<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 March 31, 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 [ ] No [X]
Number of shares outstanding of the registrant's $0.01 par value common
stock as of June 1, 1998 were as follows:
NUMBER OF SHARES
-------------------------------
20,537,209
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<TABLE>
<CAPTION>
LOCAL FINANCIAL CORPORATION
INDEX
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Financial Condition -
June 30, 1997 and March 31, 1998.........................................................1
Consolidated Statements of Operations -
For the Three Months and Nine Months Ended March 31, 1998
and 1997.................................................................................2
Consolidated Statements of Stockholders' Equity for the nine
months ended March 31, 1998 and 1997.....................................................3
Consolidated Statements of Cash Flows -
For the Nine Months Ended March 31, 1998 and 1997........................................4
Notes to Consolidated Financial Statements...............................................5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations................................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................23
PART II. OTHER INFORMATION
Item 6. Exhibits................................................................................23
Signatures ............................................................................................24
Index to Exhibits ....................................................................................25
</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>
March 31, June 30,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 24,292 $ 15,904
Interest bearing deposits with other banks - 89,500
Securities purchased under agreements to resell 208,500 -
Securities available for sale 551,167 985,565
Securities held to maturity - 408,207
Loans receivable, net of allowance for loan losses
of $24,687 at March 31, 1998 and $11,435 at
June 30, 1997 1,041,382 1,013,824
Federal Home Loan Bank of Topeka stock, at cost 47,640 40,046
Premises and equipment, net 14,927 11,060
Assets acquired through foreclosure and repossession, net 285 8,399
Intangible assets, net 8,004 2,398
Deferred tax asset, net 24,177 16,976
Current income taxes receivable 27,730 13,568
Other assets 31,930 19,734
------------- ------------
Total assets $ 1,980,034 $ 2,625,181
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 275,700 $ 248,322
Savings 73,528 71,576
Time 1,309,802 1,324,458
------------- ------------
Total deposits 1,659,030 1,644,356
Advances from borrowers for taxes and insurance 6,135 7,481
Securities sold under agreements to repurchase - 310,801
Advances from the Federal Home Loan Bank of Topeka 108,735 531,161
Senior notes 80,000 -
Notes payable - 7,010
Other liabilities 28,979 21,743
------------- ------------
Total liabilities 1,882,879 2,522,552
------------- ------------
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 March 31, 1998;
2,000 shares authorized; 60 shares issued and
outstanding at June 30, 1997 205 -
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; none outstanding - -
Additional paid-in capital 206,757 16,896
Retained earnings 36,009 117,716
Treasury stock, 60 shares, at cost (149,436) -
Unrealized gains (losses) on securities available for
sale, net of income tax provision (benefit) of $1,950
and ($17,222) respectively 3,620 (31,983)
------------- ------------
Total stockholders' equity 97,155 102,629
------------- ------------
Total liabilities and stockholders' equity $ 1,980,034 $ 2,625,181
============= ============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
1
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 72,317 $ 80,661 $ 22,529 $ 27,482
Securities available for sale 36,998 68,822 8,885 17,664
Securities held to maturity 3,193 17,537 - 6,519
Federal Home Loan Bank of Topeka stock 2,528 2,839 851 574
Short term investments and other 5,659 1,936 3,226 456
---------- ---------- ---------- ----------
Total interest and dividend income 120,695 171,795 35,491 52,695
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 60,178 62,296 19,506 21,077
Advances from the Federal Home Loan Bank of Topeka 15,514 43,734 1,509 11,374
Securities sold under agreements to repurchase and other 2,324 25,044 251 6,625
Notes payable 5,450 841 2,377 277
---------- ---------- ---------- ----------
Total interest expense 83,466 131,915 23,643 39,353
---------- ---------- ---------- ----------
Net interest and dividend income 37,229 39,880 11,848 13,342
Provision for loan losses (25,728) (20,398) (150) (10,664)
---------- ---------- ---------- ----------
Net interest and dividend income after provision for loan losses 11,501 19,482 11,698 2,678
---------- ---------- ---------- ----------
Noninterest income:
Deposit related income 6,092 5,393 1,987 1,728
Loan fees and loan service charges 1,319 1,855 338 826
Net gains (losses) on sale of assets (112,644) (21,579) 25 (18,555)
Other 758 742 324 227
---------- ---------- ---------- ----------
Total noninterest income (loss) (104,475) (13,589) 2,674 (15,774)
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 11,375 11,355 3,644 4,195
Deposit insurance premiums 862 12,199 340 257
Provision for uninsured risk - 1,340 - 740
Equipment and data processing 2,214 2,305 729 775
Occupancy 2,043 2,163 627 683
Advertising 788 1,239 266 364
Professional fees 1,471 770 487 195
Other 11,724 7,879 1,699 2,669
---------- ---------- ---------- ----------
Total noninterest expense 30,477 39,250 7,792 9,878
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes (123,451) (33,357) 6,580 (22,974)
Provision (benefit) for income taxes (41,744) (11,666) 2,331 (8,093)
---------- ---------- ---------- ----------
Net income (loss) $ (81,707) $ (21,691) $ 4,249 $ (14,881)
========== ========== ========== ==========
Basic net income (loss) per share $ ($4.64) ($1.41) $0.21 ($0.97)
========== ========== ========== ==========
Diluted net income (loss) per share $ ($4.64) ($1.41) $0.21 ($0.97)
========== ========== ========== ==========
Weighted average shares outstanding - Basic 17,595,675 15,400,000 20,109,302 15,400,000
========== ========== ========== ==========
Weighted average shares outstanding - Diluted 17,595,675 15,400,000 20,267,530 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 STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Additional on Securities Total
Common Paid-in Retained Treasury Available for Stockholders'
Stock Capital Earnings Stock Sale, Net Equity
-------- ------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ - $ 8,797 $ 147,761 $ - $ (48,499) $ 108,059
Net loss - - (21,691) - - (21,691)
Net change in unrealized gains on
securities available for sale, net of
income tax of $8,892 - - - - 9,803 9,803
-------- ------- ---------- ---------- --------- ---------
Balance, March 31, 1997 $ - $ 8,797 $ 126,070 $ - $ (38,696) $ 96,171
======== ======= ========== ========== ========= =========
Balance, June 30, 1997 $ - $ 16,896 $ 117,716 $ - $ (31,983) $ 102,629
Net loss - - (81,707) - - (81,707)
Net change in unrealized gains on
securities available for sale, net of
income tax of $19,172 - - - - 35,603 35,603
Issuance of common stock 205 189,861 - - - 190,066
Purchase of treasury stock - - - (149,436) (149,436)
-------- ------- ---------- ---------- --------- ---------
Balance, March 31, 1998 $ 205 $ 206,757 $ 36,009 $ (149,436) $ 3,620 $ 97,155
======== ======= ========== ========== ========= =========
</TABLE>
The accompanying Notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income (loss) $ (81,707) $ (21,691)
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 25,790 21,835
Deferred income tax expense (benefit) (25,327) (3,104)
Accretion of discounts on loans acquired (4,322) (2,984)
Accretion of deferred (gains) losses on interest rate swaps 806 (535)
Net amortization (accretion) of premium on securities available for sale (170) 6,339
Net amortization (accretion) of premium on securities held to maturity 97 2,690
Depreciation and amortization 2,577 2,401
Proceeds from the sales of loans 46,784 2,902
(Gain) loss on sale of assets 112,644 21,645
Stock dividends received from Federal Home Loan Bank stock (2,541) (2,839)
Change in other assets (12,965) (5,557)
Change in other liabilities 5,597 (11,026)
---------- ----------
Net cash provided by operating activities 67,263 10,076
---------- ----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 865,146 588,377
Proceeds from principal collections on securities available for sale 112,709 10,744
Proceeds from principal collections on securities held to maturity 28,054 37,926
Purchases of securities available for sale (94,643) -
Purchases of securities held to maturity (74,440) -
Payments on termination of interest rate swap agreements (47,283) -
Proceeds from the sales of equity securities available for sale - 12,986
Purchases of repurchase agreements (1,174,962) -
Proceeds from maturity of repurchase agreements 966,462 -
Purchases of Federal Home Loan Bank stock (3,425) (78,752)
Proceeds from the sale of Federal Home Loan Bank stock - 58,924
Loans made by non-bank subsidiary (26) (29,154)
Repayments of loans made by non-bank subsidiary 13,710 40,260
Change in loans receivable, net (20,763) (96,262)
Proceeds from disposal of assets acquired through foreclosure and repossession 6,512 25,681
Purchases of premises and equipment (1,439) (1,284)
Proceeds from sales of premises and equipment 51 6
Cash acquired in acquisition of Green Country Banking Corporation 2,512 -
---------- ----------
Net cash provided by investing activities 578,175 569,452
---------- ----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 10,557 12,806
Change in time deposits (74,833) 71,689
Change in securities sold under agreements to repurchase (312,774) (1,079,194)
Proceeds from advances from the Federal Home Loan Bank 1,459,664 8,002,571
Repayments of advances from the Federal Home Loan Bank (1,904,933) (7,585,332)
</TABLE>
4
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1998 1997
---------- ------------
<S> <C> <C>
Proceed from the issuance of common stock $ 181,067 $ -
Proceeds from the issuance of senior notes 80,000 -
Payments of debt issuance costs (4,344) -
Repayments of note payable (7,010) -
Purchase of treasury stock (149,436) -
Payment of liability (3,162) -
Change in advances by borrowers for taxes and insurance (1,346) (785)
---------- ------------
Net cash absorbed by financing activities (726,550) (578,245)
---------- ------------
Net change in cash and cash equivalents (81,112) 1,283
Cash and cash equivalents at beginning of period 105,404 13,640
---------- ------------
Cash and cash equivalents at end of period $ 24,292 $ 14,923
========== ============
Supplemental disclosures of cashflow information:
Cash paid (received) during the period for:
Interest $ 81,413 $ 135,239
========== ============
Income taxes $ (2,170) $ -
========== ============
Supplemental schedule of noncash investing and financing activities:
Transfers of loans to assets acquired through foreclosure
and repossession $ 4,436 $ 13,891
========== ============
Transfer of securities available for sale to loans $ 1,425 $ -
========== ============
Transfer of securities held to maturity to available for sale
at estimated market value (amortized cost of $454,496 for nine months
ended March 31, 1998) $ 448,180 $ -
========== ============
Transfer of assets acquired through foreclosure and repossession to other assets $ 6,045 $ -
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
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 nine months ended March 31, 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).
2. LOANS RECEIVABLE
Loans receivable are summarized below (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 June 30 1997
-------------- ------------
<S> <C> <C>
Residential real estate loans $ 315,852 $ 282,034
Commercial 640,845 638,091
Held for Sale 23,613 7,133
Consumer loans 90,304 115,775
------------ -------------
Total gross loans 1,070,614 1,043,033
Less:
Unaccreted discounted (4,257) (12,522)
Unearned interest 0 (4,479)
Allowance for loan losses (24,687) (11,435)
Deferred income (288) (773)
------------ -------------
Loans receivable, net $ 1,041,382 $ 1,013,824
============ =============
</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 nine months ended March 31, 1998 and the year ended June 30, 1997,
approximately $2,500,000 and $11,974,000, respectively, in guaranteed student
loans were sold resulting in gains of $34,000 and $158,000, 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 March 31, 1998
6
<PAGE> 9
and June 30, 1997, student loans totaling approximately $8,652,000 and
$1,433,000, respectively, were held for sale and are included as a component of
loans receivable in the accompanying consolidated statements of financial
condition.
During the nine months ended March 31, 1998, the Company designated as Held for
Sale all 30-year conforming single family residential loans originated since
January 1, 1998. The Company intends to securitize and sell these loans in the
secondary market. At March 31, 1998, residential real estate loans held for sale
totaled $14,961,000 and are included as a component of loans receivable in the
accompanying consolidated statements of financial condition.
7
<PAGE> 10
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 as
amended on September 5, 1997 (the "Redemption Agreement") with Barron 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 in 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
resignations and appointments, the new members of the Board of Directors caused
Robert A. Kotecki, George Nigh, Kenneth W. Townsend and J. David Rosenberg to be
appointed to the Company's Board of Directors and management appointments were
made.
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
8
<PAGE> 11
contained in the Consolidated Financial Statements and the Notes thereto. The
information 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 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 bank's 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 twelve months 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 JULY 1, 1997 TO MARCH 31, 1998
General. Total assets decreased by $645.1 million or 24.6% during the
nine months ended March 31, 1998. The substantial decrease in total assets
during the first nine months of fiscal 1998 was primarily due to the sale of an
aggregate of $869.8 million of mortgage-backed and other securities. 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 $310 million at June 30, 1997, were fully paid off as of March 31,
1998, and advances from the FHLB of Topeka declined from $531.2 million at June
30, 1997 to $108.7 million at March 31, 1998, a reduction of $422.5 million or
79.5%. The shift in the composition of the Company's asset and liability mix
reflects new management's operational philosophy of emphasizing lending as
opposed to investing activities. See "--Securities" below and "--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
9
<PAGE> 12
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, $79.0 million and
$5.0 million, respectively.
Cash and Cash Equivalents of the Company. Cash and cash equivalents
(consisting of cash and due from banks and interest-bearing deposits with other
banks) amounted to $24.3 million and $105.4 million at March 31, 1998 and June
30, 1997, respectively. The Company manages its cash and cash equivalents based
upon the Company's operating, investing and financing activities.
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. 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.
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
10
<PAGE> 13
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
approximately $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 Transactions, new management accelerated the disposition of its
securities portfolio, particularly its COFI-based CMOs. During the nine months
ended March 31, 1998, 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 $422.4 million or 79.5% of its outstanding FHLB advances
outstanding at that time. The remaining proceeds were invested in short-term
investments. At March 31, 1998, the Company's securities portfolio amounted to
$551.2 million ($429.6 million of which consisted of COFI-based mortgage-related
securities) or 27.8% of total 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 $3.6 million (net of applicable taxes)
and the Company had no trading securities. Management may continue to reduce its
securities portfolio, particularly its CMO holdings.
Loans Receivable. Net loans receivable amounted to $1.04 billion and
$1.01 billion at March 31, 1998 and June 30, 1997, respectively. Net loans
receivable increased by $27.6 million or 2.7% during the nine months ended March
31, 1998. The Green Country acquisition included $91.6 million in loans; thus
the remaining loan portfolio has declined $64 million. During the nine months
ended March 31, 1998, the Company sold $2.5 million of guaranteed student loans
and $54.1 million of indirect automobile receivables. See "Provision for Loan
Losses". 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.
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,
1997. At March 31, 1998, nonperforming assets amounted to $2.0 million or .10%
of total assets, as compared to $12.6 million or .48% as of June 30, 1997. The
decline in nonperforming assets during the nine months ended March 31, 1998
reflected a $2.0 million decline in non-accrual loans (primarily commercial real
estate loans) and an $8.3 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 and a $0.3
million decline in accruing loans greater than 90 days delinquent. 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.
11
<PAGE> 14
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>
NINE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
1998 1997
------------------------------ ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- ---- ----------- --------- -----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 1,069,316 $ 72,317 9.01% $ 1,041,464 $ 80,661 10.32%
Securities (2) 834,323 40,191 6.42% 1,947,427 86,359 5.91%
Repurchase Agreements 114,764 4,860 5.64% 35,944 1,477 5.47%
Other earning assets (3) 70,257 3,327 6.31% 67,021 3,298 6.56%
----------- --------- ---- ----------- --------- ------
Total interest-earning assets 2,088,660 120,695 7.70% 3,091,856 171,795 7.40%
----------- --------- ---- ----------- --------- ------
Noninterest-earning assets 91,179 55,075
----------- -----------
Total assets $ 2,179,839 $ 3,146,931
=========== ===========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4) 276,698 5,381 2.59% 268,337 5,613 2.79%
Term certificates of deposit 1,334,968 54,797 5.47% 1,326,971 56,683 5.69%
----------- --------- ---- ----------- --------- ------
Total deposits 1,611,666 60,178 4.97% 1,595,308 62,296 5.20%
Borrowings:
FHLB advances 288,639 15,514 7.16% 875,764 43,734 6.65%
Securities sold under agreements to
repurchase & other 37,091 2,324 8.35% 506,259 25,044 6.59%
Promissory note payable 1,740 108 8.27% 14,020 841 7.99%
Senior Notes 59,562 5,342 11.81% - - -
----------- --------- ----- ----------- --------- ------
Total interest-bearing liabilities 1,998,698 83,466 5.56% 2,991,351 131,915 5.87%
Noninterest-bearing liabilities 96,417 50,304
----------- -----------
Total liabilities 2,095,115 3,041,655
Stockholders' equity 84,724 105,276
----------- -----------
Total liabilities and stockholders'
equity $ 2,179,839 $ 3,146,931
=========== ===========
Net interest-earning assets $ 89,962 $ 100,505
=========== ===========
Net interest income/interest rate spread $ 37,229 2.14% $ 39,880 1.53%
========= ====== ========= ======
Net interest margin 2.37% 1.72%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 104.50% 103.36%
====== ======
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------
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) $ 1,045,185 $ 22,529 8.74% $ 1,084,465 $ 27,482 10.28%
Securities (2) 493,565 8,885 7.30% 1,620,881 24,183 6.05%
Repurchase Agreements 226,726 3,149 5.63% 29,857 437 5.94%
Other earning assets (3) 56,119 928 6.71% 42,934 593 5.60%
------------ -------- ------ ----------- -------- ------
Total interest-earning assets 1,821,595 35,491 7.90% 2,778,137 52,695 7.69%
------------ -------- ------ ----------- -------- ------
Noninterest-earning assets 112,591 39,200
------------ -----------
Total assets $ 1,934,186 $ 2,817,337
============ ===========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4) 267,473 1,778 2.70% 266,894 1,839 2.79%
Term certificates of deposit 1,313,228 17,728 5.47% 1,365,115 19,238 5.72%
------------ -------- ------ ----------- -------- ------
Total deposits 1,580,701 19,506 5.00% 1,632,009 21,077 5.24%
Borrowings:
FHLB advances 77,775 1,509 7.87% 647,082 11,374 7.13%
Securities sold under agreements to
repurchase & other - 251 - 382,077 6,625 7.03%
Promissory note payable - - - 14,020 277 8.01%
Senior Notes 80,000 2,377 11.81% - - -
------------ -------- ------ ----------- -------- ------
Total interest-bearing liabilities 1,738,476 23,643 5.52% 2,675,188 39,353 5.97%
------------ -------- ------ ----------- -------- ------
Noninterest-bearing liabilities 103,863 40,748
------------ -----------
Total liabilities 1,842,339 2,715,936
Stockholders' equity 91,847 101,401
------------ -----------
Total liabilities and stockholders'
equity $ 1,934,186 $ 2,817,337
============ ===========
Net interest-earning assets $ 83,119 $ 102,949
============ ===========
Net interest income/interest rate spread $ 11,848 2.38% $ 13,342 1.72%
======== ====== ======== ======
Net interest margin 2.64% 1.95%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 104.78% 103.85%
====== ======
</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.
(4) Includes demand, passbook, NOW, and money market accounts.
12
<PAGE> 15
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>
NINE MONTHS ENDED MARCH 31, 1998
COMPARED TO NINE MONTHS ENDED
MARCH 31, 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 $ (10,227) $ 2,157 $ (274) $ (8,344)
Debt securities 7,452 (49,361) (4,259) (46,168)
Repurchase Agreements 45 3,239 99 3,383
Other earning assets (124) 159 (6) 29
--------- -------- ------- --------
Total net change in income on interest-earning
assets (2,854) (43,806) (4,440) (51,100)
--------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (394) 175 (13) (232)
Term certificates of deposit (2,215) 342 (13) (1,886)
--------- -------- ------- --------
Total deposits (2,609) 517 (26) (2,118)
Borrowings:
FHLB advances 3,337 (29,320) (2,237) (28,220)
Securities sold under agreements to
repurchase and other 6,677 (23,210) (6,187) (22,720)
Promissory note payable 29 (736) (26) (733)
Senior Notes - - 5,342 5,342
--------- -------- ------- --------
Total net change in expense on interest-bearing
liabilities 7,434 (52,749) (3,134) (48,449)
--------- -------- ------- --------
Change in net interest income $ (10,288) $ 8,943 $ (1,306) $ (2,651)
========= ======== ======== =========
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THREE MONTHS ENDED
MARCH 31, 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 $ (4,107) $ (995) $ 149 $ (4,953)
Debt securities 4,996 (16,819) (3,475) (15,298)
Repurchase Agreements (22) 2,881 (147) 2,712
Other earning assets 117 182 36 335
-------- -------- -------- ---------
Total net change in income on interest-earning
assets 984 (14,751) (3,437) (17,204)
-------- -------- -------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts (65) 4 (0) (61)
Term certificates of deposit (810) (731) 31 (1,510)
-------- -------- -------- ---------
Total deposits (875) (727) 31 (1,571)
Borrowings:
FHLB advances 1,181 (10,007) (1,039) (9,865)
Securities sold under agreements to
repurchase and other (6,374) (6,625) 6,625 (6,374)
Promissory note payable (277) (277) 277 (277)
Senior Notes - - 2,377 2,377
-------- -------- -------- ---------
Total net change in expense on interest-bearing
liabilities (6,345) (17,636) 8,271 (15,710)
-------- -------- -------- ---------
Change in net interest income $ 7,329 $ 2,885 $(11,708) $ (1,494)
======== ======== ======== =========
</TABLE>
13
<PAGE> 16
At March 31, 1998, the Company's allowance for loan losses amounted to
$24.7 million, as compared to $11.4 million at June 30, 1997. In connection with
the Private Placement and the Redemption Transactions, 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. At March 31, 1998,
the Company's allowance for loan losses represented 2.37% of the total loan
portfolio, which the Company believes is adequate given the asset-based lending
nature of its commercial real estate portfolio. Although management of the
Company believes that its allowance for loan losses was adequate at March 31,
1998 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.
Deposits. At March 31, 1998, deposits totaled $1.66 billion, as
compared to $1.64 billion at June 30, 1997. 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 $79.0 million of Green Country Bank's deposits (as of February 16,
1998). In addition, Local Federal has obtained OTS approval to open a second
branch office in Edmond, Oklahoma, and has published notice to open a new
location in Afton, Oklahoma.
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 $310.8 million at June 30, 1997 to
$0 to March 31, 1998. Similarly, advances from the FHLB of Topeka declined from
$531.2 million at June 30, 1997 to $108.7 million at March 31, 1998.
Pursuant to the Private Placement and the Redemption Transactions, 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
established an interest reserve account with an independent trustee which
contained $8.8 million, which was sufficient to pay the aggregate interest
payments scheduled to be made with respect to the first two interest payment
dates on the Senior Notes and a portion of these funds were used to pay interest
due March 1, 1998.
Stockholders' Equity. Stockholders' equity declined from $102.6 million
at June 30, 1997 to $97.2 million at March 31, 1998. The decline in
stockholders' equity during the nine months ended March 31, 1998 reflected
charges recognized by the Company as a result of certain initiatives undertaken
by new management in connection with the Private Placement and the Redemption
Transactions, which was partially offset by the capital raised from the
placement of securities. Such charges included (i) a $25.7 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
14
<PAGE> 17
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). Subsequent to these initial
changes, the market for fixed income securities improved and the Company sold a
portion of the remaining COFI-based CMO portfolio for a gain of $12.7 million
during the three month period ended December 31, 1997. At March 31, 1998, the
ratio of the Company's stockholders' equity to total assets amounted to 4.9% and
both of the Banks were deemed to be well capitalized pursuant to regulatory
capital requirements.
DISCUSSION AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31,
1997
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 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 ($81.7)
million and ($21.7) million during the nine months ended March 31, 1998 and
March 31, 1997, respectively. The net loss reported for the nine months ended
March 31, 1998 is attributable to deliberate actions taken by the Company's new
management subsequent to the Private Placement and the Redemption Transactions
to restructure the Company's balance sheet. Specifically, the Company incurred
$125.5 million of losses on the sale and write-down of securities, 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", and an aggregate 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 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 resulting in a net loss on sale of assets
of $112.6 million for the nine months ended March 31, 1998. The Company also
recorded a $25.7 million provision for loan losses during the nine months ended
March 31, 1998, 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.
15
<PAGE> 18
The net loss recognized during the nine months ended March 31, 1997 was
primarily attributable to (i) a $20.4 million provision for loan losses, which
was principally associated with the Company's indirect automobile finance
receivables, (ii) $21.6 million of losses which were related to the sale of CMOs
with interest rate adjustments tied to COFI, and (iii) a non-recurring $10.3
million special assessment which was recorded in connection with legislation in
1996 which recapitalized the SAIF.
During the three months ended March 31, 1998 and March 31, 1997, the
Company reported net income (loss) of $4.2 million and ($14.9) million,
respectively. The net income during the three months ended March 31, 1998 was
the first full quarter of earnings occurring after the balance sheet
restructure. The net loss of ($14.9) million reported during the three months
ended March 31, 1997 is attributable to the additional provisions taken with
respect to the indirect automobile finance receivables as well as the sale of
CMOs with interest rate adjustments tied to COFI, as discussed above.
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 $37.2 million and $39.9
million during the nine months ended March 31, 1998 and March 31, 1997,
respectively. Net interest and dividend income decreased by $2.7 million or 6.8%
during the nine months ended March 31, 1998, as compared to the same period in
the prior year. Similarly, net interest and dividend income totaled $11.8
million and $13.3 million during the three months ended March 31, 1998 and March
31, 1997, respectively. During the quarter ended March 31, 1998, net interest
and dividend income decreased $1.5 million or 11.2% as compared to the same
period in the prior year. Declines in both the nine month and three month
comparative periods were due to a significant decline in the average balance of
securities, which is attributable to the sale and writedown of such securities
and a decline in the average yield on loans primarily due to the December 1997
sale of the indirect automobile receivables.
Interest Income. Total interest and dividend income decreased by $51.1
million or 29.7% during the nine months ended March 31, 1998, as compared to the
same period in the prior year and decreased by $17.2 million or 32.7% during the
three months ended March 31, 1998 as compared to the same period in the prior
year. Interest income on loans receivable decreased by $8.3 million or 10.3%
during the nine months ended March 31, 1998, as compared to the same period in
the prior year and decreased by $5.0 million or 18.0% during the three months
ended March 31, 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 discontinuance
of the Company's third-party automobile loan purchase activity. Such loans
generally carry higher yields than traditional real estate secured loans.
16
<PAGE> 19
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, interest rate caps
and floors and Student Loan Marketing Association preferred stock) decreased by
$46.2 million or 53.4% during the nine months ended March 31, 1998 as compared
to the same period in the prior year and decreased by $15.3 million or 63.3%
during the three months ended March 31, 1998 as compared to the same period in
the prior year. The decline in interest income on such investments during the
nine and three months ended March 31, 1998 was primarily due to the decreases in
the average balance of such investments of $1.1 billion during each of the
comparative periods. During fiscal 1997, the Company began reducing its
securities holdings (primarily its COFI-based CMOs) 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 has been accelerating the
disposition of its securities portfolio, particularly its COFI-based CMOs and
has 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. During the nine months ended March 31, 1998, the
Company sold $869.8 million of securities. Management expects to continue to
reduce what remains of the COFI-based portfolio.
Interest Expense. Total interest expense decreased by $48.4 million or
36.7% during the nine months ended March 31, 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, decreased by $2.1 million or 3.4%
during the nine months ended March 31, 1998, as compared to the same period in
the prior year.
Interest expense on FHLB advances decreased by $28.2 million or 64.5%
during the nine months ended March 31, 1998, as compared to the same period in
the prior year. Similarly, interest expense on reverse repurchase agreements
decreased by $22.7 million or 90.7% during the nine months ended March 31, 1998
as compared to the same period in the prior year. During the three months ended
March 31, 1998, interest expense on FHLB advances decreased $9.9 million or
86.7% as compared to the same period in the prior year 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 half of fiscal
1998, the Company has begun to reduce its securities holdings through periodic
bulk sale transactions and utilized the proceeds therefrom to pay off its
reverse repurchase agreements and pay down FHLB advances.
During the nine months ending March 31, 1998 and March 31, 1997,
interest expense on notes payable of $5.5 million and $841,000, 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
17
<PAGE> 20
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 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 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 $25.7 million and
$20.4 million during the nine months ended March 31, 1998 and March 31, 1997,
respectively. During such respective periods, loan charge-offs (net of
recoveries) amounted to $16.5 million and $14.5 million. The $25.7 million and
$20.4 million provisions established during the nine months ended March 31, 1998
and March 31, 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. During the three months ended March 31, 1998, the provision of
$150,000 reflected the lack of loan growth as compared to the three months ended
March 31, 1997 when the Company reported $10.7 million in provisions primarily
to cover losses related to the indirect automobile receivables discussed above.
Noninterest Income. Total noninterest income (loss) amounted to
$(104.5) million and $(13.6) million during the nine months ended March 31, 1998
and March 31, 1997, respectively. Comparatively, total noninterest income (loss)
amounted to $2.7 million and ($15.8) million during the three months ended March
31, 1998 and March 31, 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
losses recognized during the nine months ended March 31, 1998 and the nine
months ended March 31, 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
18
<PAGE> 21
with the liquidation of the hedging contracts previous management had entered
into in an attempt to reduce the Company's exposure to interest rates, and an
aggregate loss of $17.3 million on the sale of securities 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. There were no additional sales of securities during the third quarter
ending March 31, 1998. The noninterest income recognized during the three months
ending March 31, 1998 is reflective of the core noninterest income potential of
the Company as this was the first full quarter of operations occurring
subsequent to the balance sheet restructuring discussed above.
Noninterest Expense. Total noninterest expense decreased by $8.8
million or 22.4% during the nine months ended March 31, 1998, as compared to the
same period in the prior year. The decrease in noninterest expense during the
nine months ended March 31, 1997 was primarily due to the absence of the $10.3
million 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 Federal Deposit Insurance Corporation ("FDIC") lowered the
Banks' assessment rates. 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 Transactions. During the nine months ended March 31, 1997, the
Company reported provisions of $1.4 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 March 31, 1998, the
Company reported a decrease in noninterest expense of $2.1 million or 21.1% as
the Company recorded no further provisions with respect to the FDIC Dispute and
reported a decline in Compensation and Benefits of $551,000 or 31.1% due
primarily to the discontinuance of operations in the indirect lending
subsidiaries. These subsidiaries ceased operations as of December 31, 1997 and
all receivables were sold.
Provision (Benefit) for Income Taxes. During the nine months ended
March 31, 1998, the Company recognized $(41.7) million of provisions (benefits)
for income taxes. At March 31, 1998, the Company had approximately $36.8 million
and $187.7 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
19
<PAGE> 22
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.
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.
20
<PAGE> 23
Interest rate swap, cap and floor agreements outstanding at June 30, 1997 were
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
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
</TABLE>
During the nine months ended March 31, 1998, 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 resulted 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.
21
<PAGE> 24
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
March 31, 1998, 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) $ 297,884 $ 297,946 $ 146,888 $ 117,679 $ 209,922 $ 1,070,319
Securities(3) 433,629 23,490 31,421 28,229 28,828 545,597
Other interest-earning assets(4) 280,432 0 0 0 0 280,432
---------- --------- --------- --------- --------- -----------
Total $1,011,945 $ 321,436 $ 178,309 $ 145,908 $ 238,750 $ 1,896,348
========== ========= ========= ========= ========= ===========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
Accounts $ 11,110 $ 33,331 $ 59,661 $ 35,614 $ 62,943 $ 202,659
Passbook accounts 2,560 7,682 16,403 12,152 34,731 73,528
Certificates of deposit 422,344 593,585 273,794 19,760 319 1,309,802
Borrowings:
FHLB advances 68,700 0 0 40,000 35 108,735
Senior notes 0 0 0 0 80,000 80,000
---------- --------- --------- --------- --------- -----------
Total $ 504,714 $ 634,598 $ 349,858 $ 107,526 $ 178,028 $ 1,774,724
========== ========= ========= ========= ========= ===========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 507,231 $(313,162) $ (171,549) $ 38,382 $ 60,722 $ 121,624
========== ========= ========= ========= ========= ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 507,231 $ 194,069 $ 22,520 $ 60,902 $ 121,624 $ 121,624
========== ========= ========= ========= ========= ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets 25.62% 9.80% 1.14% 3.08% 6.14% 6.14%
========== ========= ========= ========= ========= ===========
</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.
22
<PAGE> 25
(2) Balances have been reduced for nonaccrual loans, which amounted to $1.50
million at March 31, 1998 and excludes discounts and other adjustments of
($5.75) million.
(3) Does not include unrealized gain on securities classified as available for
sale of $5.6 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.
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.
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 March 31, 1998, the Company had $328.0 million in
borrowing capacity under a collateralized line of credit with the FHLB of
Topeka, of which $108.7 million was outstanding as of such date. The Bank does
not currently accept
23
<PAGE> 26
brokered deposits as a source of liquidity, and does not anticipate a change in
this practice in the foreseeable future.
At March 31, 1998, the Company had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $70.5 million. Certificates of deposit which are scheduled to mature
within one year totaled $1.0 billion at March 31, 1998, and borrowings that are
scheduled to mature or reprice within the same period amounted to $68.7 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.
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 March 31, 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% $ 29,135 7.23% $ 140,449 5.73% $ 111,314
Core capital (1) 3.00% 58,297 7.27% 141,361 4.27% 83,064
Risk-based capital 8.00% 77,489 15.20% 147,200 7.20% 69,711
(2)(3)
Local America:
Tangible capital 1.50% 10,399 15.41% 106,851 13.91% 96,452
Core capital (1) 3.00% 20,798 15.41% 106,851 12.41% 86,053
Risk-based capital 8.00% 32,586 27.47% 111,890 19.47% 79,304
(2)(3)
</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.
24
<PAGE> 27
(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.
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
The Company filed no reports on Form 8-K during the quarter ended March
31, 1998.
25
<PAGE> 28
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: June 3, 1998 By /s/ Edward A. Townsend
--------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
Date: June 3, 1998 By /s/ Richard L. Park
--------------------------
Richard L. Park
Chief Financial Officer
26
<PAGE> 29
FORM 10-Q
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 24,292
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 208,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 551,167
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,070,614<F1>
<ALLOWANCE> 24,687
<TOTAL-ASSETS> 1,980,034
<DEPOSITS> 1,659,030
<SHORT-TERM> 108,735
<LIABILITIES-OTHER> 28,979
<LONG-TERM> 80,000
0
0
<COMMON> 205
<OTHER-SE> 93,330<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 1,980,034
<INTEREST-LOAN> 72,317
<INTEREST-INVEST> 48,378
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 120,695
<INTEREST-DEPOSIT> 60,178
<INTEREST-EXPENSE> 83,466
<INTEREST-INCOME-NET> 37,229
<LOAN-LOSSES> 25,728
<SECURITIES-GAINS> 112,770
<EXPENSE-OTHER> 11,724
<INCOME-PRETAX> (123,451)
<INCOME-PRE-EXTRAORDINARY> (123,451)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,707)
<EPS-PRIMARY> (4.64)
<EPS-DILUTED> (4.64)
<YIELD-ACTUAL> 7.70
<LOANS-NON> 1,500
<LOANS-PAST> 230
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,435
<CHARGE-OFFS> 16,574
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 24,687
<ALLOWANCE-DOMESTIC> 24,687
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,485
<FN>
<F1>TAG IS A GROSS LOANS NUMBER.
<F2>TAG INCLUDES RETAINED EARNINGS, PAID IN CAPITAL, AND TREASURY STOCK.
</FN>
</TABLE>
