<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number:
333-43727
LOCAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0424192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3601 N.W. 63rd, OKLAHOMA CITY, OK 73116
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 841-2298
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the registrant's $0.01 per value common stock as
of August 5, 1998 were as follows:
NUMBER OF SHARES
----------------------------------
20,537,209
<PAGE> 2
LOCAL FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated statements of Financial Condition -
December 31, 1997 and June 30, 1998 (unaudited)................................................1
Consolidated Statements of Operations-
For the Three Months and Six Months Ended June 30, 1998
And 1997 (unaudited)...........................................................................2
Consolidated Statements of Cash Flows-
For the Six Months Ended June 30, 1998 and 1997 (unaudited)....................................3
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations.....................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................................20
Signatures ..............................................................................................21
Index to Exhibits ..............................................................................................22
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 22,870 $ 34,152
Interest bearing deposits with other banks -- 20,000
Securities purchased under agreements to resell -- 178,000
Securities available for sale 625,054 518,107
Loans receivable, net of allowance for loan losses of $24,547
at June 30, 1998 and $20,484 at December 31, 1997 1,114,950 953,470
Federal Home Loan Bank of Topeka stock, at cost 48,531 45,147
Premises and equipment, net 15,330 10,646
Assets acquired through foreclosure and repossession, net 617 260
Intangible assets, net 7,746 1,779
Deferred tax asset, net 19,581 26,058
Current income taxes receivable 17,022 28,427
Other assets 32,614 65,319
----------- -----------
Total assets $ 1,904,315 $ 1,881,365
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 279,012 $ 247,264
Savings 72,887 68,937
Time 1,201,553 1,286,332
----------- -----------
Total deposits 1,553,452 1,602,533
Advances from borrowers for taxes and insurance 6,842 5,046
Advances from the Federal Home Loan Bank of Topeka 136,634 80,136
Senior notes 80,000 80,000
Other liabilities 24,489 31,025
----------- -----------
Total liabilities 1,801,417 1,798,740
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
20,537,269 shares issued and 20,537,209 shares outstanding at
June 30, 1998; 25,000,000 shares authorized; 19,700,060
shares issued and 19,700,000 shares outstanding at 205 197
December 31, 1997
Preferred Stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,757 197,766
Retained earnings 40,534 31,760
Treasury stock, 60 shares, at cost (149,436) (149,436)
Accumulated other comprehensive income 4,838 2,338
----------- -----------
Total stockholders' equity 102,898 82,625
----------- -----------
Total liabilities and stockholders' equity $ 1,904,315 $ 1,881,365
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
1
<PAGE> 4
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 44,898 $ 54,536 $ 22,369 $ 27,054
Securities available for sale 19,658 30,703 10,773 13,039
Securities held to maturity -- 16,345 -- 9,826
Federal Home Loan Bank of Topeka stock 1,741 1,393 890 819
Short term investments and other 4,219 587 993 131
------------ ------------ ------------ ------------
Total interest and dividend income 70,516 103,564 35,025 50,869
------------ ------------ ------------ ------------
Interest Expense:
Deposit accounts 38,399 41,872 18,893 20,795
Advances from the Federal Home Loan Bank of Topeka 2,837 25,089 1,328 13,715
Securities sold under agreements to repurchase and other 251 9,776 0 3,151
Notes payable 4,740 462 2,363 185
------------ ------------ ------------ ------------
Total interest expense 46,227 77,199 22,584 37,846
------------ ------------ ------------ ------------
Net interest and dividend income 24,289 26,365 12,441 13,023
Provision for loan losses (450) (18,694) (300) (8,030)
------------ ------------ ------------ ------------
Net interest and dividend income after provision
for loan losses 23,839 7,671 12,141 4,993
------------ ------------ ------------ ------------
Noninterest income:
Deposit related income 4,473 3,745 2,486 2,017
Loan fees and loan service charges 892 1,701 554 875
Net gains (losses) on sale of assets 359 (26,159) 334 (7,604)
Other 883 1,404 559 1,177
------------ ------------ ------------ ------------
Total noninterest income (loss) 6,607 (19,309) 3,933 (3,535)
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 7,630 7,428 3,986 3,233
Deposit insurance premiums 683 528 343 271
Provision for uninsured risk -- 2,700 -- 1,960
Equipment and data processing 1,537 1,550 808 775
Occupancy 1,318 1,393 691 710
Advertising 822 681 556 317
Professional fees 965 577 478 382
Other 3,959 5,027 2,260 2,358
------------ ------------ ------------ ------------
Total noninterest expense 16,914 19,884 9,122 10,006
------------ ------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes 13,532 (31,522) 6,952 (8,548)
Provision (benefit) for income taxes 4,758 (8,287) 2,427 (194)
------------ ------------ ------------ ------------
Net income (loss) $ 8,774 $ (23,235) $ 4,525 $ (8,354)
============ ============ ============ ============
Basic net income (loss) per share $ 0.43 $ (1.51) $ 0.22 $ (0.54)
============ ============ ============ ============
Diluted net income (loss) per share $ 0.42 $ (1.51) $ 0.22 $ (0.54)
============ ============ ============ ============
Weighted average shares outstanding - Basic 20,324,438 15,400,000 20,537,209 15,400,000
============ ============ ============ ============
Weighted average shares outstanding - Diluted 20,649,630 15,400,000 20,930,441 15,400,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
<PAGE> 5
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income (loss) $ 8,774 $ (23,235)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities-
Provisions for uninsured risk and losses on loans and assets
acquired through foreclosure and repossession 450 21,414
Deferred income tax expense (benefit) 5,672 925
Accretion of discounts on loans acquired (1,786) (3,756)
Accretion of deferred (gains) losses on interest rate swaps -- 323
Net amortization (accretion) of premium on securities available for sale (1,891) 3,759
Net amortization (accretion) of premium on securities held to maturity -- 1,192
Depreciation and amortization 1,765 993
Proceeds from the sales of loans 9,123 10,721
(Gain) loss on sale of assets (359) 26,159
Stock dividends received from Federal Home Loan Bank stock (1,741) (1,393)
Change in other assets 19,089 (2,872)
Change in other liabilities (10,166) (6,441)
----------- -----------
Net cash provided by operating activities 28,930 27,789
----------- -----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 20,222 599,569
Proceeds from principal collections on securities available for sale 84,144 4,035
Proceeds from principal collections on securities held to maturity -- 25,638
Purchases of securities available for sale (181,873) --
Purchases of securities held to maturity -- (73,389)
Purchases of repurchase agreements (1,200,462) --
Proceeds from maturity of repurchase agreements 1,378,462 --
Purchases of Federal Home Loan Bank stock (1,643) (27,765)
Proceeds from the sale of Federal Home Loan Bank stock -- 8,959
Loans purchased -- (1,586)
Repayments of loans made by non-bank subsidiary -- 18,934
Change in loans receivable, net (63,207) 25,498
Proceeds from disposal of assets acquired through foreclosure and repossession 56 (9,287)
Purchases of premises and equipment (5,469) (542)
Proceeds from sales of premises and equipment 35 4
Cash acquired in acquisition of Green Country Banking Corporation 2,512 --
----------- -----------
Net cash provided by investing activities 32,777 570,068
----------- -----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 16,925 (4,010)
Change in time deposits (144,956) (35,293)
Change in securities sold under agreements to repurchase -- (633,355)
Proceeds from advances from the Federal Home Loan Bank 432,515 4,170,974
Repayments of advances from the Federal Home Loan Bank (396,107) (4,008,695)
</TABLE>
3
<PAGE> 6
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Payment of liability assumed from Green Country Banking Corporation $ (3,162) $ --
Change in advances by borrowers for taxes and insurance 1,796 1,804
--------- ---------
Net cash (absorbed) by financing activities (92,989) (508,575)
--------- ---------
Net change in cash and cash equivalents (31,282) 89,282
Cash and cash equivalents at beginning of period 54,152 16,122
--------- ---------
Cash and cash equivalents at end of period $ 22,870 $ 105,404
========= =========
Supplemental disclosures of cashflow information:
Cash paid (received) during the period for:
Interest $ 41,145 $ 84,073
========= =========
Income taxes $ (11,405) $ --
========= =========
Supplemental schedule of noncash investing and financing activities:
Loans made to facilitate the sale of assets
acquired through foreclosure and repossession $ -- $ 79
========= =========
Transfers of loans to assets acquired through foreclosure
and repossession $ 420 $ 2,109
========= =========
Repayment of note payable and accrued interest by shareholders $ -- $ 8,099
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 7
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments (consisting of only normal recurring
adjustments) that are necessary, in the opinion of management, for a fair
presentation of the interim financial statements have been included; however,
the results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any interim period. The interim financial information should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's Form S-1 Registration Statement (No. 333-43727) filed with the
Securities and Exchange Commission ("SEC") (which became effective April 20,
1998).
On June 16, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year-end from June 30 to December 31.
2. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
Securities purchased under agreement to resell are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Average outstanding balance $ 141,902 $ 60,000
Maximum month-end balance 231,000 178,000
Mortgage-backed securities securing
the agreements at period-end:
Carrying value - 178,000
Estimated market value - 184,000
</TABLE>
Securities purchased under agreements to resell are held by the Company. The
agreements generally mature within one month.
3. 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
----------------- ----------------- ------------------ ------------------
June 30, 1998
<S> <C> <C> <C> <C>
Municipal securities $ 487 $ - $ - $ 487
U.S. Government and 23,981 26 3 24,004
agency securities
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Collateralized mortgage
obligations:
FNMA $ 266,074 $ 2,800 $ - $ 268,874
Private Issue 167,494 578 23 168,049
FHLMC 141,016 3,770 18 144,768
Mortgage-backed securities:
Private Issue 16,790 288 - 17,078
FNMA 982 11 - 993
FHLMC 442 12 - 454
GNMA 345 2 - 347
-------------- -------------- -------------- --------------
$ 617,611 $ 7,487 $ 44 $ 625,054
============== ============== ============== ==============
December 31, 1997
U.S. Government and $ 6,001 $ - $ 1 $ 6,000
agency securities
Collateralized mortgage
obligations:
FNMA 265,088 2,199 1,088 266,199
FHLMC 140,781 1,773 61 142,493
Private Issue 19,966 249 31 20,184
Mortgage-backed securities:
FHLMC 44,085 143 1 44,227
Private Issue 36,584 407 - 36,991
FNMA 1,619 8 - 1,627
GNMA 386 1 1 386
-------------- -------------- -------------- --------------
$ 514,510 $ 4,780 $ 1,183 $ 518,107
============== ============== ============== ==============
</TABLE>
During the six months ended June 30, 1998, the Company purchased approximately
$163,904,000 in fixed rate collateralized mortgage securities with a weighted
average yield of 6.46% and approximately $17,969,000 in agency securities with a
weighted average yield of 6.44% and an average maturity of five years. With the
merger of Green Country Bank, the Company acquired approximately $483,000 in
municipal securities with a weighted average yield of 5.39% and an average
maturity of three years and approximately $1,332,000 in U.S. Treasury notes and
bills with a weighted average yield of 5.07% which matured during the period.
6
<PAGE> 9
4. LOANS RECEIVABLE
Loans receivable are summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Residential real estate loans $ 316,331 $ 287,262
Commercial 730,697 649,283
Held for Sale 3,449 -
Consumer loans 95,075 45,751
--------------- ----------------
Total gross loans $ 1,145,552 $ 982,296
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Less:
Unaccreted discounted (6,107) (7,824)
Unearned interest - -
Allowance for loan losses (24,547) (20,484)
Deferred income 52 (518)
--------------- ----------------
Loans receivable, net $ 1,114,950 $ 953,470
============== ===============
</TABLE>
The Company acquires commercial real estate loans from various sources. These
loans are secured primarily by multifamily 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 June 30, 1998 and the six months ended December 31,
1997, approximately $9,002,000 and $1,735,000, respectively, in guaranteed
student loans were sold resulting in gains of $122,000 and $24,000,
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 June 30, 1998 and December 31, 1997,
student loans totaling approximately $1,102,000 and $0, respectively, were held
for sale and are included as a component of loans receivable in the accompanying
consolidated statements of financial condition.
During the six months ended June 30, 1998, the Company designated as Held for
Sale all 30-year conforming single family residential loans originated since
January 1, 1998. The Company securitizes and sells these loans in the secondary
market. At June 30, 1998, residential real estate loans held for sale totaled
$2,347,000 and are included as a component of loans receivable in the
accompanying consolidated statements of financial condition. During the six
months ended June 30, 1998 approximately $20,848,000 in residential real estate
loans held for sale were securitized and sold resulting in a net gain of
$224,000.
7
<PAGE> 10
5. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA
Advances from the FHLB are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------- -------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Variable rate $ 26,000 5.48% $ 30,100 5.75%
Fixed rate 110,634 5.63 50,036 6.26
----------- -----------
$ 136,634 5.60% $ 80,136 6.06%
=========== ==== =========== ====
</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.
Scheduled principal repayments of advances from the FHLB at June 30, 1998 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted
Year ending Average
December 31, Amount Contractual Rate
------------ ----------- ----------------
<S> <C> <C> <C>
1998 $ 30,600 5.62%
1999 - -
2000 - -
2001 - -
2002 and thereafter 106,034 5.60
----------- -----
$ 136,634 5.60%
========== ====
</TABLE>
6. PROPOSED ACQUISITION
On June 18, 1998, the Company entered into an agreement to purchase BankSouth
Corporation, a state bank holding company based in Lawton, Oklahoma
("BankSouth") for approximately $20,600,000 cash. The Company's resultant
wholly-owned subsidiary, Citizens Bank, which was formerly the wholly-owned
subsidiary bank of BankSouth, will be subsequently merged into Local Federal
Bank, FSB ("Local Federal"), with Local Federal being the surviving bank.
The purchase is subject to regulatory approval.
The acquisition of BankSouth will be accounted for under purchase accounting
treatment. Total assets and liabilities of BankSouth at March 31, 1998 are
approximately $177,000,000 and $165,000,000, respectively. 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 March 31, 1998 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 $8,700,000 will be amortized on a straight-line basis over 15
years.
8
<PAGE> 11
7. COMPREHENSIVE INCOME
As a result of the Company changing the fiscal year end in June 1998, the
Company adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" in the quarter ended June 30, 1998. The standard requires
reporting of comprehensive income, which includes all changes in stockholders'
equity other than additional investments by stockholders or distributions to
stockholders. Comprehensive income for the Company includes net income and
unrealized gains on securities which are charged or credited to the cumulative
unrealized gains on securities account within stockholders' equity.
Comprehensive income (loss) for the periods ended June 30, 1998 and 1997,
consists of:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ----------------- --------------- ------------
<S> <C> <C> <C> <C>
Net income (loss)..................... $ 4,525 $ (8,354) $ 8,774 $ (23,235)
Other comprehensive income, net of
tax
Unrealized gains on securities, net
of reclassification adjustment...... 1,218 6,713 2,500 13,462
---------------- ----------------- --------------- ------------
Comprehensive income (loss)........... $ 5,743 $ (1,641) $ 11,274 $ (9,773)
================ ================= =============== ============
</TABLE>
9
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On August 25, 1997, the Company entered into a redemption agreement
(the "Redemption Agreement") with Baron Collier and Miles Collier, the then sole
stockholders of the Company (the "Selling Stockholders"). In the Redemption
Agreement 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 adjustments. The Redemption Agreement was contingent upon the Company raising
through a private placement at least $190.0 million from the sale of its common
stock and at least $70.0 million from the sale of its notes. In addition, 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 ($7.0 million of principal and
$190,000 of interest).
On September 8, 1997, the Company entered into a purchase agreement
with Friedman, Billings, Ramsey & Co. and the various purchasers (the "Purchase
Agreement"). The Purchase Agreement provided generally for a private placement
of $197.0 million of common stock and $80.0 million of senior notes. In
conjunction with the Purchase Agreement, the Company also entered into a
Registration Rights Agreement with the purchasers, which required the Company to
file a registration statement with the Securities and Exchange Commission
covering the securities sold under the Purchase Agreement. The Company used its
net proceeds from the Purchase Agreement to fund the Redemption Agreement. It
closed these agreements on September 8, 1997.
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
subsidiary 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
resignation 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.
Subsequently, J. David Rosenberg joined the Board.
The Company filed its registration statement on January 5, 1998, and
the registration statement was made effective on April 20, 1998. As a result,
the Company became subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and its common stock and senior
notes began trading on AMEX under the symbols "LO" and "LO.A".
The information included in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) should be read in
conjunction with the information contained in the Consolidated Financial
Statements and the Notes thereto. This report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"), and is subject to the safe harbor created by that
Reform Act. The words "estimate", "project", "anticipate", "expect", "intend",
"believe", "plans", and similar expressions are intended to identify
forward-looking statements. Because such forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Factors, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results to differ materially include, but are not limited to: risks related to
the Company's acquisition strategy, including risks of adversely changing
results of operations and factors affecting the Company's ability to consummate
further
10
<PAGE> 13
acquisitions; changes in general economic and business conditions; changes in
market rates of interest; changes in the laws and regulations applicable to the
Company; the risks associated with the banks Non-Traditional lending (loans
other than single-family residential mortgage loans such as multifamily, real
estate acquisition and development, commercial, warehouse and mortgage servicing
rights loans); and changes in business strategies and other factors as discussed
in the Company's Form S-1 Registration Statement (No. 333-43727) for the period
ended December 31, 1997, as filed with the Securities and Exchange Commission
(SEC) and which became effective on April 20, 1998.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1997 TO JUNE 30, 1998
General. On October 22, 1997, the Company and its subsidiary bank Local
America Bank of Tulsa, FSB ("Local America") entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Green Country Banking Corporation
("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 included Edward A. Townsend, Chairman and Chief Executive Officer
of the Company, and Jan A. Norton, President and Chief Operating Officer of the
Company. The Merger was accounted for under the purchase method of accounting.
On February 16, 1998, 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 $104.6 million, $99.6
million, and $79.0 million and $5.0 million, respectively.
Total assets increased by $23 million or 1.2% during the six months
ended June 30, 1998. The net increase resulted primarily from an increase in
loans receivable of 16.9% or $161.5 million and an increase in securities
available for sale of 20.6% or $106.9 million. These increases were offset by a
decrease in securities purchased under agreements to resell of 100% or $178
million as the Company liquidated its short-term investment portfolio and
reinvested the majority of those proceeds in private issue mortgage derivative
securities. The remainder of the proceeds from the sale of its short-term
investments were used to help fund the growth in loans which primarily was seen
in the Company's commercial business and commercial real estate portfolios where
gross loan growth during the six months ended June 30, 1998 totaled $218.1
million.
Total liabilities remained relatively level increasing 0.2% or $2.7
million from December 31, 1997 to June 30, 1998. During the period a net decline
in deposits was seen as the Company selectively adjusted deposit rates which
caused some rate-sensitive movement of funds primarily in the time deposit area
where deposits fell 6.59% or $84.8 million. This outflow was offset by an
increase in demand deposits of $31.7 million or 12.8% and by an increase in
borrowings from the Federal Home Loan Bank of Topeka (the "FHLB") of 70.5% or
$56.5 million.
Stockholders' equity increased 24.5% or $20.3 million from December 31,
1997 to June 30, 1998 as a result primarily of net income during the period and
an increase in additional paid-in-capital of $9.0 million which resulted from
the shares issued in connection with the Company's acquisition of Green
11
<PAGE> 14
Country on February 16, 1998 at which point the Company issued 837,209 new
shares of Common Stock to purchase the assets of Green Country.
DISCUSSION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997 AND FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
General. On June 16, 1998, the Company's Board of Directors approved a
change in the Company's fiscal year end from June 30th to December 31st.
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 other investments securities and various
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, equipment and data processing expense and occupancy expense;
and provisions (benefits) for income taxes.
Net Income (Loss). The Company reported net income (loss) of $8.8
million and ($23.2) million during the six months ended June 30, 1998 and June
30, 1997, respectively. The net loss reported for the six months ended June 30,
1997 was attributable to the $26.2 million in losses on sale of securities, and
the $18.7 million of provision for loan loss taken in association with the
indirect lending auto portfolio which was subsequently sold as of December 1997
by new management.
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 totaled $24.3 million and $26.4
million during the six months ended June 30, 1998 and June 30, 1997,
respectively. Net interest and dividend income declined by $2.1 million or 7.9%
during the six months ended June 30, 1998, as compared to the same period in the
prior year. Similarly, net interest and dividend income totaled $12.4 million
and $13.0 million during the three months ended June 30, 1998 and June 30, 1997,
respectively. During the quarter ended June 30, 1998, net interest and dividend
income decreased $582,000 or 4.5% as compared to the same period in the prior
year. Declines in both the six month and three-month comparative periods were
due to a significant decline in the average balance of securities, which is
attributable to the sale of such securities. The Company saw a decline in the
yield on loans primarily due to the December 1997 sale of the indirect
automobile receivables. However, lower yields in the loan portfolio were offset
by higher yielding assets in the securities portfolio and other assets resulting
in increased yields overall on interest earning assets during both the six month
and three month comparative periods.
12
<PAGE> 15
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 rate; (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 JUNE 30,
-------------------------------------------------------------------
1998 1997
---------------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ---------- -------- ----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 1,068,345 $ 44,898 8.47% $ 1,062,754 $ 54,536 10.35%
Securities (2) 546,191 19,658 7.26% 1,578,833 47,048 6.01%
Repurchase Agreements 141,902 3,947 5.61% 15,313 437 5.75%
Other earning assets (3) 60,887 2,013 6.67% 53,000 1,543 5.87%
----------- -------- ------ ----------- -------- -----
Total interest-earning assets 1,817,325 70,516 7.82% 2,709,900 103,564 7.71%
----------- -------- ------ ----------- -------- -----
Noninterest-earning assets 108,775 80,833
----------- -----------
Total assets $ 1,926,100 $ 2,790,733
=========== ===========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4) 270,884 3,554 2.65% 267,028 3,697 2.79%
Term certificates of deposit 1,285,923 34,845 5.46% 1,351,041 38,175 5.70%
----------- -------- ------ ----------- -------- -----
Total interest bearing deposits 1,556,807 38,399 4.97% 1,618,069 41,872 5.22%
Borrowings:
FHLB advances 84,323 2,837 6.78% 707,216 25,089 7.15%
Securities sold under agreements to
repurchase & other - 251 0.00% 268,741 9,776 7.34%
Promissory note payable - 0 0.00% 11,683 462 7.97%
Senior Notes 80,000 4,740 11.81% - - -
----------- -------- ------ ----------- -------- -----
Total interest-bearing liabilities 1,721,130 46,227 5.42% 2,605,709 77,199 5.97%
----------- -------- ------ ----------- -------- -----
Noninterest-bearing liabilities 108,732 83,368
----------- -----------
Total liabilities 1,829,862 2,689,077
Stockholders' equity 96,238 101,656
----------- -----------
Total liabilities and stockholders'
equity $ 1,926,100 $ 2,790,733
=========== ===========
Net interest-earning assets $ 96,195 $ 104,191
=========== ===========
Net interest income/interest rate spread $ 24,289 2.40% $ 26,365 1.74%
======== ====== ======== ======
Net interest margin 2.70% 1.96%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 105.59% 104.00%
====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1998 1997
---------------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 1,083,483 $ 22,369 8.28% $ 1,041,044 $ 27,054 10.42%
Securities (2) 598,358 10,773 7.22% 1,536,784 22,865 5.97%
Repurchase Agreements 58,011 799 5.52% 769 11 5.74%
Other earning assets (3) 66,460 1,084 6.54% 63,065 939 5.97%
----------- -------- ------ ----------- -------- ------
Total interest-earning assets 1,806,312 35,025 7.78% 2,641,662 50,869 7.72%
----------- -------- ------ ----------- -------- ------
Noninterest-earning assets 107,131 83,107
----------- -----------
Total assets $ 1,913,443 $ 2,724,769
=========== ===========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4) 272,594 1,774 2.61% 267,162 1,858 2.79%
Term certificates of deposit 1,256,739 17,119 5.46% 1,336,966 18,937 5.68%
----------- -------- ------ ----------- -------- ------
Total interest bearing deposits 1,529,333 18,893 4.96% 1,604,128 20,795 5.20%
Borrowings:
FHLB advances 90,865 1,328 5.86% 767,349 13,715 7.17%
Securities sold under agreements to
repurchase & other 0 - 0.00% 155,404 3,151 8.13%
Promissory note payable 0 - 0.00% 9,347 185 7.94%
Senior Notes 80,000 2,363 11.81% - - -
----------- -------- ------ ----------- -------- ------
Total interest-bearing liabilities 1,700,198 22,584 5.33% 2,536,228 37,846 5.99%
----------- -------- ------ ----------- -------- ------
Noninterest-bearing liabilities 112,616 86,629
----------- -----------
Total liabilities 1,812,814 2,622,857
Stockholders' equity 100,629 101,912
----------- -----------
Total liabilities and stockholders'
equity $ 1,913,443 $ 2,724,769
=========== ===========
Net interest-earning assets $ 106,114 $ 105,434
=========== ===========
Net interest income/interest rate spread $ 12,441 2.45% $ 13,023 1.73%
======== ====== ======== ======
Net interest margin 2.76% 1.98%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.24% 104.16%
====== ======
</TABLE>
- -------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and excludes the allowance
for loan losses which is included in noninterest-earning assets.
(2) Includes all securities classified as held to maturity and available for
sale, including the market valuation accounts.
(3) Includes cash and due from banks, equity securities, interest bearing
deposits, and FHLB stock.
12a
<PAGE> 16
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 JUNE 30, 1998
COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
----------------------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------
RATE/ TOTAL NET INCREASE
RATE VOLUME VOLUME (DECREASE)
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (9,873) $ 287 $ (52) $ (9,638)
Debt securities 9,776 (30,772) (6,394) (27,390)
Repurchase Agreements (11) 3,613 (92) 3,510
Other earning assets 209 230 31 470
-------- -------- -------- --------
Total net change in income on interest-earning
assets 101 (26,642) (6,507) (33,048)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (193) 53 (3) (143)
Term certificates of deposit (1,566) (1,839) 75 (3,330)
-------- -------- -------- --------
Total deposits (1,759) (1,786) 72 (3,473)
Borrowings:
FHLB advances (1,295) (22,098) 1,141 (22,252)
Securities sold under agreements to
repurchase and other (9,525) (9,776) 9,776 (9,525)
Promissory note payable (462) (462) 462 (462)
Senior Notes -- -- 4,740 4,740
-------- -------- -------- --------
Total net change in expense on interest-bearing
liabilities (13,041) (34,122) 16,191 (30,972)
-------- -------- -------- --------
Change in net interest income $ 13,142 $ 7,480 $(22,698) $ (2,076)
======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
--------------------------------------------------
INCREASE (DECREASE) DUE TO
-----------------------------------
RATE/ TOTAL NET INCREASE
RATE VOLUME VOLUME (DECREASE)
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (5,562) $ 1,104 $ (227) $ (4,685)
Debt securities 4,804 (13,962) (2,934) (12,092)
Repurchase Agreements (0) 819 (31) 788
Other earning assets 90 51 4 145
-------- -------- -------- --------
Total net change in income on interest-earning
assets (668) (11,988) (3,188) (15,844)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (120) 38 (2) (84)
Term certificates of deposit (725) (1,137) 44 (1,818)
-------- -------- -------- --------
Total deposits (845) (1,099) 42 (1,902)
Borrowings:
FHLB advances (2,500) (12,091) 2,204 (12,387)
Securities sold under agreements to
repurchase and other (3,151) (3,151) 3,151 (3,151)
Promissory note payable (185) (185) 185 (185)
Senior Notes -- -- 2,363 2,363
-------- -------- -------- --------
Total net change in expense on interest-bearing
liabilities (6,681) (16,526) 7,945 (15,262)
-------- -------- -------- --------
Change in net interest income $ 6,013 $ 4,538 $(11,133) $ (582)
======== ======== ======== ========
</TABLE>
12b
<PAGE> 17
The yield on the Company's interest earning assets increased 11 basis
points while the cost of the interest bearing liabilities decreased 55 basis
points resulting in an increase in the Company's net interest spread and net
interest margin of 66 and 74 basis points, respectively, during the six months
ended June 30, 1998 as compared to the same period in 1997. Likewise during the
three months ended June 30, 1998, the Company's yield on interest earning assets
increased 6 basis points while the cost of the interest bearing liabilities
decreased 66 basis points as compared to the same period in 1997.
Interest Income. Total interest and dividend income decreased by $33.0
million or 31.9% during the six months ended June 30, 1998, as compared to the
same period in the prior year and declined by $15.8 million or 31.1% during the
three months ended June 30, 1998 as compared to the same period in the prior
year. Interest income on loans receivable decreased by $9.6 million or 17.7%
during the six months ended June 30, 1998, as compared to the same period in the
prior year and decreased by $4.7 million or 17.3% during the three months ended
June 30, 1998 as compared to the same period in the prior year. The decrease in
interest on loans receivable was due to a reduction in the average yield. This
decline in the average yield reflected, in part, the sale of the Company's
indirect automobile portfolio. Such loans generally carry higher yields than
traditional real estate secured loans.
Interest income on assets (which include mortgage-backed and related
securities, including CMOs, U.S. Government and agency securities, FHLB stock
and, during fiscal 1997, interest rate caps and floors and Student Loan
Marketing Association preferred stock) declined by $23.4 million or 47.7% during
the six months ended June 30, 1998 as compared to the same period in the prior
year and declined by $11.2 million or 46.9% during the three months ended June
30, 1998 as compared to the same period in the prior year. The decline in
interest income on such investments during the six and three months ended June
30, 1998 was primarily due to the decline in the average balance of securities
of $1.0 billion and $938.4 million during each of the comparative periods.
During the six months ended June 1997, the Company reduced its securities
holdings (primarily its COFI-based CMOs) through periodic bulk sale transactions
which resulted in the sale of $624 million of securities during the period.
During the six months ended December 1997 and in connection with the Private
Placement and the Redemption, new management accelerated the disposition of its
securities portfolio particularly its COFI-based CMOs and 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 to market value.
Management expects to continue to reduce what remains of the COFI-based
portfolio; however, no sales of COFI-based CMOs occurred during the six month
period ending June 1998.
Interest Expense. Total interest expense declined by $31.0 million or
40.1% during the six months ended June 30, 1998, as compared to the same period
in the prior year. Similarly, total interest expense declined by $15.3 million
or 40.3% during the three months ended June 30, 1998 as compared to the same
period in the prior year. Interest expense on deposits, the largest component of
the Company's interest-bearing liabilities, declined by $3.5 million or 8.3%
during the six months ended June 30, 1998, and $1.9 million or 9.2% during the
three months ended June 30, 1998 as compared to the same period in the prior
year. The decline in interest expense on deposits was a result of the decline in
average balances during the period as well as lower rates being paid overall.
Interest expense on FHLB advances declined by $22.3 million or 88.7%
during the six months ended June 30, 1998, as compared to the same period in the
prior year. During the three months ended June 30, 1998, interest expense on
FHLB advances decreased $12.4 million or 90.3% as compared to the same period in
the prior year. The decline in interest expense on borrowings was a function of
a declining
13
<PAGE> 18
balance of borrowings as well as lower rates available at the FHLB. However,
during the three months ended June 30, 1998, the Company has been increasing its
FHLB borrowings to fund the increased commercial lending activity and cover
deposit outflows. Interest expense on reverse repurchase agreements decreased
$9.5 million or 97.4% during the six months ended June 30, 1998 and $3.2 million
or 100% during the 3 months ended June 30, 1998 as compared to the same periods
in the prior year.
During the six months ended June 30, 1998 and June 30, 1997, interest
expense on notes payable of $4.7 million and $462,000, respectively, 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. On
September 8, 1997, in connection with the closing of the Private Placement and
the Redemption Transactions, 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).
Provision for Loan Losses. The Company established provisions for loan
losses of $450,000 and $18.7 million during the six months ended June 30, 1998
and June 30, 1997, respectively. During such respective periods, loan
charge-offs (net of recoveries) amounted to $341,000 and $9.2 million. Allowance
acquired as a result of the acquisition of Green Country was $4.0 million and is
reflected in the allowance at June 30, 1998. The provisions established during
the six months 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. The provisions established during the six months
ended June 30, 1998 were a function of management's credit risk monitoring
process that considers several factors, including among other things, current
economic conditions affecting the Company's customers, the payment performance
of individual large loans and pools of homogeneous small loans, portfolio
seasoning, change in collateral values, and detailed review of specific large
loan relationships. Management will continue to review its loan loss allowance
as the Company's loan portfolio grows and diversifies to determine if changes to
the policy and resulting allowance for loan loss are necessary.
Noninterest Income. Total noninterest income (loss) amounted to $6.6
million and $(19.3) million during the six months ended June 30, 1998 and June
30, 1997, respectively. Comparatively, total noninterest income (loss) amounted
to $3.9 million and ($3.5) million during the three months ended June 30, 1998
and June 30, 1997, 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 income
(losses) recognized during the six months ended June 30, 1997 and the three
months ended June 30, 1997 primarily related to losses incurred on the sale of
securities. Specifically, during the six-month period ending June 30, 1997, the
Company incurred ($26.4) million of losses on the sale of securities from its
COFI-based CMO portfolio. These sales continued through December 31, 1997, as
new management pursuant to the Private Placement Memorandum dramatically
restructured the Statement of Financial Condition of the Company. Specifically,
during the quarter ended September 1997, the Company (1) liquidated the hedging
contracts previous management had entered into in an attempt to reduce the
Company's exposure to interest rates, (2) sold the majority of its COFI-based
CMO portfolio, and (3) wrote-down the remaining COFI-based CMO portfolio to
reflect market values. There were no further sales during the six month period
ended June 30 1998. Gains on sale recognized during the six month period ending
June 30, 1998 of $359,000, came as a result of the Company's sale of $9.0
million in student loans and its securitization and sale of $21.0 million in
30-year residential mortgages which it had originated. The noninterest income
recognized during the six months ending June 30, 1998 is reflective of the core
noninterest income potential of the Company as this was the first full six
months of operations occurring subsequent to the balance sheet restructuring
discussed above.
14
<PAGE> 19
Noninterest Expense. Total noninterest expense decreased by $3.0
million or 14.9% during the six months ended June 30, 1998, as compared to the
same period in the prior year. During the six months ended June 30, 1997, the
Company reported provisions of $2.7 million as the Company reassessed its
potential liability with respect to a pending dispute with the FDIC regarding
amounts owed by Local America to the FDIC under the 1989 Assistance Agreement
between Local America and the Federal Savings and Loan Insurance Corporation
(the "FDIC Dispute"). During the three month period ended June 30, 1998, the
Company reported a decrease in noninterest expense of $884,000 or 8.8%. The
Company recorded no further provisions with respect to the FDIC dispute after
June 30, 1997. The decline in noninterest expense overall was partially offset
by increases in Compensation and employee benefits of $202,000 or 2.7% and
$753,000 or 23.3% during the six month period ending June 30, 1998 and the three
month period ending June 30, 1998, when compared to the same periods in the
prior year. The increases came primarily as a result of the staffing necessary
to support the expansion of the loan production base to include commercial
business lending.
Provision (Benefit) for Income Taxes. During the six months ended June
30, 1998, the Company recognized $4.8 million of provisions for income taxes. At
June 30, 1998, the Company had approximately $31 million and $180 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. A valuation allowance for all available State net
operating loss carryforwards has been 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 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.
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.
15
<PAGE> 20
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. There were no hedging contracts outstanding at June 30, 1998 or
for the six months then ended.
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 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
June 30, 1998, based on the information and assumptions set forth in the notes
below:
<TABLE>
<CAPTION>
More Than
Within Three to More Than Three Years
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) $ 259,015 $ 285,262 $ 201,737 $ 161,533 $ 236,705 $1,144,252
Securities(3) 435,464 30,465 51,223 43,667 56,792 617,611
Other interest-earning
assets(4) 71,401 0 0 0 0 71,401
---------- ---------- ---------- ---------- ---------- ----------
Total $ 765,880 $ 315,727 $ 252,960 $ 205,200 $ 293,497 $1,833,264
========== ========== ========== ========== ========== ==========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
Accounts $ 10,815 $ 32,446 $ 58,187 $ 34,821 $ 61,828 $ 198,097
Passbook accounts 2,538 7,615 16,260 12,046 34,428 72,887
Certificates of deposit 353,228 559,956 268,561 19,547 261 1,201,553
</TABLE>
16
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Borrowings:
FHLB advances 56,600 0 0 40,000 40,034 136,634
0
Senior notes 0 0 0 0 80,000 80,000
---------- ---------- ---------- ---------- ---------- ----------
Total $ 423,181 $ 600,017 $ 343,008 $ 106,414 $ 216,551 $1,689,171
========== ========== ========== ========== ========== ==========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 342,699 $ (284,290) $ (90,048) $ 98,786 $ 76,946 $ 144,093
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $ 342,699 $ 58,409 $ (31,639) $ 67,147 $ 144,093 $ 144,093
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as
a percent of total assets 18.00% 3.07% (1.66)% 3.53% 7.57% 7.57%
========== ========== ========== ========== ========== ==========
</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. Fixed-rate loans and securities are included in the periods
in which they are scheduled to be repaid, based on scheduled amortization, and
adjusted to take into account estimated prepayments based on, among other
things, historical performance.
(2) Balances have been reduced for nonaccrual loans, which amounted to
$1.30 million at June 30, 1998 and excludes discounts and other adjustments of
($6.1) million.
(3) Does not include unrealized gain on securities classified as available
for sale of $7.44 million.
(4) Comprised of cash and due from banks, deposits with other banks,
repurchase agreements and FHLB stock.
(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.
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.
17
<PAGE> 22
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 June 30, 1998, the Company had $328.0 million in
borrowing capacity under a collateralized line of credit with the FHLB of
Topeka, of which $136.6 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 June 30, 1998, the Company had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $109.4 million. Certificates of deposit which are scheduled to mature
within one year totaled $913.2 million at June 30, 1998, and borrowings that are
scheduled to mature or reprice within the same period amounted to $56.6 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.
As of March 1, 1998, the Company began making interest payments on the
Senior Notes. The interest payment was initially funded through an interest
reserve account established with an independent trustee using proceeds from the
Private Placement. The Senior Notes have an annual debt service requirement of
$8.8 million (or $4.4 million for each semi-annual period). The Interest Reserve
Account currently contains cash and other investments permitted by the Indenture
governing the Senior Notes sufficient to pay the aggregate interest payment
scheduled to be made on September 1, 1998.
18
<PAGE> 23
Capital Resources. Federally insured savings institutions such as the
Banks are required to maintain minimum levels of regulatory capital. The
following table reflects the Banks' actual levels of regulatory capital and
applicable regulatory capital requirements at June 30, 1998.
<TABLE>
<CAPTION>
MINIMUM
REQUIRED(4) ACTUAL EXCESS
----------- ------ ------
PERCENT AMOUNT ($) PERCENT AMOUNT ($) PERCENT AMOUNT ($)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Local Federal:
Tangible capital 1.50% 28,033 8.09% 151,201 6.59% 123,168
Core capital (1) 3.00% 56,089 8.13% 151,974 5.13% 95,885
Risk-based
capital (2)(3) 8.00% 83,323 15.24% 158,690 7.24% 75,367
Local America:
Tangible capital 1.50% 10,024 16.45% 109,921 14.95% 99,897
Core capital (1) 3.00% 20,048 16.45% 109,921 13.45% 88,873
Risk-based
capital(2)(3) 8.00% 36,626 25.23% 115,506 17.23% 78,880
</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.
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
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.
19
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" for Quantitative and
Qualitative Disclosures about Market Risk.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
On June 16, 1998, the Company filed a Form 8-K current report to report
that the Company's Board of Directors adopted a resolution changing the fiscal
year end from June 30 to December 31. No financial statements were filed with
this report.
On June 18, 1998, the Company filed a Form 8-K current report to report
that the Company's wholly-owned subsidiary, Local Federal Bank, F.S.B., had
entered into a definitive agreement to acquire BankSouth Corporation, a state
bank holding company based in Lawton, Oklahoma. No financial statements were
filed with this report.
20
<PAGE> 25
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 1998 By /s/ Edward A. Townsend
------------------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
Date: August 10, 1998 By /s/ Richard L. Park
------------------------------------
Richard L. Park
Chief Financial Officer
21
<PAGE> 26
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
27 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,870
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 625,054
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,145,552<F1>
<ALLOWANCE> 24,547
<TOTAL-ASSETS> 1,904,315
<DEPOSITS> 1,553,452
<SHORT-TERM> 136,634
<LIABILITIES-OTHER> 24,489
<LONG-TERM> 80,000
0
0
<COMMON> 205
<OTHER-SE> 102,693<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 1,904,315
<INTEREST-LOAN> 44,898
<INTEREST-INVEST> 25,618
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 70,516
<INTEREST-DEPOSIT> 38,399
<INTEREST-EXPENSE> 46,227
<INTEREST-INCOME-NET> 24,289
<LOAN-LOSSES> 450
<SECURITIES-GAINS> (812)
<EXPENSE-OTHER> 3,959
<INCOME-PRETAX> 13,532
<INCOME-PRE-EXTRAORDINARY> 13,532
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,774
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 7.82
<LOANS-NON> 1,288
<LOANS-PAST> 119
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,484
<CHARGE-OFFS> 456
<RECOVERIES> 115
<ALLOWANCE-CLOSE> 24,547
<ALLOWANCE-DOMESTIC> 24,547
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,763
<FN>
<F1>LOANS TAG IS A GROSS LOANS NUMBER
<F2>OTHER-SE TAG INCLUDES RETAINED EARNINGS, PAID IN CAPITAL, TREASURY STOCK,
AND UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE.
</FN>
</TABLE>
