedge a
portion of the Company's cost of borrowings in periods of rising interest rates.
15. INCOME TAXES:
The provision (benefit) for income taxes has been allocated as follows,
including the tax effect of the changes in unrealized gains (losses) on
available for sale securities (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
December 31, June 30,
------------------ -----------------------------------
1997 1996 1997 1996 1995
----- ------ ----- ----- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) from operations $(44,075) $ (3,573) $(11,860) $ 4,872 $ 6,568
Stockholders' equity 18,481 1,645 8,892 (26,238) 1,141
-------- -------- ------- -------- -------
$(25,594) $ (1,928) $ (2,968) $(21,366) $ 7,709
========= ========= ======== ======== =======
</TABLE>
Components of the provision (benefit) for income taxes from operations are as
follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
December 31, June 30,
--------------------- ---------------------------------
1997 1996 1997 1996 1995
----- -------- ----- ----- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Current income tax expense
(benefit) $ (16,490) $ (1,219) $(10,431) $2,911 $12,601
Deferred income tax expense
(benefit) (27,585) (2,354) (1,429) 1,961 (6,033)
--------- --------- --------- ------ -------
$ (44,075) $ (3,573) $(11,860) $4,872 $ 6,568
========= ========= ======== ====== =======
</TABLE>
F-28
<PAGE>
The effective income tax rates differ from the statutory federal income tax rate
of 35%. A reconciliation of the provision (benefit) for income taxes based on
the statutory rates with the effective rates is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
December 31, June 30,
----------------------- -----------------------------------
1997 1996 1997 1996 1995
------ ------- ------ -------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income tax at statutory rate
(35%) $(45,511) $(3,634) $(14,667) $ 6,453 $ 7,344
Provision for deferred
tax assets 742 -- 2,000 -- --
Effect of state income tax
(benefit), net of federal (5,236) (771) (3,013) (675) (607)
Refund of taxes
previously paid, net -- -- -- (800) --
Change in valuation
allowance 6,254 771 2,949 -- --
Other, net (324) 61 871 (106) (169)
------- ------ --------- ------ -------
Provision (benefit) for income
taxes $(44,075) $(3,573) $(11,860) $ 4,872 $ 6,568
======== ======= ======== ======= =======
</TABLE>
Deferred income tax assets and liabilities consisted of the following
(in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------------------
1997 1997 1996
------ ------- -----
<S> <C> <C> <C>
Deferred income tax assets:
Unrealized losses on available for
sale securities $ -- $17,222 $26,114
Realized losses on available for sale securities 10,787 -- --
Federal net operating loss carryforwards 14,283 -- --
State net operating loss carryforwards 9,203 4,071 1,058
Allowance for loan losses 4,109 -- --
Other 1,365 2,288 4,446
-------- ------- -------
39,747 23,581 31,618
-------- ------- -------
Deferred income tax liabilities:
Allowance for loan losses -- (1,012) (4,361)
Stock dividends receivable (1,602) (1,015) (650)
Depreciation and amortization (364) (373) (472)
Deferred loan fees (970) (805) (471)
Unrealized gains on available for sale securities (1,259) -- --
Other (291) (451) (1,225)
-------- ------- -------
(4,486) (3,656) (7,179)
-------- ------- -------
Net deferred tax asset 35,261 19,925 24,439
Valuation allowance (9,203) (2,949) --
-------- ------- -------
Deferred tax asset, net $ 26,058 $16,976 $24,439
======== ======== ========
</TABLE>
F-29
<PAGE>
At December 31, 1997, the Company had approximately $40,809,000 and $190,466,000
of operating loss carryforwards available for federal and state income tax
purposes, respectively. The state net operating losses expire in varying amounts
between 2006 and 2013. The federal net operating losses expire in 2013. At June
30, 1997, the Company had no net operating loss carryforwards available for
federal income tax purposes and approximately $106,458,000 available for state
income tax purposes.
During 1997, the Company established a valuation allowance for the portion of
the available state net operating loss carryforwards for which it was determined
to be more likely than not that the benefit of the deferred tax asset would not
be realized. At December 31, 1997, a valuation allowance for all available state
net operating loss carryforwards was established as it was determined to be more
likely than not that the benefit of the deferred tax asset would not be
realized. Historically, the Company has generated income for federal income tax
purposes. The tax loss for the year ended June 30, 1997, and the six months
ended December 31, 1997, was a result of the Company exiting the indirect
subprime automobile lending program, terminating the interest rate swap
agreements, and discontinuing the wholesale securities strategy previously
employed by former management. Based on the current strategy of new management,
no valuation allowance for other deferred tax assets has been established as the
Company believes it is more likely than not that sufficient income for federal
income tax purposes will be realized.
As a result of the Small Business Job Protection Act, the Company was required
to change its method of accounting for bad debts from the reserve method to the
direct charge-off method for income tax purposes during 1997. The Company will
be required to recapture the excess of the qualifying and nonqualifying tax loan
loss reserves over the base year tax loan loss reserves over a six-year period.
The recapture amount is estimated to be $17,244,000 and the qualifying and
nonqualifying base year tax reserves totaled approximately $8,116,000 and
$1,373,000, respectively. The Company expects to be eligible to defer this
recapture period for two years.
In accordance with SFAS No. 109, "Accounting for Income Taxes," a deferred tax
liability has not been recognized for the tax bad debt reserve and supplemental
reserves of the Company that arose in tax years that began prior to December 31,
1987. At December 31, 1997 and June 30, 1997 and 1996, the portion of the tax
bad debt reserve and supplemental reserves attributable to pre-1988 tax years
was approximately $13,329,000. The amount of unrecognized deferred tax liability
at December 31, 1997 and June 30, 1997 and 1996, was approximately $4,665,000.
This deferred tax liability could be recognized if certain distributions are
made with respect to the stock of Local, or the bad debt reserve is used for any
purpose other than absorbing bad debt losses.
During 1997, the Company's federal income tax returns were examined by and/or
settled with the Internal Revenue Service through fiscal year 1993. As a result
of these examinations and related claims for refund, the Company received a
refund of taxes previously paid of approximately $800,000 which had not been
anticipated by the Company prior to the examination.
16. COMMITMENTS AND CONTINGENCIES:
In conjunction with the acquisition of LAB during fiscal 1989, the Company and
LAB entered into an Assistance Agreement with the Federal Savings and Loan
Insurance Corporation (the "FSLIC"). Under the terms of the Assistance
Agreement, the FSLIC Resolution Fund (the "FUND"), which is managed by the
Federal Deposit Insurance Corporation (the "FDIC"), is entitled to receive 100%
of the tax benefits attributable to acquired net operating loss carryforwards
and deductions resulting from certain items, other than covered asset losses,
for which the FUND has agreed to provide assistance to the extent such tax
benefits are realized by the consolidated group. LAB is entitled to share in
realized tax benefits of a portion of the FUND assistance on a 50-50 basis.
Under the LAB Assistance Agreement, a dispute exists between LAB and the FDIC
regarding tax benefits which have been received. Management, after consultation
with legal counsel and based on available facts and proceedings to date, has
determined that it is probable that LAB has some liability to the FDIC with
regard to the tax benefits. The Company's estimate of this liability is
F-30
<PAGE>
approximately $13,000,000, which is included in other liabilities in the
accompanying December 31, 1997, and June 30, 1997, consolidated statements of
financial condition. The Company provided for this liability through a provision
for uninsured risk in the consolidated statements of operations for the years
ended 1997, 1996 and 1995. The FDIC's estimate of this liability is
approximately $23,000,000. Management of the Company is of the opinion that the
FDIC's estimate does not give credit to the Company for certain tax benefits
originally contracted for in the Assistance Agreement, but later eliminated as a
result of the Revenue Reconciliation Act of 1993. Management intends to
vigorously defend its estimate of the liability.
Pursuant to the terms of the Redemption Agreement discussed in Note 2, the
Selling Shareholders have agreed to indemnify the Company with respect to the
Assistance Agreement to the extent the Company is found to be liable for an
amount in excess of approximately $13,000,000. In addition, the Selling
Shareholders have agreed to be solely and exclusively responsible for all
reasonable litigation costs and expenses which are incurred by the Company in
connection with the prosecution, defense and settlement with the FDIC.
In the ordinary course of business, the Company is subject to other legal
actions and complaints. Management, after consultation with legal counsel, and
based on available facts and proceedings to date, believes the ultimate
liability, if any, arising from such legal actions or complaints, will not have
a material adverse effect on the Company's consolidated financial position or
future results of operations.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each customers' creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties. At December 31, 1997, the Company had
approximately $67,377,000 of outstanding loan commitments consisting of
residential real estate, commercial real estate and commercial industrial loans
approved but unfunded.
During 1995, the Company securitized and sold approximately $62,147,000 of fixed
rate multi-family commercial loans with recourse (See Note 6). The maximum
contractual recourse obligation of the Company is 10% of the total unpaid
principal balance of the mortgages on the settlement date. At December 31, 1997,
the unpaid principal balance of loans sold totaled approximately $33,289,000.
The Company has pledged assets, consisting primarily of mortgage-backed
securities totaling approximately $6,824,000 under the recourse provision of the
securitization transaction. Management does not expect any material losses to be
incurred as a result of the recourse provision.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The Company holds marketable securities as collateral
supporting those commitments for which collateral is deemed necessary.
The Company leases certain real estate and equipment under operating leases. For
the six months ended December 31, 1997, and for the years ended June 30, 1997,
1996, and 1995 lease expense totaled approximately $387,000, $730,000, $618,000,
and $465,000, respectively. Future obligations under operating leases at
December 31, 1997, are summarized as follows (in thousands):
F-31
<PAGE>
Year Ending June 30,
--------------------
1998 $ 645
1999 506
2000 251
2001 183
2002 and thereafter 214
-----
$1,799
======
17. REGULATORY MATTERS:
Local and LAB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on Local's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Local and LAB must meet specific capital guidelines that involve quantitative
measures of Local's and LAB's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Local's and LAB's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Local and LAB to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), of core capital (as defined) to adjusted
tangible assets (as defined) and of tangible capital (as defined) to tangible
assets. Management believes, as of December 31, 1997 and June 30, 1997, that
Local and LAB meet all capital adequacy requirements to which they are subject.
As of June 30, 1997 and 1996, the most recent notifications from the OTS
categorized Local and LAB as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Local and LAB
must maintain minimum total capital, core capital, and Tier I capital as set
forth in the table. There are no conditions or events since that notification
that management believes have changed Local's or LAB's category.
F-32
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Minimum For Capital For Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk weighted
assets):
Local Federal Bank Consolidated $ 134,331 14.14% $ 76,022 8.00% $ 95,027 10.00%
Local America Bank 101,398 28.45% 28,511 8.00% 35,639 10.00%
Core capital (to adjusted tangible assets):
Local Federal Bank Consolidated 128,803 6.98% 55,384 3.00% 92,307 5.00%
Local America Bank 97,975 15.90% 18,482 3.00% 30,803 5.00%
Tangible capital (to tangible assets):
Local Federal Bank Consolidated 127,024 6.89% 27,665 1.50% n/a n/a
Local America Bank 97,246 15.80% 9,230 1.50% n/a n/a
Tier I Capital (to risk weighted assets):
Local Federal Bank Consolidated 128,803 13.55% n/a n/a 57,016 6.00%
Local America Bank 97,975 27.49% n/a n/a 21,383 6.00%
As of June 30, 1997:
Total capital (to risk weighted
assets):
Local Federal Bank Consolidated $ 145,132 12.34% $ 94,062 8.00% $ 117,578 10.00%
Local America Bank 112,842 25.31% 35,671 8.00% 44,589 10.00%
Core capital (to adjusted tangible assets):
Local Federal Bank Consolidated 140,442 5.25% 80,187 3.00% 133,645 5.00%
Local America Bank 111,482 12.07% 27,711 3.00% 46,185 5.00%
Tangible capital (to tangible assets):
Local Federal Bank Consolidated 138,044 5.17% 40,062 1.50% n/a n/a
Local America Bank 110,411 11.97% 13,839 1.50% n/a n/a
Tier I Capital (to risk weighted assets):
Local Federal Bank Consolidated 140,442 11.94% n/a n/a 70,547 6.00%
Local America Bank 111,482 25.00% n/a n/a 26,754 6.00%
As of June 30, 1996:
Total capital (to risk weighted
assets):
Local Federal Bank Consolidated $ 172,055 12.71% $ 108,336 8.00% $ 135,419 10.00%
Local America Bank 115,638 28.14% 32,870 8.00% 41,088 10.00%
Core capital (to adjusted tangible assets):
Local Federal Bank Consolidated 168,975 5.04% 100,513 3.00% 167,522 5.00%
Local America Bank 114,577 10.69% 32,155 3.00% 53,591 5.00%
Tangible capital (to tangible assets):
Local Federal Bank Consolidated 165,339 4.94% 50,247 1.50% n/a n/a
Local America Bank 112,822 10.54% 16,096 1.50% n/a n/a
Tier I Capital (to risk weighted assets):
Local Federal Bank Consolidated 168,975 12.48% n/a n/a 81,252 6.00%
Local America Bank 114,577 27.89% n/a n/a 24,653 6.00%
</TABLE>
F-33
<PAGE>
Management intends to continue compliance with all regulatory capital
requirements.
Federal regulations allow Local and LAB to pay dividends during a calendar year
up to the amount that would reduce Local's and LAB's surplus capital ratio, as
defined, to one-half of Local's and LAB's surplus capital ratio at the beginning
of the calendar year, adjusted to reflect Local's and LAB's net income to date
during the calendar year. At the beginning of calendar year 1998, under
applicable regulations of the OTS, the total capital available for the payment
of dividends by Local to the Company was $27.5 million plus 1998 net income
subject to the maintenance of required capital guidelines. The surplus capital
ratio is defined as the percentage by which Local's and LAB's net capital to
assets ratio would exceed the ratio of its fully phased-in capital requirement
to its assets.
18. STOCK COMPENSATION:
Effective with the securities offering and redemption in September 1997, the
board of directors adopted a stock option plan. The stock option plan has
1,420,370 shares of common stock authorized and the stock option plan will
provide for the granting of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code as well as
non-incentive or compensatory stock options and stock appreciation rights. At
September 8, 1997, incentive stock options for 1,116,005 shares of common stock
were granted to executive officers of the Company at an exercise price of $10
per share. At December 3, 1997, incentive stock options for 158,000 shares of
common stock were granted to officers and compensatory stock options for 60,000
shares of common stock were granted to directors of the Company at an exercise
price of $11.75 per share. Stock options to buy 1,141,005 and 193,000 shares of
common stock shall be exercisable in three and five equal annual installments,
respectively, commencing with the end of the first twelve month period following
the date the stock options were granted. The stock options expire ten years from
the dates the options first become exercisable by officers and directors.
The per share weighted-average fair value of stock options granted for the six
months ended December 31, 1997, was $2.36 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 5.29%, expected life of 5 years, and no expected dividend yield
or volatility.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been recognized
for its stock option rights. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
"Accounting for Stock Based Compensation," the Company's net loss for the six
months ended December 31, 1997, would have been increased to the pro forma
amounts below.
Net loss As reported $ (85,956)
Pro forma (86,148)
Basic and Diluted net loss per share As reported $ (4.76)
Pro forma (4.77)
Stock options of 1,334,005 were outstanding at December 31, 1997, with a range
of exercise prices of $10.00 - $11.75, weighted average exercise price of
$10.29, and weighted average contractual life of outstanding options of 11.8
years. No options were exercisable at December 31, 1997.
19. EMPLOYEE BENEFITS:
The Company has a retirement plan (the "Plan"), which is a noncontributory
defined benefit pension plan, covering substantially all of its full-time
employees. The benefits are based on years of service and the employees'
compensation during the last five years of employment. The Company's policy,
generally, is to fund pension costs unless the Plan is overfunded and no
contribution is required. Contributions are intended to provide not only for
benefits attributed to service to date but also for
F-34
<PAGE>
those expected to be earned in the future. No contributions were made during the
six months ended December 31, 1997, and the years ended June 30, 1997, 1996 or
1995, as the Plan is overfunded.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated statements of financial condition and operations
at June 30 and for the years then ended (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- ------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $6,549, in 1997, $6,097
in 1996 and $5,313 in 1995 $(7,159) $(6,293) $(5,827)
======= ======= =======
Projected benefit obligation for service rendered
to date $(9,332) $(8,226) $(7,739)
Plan assets at market value, primarily stocks and
cash equivalents 17,339 14,040 10,310
------- ------- -------
Plan assets in excess of projected benefit 8,007 5,814 2,571
Unrecognized net gain from past experience (6,588) (4,937) (1,809)
different from that assumed
Unrecognized prior service cost (531) (566) (601)
Unrecognized net asset being recognized over 15
years (253) (337) (422)
------- ------- -------
Prepaid (accrued) pension cost $ 635 $ (26) $ (261)
======= ======= =======
Net pension benefit:
Service cost-benefits earned during the period $ 515 $ 490 $388
Interest cost on projected benefit obligation 627 553 516
Actual return on plan assets (3,820) (4,150) (2,449)
Net amortization and deferral 2,017 2,871 1,438
------- ------- -------
Net periodic pension benefit $ (661) $ (236) $ (107)
======= ======= =======
</TABLE>
A weighted average discount rate of 7.5% in each of the years 1997, 1996 and
1995 and a rate of increase in future compensation levels of 5.5% was used in
determining the actuarial present value of the projected benefit obligation for
1997, 1996 and 1995. The expected long-term rate of return on assets was 11.0%
for 1997, 1996 and 1995.
The Company is currently reviewing the Plan and has changed the investment
manager which is in the process of liquidating the equity investment portfolio.
The Company had a projected net periodic pension benefit for the year ended June
30, 1998, based on the June 30, 1997, valuation; however, the Company did not
record any prepaid pension benefit for the six months ended December 31, 1997,
due to the uncertainty of any changes made by new management. At December 31,
1997, prepaid pension cost was approximately $635,000.
The Company does not provide postretirement benefits other than pensions.
At June 30, 1997, the Company employed 481 full-time equivalent persons compared
to 492 at June 30, 1996 and 425 at June 30, 1995.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
Fair value estimates, methods and assumptions set forth below for the Company's
financial instruments, are made solely to comply with the requirements of SFAS
No. 107.
F-35
<PAGE>
Fair values are based on estimates or calculations at the transaction
level using present value techniques in instances where quoted market prices are
not available. Because broadly traded markets do not exist for most of the
Company's financial instruments, the fair value calculations attempt to
incorporate the effect of current market conditions at a specific time. Fair
valuations are management's estimates of the values, and they are often
calculated based on current pricing policy, the economic and competitive
environment, the characteristics of the financial instruments, expected losses
and other such factors. These calculations are subjective in nature, involve
uncertainties and matters of significant judgment and do not include tax
ramifications; therefore, the results cannot be determined with precision,
substantiated by comparison to independent markets and may not be realized in an
actual sale or immediate settlement of the instruments. The Company has not
included certain material items in its disclosure, such as the value of the
long-term relationships with the Company's depositors, since this intangible is
not a financial instrument. There may be inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows, could significantly affect the
results. For all of these reasons, the aggregation of the fair value
calculations presented herein do not represent, and should not be construed to
represent, the underlying value of the Company.
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997 June 30, 1996
--------------------- ---------------------- ----------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
--------- ----------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash
equivalents $ 54,152 $ 54,152 $ 105,404 $ 105,404 $ 13,640 $ 13,640
Securities purchased under
agreements to resell 178,000 178,000 -- -- -- --
Securities 518,107 518,107 1,393,724 1,384,434 2,129,397 2,116,077
Equity securities -- -- -- -- 11,604 11,604
Loans receivable, net 953,470 972,820 1,013,824 1,014,243 1,018,135 1,032,297
FHLB stock 45,147 45,147 40,046 40,046 23,421 23,421
Interest rate caps -- -- 48 48 4,652 4,652
and floors
Financial Liabilities:
Deposits $1,602,533 $1,608,540 $1,644,356 $1,641,328 $1,602,460 $1,597,150
Securities sold under
agreements to
repurchase -- -- 310,801 312,789 1,079,194 1,079,203
Advances from the FHLB 80,136 80,173 531,161 533,732 439,011 440,957
Notes payable 80,000 80,000 7,010 7,010 14,020 14,020
Interest rate swaps -- -- -- 37,538 -- 41,631
</TABLE>
The following are descriptions of the methods used to determine the estimated
fair values:
Cash and Cash Equivalents and Securities Purchased Under Agreements to Resell
The carrying amount is a reasonable estimate of fair value because of the
relatively short period of time between the origination of the instrument and
its expected realization.
Securities and Equity Securities
The carrying value and estimated fair value of equity securities available for
sale and securities at December 31, 1997, and June 30, 1997 and 1996, are set
forth in Notes 4 and 5, respectively. The estimated fair value of interest rate
caps and floors used to hedge securities is based on the replacement cost
(mark-to-market) of the agreements. The estimated fair value of FHLB stock
approximates the carrying value as of December 31, 1997 and June 30, 1997 and
1996.
F-36
<PAGE>
Loans
The fair valuation calculation process differentiates loans based on their
financial characteristics, such as product classification, loan category,
pricing features and remaining maturity. Prepayment estimates are evaluated by
product and loan rate. In establishing the credit risk component of the fair
value calculations for loans, the Company considered several approaches,
including the use of variable discount rates based on relative credit quality,
forecasting cash flows, net of projected losses and secondary market pricing for
certain third party loan sale transactions. After evaluating such information,
the Company concluded that the allowance for loan losses represented a
reasonable estimate of the credit risk component of the fair value of loans at
December 31, 1997, and June 30, 1997 and 1996.
The fair value of commercial real estate loans, other real estate mortgage loans
and real estate construction loans is calculated by discounting contractual cash
flows using discount rates that reflect the Company's current pricing for loans
with similar characteristics and remaining maturity.
For real estate single family first and junior lien mortgages, fair value is
calculated by discounting contractual cash flows, adjusted for prepayment
estimates, using discount rates based on the Company's current pricing for loans
of similar size, type, remaining maturity and repricing characteristics.
For other consumer loans, the fair value is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, using discount rates
based on the company's current pricing for loans of similar size, type, and
remaining maturity.
Deposit Liabilities
SFAS No. 107 states that the fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, interest-bearing checking and
savings deposits and market rate savings, is equal to the amount payable on
demand at the measurement date. Although SFAS No. 107's requirements for these
categories is not consistent with the market practice of using prevailing
interest rates to value these amounts, the amount included for these deposits in
the previous table is their carrying value at December 31, 1997, and June 30,
1997 and 1996. The fair value of certificates of deposit and other time deposits
is calculated based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for similar
duration deposits.
Advances from the Federal Home Loan Bank of Topeka and Securities Sold Under
Agreements to Repurchase, Notes Payable and Senior Notes
The estimated fair value of FHLB advances and securities sold under agreements
to repurchase is based on the discounted value of contractual cash flows. The
discount rate is estimated using the current market rate for similar duration
borrowings. The estimated fair market value of interest rate swap agreements
used to hedge FHLB advances and securities sold under agreements to repurchase
is based on the replacement cost (mark-to-market value) of the agreements.
Commitments are related primarily to variable rate loans originated at current
market rates. The estimate of fair value of these commitments is considered to
be immaterial. The estimate of value of notes payable and senior notes is based
on the discounted value of contractual cash flows.
Limitations
The information presented in this footnote is based on market quotes and fair
value calculations as of December 31, 1997, and June 30, 1997 and 1996. These
amounts have not been updated since period end; therefore, the valuations may
have changed since that point in time.
F-37
<PAGE>
21. PROPOSED ACQUISITION:
On October 22, 1997, the Company entered into an agreement to purchase Green
Country Banking Corporation (the Holding Company) which is majority owned by the
Chief Executive Officer and President of the Company. Regulatory approval has
been received and the acquisition is expected to occur on February 16, 1998. The
Company will issue 837,209 shares of its common stock to acquire 100% of the
Holding Company with the Company being the surviving corporation. The Company's
resultant wholly-owned subsidiary, Green Country Bank, FSB, which was formerly
the wholly-owned subsidiary bank of the Holding Company, will be subsequently
merged into LAB, with LAB being the surviving bank.
The acquisition of the Holding Company will be accounted for under purchase
accounting treatment. Total assets and liabilities of the Holding Company at
December 31, 1997, are approximately $106,463,000 and $103,553,000,
respectively. Purchase accounting adjustments to estimated fair values will be
made with respect to the assets and liabilities based upon preliminary estimates
and evaluations as of December 31, 1997, resulting in a decrease in net assets
of approximately $425,000. Final purchase price adjustments will be made upon
closing of the transaction and will be based on the fair values of assets and
liabilities at that date. Earnings retained between December 31, 1997, and the
closing date will affect the allocation of the purchase price to the extent they
affect net asset values at closing. The excess of the purchase price over the
amounts assigned to identifiable assets acquired less liabilities assumed will
be recorded as goodwill. The resulting goodwill of approximately $6,800,000 will
be amortized on a straight-line basis over 15 years.
Pro forma results of operations assuming the proposed acquisition of Holding
Company occurred on July 1, 1995, are not material.
22. PARENT COMPANY FINANCIAL INFORMATION:
Condensed financial information for Local Financial Corporation is as follow
(in thousands):
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------------------
1997 1997 1996
------ ---- -----
<S> <C> <C> <C>
Assets:
Cash and due from banks, substantially restricted $ 11,840 $ 3 $ 29
Investment in subsidiary 143,917 109,682 122,517
Other assets 10,061 135 272
-------- -------- --------
Total assets $165,818 $109,820 $122,818
======== ======== ========
Liabilities and Stockholders' Equity:
Note payable $ -- $ 7,010 $ 14,020
Senior notes 80,000 -- --
Other liabilities 3,193 181 739
-------- ------- ------
Total liabilities 83,193 7,191 14,759
-------- ------- ------
Common stock 197 -- --
Additional paid-in capital 197,766 16,896 8,797
Retained earnings 31,760 117,716 147,761
Treasury stock (149,436) -- --
Unrealized gains (losses) on securities available
for sale, net of income tax 2,338 (31,983) (48,499)
-------- ------- --------
Total stockholders' equity 82,625 102,629 108,059
-------- ------- --------
Total liabilities and stockholders' equity $165,818 $109,820 $122,818
======== ======== ========
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
Six Months Ended Years Ended
December 31, June 30,
---------------------- -------------------------------------
1997 1996 1997 1996 1995
----- ----- ----- ----- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Income:
Dividend income from subsidiary $ -- $ 500 $ 500 $10,600 $19,757
Equity in undistributed earnings (losses) of (83,925) (6,858) (29,886) 5,124 3,119
subsidiary
Other -- 3 200 43 10
-------- ------- -------- ------ ------
Total income (loss) (83,925) (6,355) (29,186) 15,767 22,886
Expense:
Interest expense 3,073 564 1,026 1,606 2,105
Compensation and employee benefits -- -- -- 871 11,468
Other 52 135 145 828 285
--------- ------- -------- -------- ------
Total expense 3,125 699 1,171 3,305 13,858
Benefit for income taxes 1,094 244 312 1,106 5,387
--------- ------- -------- ------- -------
Net income (loss) $ (85,956) $(6,810) $(30,045) $13,568 $14,415
========= ======= ======== ======= =======
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Years Ended
December 31, June 30,
------------------- ------------------------------
1997 1996 1997 1996 1995
------- ----- ------- ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income (loss) $(85,956) $(6,810) $(30,045) $13,568 $14,415
Adjustments to reconcile net income to net cash
provided (absorbed) by operating activities:
Equity in undistributed losses (earnings) of 83,925 6,858 29,886 (5,124) (3,119)
subsidiary
Change in other liabilities 3,012 267 (558) 531 (126)
Change in other assets (5,582) (341) (398) (1,937) (4,166)
-------- ------- -------- ------- -------
Net cash provided (absorbed) by operating activities (4,601) (26) (1,115) 7,038 7,004
-------- ------- -------- ------- -------
CASH ABSORBED BY INVESTING ACTIVITY:
Investment in subsidiary (83,839) -- -- -- --
-------- ------- -------- ------- -------
Net cash absorbed by investing activity (83,839) -- -- -- --
-------- ------- -------- ------- -------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 181,067 -- -- -- --
Capital contribution -- -- 8,099 -- --
Purchase of treasury stock (149,436) -- -- -- --
Repayment of note payable (7,010) -- (7,010) (7,010) (7,010)
Proceeds from issuance of senior notes 80,000 -- -- -- --
Payments of debt issuance costs (4,344) -- -- -- --
-------- ------- -------- ------- -------
Net cash provided (absorbed) by financing activities 100,277 -- 1,089 (7,010) (7,010)
Net change in cash and cash equivalents 11,837 (26) (26) 28 (6)
Cash and cash equivalents at beginning of period 3 29 29 1 7
-------- ------- -------- ------- -------
Cash and cash equivalents at end of period $11,840 $ 3 $ 3 $ 29 $ 1
======= ======= ======== ======= =======
Supplemental schedule of noncash investing activity:
Tax benefit contributed to subsidiary $ -- $ -- $ 535 $ 1,752 $ 5,386
======= ======= ======== ======= =======
</TABLE>
F-39
<PAGE>
===================================================================
No dealer, salesman or any other person has been authorized to
give any information or to make any representation not contained
in this Prospectus, and, if given or made, such information and
representation must not be relied upon as having been authorized
by the Company, a Selling Holder or any other person. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby in any
state to any person to whom it is unlawful to make such offer in
such state. Neither the delivery of this Prospectus nor any
sales made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the
Company since the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................... 2
Selected Consolidated Financial and Other Data............... 10
Risk Factors................................................. 12
The Company.................................................. 22
The Private Placement and the Redemption
Transactions............................................... 24
Ratio of Earnings to Fixed Charges........................... 28
Use of Proceeds.............................................. 28
Dividends and Market for Local Securities.................... 29
Capitalization............................................... 31
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 32
Business..................................................... 52
Management................................................... 81
Regulation................................................... 92
Taxation..................................................... 104
Selling Holders.............................................. 106
Description of Senior Notes.................................. 115
Description of Capital Stock................................. 134
Registration Rights.......................................... 139
Plan of Distribution......................................... 141
Shares Eligible For Future Sale.............................. 142
Experts...................................................... 143
Change in Independent Certified Public Accountants........... 143
Certain Legal Matters........................................ 143
Additional Information....................................... 144
Index to Consolidated Financial Statements................... F-1
===================================================================
<PAGE>
===================================================================
21,128,209 Shares of Common Stock
$80,000,000 of 11.0% Senior Notes due
September 8, 2004
LOCAL FINANCIAL CORPORATION
PROSPECTUS
April 20, 1998
==================================================================
