As filed with the Securities and Exchange Commission on April 21, 1999
Registration No. 333-43727
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
LOCAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
----------
<TABLE>
<S> <C> <C>
Delaware 6711 65-0424192
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code Number) Identification No.)
</TABLE>
----------
3601 N.W. 63rd Street
Oklahoma City, Oklahoma 73116
(405) 841-2100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------
Alan L. Pollock
Senior Vice President, Secretary and General Counsel
Local Financial Corporation
3601 N.W. 63rd Street
Oklahoma City, Oklahoma 73116
(405) 841-2100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
----------
Approximate date of commencement of proposed sale to public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ x ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
================================================================================================================================
Proposed Maximum Proposed Maximum
Title Of Each Class Of Amount To Be Offering Price Per Aggregate Offering Amount Of
Securities To Be Registered Registered Note or Share(1) Price(1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Notes due 2004............... $80,000,000(2) 100% $80,000,000 $23,600.00
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per
share............................. 21,128,209 shares $10.75(3) $227,128,247 $67,003.00
- --------------------------------------------------------------------------------------------------------------------------------
Total.................................................................................................... $90,603.00(4)
================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Includes up to 591,000 shares which may be issued in connection with
warrants previously granted to the Registrant's placement agent and 837,209
shares which were issued in connection with the Registrant's acquisition of
Green Country Banking Corporation.
(3) Based upon the average of the bid and asked price for the Common Stock on
January 2, 1998.
(4) Previously filed.
The Registrant hereby amends this Registration Statement on such date as
may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with section 8(a)
of the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated April 21, 1999
PROSPECTUS
21,128,209 Shares of Common
Stock $80,000,000 of 11.0% Senior Notes
due September 8, 2004
LOCAL FINANCIAL CORPORATION
This Prospectus relates to the public offer and sale of up to
21,128,209 shares of common stock, par value $0.01 per share (the "Common
Stock"), of Local Financial Corporation (the "Company") and up to $80.0 million
of the Company's 11.0% Senior Notes due September 8, 2004 (the "Senior Notes").
The Common Stock covered by this Prospectus includes up to 591,000 shares which
may be issued in connection with warrants previously granted to the Company's
placement agent, which assisted the Company in the private placement of
19,700,000 shares of Common Stock and the Senior Notes, which were issued and
sold on September 8, 1997 (the "Private Placement"). The Common Stock covered by
this Prospectus also includes 837,209 shares which were issued by the Company in
connection with its acquisition of Green Country Banking Corporation ("Green
Country"). The Senior Notes are general unsecured obligations of the Company and
rank senior to such other indebtedness as the Company may incur. At December 31,
1998, the Company had borrowings of $220.0 million (not including the Senior
Notes), all of which ranked junior to the Senior Notes. All of the Common Stock
and the Senior Notes offered hereby are collectively referred to herein as the
"Local Securities." For additional information with respect to the terms of the
Local Securities, see "Description of Senior Notes" and "Description of Capital
Stock."
The Local Securities were issued and sold in private placement
transactions exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), to persons reasonably believed by the
Company to be "qualified institutional buyers" (as defined by Rule 144A under
the Securities Act) or other "accredited investors" (as defined in Rule 501(a)
of Regulation D under the Securities Act). In connection with the Private
Placement, the Company executed and delivered for the benefit of the holders of
the Local Securities a Registration Rights Agreement dated September 8, 1997
(the "Registration Rights Agreement"), providing for, among other things, the
filing with the Securities and Exchange Commission (the "Commission") of the
Registration Statement of which this Prospectus forms a part. The Company has
also agreed to register the Common Stock which was issued in connection with its
acquisition of Green Country. The Local Securities offered hereby may be offered
and sold from time to time (the "Offering") by the holders named herein or, if
required, by holders named in an accompanying supplement (a "Prospectus
Supplement") or by their respective transferees, pledgees, donees, or their
successors (collectively, the "Selling Holders") pursuant to this Prospectus and
a Prospectus Supplement, if required.
The Local Securities may be sold by the Selling Holders from time to
time directly to purchasers or through underwriters, dealers or agents at market
prices or negotiated prices. See "Plan of Distribution." If required, the names
of any such underwriters, dealers or agents involved in the sale of the Local
Securities in respect of which this Prospectus is being delivered and the
applicable underwriter's discount, dealer's purchase price or agent's
commission, if any, will be set forth in a Prospectus Supplement.
The Selling Holders will receive all of the net proceeds from the sale
of the Local Securities and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the Local Securities. The Company
is responsible for payment of all other expenses incident to the offer and sale
of the Local Securities.
The Selling Holders and any underwriters, dealers or agents which
participate in the distribution of the Local Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit on the resale of the Local Securities purchased
by them may be deemed to be underwriting commissions or discounts under the
Securities Act. See "Plan of Distribution" for a description of indemnification
arrangements.
The Common Stock and the Senior Notes are listed on the American Stock
Exchange ("AMEX") under the symbols "LO" and "LO.A," respectively. There can be
no assurance that an active public trading market for either or both of the
Common Stock or the Senior Notes will be sustained.
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE LOCAL SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SAVINGS ASSOCIATION INSURANCE FUND, THE BANK INSURANCE
FUND OR ANY GOVERNMENT AGENCY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1999
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements, including the
accompanying Notes, appearing elsewhere in this Prospectus. Prospective
investors should carefully consider the information set forth under the heading
"Risk Factors." A glossary of terms applicable to the Indenture and the Senior
Notes is set forth under "Description of Senior Notes--Certain Definitions."
The Company
General. Local Financial Corporation ("Local Financial" or the
"Company") is the holding company for Local Federal Bank, F.S.B., a federally
chartered stock savings bank, ("Local" or the "Bank"). Effective March 31, 1999,
the Bank changed its name to Local Oklahoma Bank, F.S.B. The Company was
chartered in 1992 as a Delaware corporation. Local Financial and the Bank are
headquartered in Oklahoma City, Oklahoma. The Bank is the oldest and largest
savings institution in Oklahoma. It was organized in 1908 under the name Local
Building and Loan Association, changed to a federal mutual charter in 1935 and
converted to the stock form of organization in 1983. The Company and the Bank
have filed applications with the Federal Reserve System and the Comptroller of
the Currency, respectively, to cause the Bank to be converted to a national
bank. References to the "Bank" or "Local" refer to Local and its subsidiaries on
a consolidated basis, as the context requires.
At December 31, 1998, the Company had consolidated assets of $2.1
billion, substantially all of which is comprised of its 100% ownership interest
in the Bank, consolidated liabilities of $2.0 billion, including consolidated
deposits of $1.7 billion and consolidated stockholders' equity of $118.8
million. 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 Bank offers a full range of commercial banking products and related
financial services through 50 branch offices within the state of Oklahoma. Its
offices are primarily located in the State's major metropolitan areas of
Oklahoma City, Tulsa and Lawton. The Bank is the largest savings institution and
the fifth largest financial institution in Oklahoma based on deposits at May 20,
1998. Its deposits of $1.7 billion at December 31, 1998, represent approximately
five percent of the Oklahoma market. Local is presently regulated and examined
by the Office of Thrift Supervision (the "OTS") and the Federal Deposit
Insurance Corporation ("FDIC") and its deposit accounts are insured up to
applicable limits by the FDIC.
The Private Placement and the Redemption. On August 25, 1997, the
Company entered into a Redemption Agreement, as amended on September 5, 1997
(the "Redemption Agreement"), with Barron Collier and Miles Collier, the sole
stockholders of the Company (the "Selling Stockholders"), pursuant to which the
Company agreed to redeem all of the Company's issued and outstanding shares of
Common Stock for consideration of $154.0 million, subject to adjustment (the
"Redemption"), and the satisfaction of various conditions, including the raising
of funds through a
1
<PAGE>
private placement of at least $190.0 million of Common Stock and at least $70.0
million of Senior Notes. In addition, pursuant to the Redemption Agreement, the
Company agreed to prepay a promissory note payable to the mother of the Selling
Stockholders at a price equal to the principal amount thereof plus accrued and
unpaid interest thereon to the date of prepayment (i.e., $7.2 million).
On September 8, 1997, the Company entered into a Purchase Agreement
with Friedman Billings, Ramsey & Co., Inc. ("FBR" or the Placement Agent") and
the various purchasers of the Local Securities (the "Purchase Agreement"), which
provided, among other things, for the purchase on such date of an aggregate of
$197.0 million of Common Stock and $80.0 million of Senior Notes. A closing was
held on such date at which the Redemption was consummated. In connection with
the Private Placement, the Company on September 8, 1997 also entered into the
Registration Rights Agreement with the initial purchasers of the Local
Securities and the Placement Agent, pursuant to which, among other things, the
Company agreed to file within 120 days a shelf registration statement with the
Commission providing for the offer and sale of the Local Securities. The
Registration Statement of which this Prospectus forms a part, has been filed in
satisfaction of such requirement. See "Management" and "Registration Rights."
Strategy for Growth. Management believes the ongoing consolidation
among financial institutions in Oklahoma has created significant gaps in the
ability of large regional and nationwide banks to serve certain customers,
primarily the Bank's targeted customer base of small and medium sized businesses
(up to $100 million in annual sales), professionals and other individuals. The
Bank's business strategy is to provide its customers with the range of banking
products and services of a regional bank while retaining the appeal and level of
individualized service of a community bank. Management believes that as a result
of the Company's strong commitment to highly personalized relationship-oriented
customer service, its varied products, its strategic branch locations and the
long-standing community presence of its managers, lending officers and branch
personnel, it is well positioned to attract new customers and to increase its
market share of loans and deposits.
In pursuit of this strategy, the Bank has shifted its activities from
those of a traditional savings and loan to those generally associated with a
commercial bank. The Bank has increased its commercial and consumer lending and
expects further increases in these areas. To attract and serve its commercial
customers, the Bank in 1998 created a new corporate lending unit and added 38
commercial lending officers and supporting staff. The added lending officers
have an average of 18 years experience in the banking industry and most have
strong community ties and banking relationships. To increase consumer lending,
the Bank has increased its advertising and made internal changes to standardize
credit evaluations and reduce branch response times to customer loan
applications. The Bank also has targeted increases in non-interest income,
increases in lending activities rather than investing activities, and increases
in direct lending rather than indirect lending.
Local Financial also intends to grow through selective acquisitions. In
February 1998, the Company acquired Green Country, with three full-service
locations in northeastern Oklahoma. In October 1998, the Bank acquired Citizens
Bank, with six branch offices including five in Lawton,
2
<PAGE>
Oklahoma, which is in southwestern Oklahoma. Through these acquisitions, the
Company acquired assets of $281.5 million, $270.2 million of liabilities,
including $238.7 million of deposits, based on fair values as of the respective
acquisition dates. The Company will continue to make selective acquisitions to
increase its deposits and branch office locations.
The prior owners had operated the Bank by emphasizing traditional
savings institution products and services, indirect lending such as sub-prime
automobile financing, the acquisition of residential mortgage packages, and a
wholesale securities portfolio. New management has changed the Bank's activities
significantly. Since the change in ownership, management has reduced the level
of collateralized mortgage obligations ("CMOs") with interest rate adjustments
tied to the 11th District Cost of Funds Index ("COFI"), eliminated all swap and
hedging contracts which were used to manage interest rate risk and eliminated
the Bank's portfolio of sub-prime, indirect automobile loans. While these
measures reduced the Bank's assets by over $1 billion and resulted in
substantial losses on the sale and write-down of assets, management believes the
Bank's financial condition is greatly improved and it is better positioned for
future growth. For the year ended December 31, 1998, the first full year of
operations following management's restructuring initiatives, the Bank had net
income of $18.4 million, growth in assets of $247.6 million and growth in
stockholders' equity of $36.2 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations."
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS"). The Bank, as a federally chartered savings bank, is subject to
comprehensive regulation and examination by the OTS, as its chartering authority
and primary regulator, and by the Federal Deposit Insurance Corporation
("FDIC"), which administers the Savings Association Insurance Fund ("SAIF"),
which insures the Bank's deposits to the maximum extent permitted by law. The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is one
of the 12 regional banks which comprise the FHLB System. The Bank is further
subject to regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves required to be maintained against
deposits and certain other matters.
The Company's executive offices are located at 3601 NW 63rd Street,
Oklahoma City, Oklahoma 73116-2087 and its main telephone number is (405)
841-2100.
The Offering
<TABLE>
<S> <C>
The Private Placement.......................... The Local Securities issued to investors in the Private
Placement were sold by the Company on September 8,
1997. An aggregate of 19.7 million shares of Common
Stock were sold to 113 purchasers and an aggregate of
$80.0 million of the Senior Notes were sold to 38
purchasers. In connection therewith, the Company
executed and delivered for the benefit of the holders of
3
<PAGE>
the Local Securities the Registration Rights Agreement,
providing for, among other things, the filing of the
Registration Statement of which this Prospectus forms a
part. See "Selling Holders."
Securities Offered............................. 21,128,209 shares of Common Stock and $80.0 million
aggregate principal amount of Senior Notes.
The Senior Notes............................... See "Description of the Senior Notes."
Maturity Date............................. September 8, 2004
Interest Payment Dates.................... Semi-annually on March 1 and September 1, commencing
March 1, 1998.
Ranking................................... The Senior Notes are general unsecured obligations of
the Company and will rank senior to such other
Indebtedness (as defined in the Indenture) as the
Company may incur.
Because the Company is the sole stockholder of the
Bank, the rights of creditors of the Bank to payments
from the Bank are, in effect, senior to the rights of the
Company as a stockholder of the Bank, and in effect,
senior to the rights of holders of Senior Notes, who will
have no direct claim against the Bank for payment.
Sinking Fund.............................. None
Mandatory or Optional Redemption.......... None
Change of Control......................... Upon a Change of Control (as defined in the Indenture),
holders of Senior Notes will have the option to require
the Company to repurchase all outstanding Senior Notes
at 101% of their principal amount, plus accrued interest
to the date of repurchase. There can be no assurance that
the Company will have the funds available to repurchase
the Senior Notes in the event of a Change of Control.
Certain Additional Covenants.............. The Indenture pursuant to which the Senior Notes have
been issued contains certain additional covenants that,
among other things, limit: (i) the incurrence of
Indebtedness by the Company, except for certain Junior
4
<PAGE>
Indebtedness; (ii) the payment of dividends and the making
of certain other distributions by the Company and its
subsidiaries; (iii) the incurrence of certain liens on the
Company's assets; (iv) the sale or other transfer of
capital stock of the Bank; and (v) the Company's ability to
enter into any arrangement that would impose certain
restrictions on the ability of subsidiaries of the Company
to make dividend and other payments to the Company. The
Indenture also restricts the Company's and the Bank's
ability to merge, consolidate or sell all or substantially
all of the assets of the Company or the Bank.
Acceleration.............................. The maturity of the Senior Notes may be accelerated
upon an Event of Default, as defined in the Indenture.
Such Events of Default include, among other things,
continued default in payment of interest upon any Senior
Note for a period of thirty days, continued breach of
certain covenants or warranties of the Indenture for a
period of thirty days after notice of such default from the
holders of at least 25% of the outstanding principal
balance of the Senior Notes, bankruptcy of the Company
or the Bank, the appointment of a conservator or receiver
for the Company or the Bank, default by the Company or
a Subsidiary on any Indebtedness in excess of 5% of the
Company's Consolidated Tangible Net Worth, which
default has not been cured within 30 days, the entry of a
final judgment in excess of 5% of the Company's
Consolidated Tangible Net Worth or the continuing
failure of the Bank to comply with its Regulatory
Capital Requirements.
The Common Stock............................... See "Description of Capital Stock."
Dividends................................. The Company does not expect to pay a dividend on the
Common Stock in the immediate future, but rather will
retain any earnings and increase capital. The Company's
ability to pay dividends will depend principally on the
ability of the Bank to pay dividends to the Company.
As of January 1, 1999, under applicable regulations of the
OTS, the total capital available for the payment of
dividends by the Bank to the Company was $37.6
5
<PAGE>
million, assuming application of the OTS' safe harbor for
capital distributions. See generally
"Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation."
Market for Local Securities.................... The Common Stock and the Senior Notes are listed on
the AMEX under the symbols "LO" and "LO.A,"
respectively. There can be no assurance that an active
public trading market for either or both of the Common
Stock or the Senior Notes will be sustained.
Use of Proceeds................................ The Selling Holders will receive all of the proceeds from
the Local Securities sold pursuant to this Prospectus.
</TABLE>
Risk Factors
Prospective investors are urged to carefully review the matters
discussed under "Risk Factors."
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except Per Share Data)
The selected consolidated financial data of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements of the Company, including the related Notes,
included herein.
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet and Other Data:
Total assets $2,128,979 $1,881,365 $2,625,181 $3,278,511 $3,264,850 $3,325,613
Cash and due from banks 27,180 34,152 15,904 13,640 14,497 11,678
Loans receivable, net 1,362,272 953,470 1,013,824 1,018,135 804,610 708,566
Securities available for sale 570,964 518,107 985,565 1,741,725 361,402 373,532
Securities and other investments
held to maturity -- -- 408,207 392,324 1,983,756 2,078,748
Equity securities available for sale -- -- -- 11,604 12,287 17,076
Non-performing assets(1) 4,270 921 12,570 16,185 10,889 10,961
Deposits 1,668,074 1,602,533 1,644,356 1,602,460 1,577,821 1,474,171
Securities sold under agreements to
repurchase -- -- 310,801 1,079,194 779,626 381,829
Promissory note payable -- -- 7,010 14,020 21,030 28,040
Senior notes payable 80,000 80,000 -- -- -- --
FHLB advances 220,033 80,136 531,161 439,011 703,202 1,287,377
Total liabilities 2,010,173 1,798,740 2,522,552 3,170,452 3,121,631 3,198,925
Stockholders' equity 118,806 82,625 102,629 108,059 143,219 126,688
Number of full service customer
facilities 50 41 41 41 41 41
Approximate number of full-time
equivalent employees 694 525 546 536 471 423
<CAPTION>
Six Months
Years Ended December 31, Ended December 31, Years Ended June 30,
------------------------- ------------------------ ----------------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994
------------ ------------ ---------- ----------- --------- ---------- -------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Interest and dividend income $147,204 $ 188,768 $ 85,204 $119,100 $222,664 $236,156 $214,558 $175,143
Interest expense 92,438 137,022 59,823 92,562 169,761 187,488 162,590 104,496
-------- --------- --------- -------- -------- -------- -------- --------
Net interest income 54,766 51,746 25,381 26,538 52,903 48,668 51,968 70,647
Provision for loan losses (1,450) (44,272)(2) (25,578)(2) (9,734) (28,428)(2) (5,117) (1,157) (1,764)
-------- --------- --------- -------- -------- -------- -------- --------
Net interest income (loss) after
provision for loan losses 53,316 7,474 (197) 16,804 24,475 43,551 50,811 68,883
Noninterest income (loss) 14,782 (126,458) (107,149)(3) 2,185 (17,124)(3) 10,316 16,632 29,916
Noninterest expense 39,407 42,569 22,685 29,372 49,256 35,427 46,460 25,089
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes
and cumulative effect of
change in accounting
principle 28,691 (161,553) (130,031) (10,383) (41,905) 18,440 20,983 73,710
Provision (benefit) for income
taxes 10,254 (52,362) (44,075) (3,573) (11,860) 4,872 6,568 27,516
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle 18,437 (109,191) (85,956) (6,810) (30,045) 13,568 14,415 46,194
Cumulative effect of change in
accounting principle -- -- -- -- -- -- -- 6,266
-------- --------- --------- -------- -------- -------- -------- --------
Net income (loss) $ 18,437 $(109,191) $ (85,956) $ (6,810) $(30,045) $ 13,568 $ 14,415 $ 52,460
======== ========= ========= ======== ======== ======== ======== ========
Basic net income (loss) per
share(4) $ 0.90 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94 $ 3.40
====== ======= ======= ======= ======= ====== ====== ======
Diluted net income (loss) per
share(4) $ 0.89 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94 $ 3.40
====== ======= ======= ======= ======= ====== ====== ======
Dividends declared per
share(4) $ -- $ -- $ -- $ 0.03 $ 0.03 $ 0.69 $ 1.28 $ 0.99
====== ======= ======= ======= ======= ====== ====== ======
7
<PAGE>
<CAPTION>
At or For the Years Ended At or For the Six Months
December 31, Ended December 31, At or for the Years Ended June 30,
------------------------- ------------------------ --------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994
------------ ----------- ---------- ------------ -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios(5):
Return on assets 0.93% (4.35)% (3.84)% (0.21)% (0.98)% 0.41% 0.43% 1.58%
Return on common equity 17.73 (117.17) (101.45) (6.35) (28.77) 10.00 10.59 41.41
Dividend payout ratio(6) -- -- -- -- -- 77.98 137.38 29.09
Net interest spread(7) 2.57 1.91 2.13 1.45 1.57 1.36 1.32 1.80
Net interest margin(8) 2.91 2.13 2.34 1.62 1.78 1.52 1.59 2.46
Noninterest expense to
average assets(9) 1.90 1.64 0.99 0.87 1.56 1.04 1.36 0.75
Efficiency ratio(10)(11) 54.61 64.46 N/A 56.14 56.14 57.07 72.75 28.67
Capital Ratios(12):
Tangible 7.61 6.89 6.89 4.99 5.17 4.94 4.89 4.45
Core 7.63 6.98 6.98 5.07 5.25 5.04 5.03 4.60
Risk-based 13.08 14.14 14.14 12.59 12.34 12.71 13.22 13.60
Asset Quality Ratios:
Nonperforming assets to total
assets at end of period(1) 0.20 0.05 0.05 0.93 0.48 0.49 0.33 0.33
Nonperforming loans to total
loans at end of period(1) 0.26 0.06 0.06 0.82 0.38 0.51 0.38 0.46
Allowance for loan losses to
total loans at end of period 2.00 2.09 2.09 0.50 1.10 0.31 0.56 0.51
Allowance for loan losses to
nonperforming loans at
end of period(1) 7.80x 32.72x 32.72x 0.56x 2.91x 0.60x 1.48x 1.10x
</TABLE>
(1) Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets consist
of nonperforming loans, real estate acquired through foreclosure or
deed-in-lieu thereof and repossessions, net of writedowns and reserves.
(2) Primarily reflects provisions established by management to cover realized
and inherent losses with respect to the Company's portfolio of indirect
automobile receivables which were sold as of December 31, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Provision for Loan Losses."
(3) Primarily reflects losses incurred by the Company relating to the
liquidation or disposition of certain hedging contracts and the disposition
of investment securities and adjustments to reflect market values. See
"Prospectus Summary--The Company--Strategy for Growth" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(4) Net income (loss) per share and dividends per share are based upon the
weighted average number of shares outstanding during the period. As a
result of the Private Placement and the Redemption, the weighted average
number of shares used in the computation of income (loss) per share and
dividends per share is 15,400,000 for each of the years in the four-year
period ended June 30, 1997 (based on an equivalent number of shares for the
60 shares outstanding prior to the recapitalization). For the years ended
December 31, 1998 and 1997, the weighted average number of shares are
20,431,698 and 16,754,795, respectively. For the six months ended December
31, 1997, the weighted average number of shares is 18,066,000. See also
Note 1 of the Notes to Consolidated Financial Statements.
(5) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods presented. All ratios are annualized
where appropriate.
(6) The dividend payout ratio represents dividends declared per share divided
by net income per share.
(7) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(8) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(9) Noninterest expense excludes the amortization of intangibles.
(10) Represents noninterest expense (exclusive of amortization of intangibles)
divided by the aggregate of net interest income before provision for loan
losses and noninterest income (exclusive of gains and losses on sales of
assets).
(11) For the year ended June 30, 1997 and the six months ended December 31,
1996, the efficiency ratio does not reflect the $10.3 million one-time
special assessment (before applicable tax benefits) to recapitalize the
SAIF which was accrued during the quarter ended September 30, 1996. See
"Regulation."
(12) The tangible and core capital ratios are calculated as a percent of
adjusted total assets and the risk-based capital ratio is calculated as a
percent of total risk-weighted assets. See "Regulation" for information
with respect to the Bank's regulatory capital requirements.
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Local Securities in the Offering. This Prospectus
contains certain forward-looking statements and information relating to the
Company that are based on the beliefs of management as well as assumptions made
by and information currently available to management. In addition, in those and
other portions of this document, the words "anticipate," "believe," "estimate,"
"expect," "intend," "should" and similar expressions, or the negative thereof,
as they relate to the Company or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future looking events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Prospectus. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Risks Relating to the Company's Financial Condition and Results of Operations
The Company has recognized significant losses in recent periods which
have adversely affected the Company's financial condition. The Company reported
a $86.0 million and $30.0 million net loss for the six months ended December 31,
1997 and the fiscal year ended June 30, 1997, respectively, after reporting net
income of $13.6 million, $14.4 million and $52.5 million for the years ended
June 30, 1996, 1995 and 1994, respectively. The net loss reported for the six
months ended December 31, 1997 was attributable to deliberate actions taken by
the Company's new management subsequent to the Private Placement and the
Redemption to restructure the Company's balance sheet. Specifically, the Company
incurred $125.5 million of losses on the sale of assets, of which an aggregate
loss of $53.4 million was incurred in connection with liquidation or write-off
of the hedging contracts which the Company had entered into to reduce its
exposure to interest rates, and an aggregate loss of $72.1 million was incurred
on the sale and mark-to-market of the Company's securities portfolio (which
primarily related to the sale and mark-to-market of the Company's COFI-based
CMOs). The Company also recorded a $25.6 million provision for loan losses
during the six months ended December 31, 1997, primarily to cover realized and
inherent losses with respect to the Company's portfolio of indirect automobile
receivables, all of which had been sold as of December 31, 1997. The market for
fixed income securities improved during the three-month period ended December
31, 1997 and the Company sold an additional $330.6 million of COFI-based CMOs
for a pre-tax gain of $12.7 million. As of December 31, 1997, the Company
recorded, as a separate component of stockholders' equity, unrealized gains with
respect to its securities portfolio of $2.3 million (net of taxes).
For the fiscal year ended June 30, 1997, the net loss recognized by the
Company was primarily attributable to a $28.4 million provision for loan losses,
which was also primarily associated with the Company's indirect automobile
finance receivables, $29.2 million of losses on the sale of assets, of which
$29.9 million related to the sale of CMOs with interest rate adjustments
9
<PAGE>
tied to COFI, and a non-recurring $10.3 million special assessment (before
applicable tax benefits) which was recorded in connection with the SAIF
recapitalization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
During the year ended December 31, 1998, the Company returned to
profitability and recognized $18.4 million of net income. No assurance can be
made, however, that the Company will continue to remain profitable.
Risks Relating to the Company's Lending Activities
The Company's new management is emphasizing the origination of
commercial business and commercial real estate loans (including loans secured by
multi-family residential property). As of December 31, 1998, such loans amounted
to in the aggregate $927.7 million or 66.7% of total loans, as compared to
$646.5 million or 66.4% of total loans as of December 31, 1997. Although
commercial business and commercial real estate loans typically provide for
higher interest rates and shorter terms that single-family residential real
estate loans, such loans generally have a higher degree of credit risk.
Risks Relating to Outstanding Litigation With Respect to Interest Rate Swaps,
Floors and Caps
Pursuant to the Redemption Agreement, the Selling Stockholders are
responsible to the Company for any aggregate pre-tax loss (net of any related
tax benefit) to the Company in excess of $42.5 million which results from the
sale or termination of the Company's existing hedging contracts. The Company is
currently attempting to collect such difference (which it estimates to amount to
$4.6 million and which is reflected in the Company's consolidated statement of
financial condition as a receivable included in other assets) from the Selling
Stockholders and has filed a lawsuit in the United States District Court for the
Western District of Oklahoma in order to facilitate such recovery. However, no
assurance can be made that the Company will be able to recover from the Selling
Stockholders all or a portion of such $4.6 million. For a discussion of this
lawsuit as well as other legal proceedings involving the Company, see "Business
- --Legal Proceedings."
Risks Relating to the Adequacy of the Company's Allowance for Losses
The Company's allowance for loan losses amounted to $27.9 million or
2.00% of total loans and 7.80X of total nonperforming loans, each at December
31, 1998. The Company brings its total allowance for loan losses to a level
considered appropriate by management by charging the provision for loan losses
to earnings. The Company established provisions for loans losses of $1.5
million, $25.6 million, $28.4 million, and $5.1 million during the year ended
December 31, 1998, the six months ended December 31, 1997 and the years ended
June 30, 1997 and 1996, respectively. During such respective periods, loan
charge-offs (net of recoveries) amounted to $1.3 million, $16.5 million, $20.2
million and $6.5 million. The $25.6 million and $28.4 million of provisions
established during the six months ended December 31, 1997 and the year ended
June 30, 1997 were
10
<PAGE>
intended primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables. As of December 31, 1997,
the Company's portfolio of such indirect automobile loans had been sold.
Future additions to the allowance for loan losses may be necessary due
to changes in economic conditions and the performance of the Company's loan
portfolio. Future additions to the Company's allowance for losses on foreclosed
assets may also be necessary to reflect changes in the economies and markets for
real estate in which the Company's real estate owned is located (as of December
31, 1998, all of the Company's real estate owned was located in Oklahoma) and
other factors (such as, among other things, the condition of the properties,
occupancy levels and vacancy rates) which may result in adjustments which are
necessary to ensure that the Company's foreclosed assets are carried at fair
value, less estimated costs to dispose of the properties. Moreover, the Company
and the Bank's regulators, as an integral part of their examination process,
periodically reviews the Company's allowances for losses and the carrying values
of its assets. Future increases in the provisions for losses on loans and
foreclosed assets would adversely affect the Company's results of operations.
See "Business--Asset Quality--Allowance for Loan Losses."
Dependence on the Company's New Management
In connection with the closing of the transactions contemplated by the
Private Placement and the Redemption, the prior members of the Company's Board
of Directors resigned. A new Board of Directors, under the leadership of Edward
A. Townsend, the Chairman of the Board and Chief Executive Officer, are now
responsible for the direction and operation of the Company. In addition to
electing Mr. Townsend as Chief Executive Officer, the Company's new Board of
Directors elected Jan A. Norton as President. Messrs. Townsend and Norton are
expected to have a significant role in the development and management of the
Company's business. The Company has entered into three-year employment
agreements with both of such officers, which agreements will automatically
extend for an additional one-year term beginning at the end of the first
anniversary of the effective date, unless prior notice is given by either party.
The loss of services of one or both of such officers could disrupt and have a
material adverse effect on the operations of the Company. See "Management."
Concerns Relating to Dividend Restrictions Applicable to the Company
Payment of dividends on the Common Stock is at the discretion of the
Board of Directors, subject to applicable regulatory and other restrictions
imposed by law and subject to the terms of the Indenture. The Company does not
expect to pay a dividend on the Common Stock but intends to retain earnings and
increase capital. The Company's ability to pay dividends will depend principally
on the ability of the Bank to pay dividends to the Company.
As of January 1, 1999, under applicable regulations of the OTS, the
total capital available for the payment of dividends by the Bank to the Company
was $37.6 million, assuming application
11
<PAGE>
of the OTS' safe harbor for capital distributions. See generally
"Regulation--Regulation of Federal Savings Institutions--Capital Distribution
Regulation."
Impact of Fluctuations in Interest Rates on the Company's Financial Condition
and Results of Operations
The Company's operating results depend to a large extent on its net
interest income, which is the difference between the interest and dividend
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities. Changes in the general level
of interest rates can affect the Company's net interest income by affecting the
spread between the Company's interest-earning assets and interest-bearing
liabilities. This may be due to the disparate maturities or period to period
repricing of the Company's interest-earning assets and interest-bearing
liabilities, as well as in the case of an increase in the general level of
interest rates, periodic caps which limit the interest rate change on many of
the Company's adjustable-rate mortgage loans. In addition to its effect on the
Company's interest rate spread, changes in the general level of interest rates
also affect, among other things, the ability of the Company to originate loans,
the value of the Company's interest-earning assets and its ability to realize
gains from the sale of such assets, the average life of the Company's
interest-earning assets, and the Company's ability to obtain deposits in
competition with other available investment alternatives. Interest rates are
highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors
beyond the control of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability Management."
Risks to Investors As a Result of the Company's Limited Source of Payments on
the Senior Notes
The Company is a holding company with no significant business
operations of its own. The Company's only significant asset is all of the common
stock of the Bank. Other than operating cash reserves retained from the proceeds
of the Private Placement, the Company's only source of cash to pay interest on
and principal of the Senior Notes consist of distributions from the Bank. There
can be no assurance that the earnings from the Bank will be sufficient to make
distributions to the Company to enable it to pay interest on the Senior Notes
when due or principal of the Senior Notes at maturity or that such distributions
will be permitted by applicable federal banking laws and regulations. Moreover,
distributions from the Bank may not be sufficient to pay the principal amount of
the Senior Notes prior to maturity upon the occurrence of an event of default
(as defined in the Indenture) or to repurchase the Senior Notes upon a change of
control (as defined therein). If there shall occur an event of default or a
requirement for the Company to repurchase the Senior Notes upon a change of
control or, in the event that earnings from the Bank are not sufficient to make
distributions to the Company to enable it to pay the principal amount of the
Senior Notes at maturity, the Company may be required to adopt one or more
alternatives, such as borrowing funds, selling its equity securities and/or the
equity securities or assets of the Bank, or seeking loans from the Bank. There
can be no assurance that any of the foregoing actions could be effected on
12
<PAGE>
satisfactory terms, that any of the foregoing actions would enable the Company
to pay the principal amount of the Senior Notes or that any of such actions
would be permitted by the terms of the Indenture or applicable federal banking
laws and regulations. See "Description of Senior Notes."
Federal banking laws and regulations, including the regulations of the
OTS, limit the Bank's ability to pay dividends. The Bank generally may not
declare dividends or make any other capital distribution to the Company if,
after the payment of such dividend or other distribution, they would fall within
any of the three undercapitalized categories under the prompt corrective action
standards established by the OTS and the other federal banking agencies pursuant
to the Federal Deposit Insurance Act. In addition, a capital distribution
regulation of the OTS also limits the Bank's ability to pay dividends and make
other capital distributions. The Home Owners' Loan Act ("HOLA") requires every
savings institution subsidiary of a savings and loan holding company to give the
OTS at least 30 days advance notice of any proposed dividends or capital
distributions. The OTS may prohibit any dividend or other capital distribution
that it determines would constitute an unsafe or unsound practice. There are
also various statutory and regulatory limitations on the extent to which the
Bank can finance or otherwise transfer funds to the Company or non-banking
subsidiaries of the Company, whether in the form of loans, extensions of credit,
investments or asset purchases. The Director of the OTS may further restrict
these transactions in the interests of safety and soundness.
As of January 1, 1999, under regulations of the OTS, the total capital
available for payment of dividends by the Bank to the Company was $37.6 million,
assuming application of the OTS' safe harbor for capital distributions. See
"Regulation--Regulation of Federal Savings Institutions--Capital Distribution
Regulation."
Possible Effect of Economic Conditions on the Company's Business
The success of the Company is dependent to a certain extent upon
general economic conditions, particularly in the areas in which it conducts its
business activities. Adverse changes in the economic conditions of these areas
may impair the ability of the Company to collect loans and would otherwise have
an adverse effect on its business, including the demand for new loans, the
ability of customers to repay loans and the value of both the real estate which
secures its loans and its foreclosed assets.
Economic conditions within the Company's primary market area remain
strong. Nevertheless, no assurance can be made that economic conditions will not
deteriorate either within Oklahoma or the country as a whole. Any such
deterioration would adversely affect the Company's business.
Possible Effect of Competition on the Company's Business
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for deposits
historically has come from other thrift institutions, commercial banks and
credit unions doing business in its market areas. In addition, as
13
<PAGE>
with all banking organizations, the Company has experienced increasing
competition from nonbanking sources. For example, the Company competes for funds
with full service and discount broker-dealers and with other investment
alternatives, such as mutual funds and corporate and governmental debt
securities. The Company's competition for loans comes principally from other
thrift institutions, commercial banks, mortgage banking companies, consumer
finance companies, insurance companies and other institutional lenders. A number
of institutions with which the Company competes for deposits and loans have
significantly greater assets, capital and other resources than the Company. In
addition, many of the Company's competitors are not subject to the same
extensive federal regulation that governs savings and loan holding companies
such as the Company and federally-chartered and federally-insured savings
institutions such as the Bank. As a result, many of the Company's competitors
have advantages over the Company in conducting certain businesses and providing
certain services.
Possible Effect of Regulatory Changes on the Company's Business
Both the Company, as a savings and loan holding company, and the Bank,
as federally-chartered savings institutions, are subject to significant
governmental supervision and regulation, which is intended primarily for the
protection of depositors and the federal deposit insurance funds. Statutes and
regulations affecting the Company and the Bank may be changed at any time, and
the interpretation of these statutes and regulations by examining authorities
also is subject to change. There can be no assurance that future changes in
applicable statutes and regulations or in their interpretation will not
adversely affect the business of the Company. The Company is subject to
regulation and examination by the OTS, and the Bank is subject to examination by
the OTS, as its chartering authority and primary regulator, and by the FDIC, as
their insurer of deposits through the SAIF administered by it. There can be no
assurance that the OTS or the FDIC will not, as a result of such regulation and
examination, impose various requirements or regulatory sanctions upon the
Company or the Bank, as applicable. In addition to governmental supervision and
regulation, each of the Company and the Bank is subject to changes in federal
and state laws, including changes in tax laws, which could materially and
adversely affect the real estate industry, such as repeal of the federal
mortgage interest deduction. See "Regulation."
Certain Charter and Bylaw Provisions Which May Restrict a Potential Change of
Control of the Company
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include (i) a Board of
Directors classified into three classes with the directors of each class having
staggered, three-year terms, (ii) a provision establishing certain advance
notice procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at an annual meeting of stockholders and
(iii) a provision that special meetings of the stockholders of the Company may
be called by stockholders only upon the written request of holders of at least a
majority of the outstanding shares of capital stock entitled to vote at any such
meeting. The Company's Certificate of Incorporation authorizes the Board of
Directors of the Company to
14
<PAGE>
issue shares of preferred stock without stockholder approval and upon such terms
as the Board of Directors may determine. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisition,
financings and other corporate purposes, could also have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a controlling interest in the Company. See "Description of
Capital Stock--Restrictions on Acquisition of the Company."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to
fixed charges of the Company for the periods indicated.
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, December 31, Years Ended June 30,
-------------------- --------------------- -----------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994
-------- --------- --------------------- -----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratios of earnings to fixed charges:
Including interest on deposits....... 1.31 N/A N/A N/A N/A 1.10 1.13 1.71
Excluding interest on deposits....... 6.85 N/A N/A 1.01 1.48 1.94 1.95 3.63
Dollar amount of excess (deficiency)
of earnings to fixed charges:
Including interest on deposits....... $ 28,691 $(161,553) $(130,031) $(10,383) $(41,905) $18,440 $20,983 $ 73,710
======== ========= ========= ======== ======== ======= ======= ========
Excluding interest on deposits....... $103,434 $ (79,009) $ (89,359) $ 30,836 $ 41,186 $99,613 $89,218 $129,057
======== ========= ========= ======== ======== ======= ======= ========
</TABLE>
For purposes of computing the ratios of earnings to fixed charges,
earnings represent net income (loss) before extraordinary items and cumulative
effect of changes in accounting principles plus applicable income taxes and
fixed charges. Fixed charges, excluding interest on deposits, include gross
interest expense (other than on deposits). Fixed charges, including gross
interest on deposits, including all interest expense.
USE OF PROCEEDS
The Selling Holders will receive all of the proceeds from the Local
Securities sold pursuant to this Prospectus.
DIVIDENDS AND MARKET FOR LOCAL SECURITIES
The Board of Directors of the Company currently does not have a policy
of paying dividends on the Common Stock. Rather, the Company expects to retain
earnings to increase capital. The initiation of a cash dividend policy will
depend upon a number of factors, including investment opportunities available to
the Company or the Bank, capital requirements, the Company's and the Bank's
financial condition and results of operations, tax considerations, statutory and
regulatory limitations, general economic conditions and the terms of the
Indenture. No assurances can be given
15
<PAGE>
that any dividends will be paid or that, if paid, will not be reduced or
eliminated in future periods. See "Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation," "Description of Senior
Notes--Certain Covenants--Limitations on Dividends and Other Payment
Restrictions Affecting Subsidiaries" and "Description of Capital Stock."
Dividends from the Company will depend principally on the ability of
the Bank to pay dividends to the Company. As described in Regulation--Regulation
of Federal Savings Institutions--Capital Distribution Regulation." A well
capitalized institution is authorized to make capital distributions without OTS
approval during a calendar year of up to the higher of (i) 100 percent of its
net income to the date of such distribution during the calendar year plus the
amount that would reduce by one-half its surplus capital ratio, as defined, at
the beginning of the calendar year; or (ii) 75% of its net income over the most
recent four-quarter period. Applicable regulations require, however, that all
savings institutions that are subsidiaries of savings and loan holding companies
give the OTS at least 30 days advance notice of any capital distributions, and
the OTS may prohibit any capital distribution that it determines would
constitute an unsafe or unsound practice. As of January 1, 1999, under
applicable regulations of the OTS, the total capital available for the payment
of dividends by the Bank to the Company was $37.6 million, assuming application
of the OTS' safe harbor for capital distributions. See "Regulation--Regulation
of Federal Savings Institutions--Capital Distribution Regulation."
Any payment of dividends by the Bank to the Company which would be
deemed to be drawn out of the Bank's bad debt reserves would require a payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
deemed to be removed from the reserves for such distribution. If not paid out of
current period earnings, taxes on any such distribution to the extent made out
of such reserves would also be subject to the Company's carryforward of net
operating losses. See "Taxation."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends may be dependent, in part, upon dividends
from the Bank. The Company is subject, however, to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
The Common Stock and the Senior Notes are listed on the AMEX under the
symbols "LO" and "LO.A," respectively. A liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company. Accordingly, the number of active buyers and sellers of
the Common Stock or the Senior Notes at any particular time may be limited.
Under such circumstances, investors in the Common Stock or the Senior Notes
could have difficulty disposing of their securities and should not view the
Common Stock or the Senior Notes as a short-term investment. Accordingly, there
can be no assurance that an active and liquid trading market for the Common
Stock or the Senior Notes will develop or that, if developed, it will
16
<PAGE>
continue, nor is there any assurance that persons purchasing shares of Common
Stock or Senior Notes will be able to sell them at or above the purchase price
therefor.
The following table sets forth the range of high and low closing prices
for the periods indicated:
Year Ended
December 31, 1998
--------------------------------
High Low
-------------- --------------
First quarter $ -- $ --
Second Quarter 13.75 12.63
Third Quarter 13.06 8.50
Fourth Quarter 9.56 6.94
The Company's Common Stock began trading on April 22, 1998.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1998. The table should be read in conjunction with
the Consolidated Financial Statements of the Company, including the related
Notes, included elsewhere herein.
December 31, 1998
-----------------
(In Thousands)
Deposits......................................................... $1,668,074
Borrowings:
FHLB advances................................................. 220,033
Senior Notes.................................................. 80,000
Other liabilities................................................ 42,066
----------
Total liabilities............................................. 2,010,173
----------
Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; none outstanding............................... --
Common Stock, $0.01 par value; 25,000,000 shares authorized;
20,537,269 shares issued and 20,537,209 sharesoutstanding.. 205
Additional paid-in-capital.................................... 206,758
Retained earnings............................................. 50,197
Treasury stock, 60 shares, at cost............................ (149,436)
Accumulated other comprehensive income........................ 11,082
----------
Total stockholders' equity....................................... 118,806
----------
Total liabilities and stockholders' equity....................... $2,128,979
==========
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto, included
herein.
General
Local Financial's primary asset is the capital stock of Local, formerly
Local Federal Bank, F.S.B. In August 1997, a group led by Mr. Edward A.
Townsend, the Company's present Chairman, undertook to redeem all of the stock
of the Selling Shareholders. The Company financed the redemption through a
private placement of $197.0 million of Common Stock and $80.0 million of Senior
Notes. The Private Placement and Redemption were closed in September 1997. The
Company subsequently registered the Common Stock and Senior Notes for public
resale, and the Common Stock and Senior Notes began publicly trading on April
22, 1998.
The prior owners operated the Bank as a low cost institution,
emphasizing traditional savings institution products and services, indirect
lending of sub-prime automobile financing, residential mortgage products and a
wholesale securities portfolio. New management has changed the Bank's activities
significantly. As described more fully below, management has reduced the level
of CMOs with interest rate adjustments tied to the COFI, eliminated all swap and
hedging contracts and eliminated the Bank's portfolio of sub-prime, indirect
automobile loans. While these measures reduced the Bank's assets by over $1
billion and resulted in substantial losses on the sale and write-down of assets,
management believes the Bank's financial condition is greatly improved and it is
better positioned for future growth.
In pursuit of new management's growth strategy, the Bank has shifted
its activities from those of a traditional savings and loan to those generally
associated with a commercial bank. The Bank has increased its commercial and
consumer lending and expects further increases in those areas. The Bank also has
targeted increases in non-interest income, increases in lending activities
rather than investing activities, and increases in direct lending rather than
indirect lending.
The Bank's business strategy is to provide its customers with a range
of banking products and services of a regional bank while retaining the appeal
and level of individualized service of a community bank. Management believes
that as a result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits.
18
<PAGE>
Changes in Financial Condition from December 31, 1997 to December 31, 1998
General. On October 22, 1997, the Company and the Bank's former
subsidiary bank, Local America Bank of Tulsa, FSB ("Local America"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Green Country
and its wholly-owned subsidiary, Green Country Bank, FSB ("Green Country Bank"),
pursuant to which Green Country would be merged with and into the Company, with
the Company as the surviving corporation, and in connection therewith, Green
Country Bank would be merged with and into Local America with Local America as
the surviving bank (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 4,150.27 and
27.907 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
$105.1 million, $103.2 million, $79.0 million and $1.9 million, respectively.
On June 18, 1998, the Company announced that the Bank had entered into
a definitive agreement to acquire BankSouth Corporation, a Lawton, Oklahoma bank
holding company, for approximately $20.3 million in cash, which includes the
redemption of its outstanding preferred stock. BankSouth was the holding company
of Citizens Bank, which had five branches in Lawton, Oklahoma and one in Norman,
Oklahoma. BankSouth had total assets, liabilities, deposits and stockholders'
equity of approximately $176.5 million, $167.0 million, $159.7 million and $9.5
million, respectively, as of September 30, 1998. The acquisition was accounted
for under the purchase method of accounting and included in the financial
statements as of September 30, 1998.
Effective November 30, 1998, Local America was merged with and into its
parent bank, Local, with Local as the surviving bank. Since, for financial
statement purposes, the Company, Local and its wholly owned subsidiary bank,
Local America, were presented on a consolidated basis, this merger of Local
America with and into Local had no effect on the consolidated financial
statements.
Excluding the effect of the acquired institutions, the Company's total
assets, deposits and total liabilities declined $33.6 million or 1.79%, $173.1
million or 10.8% and $59.2 million or 3.3%, respectively, during the period.
Stockholders' equity increased $36.2 million or 43.8% from December 31, 1997 to
December 31, 1998 as a result of net income during the period, 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 Country, as discussed
above, and the increase in accumulated other comprehensive income.
19
<PAGE>
Cash and Cash Equivalents. Cash and cash equivalents (consisting of
cash, cash due from banks and interest-bearing deposits with other banks)
amounted to $54.9 million and $54.2 million at December 31, 1998 and December
31, 1997, respectively. The Company manages its cash and cash equivalents based
upon the Company's operating, investing and financing activities. See
"--Liquidity and Capital Resources."
Securities. During the fiscal year ended December 31, 1998, the Company
substantially liquidated its short-term investment portfolio and reinvested a
portion of those funds in mortgage securities available for sale. The remainder
of the proceeds from the sale of its short-term investments was used to help
fund the growth in loans. The Company views both the short-term investment
portfolio and the securities available for sale as a source of asset liquidity.
Liquidity is derived from this source by receipt of interest and principal
payments and prepayments; by the ability to sell these securities at market
prices; and by utilizing unpledged securities as collateral for borrowings.
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. Future changes in
the securities accounts will be determined by, among other things, liquidity
guidelines established by the Company and applicable regulatory rules; pledging
requirements to retain public funds; and by the rate at which the Company can
grow its loan portfolio through originations.
20
<PAGE>
The following table sets forth information regarding the carrying and
market value of the Company's securities at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------ -------------------------------------------------
1998 1997 1997 1996
------------------------ --------------------- ----------------------- -----------------------
Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value
------------ --------- --------- --------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale (at market):
U.S. Government and agency
securities ................ $ 39,092 $ 39,092 $ 6,000 $ 6,000 $ -- $ -- $ -- $ --
Municipal securities ......... 965 965 -- -- -- -- -- --
Collateralized mortgage
obligations ............... 522,128 522,128 428,876 428,876 957,519 957,519 1,700,551 1,700,551
Mortgage-backed
securities ................ 8,779 8,779 83,231 83,231 28,046 28,046 41,174 41,174
Equity securities ............ -- -- -- -- -- -- 11,604 11,604
--------- --------- --------- --------- ---------- ---------- ---------- ----------
$ 570,964 $ 570,964 $ 518,107 $ 518,107 $ 985,565 $ 985,565 $1,753,329 $1,753,329
========= ========= ========= ========= ========== ========== ========== ==========
Held to maturity:
U.S. Government and agency
securities ................ $ -- $ -- $ -- $ -- $ 74,119 $ 74,219 $ -- $ --
Collateralized mortgage
obligations ............... -- -- -- -- 156,159 149,484 163,883 156,760
Mortgage-backed securities ... -- -- -- -- 177,929 175,214 228,441 222,244
--------- --------- --------- --------- ---------- ---------- ---------- ----------
$ -- $ -- $ -- $ -- 408,207 $ 398,917 $ 392,324 $ 379,004
========= ========= ========= ========= ========== ========== ========== ==========
</TABLE>
Loans Receivable. Net loans receivable amounted to $1.4 billion and
$953.5 million at December 31, 1998 and December 31, 1997, respectively. Net
loans receivable increased by $408.8 million or 42.9% during the year ended
December 31, 1998. Under its new management, the Bank strategically focused its
commercial lending efforts towards growth of its Oklahoma-based commercial
portfolio, hiring 38 experienced commercial lending officers and supporting
staff and forming a new corporate lending unit. During 1998, the Bank's total
commercial lending portfolio experienced growth of $281.1 million or 43.5%, with
virtually all of that growth occurring from loans made in Oklahoma. Much of this
growth occurred late in the year as the newly-hired officers moved some of their
existing customer relationships to the Bank. Residential real estate loans grew
from $281.6 million to $344.6 million, an increase of $63.0 million or 22.4%.
While most of this increase was due to acquisitions, the Bank continued to
originate adjustable-rate and 15-year fixed-rate loans for its own portfolio. In
addition, consumer loans grew from $38.7 million to $101.7 million, an increase
of $63.0 million or 162.8%. Again, most of this increase was attributable to
acquisitions, but the Bank has heavily promoted its consumer loan products in
the media and intends to better utilize its existing branch locations to
originate consumer loans. The Bank also continues to originate and sell a
variety of mortgage and consumer loan products. Approximately $83 million of
loans were sold during 1998 and the Bank intends to originate and sell even more
loans during 1999 as part of a program to control exposure to longer-term
interest rate
21
<PAGE>
risk and improve profitability of the more labor-intensive lending functions.
Management intends to continue its emphasis on lending activities, and
consequently, expects its loan portfolio to grow over the next several years.
For additional information, see "Business--Lending Activities" and Note 6 of the
Notes to Consolidated Financial Statements.
Contractual Principal Repayments and Interest Rates. The following
table sets forth scheduled contractual amortization of the Company's total loan
portfolio at December 31, 1998, as well as the dollar amount of such loans which
are scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due or Repricing
Total at In Years Ended December 31,
December 31, ----------------------------------------------------------------------------------
1998(1) 1999 2000 2001 2002 2003 Thereafter
------------ --------- --------- --------- -------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential real $ 353,796 $ 19,744 $ 17,483 $ 18,111 $ 17,488 $ 18,255 $ 262,715
estate
Commercial 927,682 140,266 87,406 83,743 60,908 138,737 416,622
Consumer 108,695 38,128 17,888 14,107 10,452 7,063 21,057
----------- --------- --------- --------- -------- --------- ---------
Total(1) $ 1,390,173 $ 198,138 $ 122,777 $ 115,961 $ 88,848 $ 164,055 $ 700,394
=========== ========= ========= ========= ======== ========= =========
</TABLE>
- -------------------------
(1) Of the $1.2 billion of loan principal repayments contractually due after
December 31, 1999, $696.0 million have fixed rates of interest and $496.1
million have adjustable rates of interest. Commercial, consumer and total
loans are presented net of undistributed loan proceeds.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which generally give the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates).
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 increased primarily due to nonperforming
assets acquired in the acquisitions of Green Country and BankSouth.
22
<PAGE>
At December 31, 1998, nonperforming assets amounted to $4.3 million or .20% of
total assets, as compared to $921,000 or .05% at December 31, 1997.
The following table presents information on the Company's nonperforming
assets at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994
--------------- --------------- --------------- --------------- --------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans $ 2,203 $ 626 $ 3,508 $ 3,794 $ 3,107 $ 3,342
Accruing loans greater than
90 days delinquent 1,374 -- 415 1,548 -- --
Foreclosed assets 693 295 8,647 10,843 7,782 7,619
------- ------ -------- -------- -------- ---------
Total nonperforming assets $ 4,270 $ 921 $ 12,570 $ 16,185 $ 10,889 $ 10,961
======= ====== ======== ======== ======== ========
Total nonperforming assets
as a percentage of total
assets 0.20% 0.05% 0.48% 0.49% 0.33% 0.33%
==== ==== ==== ==== ==== ====
</TABLE>
The decline in nonperforming assets from June 30, 1997 to December 31,
1997 reflected a $2.9 million decline in non-accrual loans (primarily commercial
real estate loans) and an $8.4 million decline in foreclosed assets (which was
primarily due to a transfer of a $6.0 million retail shopping center from real
estate owned to real estate held for investment during the period).
At December 31, 1997, the allowance for loan loss amounted to $20.5
million, representing 2.09% of total loans. The Company's allowance for loan
loss rose $7.4 million or 36% during the year ended December 31, 1998, primarily
as a result of the allowance acquired in the acquisitions of Green Country and
BankSouth, which aggregated $7.3 million.
During 1998, the Bank continued to focus on commercial loan growth. As
a result, the Bank's total loan portfolio grew $416.2 million or 42.7%, with the
majority of this growth occurring in the newly formed commercial business
lending area as described herein. During the year the Company was very
successful in its formation of a corporate lending unit focused on commercial
business lending within the state of Oklahoma. During 1998, the Bank's
commercial business portfolio grew $232.9 million or 16.8% of the total loan
portfolio. This lending unit was staffed with area lenders with many years of
experience and established customer relationships in the Oklahoma market. Many
of these relationships were moved to the Bank during 1998 from competitor
institutions within the market. To support this function, the Bank added
professionals in the credit administration and loan review area to strengthen
and expand the Bank's credit policies to accommodate the new array of loan
products and services being offered. In light of the magnitude of changes which
have occurred in the Bank's loan portfolio and lending staff, there is no
assurance that these changes will not result in losses in excess of those
historically experienced by this institution.
23
<PAGE>
The Bank also grew its loan portfolio through acquisitions amounting to
$211.0 million or 21.7%. The Bank pays particular attention to the loan
portfolios acquired but recognizes that the acquired portfolios are more mature
than its own, and therefore, may contain more non-performing loans. The increase
in the Bank's non-performing assets from $921,000 at December 31, 1997 to $4.3
million at December 31, 1998 was largely attributable to the BankSouth
acquisition. In connection with that acquisition, the Bank acquired a $22.1
million portfolio of indirect automobile receivables. Management believes the
loss experience on the acquired indirect receivables will be better than
historical losses experienced by the Bank on such portfolios in the past due to
the fact that these loans were originated within the Bank's local market and
through dealers with whom the Bank had established relationships.
As part of its periodic review and analysis of the loss factors
utilized in the Bank's allowance methodology (see "Business--Asset
Quality--Allowance for Loan Loss"), the Bank during 1998 revised those loss
factors to comply with regulatory guidance resulting in a reallocation of the
Bank's existing reserves. Due to the significant changes in the nature and
volume of the Bank's loan portfolio, it was recognized that historical loss
experience upon which the Bank's loss factors had been based would not be a
representative indicator of losses inherent in the portfolio.
24
<PAGE>
The following table provides information on the Company's allowance for
loan losses as of the dates indicated (Dollars in Thousands):
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, December 31, Years Ended June 30,
----------------------- ----------------------- ----------------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994
---------- ---------- --------- ---------- ---------- ---------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 20,484 $ 5,475 $ 11,435 $ 3,228 $ 3,228 $ 4,593 $ 3,689 $ 2,172
Loans charged off:
Residential real estate (31) (8) (5) -- (3) (143) (191) (320)
Commercial (545) (14) (14) -- -- (1,368) (4) (48)
Consumer (928) (29,298) (16,535) (8,083) (20,290) (5,026) (167) (11)
Recoveries 187 57 25 596 72 55 109 132
-------- -------- -------- -------- -------- -------- -------- --------
Net loans charged off (1,317) (29,263) (16,529) (7,487) (20,221) (6,482) (253) (247)
Allowances acquired 7,284 -- -- -- -- -- -- 1,764
Provision for loan losses 1,450 44,272 25,578 9,734 28,428 5,117 1,157 --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at end of period $ 27,901 $ 20,484 $ 20,484 $ 5,475 $ 11,435 $ 3,228 $ 4,593 $ 3,689
======== ======== ======== ======== ======== ======== ======== ========
Allowance for loan losses to
total nonperforming loans
at end of period 7.80x 32.72x 32.72x 0.56x 2.91x 0.60x 1.48x 1.10x
======= ======= ======= ======= ======= ======= ======= ======
Allowance for loan losses to
total loans at end of period 2.00% 2.09% 2.09% 0.50% 1.10% 0.31% 0.57% 0.52%
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
The following table sets forth information concerning the allocation of
the Company's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------- -----------------------------------------------------
1998 1997 1997 1996
------------------------- ----------------------- ------------------------- --------------------------
Percent to Percent to Percent to Percent to
Total Total Total Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance
--------- ----------- -------- ----------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $ 3,311 11.87% $ 412 2.01% $ 427 3.73% $ 407 12.61%
Commercial 18,798 67.37 10,459 51.06 2,836 24.80 2,624 81.29
Consumer 5,792 20.76 6,203 30.28 8,172 71.47 197 6.10
General unallocated -- -- 3,410 16.65 -- -- -- --
------- ------ ------- ------- ------ ------ ------ ------
Total $27,901 100.00% $20,484 100.00% $11,435 100.00% $3,228 100.00%
======= ====== ======= ====== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------
1995 1994
--------------------------- -------------------------
Percent to Percent to
Total Total
Amount Allowance Amount Allowance
-------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Residential real estate $ 411 8.95% $ 467 12.66%
Commercial 3,644 79.34 3,023 81.95
Consumer 538 11.71 199 5.39
General unallocated -- -- -- --
------ ------ ------ ------
Total $4,593 100.00% $3,689 100.00%
====== ====== ====== ======
</TABLE>
25
<PAGE>
Deposits. At December 31, 1998, deposits totaled $1.7 billion, as
compared to $1.6 billion at December 31, 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). Likewise, in connection with the acquisition of BankSouth, the Company
acquired six branch offices and assumed $159.7 million of deposits (as of
September 30, 1998). However, three branches of the combined institution had
overlapping markets and at December 31, 1998, two of these branches have been
closed with the remaining one scheduled for closure. The Bank has received OTS
approval to open de novo branch offices in Edmond, Oklahoma and in Afton,
Oklahoma. The Company expects to continue to focus on improving its retail
deposit franchise. For additional information, see "Business--Sources of
Funds--Deposits" and Note 9 of the Notes to Consolidated Financial Statements.
26
<PAGE>
The following table presents the average balance of each deposit type
and the average rate paid on each deposit type of the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1998 December 31, 1997
--------------------------------------- ----------------------------------------
Average Average
Average Rate Average Rate
Balance Interest Paid Balance Interest Paid
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing deposits $ 72,215 $ -- --% $ 57,778 $ -- --%
Passbook accounts 73,068 2,110 2.89 78,731 1,009 2.56
NOW and money
market accounts 225,740 4,892 2.17 187,381 2,594 2.77
Term certificates 1,253,482 67,741 5.40 1,301,703 37,069 5.70
---------- ------- --------- -------
Total deposits $1,624,505 $74,743 4.60% $1,625,593 $40,672 5.00%
========== ======= ==== ========== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------------------------------------------
1997 1996
------------------------------------------- -----------------------------------------
Average Average
Average Rate Average Rate
Balance Interest Paid Balance Interest Paid
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing deposits $ 52,087 $ -- --% $ 46,791 $ -- --%
Passbook accounts 72,441 2,092 2.89 75,359 2,190 2.91
NOW and money
market accounts 195,606 5,381 2.75 204,752 5,638 2.75
Term certificates 1,329,463 5,618 5.69 1,271,079 73,345 5.77
---------- ------- ---------- -------
Total deposits $1,649,597 $83,091 5.04% $1,597,981 $81,173 5.08%
========== ======= ==== ========== ======= ====
</TABLE>
27
<PAGE>
Other Assets. Other assets declined by $38.9 million from December 31,
1997 to December 31, 1998, primarily due to the collection of a receivable from
the sale of the indirect lending portfolio.
Borrowings. Other than deposits, the Company utilized advances from the
FHLB of Topeka to fund its operations. Advances from the FHLB increased $139.9
million from December 31, 1997 to December 31, 1998. The increase came as the
Company took advantage of favorable rates available at the FHLB to fund earning
assets and offset rate-sensitive movement of funds within the deposit portfolio.
The following table sets forth certain information regarding the
short-term borrowings of the Company at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Years At or For the Six Months At or For the Years
Ended December 31, Ended December 31, Ended June 30,
---------------------- -------------------------- ---------------------------
1998 1997 1997 1996 1997 1996
---------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
FHLB of Topeka advances:
Average balance outstanding $132,659 $549,465 $391,711 $ 987,618 $ 848,733 $ 869,568
Maximum amount outstanding at any
month-end during the period 220,033 874,356 839,347 1,311,735 1,311,735 1,588,618
Balance outstanding at end of period 220,033 80,136 80,136 371,612 531,161 439,011
Average interest rate during the period 5.69% 7.12% 7.09% 6.50% 6.77% 6.71%
Average interest rate at end of period 4.77% 6.06% 6.06% 5.59% 5.73% 5.70%
Securities sold under agreements to purchase
Average balance outstanding $ -- $161,988 $ 55,235 $ 567,000 $ 418,784 $ 686,558
Maximum amount outstanding at any
month-end during the period -- 543,683 239,914 942,325 942,315 1,079,194
Balance outstanding at end of period -- -- -- 942,325 310,801 1,079,194
Average interest rate during the period(1) -- 7.31% 7.44% 6.45% 6.73% 6.76%
Average interest rate at end of period -- -- -- 5.38% 5.55% 5.36%
</TABLE>
- -------------------------
(1) Average interest rate during the period reflects the effect of the Company's
interest rate swaps.
Pursuant to the Private Placement, the Company issued $80.0 million of
Senior Notes which are due in September 2004 and which bear interest at the rate
of 11.0%, payable semi-annually. During fiscal 1997, as anticipated in the
Purchase Agreement, the Company established an interest reserve account with an
independent trustee which contained $8.8 million, sufficient to pay the
aggregate interest payments scheduled to be made with respect to the first two
interest payment dates on the senior notes. Debt issuance costs of approximately
$4.3 million at December 31, 1997 were capitalized and are reflected as Other
Assets in the Consolidated Statement of Financial Condition. The Company intends
to fund the semiannual interest payments through dividends paid to the Company
from the Bank. For additional information, see "Business--Sources of
Funds--Borrowings" and Note 12 of the Notes to Consolidated Financial
Statements.
Stockholders' Equity. Stockholders' equity increased from $82.6 million
at December 31, 1997 to $118.8 million at December 31, 1998. The increase in
stockholders' equity came primarily as a result
28
<PAGE>
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 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. Accumulated other comprehensive income rose $8.7 million or
374.0% during fiscal 1998, as the Company marked its available-for-sale security
portfolio to market net of taxes in accordance with generally accepted
accounting principals ("GAAP"). At December 31, 1998, the ratio of the Company's
stockholders' equity to total assets amounted to 5.58% and the Bank exceeded its
minimum regulatory capital requirements. See "--Liquidity and Capital
Resources."
Results of Operations
General. The Company's results of operations depend substantially on
its net interest and dividend income, which is the difference between interest
and dividend income on interest-earning assets, consisting primarily of loans
receivable, mortgage-backed and investment securities and various other
short-term investments, and interest expense on interest-bearing liabilities,
consisting primarily of deposits and borrowings. In prior periods the Company's
results of operations have been significantly affected by the net costs of
hedging its interest rate exposure. On an ongoing basis, the Company's results
of operations will be affected by the level of its noninterest income including
deposit related income; loan fees and service charges; net gains (losses) on
sales of assets; the level of its noninterest expense, such as compensation and
employee benefits, deposit insurance premiums, provisions for losses on
foreclosed assets, equipment and data processing expense and occupancy expense;
its provisions for losses on loans resulting from the Company's assessment of
the adequacy of its allowance for losses on loans; and provisions (benefits) for
income taxes.
Net Income (Loss). The Company reported net income (loss) of $18.4
million, ($86.0) million, ($30.0) million and $13.6 million during the year
ended December 31, 1998, the six months ended December 31, 1997, and the years
ended June 30, 1997 and 1996, respectively. The net income reported for the year
ended December 31, 1998 is reflective of the Company's first full fiscal year of
operations since the restructuring initiatives contemplated by the Private
Placement and Redemption. The net loss reported for the six months ended
December 31, 1997 is attributable to deliberate actions taken by the Company's
new management subsequent to the Private Placement and Redemption to restructure
the Company's balance sheet. Specifically, the Company incurred $125.5 million
of losses on the sale and write-down of assets, of which an aggregate loss of
$53.4 million was incurred in connection with the liquidation or write-off of
the hedging contracts which the Company had entered into in order to reduce its
exposure to interest rates. See "-Asset and Liability Management." These losses
also included a loss of $72.1 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). Further the Company recorded a
$25.4 million provision for loan losses during the three-months ended September
30, 1997, primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables which had been sold as of
December 31, 1997. See "Business--Lending Activities--Consumer Loans." 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
29
<PAGE>
CMO portfolio for a gain of $12.7 million in furtherance of its plan to
accelerate the disposition of the COFI-based CMOs. The effect of these
transactions on the Company's operating results for the six months ended
December 31, 1997 is shown below.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------ Six Months Ended
September 30, 1997 December 31, 1997 December 31, 1997
---------------------- ------------------ ------------------
<S> <C> <C> <C>
Net interest income $ 12,272 $ 13,109 $ 25,381
Provision for loan losses (25,353) (225) (25,578)
---------- -------- ----------
Net interest income (loss) after provision for loan losses (13,081) 12,884 (197)
Net gains (losses) on sale of assets (125,485) 12,816 (112,669)
Other noninterest income 2,888 2,632 5,520
---------- -------- ----------
Total noninterest income (loss) (122,597) 15,448 (107,149)
Total noninterest expense 13,568 9,117 22,685
---------- -------- ----------
Income (loss) before provision (benefit) for income taxes (149,246) 19,215 (130,031)
Provision (benefit) for income taxes (50,795) 6,720 (44,075)
---------- -------- ----------
Net income (loss) $ (98,451) $ 12,495 $ (85,956)
========== ======== ==========
</TABLE>
The Company recognized a net loss of $30 million during the fiscal year
ended June 30, 1997 as compared to net income of $13.6 million during the year
ended June 30, 1996. The net loss during fiscal year ended June 30, 1997 was
primarily attributable to a $28.4 million provision for loan losses, which was
principally associated with the Company's indirect automobile finance
receivables, $29.9 million of losses which were related to the sale of CMOs with
interest rate adjustments tied to COFI, and a non-recurring $10.3 million
special assessment (before applicable tax benefits) which was recorded in
connection with legislation in 1996 which recapitalized the SAIF.
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 $54.8 million, $25.4 million,
$52.9 million and $48.7 million during the year ended December 31, 1998, six
months ended December 31, 1997, and years ended June 30, 1997 and 1996,
respectively. Net interest and dividend income increased by $3.0 million or 5.8%
during the year ended December 31, 1998, as compared to the year ended December
31, 1997, due to an increase in the Company's net interest earnings assets
(interest-earnings assets less interest-bearing liabilities) and a corresponding
66 basis point rise in the Company's interest rate spread during the period. Net
interest and dividend income decreased by $1.2 million or 4.4% during the six
months ended December 31, 1997 as compared to the six months ended December 31,
1996 due to a significant decline of $1.1 billion in the average balance of
securities during the period, which is attributable to the sale and writedown of
such securities in connection with the restructuring activities described above.
Net interest and dividend income increased by $4.2 million or 8.7% during the
year ended June 30, 1997 due to a $22.1 million increase in net interest-earning
assets and a 21 basis point increase in the Company's interest rate spread.
30
<PAGE>
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yield, (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rates, (iii) net interest income, (iv) interest rate spread, and (v) net
interest margin. Information is based on average daily balances during the
indicated periods (Dollars in Thousands).
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended December 31,
------------------------------------------------------------------- -----------------------------
1998 1997 1997
------------------------------- -------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $1,162,514 $ 96,851 8.33% $1,036,300 $104,324 10.07% $1,009,843 $ 49,788 9.78%
Securities(2) 577,526 41,862 7.25% 1,289,822 78,354 6.07% 1,000,808 31,306 6.21%
Securities purchased under
agreements to resell 70,368 3,947 5.61% 37,657 2,159 5.73% 60,000 1,711 5.66%
Other earning assets(3) 73,004 4,544 6.22% 64,707 3,931 6.08% 76,415 2,399 6.23%
---------- -------- --------- -------- ---------- --------
Total interest-earning
assets 1,883,412 147,204 7.81% 2,428,486 188,768 7.77% 2,147,066 85,204 7.87%
-------- ====== -------- ====== -------- ======
Noninterest-earning assets 93,316 84,115 92,823
---------- ---------- ----------
Total assets $1,976,728 $2,512,601 $2,239,889
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 298,808 $ 7,002 2.34% $ 266,569 $ 7,300 2.74% $ 266,112 $ 3,603 2.69%
Term certificates of
deposits 1,253,482 67,741 5.40% 1,326,371 $ 75,244 5.67% 1,301,703 37,069 5.65%
---------- -------- ---------- -------- ---------- --------
Total deposits 1,552,290 74,743 4.82% 1,592,940 82,544 5.18% 1,567,815 40,672 5.15%
Borrowings:
FHLB advances 132,659 7,547 5.69% 549,465 39,095 7.12% 391,711 14,005 7.09%
Securities sold under
agreements to repurchase
and other 64 678 -- 161,988 11,848 7.31% 55,235 2,073 7.44%
Promissory note payable -- -- -- 7,087 583 8.23% 2,591 108 8.27%
Senior notes 80,000 9,470 11.81% 24,986 2,952 11.81% 49,565 2,965 11.87%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 1,765,013 92,438 5.24% 2,336,466 137,022 5.86% 2,066,917 59,823 5.74%
-------- ====== -------- ====== -------- ======
Noninterest-bearing
liabilities 107,718 82,945 88,248
---------- ---------- ----------
Total liabilities 1,872,731 2,419,411 2,155,165
Stockholders' equity 103,997 93,190 84,724
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,976,728 $2,512,601 $2,239,889
========== ========== ==========
Net interest-earning assets $ 118,399 $ 92,020 $ 80,149
========== ========== ==========
Net interest income/interest
rate spread $ 54,766 2.57% $ 51,746 1.91% $ 25,381 2.13%
======== ====== ======== ====== ========= ======
Net interest margin 2.91% 2.13% 2.34%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.71% 103.94% 103.88%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31, Years Ended June 30,
------------------------------- ------------------------------------------------------------------
1996 1997 1996
------------------------------- -------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $1,020,534 $ 53,179 10.34% $1,041,342 $107,715 10.34% $ 867,151 $ 95,839 11.05%
Securities(2) 2,107,408 62,176 5.85% 1,845,179 109,224 5.92% 2,255,318 134,761 5.98%
Securities purchased under
agreements to resell 38,921 1,040 5.30% 27,174 1,488 5.48% 4,467 322 7.21%
Other earning assets(3) 78,544 2,705 6.83% 65,903 4,237 6.43% 79,847 5,234 6.56%
---------- -------- --------- -------- ---------- --------
Total interest-earning
assets 3,245,407 119,100 7.28% 2,979,598 222,664 7.47% 3,206,783 236,156 7.36%
-------- ====== -------- ====== -------- ======
Noninterest-earning assets 55,873 92,630 89,147
---------- ---------- ----------
Total assets $3,301,280 $3,072,228 $3,295,930
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 269,044 3,776 2.78% $ 268,047 $ 7,473 2.79% $ 280,111 $ 7,828 2.79%
Term certificates of
deposits 1,308,314 37,443 5.68% 1,329,463 $ 75,618 5.69% 1,271,079 73,345 5.77%
---------- -------- ---------- -------- ---------- --------
Total deposits 1,577,358 41,219 5.18% 1,597,510 83,091 5.20% 1,551,190 81,173 5.23%
Borrowings:
FHLB advances 987,618 32,353 6.50% 848,733 57,442 6.77% 869,568 58,309 6.71%
Securities sold under
agreements to repurchase
and other 567,000 18,426 6.45% 418,784 28,202 6.73% 686,558 46,400 6.76%
Promissory note payable 14,020 564 7.98% 12,852 1,026 7.98% 19,862 1,606 8.09%
Senior notes -- -- -- -- -- -- -- -- --
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 3,145,996 92,562 5.84% 2,877,879 169,761 5.90% 3,127,178 187,488 6.00%
-------- ====== -------- ====== -------- ======
Noninterest-bearing
liabilities 48,071 89,914 33,075
---------- ---------- ----------
Total liabilities 3,194,067 2,967,793 3,160,253
Stockholders' equity 107,213 104,435 135,677
---------- ---------- ----------
Total liabilities and
stockholders' equity $3,301,280 $3,072,228 $3,295,930
========== ========== ==========
Net interest-earning assets $ 99,411 $ 101,719 $ 79,605
========== ========== ==========
Net interest income/interest
rate spread $ 26,538 1.44% $ 52,903 1.57% $ 48,668 1.36%
======== ====== ======== ====== ========= ======
Net interest margin 1.62% 1.78% 1.52%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 103.16% 103.53% 102.55%
====== ====== ======
</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 loans 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.
31
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Year Ended December 31, 1998 compared to 1997
-----------------------------------------------------------
Increase (decrease) due to
-------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $(17,988) $ 12,706 $ (2,191) $ (7,473)
Securities 15,139 (43,271) (8,360) (36,492)
Securities purchased under
agreements to resell (46) 1,875 (41) 1,788
Other earning assets 97 504 12 613
-------- -------- -------- --------
Total net change in income
on interest-earning assets (2,798) (28,186) (10,580) (41,564)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (1,053) 883 (128) (298)
Term certificates of
deposit (3,564) (4,135) 196 (7,503)
-------- -------- -------- --------
Total deposits (4,617) (3,252) 68 (7,801)
Borrowings:
FHLB advances (7,836) (29,656) 5,944 (31,548)
Securities sold under
agreements to repurchase (11,848) (11,843) 12,521 (11,170)
Promissory note payable (583) (583) 583 (583)
Senior notes (2) 6,500 20 6,518
-------- -------- -------- --------
Total net change in expense
on interest-bearing
liabilities (24,886) (38,834) 19,136 (44,584)
-------- -------- -------- --------
Change in net interest income $ 22,088 $ 10,648 $(29,716) $ 3,020
======== ======== ======== ========
<CAPTION>
Six Months Ended December 31, 1997 compared to 1996
----------------------------------------------------------
Increase (decrease) due to
------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
-------- -------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ (2,864) $ (557) $ 30 $ (3,391)
Securities 3,745 (32,649) (1,966) (30,870)
Securities purchased under
agreements to resell 70 563 38 671
Other earning assets (239) (73) 6 (306)
-------- -------- -------- --------
Total net change in income
on interest-earning assets 712 (32,716) (1,892) (33,896)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (133) (41) 1 (173)
Term certificates of
deposit (186) (189) 1 (374)
-------- -------- -------- --------
Total deposits (319) (230) 2 (547)
Borrowings:
FHLB advances 2,958 (19,521) (1,785) (18,348)
Securities sold under
agreements to repurchase 2,854 (16,631) (2,576) (16,353)
Promissory note payable 20 (460) (16) (456)
Senior notes - - 2,965 2,965
-------- -------- -------- --------
Total net change in expense
on interest-bearing
liabilities 5,513 (36,842) (1,410) (32,739)
-------- -------- -------- --------
Change in net interest income $ (4,801) $ 4,126 $ (482) $ (1,157)
======== ======== ======== ========
<CAPTION>
Year Ended June 30, 1997 compared to 1996
---------------------------------------------------------
Increase (decrease) due to
------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable $ (6,142) $ 19,252 $ (1,234) $ 11,876
Securities (1,259) (24,507) 229 (25,537)
Securities purchased under
agreements to resell (77) 1,637 (394) 1,166
Other earning assets (101) (914) 18 (997)
-------- -------- -------- --------
Total net change in income
on interest-earning assets (7,579) (4,532) (1,381) (13,492)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (19) (337) 1 (355)
Term certificates of
deposit (1,048) 3,369 (48) 2,273
-------- -------- -------- --------
Total deposits (1,067) 3,032 (47) 1,918
Borrowings:
FHLB advances 543 (1,397) (13) (867)
Securities sold under
agreements to repurchase (165) (18,098) 65 (18,198)
Promissory note payable (20) (567) 7 (580)
Senior notes - - - -
-------- -------- -------- --------
Total net change in expense
on interest-bearing
liabilities (709) (17,030) 12 (17,727)
-------- -------- -------- --------
Change in net interest income $ (6,870) $ 12,498 $ (1,393) $ 4,235
======== ======== ======== ========
</TABLE>
32
<PAGE>
Interest Income. Total interest and dividend income decreased by $41.6
million or 22.0% during the year ended December 31, 1998 as compared to the year
ended December 31, 1997. Total interest and dividend income decreased by $33.9
million or 28.5% during the six months ended December 31, 1997, as compared to
the same period in the prior year, and decreased by $13.5 million or 5.7% during
the year ended June 30, 1997 compared to 1996. Interest income on loans
receivable declined $7.5 million or 7.2% during the year ended December 31, 1998
as compared to the year ended December 31, 1997. Interest income on loans
receivable decreased by $3.4 million or 6.4% during the six months ended
December 31, 1997, as compared to the same period in the prior year, and
increased by $11.9 million or 12.4% during the year ended June 30, 1997 compared
to 1996. The decrease in interest income on loans during both the year ended
December 31, 1998 and the six months ended December 31, 1997 comparative periods
was due to a decline in the average yield earned on the Company's loan portfolio
of 1.74% in the twelve month comparative periods and 56 basis points in the six
month comparative periods. This decline in the average yield reflected, in part,
the discontinuance of the Company's third-party automobile loan purchase
activity, which generally carried higher yields than traditional real estate
secured loans. The increase in interest on loans receivable during the year
ended June 30, 1997 as compared to June 30, 1996 was primarily due to an
increase in the average balance of loans outstanding of $174.2 million. During
the year ended June 30, 1997, prior management significantly increased its
originations of third-party automobile loans and continued its emphasis on the
origination and purchase of commercial real estate loans.
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) declined by
$34.1 million or 40.4% and $30.5 million or 46.3% during the year ended December
31, 1998 and the six months ended December 31, 1997, respectively, as compared
to the same periods in the prior years. During the year ended June 30, 1997,
interest income on securities and other interest earning assets declined $25.4
million or 18.1%. The decline in interest income on such investments during the
twelve and six month comparative periods and during the year ended June 30, 1997
was primarily due to the decreases in the average balance of such investments of
$671.3 million, $1.1 billion and $401.4 million during each respective
comparative period. During the year ended June 30, 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 six months ended December 31, 1997 and in
connection with the Private Placement and the Redemption, new management of the
Company determined that its remaining CMO portfolio was "other than temporarily
impaired" in accordance with SFAS No. 115 and, pursuant to GAAP, wrote-down the
portfolio by $54.7 million and sold $865.1 million of its COFI-based CMOs.
Interest Expense. Total interest expense decreased by $44.6 million or
32.5% and $32.7 million or 35.4% during the year ended December 31, 1998 and the
six months ended December 31, 1997, respectively, as compared to the same
periods in the prior years. Total interest expense
33
<PAGE>
decreased by $17.7 million or 9.5% during the year ended June 30, 1997 compared
to 1996. Interest expense on deposits is the largest component of the Company's
interest-bearing liabilities. Interest expense on deposits declined by $7.8
million or 9.5% and $547,000 or 1.3% during the year ended December 31, 1998 and
the six months ended December 31, 1997, respectively, when compared to the same
periods in prior years. During the fiscal year ended June 30, 1997, interest
expense on deposits rose $1.9 million or 2.4%. Average balance declines of
interest-bearing deposits in both the twelve and six month comparative periods,
coupled with declines in the costs of those funds, led to the declines in
interest expense noted in those periods. During fiscal year ended June 30, 1997,
average balance of interest-bearing deposits rose $46.3 million while the rates
paid remained relatively stable causing a corresponding increase in interest
expense during the year.
Interest expense on FHLB advances declined $31.5 million or 80.7% and
$18.3 million or 56.7% during the year ended December 31, 1998 and the six
months ended December 31, 1997 due to the 75.9% and 60.3% respective decline in
the average balance of those borrowings, when compared to the same periods in
the prior years. Similarly, interest expense on reverse repurchase agreements
declined $11.2 million or 94.3% and $16.4 million or 88.8% during the twelve and
six month comparative periods. During the fiscal year ended June 30, 1997,
interest expense on reverse repurchase agreements declined by $18.2 million or
39.2% and interest expense on FHLB advances declined by $867,000 or 1.5%. The
significant declines in interest expense during all of the above comparative
periods is due to the strategic balance sheet restructuring begun by the Company
after the Private Placement and the Redemption and continuing through December
31, 1997. During this period, the Company began to reduce its securities
holdings through periodic bulk sale transactions and utilized those proceeds to
pay off its reverse repurchase agreements and pay down FHLB advances. Prior to
this time, the Company's strategy had been to finance the purchase of
mortgage-backed and related securities primarily through FHLB borrowings and
reverse repurchase agreements.
During the periods presented, interest expense on notes payable
consisted of interest paid on a promissory note payable to the mother of the
Selling Stockholders and, since September 8, 1997, interest accrued with respect
to the Senior Notes. Interest expense on the promissory note amounted to
$108,000, $1.0 million and $1.6 million during six months ended December 31,
1997 and years ended June 30, 1997 and 1996, respectively. On September 8, 1997,
in connection with the closing of the Private Placement and the Redemption, the
Company issued $80.0 million of the Senior Notes (which are due in September
2004 and bear interest at the rate of 11.0% payable semi-annually) and prepaid
the promissory note held by the mother of the Selling Stockholders at a price
equal to the principal amount thereof plus accrued and unpaid interest thereon.
Interest expense and amortization of issuance costs on the Senior Notes (which
began to accrue on September 8, 1997) amounted to $9.5 million and $3.1 million
during the year ended December 31, 1998 and six months ended December 31, 1997,
respectively.
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
34
<PAGE>
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 loan's 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 Bank to recognize additions to its
allowance based upon their judgments about information available to them at the
time of their examination.
The Company established provisions for loan losses of $1.5 million,
$25.6 million, $28.4 million and $5.1 million during the year ended December 31,
1998, the six months ended December 31, 1997 and the years ended June 30, 1997
and 1996, respectively. During such respective periods, loan charge-offs (net of
recoveries) amounted to $1.3 million, $16.5 million, $20.2 million and $6.5
million. The $25.6 million and $28.4 million provisions established during the
six months ended December 31, 1997 and the year ended June 30, 1997 were
intended primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables. At December 31, 1997,
the Company's portfolio of such indirect automobile loans had been sold. See
"Business--Lending Activities--Consumer Loans."
Noninterest Income. Total noninterest income (loss) amounted to $14.8
million, $(107.1) million, $(17.1) million and $10.3 million during the year
ended December 31, 1998, the six months ended December 31, 1997 and the years
ended June 30, 1997 and 1996, 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 year ended June 30, 1997 and the six
months ended December 31, 1997 primarily related to losses incurred on the sale
of securities and the liquidation of related hedges. During the three month
period ended September 30, 1997, such sales resulted in $125.5 million of
losses. These sales continued through December 31, 1997 as new management
dramatically restructured the balance sheet of the Company. Specifically, during
the quarter ended September 30, 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. The market for fixed income securities improved during
the three month period ended December 31, 1997 and continued sales from this
portfolio resulted in a gain of $12.7 million reducing the loss to $112.8
million for the six months ended December 31, 1997. Net gains
35
<PAGE>
on sale of assets recognized during the year ended December 31, 1998 of $932,000
came as a result of the Company's sale of COFI-based CMOs, mortgages and
consumer loans. The Company routinely sells mortgages and other longer-term
loans with and without servicing released in order to manage interest-rate risk.
See "--Asset and Liability Management." The noninterest income recognized during
the year ended December 31, 1998 is reflective of the core noninterest income
potential of the Company as this was the first year of operations occurring
subsequent to the balance sheet restructuring discussed above.
Noninterest Expense. Total noninterest expense declined $3.2 million or
7.4% during the year ended December 31, 1998 as compared to the year ended
December 31, 1997. Similarly, total noninterest expense decreased by $6.7
million or 22.8% during the six months ended December 31, 1997, as compared to
the same period in the prior year, while increasing $13.8 million or 39.0%
during the year ended June 30, 1997. During the year ended June 30, 1997, the
increase in noninterest expense came as a result of the one-time special SAIF
assessment, as discussed below. In addition, during the year ended June 30,
1997, the Company's provision for uninsured risk and losses increased by $1.9
million or 140.5% due to the Company's reassessment of its potential liability
with respect to the FDIC Case (as defined and discussed under "Business--Legal
Proceedings"). The decrease in noninterest expense during the year ended
December 31, 1998 as compared to the year ended December 31, 1997 was due
primarily to nonrecurring charges associated with the Private Placement. The
decrease in noninterest expenses attributable to the Private Placement was
partially offset by increases in compensation and employee benefits during the
year ended December 31, 1998 resultant from the Company's strategic development
of a commercial business lending line of business. The decrease in noninterest
expense during the six months ended December 31, 1996 was primarily due to the
absence of the $10.3 million (before applicable tax benefits) special assessment
which was recognized by the Company in September 1996 in connection with the
recapitalization of the SAIF. Pursuant to legislation effective September 30,
1996, all SAIF member institutions were required to pay a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995. This legislation resulted in the recapitalization of the SAIF
and, consequently, during the fourth calendar quarter of 1996, the FDIC lowered
the Bank's assessment rates. See "Regulation--Regulation of Federal Savings
Institutions--FDIC Assessments."
Provision (Benefit) for Income Taxes. During the year ended December
31, 1998, the six months ended December 31, 1997 and the years ended June 30,
1997 and 1996, the Company recognized $10.3 million, $(44.1) million, $(11.9)
million and $4.9 million, respectively, of provisions (benefits) for income
taxes. At December 31, 1998, the Company had approximately $19.1 million and
$176.4 million of net operating loss carryforwards available for federal and
state income tax purposes, respectively. The state net operating loss
carryforwards expire in varying amounts between 2006 and 2013. The federal net
operating loss carryforwards expire in 2013. At December 31, 1997 and 1998, a
valuation allowance for all available state net operating loss carryforwards was
established as it was determined to be more likely than not that the benefit of
the deferred tax asset would not be realized. Historically, the Company has
generated income for
36
<PAGE>
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. See
"--Taxation" and Note 15 of the Notes to Consolidated Financial Statements.
Asset and Liability Management
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Management Committee, which is comprised of the
Chief Executive Officer, the President, the Chief Financial Officer, the
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 monthly or as needed to
review, among other things, the sensitivity of the Company's assets and
liabilities to interest rate changes, the book and market values of assets and
liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities and prepayments
of loans, investments and borrowings. The Asset/Liability Management Committee
also approves and establishes pricing and funding decisions with respect to
overall asset and liability composition and reports to the full Board of
Directors.
One of the primary goals of the Company's Asset/Liability Management
Committee is to effectively increase the duration of the Company's liabilities
and/or effectively contract the duration of the Company's assets so that the
respective durations are matched as closely as possible. This duration
adjustment can be accomplished either internally by restructuring the Company's
balance sheet, or externally by adjusting the duration of the Company's assets
and/or liabilities through the use of hedging contracts, such as interest rate
swaps, caps and floors. Although the Company has in the past hedged its interest
rate exposure externally through the use of various hedging contracts, the
Company's current strategy is to hedge internally through the use of core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments and FHLB advances, together with an emphasis on investing in
shorter-term or adjustable rate assets which are more responsive to changes in
interest rates, such as adjustable rate U.S. Government agency mortgage-backed
securities, short-term U.S. Government agency securities and commercial and
consumer loans. The foregoing strategies are more fully described below.
A commonly used method for evaluating interest rate risk includes an
analysis of the 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
37
<PAGE>
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. Normally, 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. Due to differences between
institution's balance sheets, these variances may affect institutions
differently. 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.
38
<PAGE>
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
December 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) $473,474 $ 277,424 $269,513 $193,037 $174,522 $1,387,970
Securities (3) 324,859 83,496 103,307 31,809 10,445 553,916
Other interest-earning assets (4) 97,573 -- -- -- -- 97,573
-------- --------- -------- -------- -------- ----------
Total $895,906 $ 360,920 $372,820 $224,846 $184,967 $2,039,459
======== ========= ======== ======== ======== ==========
Interest-bearing liabilities:
Deposits (5):
Money market and NOW
accounts $ 30,117 $ 36,581 $ 66,466 $ 40,455 $ 74,061 $ 247,680
Passbook accounts 2,611 7,832 16,723 12,389 35,408 74,963
Certificates of deposit 345,484 611,773 232,099 23,354 605 1,213,315
Borrowings:
FHLB advances (6) -- 155,000 25,000 40,000 33 220,033
Senior notes -- -- -- -- 80,000 80,000
-------- --------- -------- -------- -------- ----------
Total $378,212 $ 811,186 $340,288 $116,198 $190,107 $1,835,991
======== ========= ======== ======== ======== ==========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities $517,694 $(450,266) $ 32,532 $108,648 $ (5,140) $ 203,468
======== ========= ======== ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $517,694 $ 67,428 $ 99,960 $208,608 $203,468 $ 203,468
======== ========= ======== ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets 24.32% 3.17% 4.70% 9.80% 9.56% 9.56%
===== ==== ==== ==== ==== ====
</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 mature and fixed-rate loans and securities are included in the
periods in which they are scheduled to be repaid, based on scheduled
amortization, in each case as adjusted to take into account estimated
prepayments based on, among other things, historical performance.
(2) Balances have been reduced for nonaccrual loans.
(3) Does not include unrealized gain on securities classified as available for
sale.
(4) Comprised of cash and due from banks, deposits with other banks and FHLB
stock.
(5) Adjusted to take into account assumed annual decay rates which were applied
against money market, NOW and passbook accounts.
(6) Maturity based on call date rather than actual maturity date.
39
<PAGE>
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Company.
The following tables set forth for the indicated dates the estimated
dollar and percentage change in the Company's net interest income over a four
quarter period and NPV based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Net Interest Income Net Interest Income
(next four quarters) (next four quarters)
- ---------------------------- ------------------------------------------ ---------------------------------------------
Estimated Change Estimated Change
Change (in Basis Points) in From Base % Change from Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
- ---------------------------- ------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
+300 ($9,058) (14) ($1,985) (4)
+200 (5,494) (8) (947) (2)
+100 (1,259) (2) (341) (1)
0 66,895(2) - 47,508(2) -
-100 14,141 21 129 -
-200 17,474 26 467 1
-300 15,924 24 2,408 5
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
NPV NPV
---------------------------------------------- ----------------------------------------------
Estimated Change Estimated Change
Change (in Basis Points) in From Base % Change From Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
- --------------------------- -------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
+300 ($58,018) (43) ($38,218) (25)
+200 (34,595) (26) (20,141) (13)
+100 (13,739) (10) (7,101) (5)
0 134,252 - 153,545 -
-100 3,755 3 2,606 2
-200 1,973 1 (2,235) (1)
-300 (6,771) (5) (8,469) (6)
</TABLE>
- -------------------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) The base net interest income is an estimate made by utilizing yields and
rates on assets and liabilities in the existing balance sheet as of the
dates shown adjusted for assumptions based on, among other things, future
loan and deposit changes and estimated loan prepayment speeds.
At December 31, 1998, the rate of change in net interest income is
affected by an increase in loan prepayment speeds, which is reinvested in lower
yielding short-term investments during down shocks. Also, lower rate-paying
deposit accounts such as passbooks, money market and NOW accounts do not drop
below 0% in 300 basis points down shocks. These factors cause the rate of change
to be relatively flat in the down shocks. Conversely, the rate of change in net
interest income in up shocks is affected by a decrease in loan prepayment speeds
while all deposit accounts are able to reprice fully in each 100 basis point
increment. The differences between December 31, 1997 and December 31, 1998 net
interest income in the base case are mainly due to the acquisition of two
financial institutions, increased loan growth, higher investment yields and
reduced cost of deposits and borrowings. The difference within the down shocks
is mainly due to December 31, 1998 down shocks taking into consideration the
higher prepayment speeds that would result from reductions in the already
relatively low interest rates that existed at that date.
The differences between December 31, 1997 and December 31, 1998 NPV in
the base case are mainly due to the goodwill (which is considered to have no
market value) that was booked in 1998 from the two acquisitions; and shorter
duration on deposit accounts as of December 31, 1998 reducing NPV; and net
income for 1998. The differences in NPV between the up shocks at December 31,
1998 versus December 31, 1997 is mainly due to the shorter duration of deposit
accounts.
41
<PAGE>
The model reflects only the effects of assumptions made by management
while running the different interest rate shocks. The only variables between the
different rate shocks are the interest rates and the prepayment speeds.
The prepayment assumptions used in the model are based on historical
and market estimates. Standard present value calculation methodology is used to
discount the estimated future cash flows of assets and liabilities at
appropriate discount rates. The market value for COFI-indexed CMOs is obtained
through the Bloomberg calculator designated by the OTS.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates are reasonable; however, the interest rate sensitivity of the Company's
assets and liabilities and the estimated effects of changes in interest rates on
the Company's net interest income and NPV could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which they are based.
The preceding discussion about the Company's risk management activities
includes "forward-looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
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
42
<PAGE>
money funds and short-term government agency securities. If the Company requires
funds beyond its ability to generate them internally, various forms of both
short and long-term borrowings provide an additional source of funds. At
December 31, 1998, the Company had $130 million in borrowing capacity under a
collateralized line of credit with the FHLB of Topeka, none of which was
outstanding as of such date. The Bank does not currently accept brokered
deposits as a source of liquidity, and does not anticipate a change in this
practice in the foreseeable future.
At December 31, 1998, the Company had outstanding commitments
(including unused lines of credit) to originate mortgage and non-mortgage loans
of $133.3 million. Certificates of deposit which are scheduled to mature within
one year totaled $961.4 million at December 31, 1998, and the Company did not
have borrowings that are scheduled to mature within the same period. 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 any maturing borrowings.
During the year ended December 31, 1998, the Company began making
interest payments on the Senior Notes, which were to be initially funded through
an interest reserve account established with an independent trustee and
subsequently through dividends from the Bank. The Senior Notes have an annual
debt service requirement of $8.8 million (or $4.4 million for each semi-annual
period). During the year ending December 31, 1999, the Company intends to fund
the interest payments scheduled to be made on March 1, 1999 and September 1,
1999 through dividends from the Bank.
Capital Resources. Federally insured savings institutions such as the
Bank are required to maintain minimum levels of regulatory capital. See
"Regulation--Regulation of Federal Savings Institutions--Regulatory Capital
Requirements." The following table reflects the Bank's actual levels of
regulatory capital and applicable regulatory capital requirements at December
31, 1998.
<TABLE>
<CAPTION>
Minimum Required Actual Excess
------------------------------- ------------------------------- -----------------------------
Percent Amount Percent Amount Percent Amount
-------------- --------------- -------------- -------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital 1.50% $ 31,218 7.61% $ 158,362 6.11% $ 127,144
Core capital (1) 3.00 62,448 7.63 158,786 4.63 96,338
Risk-based capital (2)(3) 8.00 106,669 13.08 174,398 5.08 67,729
</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.
43
<PAGE>
Inflation and Changing Prices
The Consolidated Financial Statements and related data presented have
been prepared in accordance with GAAP, 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.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's Notes to Consolidated Financial
Statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 with earlier application permitted. Management
does not anticipate that this Statement will have a material adverse impact on
the consolidated financial position or the future results of operations of the
Company.
Year 2000 Compliance
The Year 2000 could have a broad impact on the business environment in
which the Company operates due to the possibility that many computerized systems
across all industries will be unable to process information containing dates
beginning in the Year 2000. The Company has established an enterprise-wide
program to prepare its computer systems and applications for the Year 2000 and
is utilizing both internal and external resources to identify, correct and test
the systems for Year 2000 compliance. The Company had completed its
reprogramming as of
44
<PAGE>
December 31, 1998 and testing efforts will be substantially concluded by April
30, 1999. Further validation through testing will be conducted throughout
calendar year 1999.
The Company does not rely on in-house data processing or computer
programming for its main frame banking applications. The Company's primary data
processing vendor, AllTel, Inc., has a history of producing high quality banking
applications and has assured the Company that its core applications will be
capable of handling the Year 2000. The Company has been testing these
applications in its own environment to validate these assurances.
Because third party failures could have a material impact on the
Company's ability to conduct business, questionnaires have been sent to
substantially all of the Company's vendors and large commercial borrowers to
certify that plans are being developed to address the Year 2000 issue. The
returned questionnaires are currently being assessed by the Company, and are
being categorized based upon readiness for the Year 2000 issues and prioritized
in order of significance to the business of the Company. To the extent that
business-critical vendors do not provide the Company with satisfactory evidence
of their readiness to handle Year 2000 issues, contingency plans will be
developed. Furthermore, information has been provided to large commercial
borrowers regarding the potential business risks associated with the Year 2000
issue. The Company intends to make every reasonable effort to assess the Year
2000 readiness of these critical business partners and to create action plans to
address the identified risks.
The Company believes that it has substantially completed an assessment
of the Year 2000 compliance status of all its information technology and
non-information technology equipment as of December 31, 1998 and is now in the
process of addressing the Year 2000 compliance of such equipment.
Testing and remediation of all of the Company's systems and
applications is expected to incrementally cost approximately $500,000 in 1999,
excluding costs of Company employees involved in Year 2000 compliance
activities, from inception in calendar year 1997 through completion in calendar
year 1999. All estimated costs have been budgeted and are expected to be funded
by cash flows from operations.
The Company does not believe the costs and efforts related to the Year
2000 compliance project will be material to its financial position or results of
operations. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. Unanticipated failures by critical vendors
and large commercial borrowers, as well as the failure by the Company to execute
its own remediation efforts, could have a material adverse effect on the cost of
the project and its completion date. As a result, there can be no assurance that
these forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risk.
45
<PAGE>
BUSINESS
Lending Activities
General. As the Bank shifts its activities from those of a traditional
savings and loan to those generally associated with a commercial bank, it has
focused increasingly on the origination of commercial business loans within the
Oklahoma market. Because the amount of commercial loans that may be made by a
savings institution are limited to twenty percent of its total assets, the Bank
has chosen to convert to a national banking association in order to accommodate
the rapid growth of its commercial loan portfolio. See "Regulation--Regulation
of Federal Savings Institutions." It has pursued this market by adding
experienced lending officers with strong community ties and banking
relationships, many of whom have left regional or national banks in the growing
industry consolidation and are attracted by the Bank's relationship-oriented
approach. The Bank will continue its historical patterns of originating
residential and consumer loans through its own branch network and, in the case
of commercial real estate loans, through a network of real estate brokers,
mortgage bankers and unaffiliated financial institutions.
The following table presents information on the Bank's consolidated
loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial(1) $ 927,682 $ 646,539 $ 627,295 $ 594,151 $ 485,979 $ 388,002
Residential real estate 344,565 281,565 281,606 280,264 281,986 291,706
Consumer 101,738 38,717 114,925 146,107 40,408 18,391
Held for sale 16,188 7,133 1,433 841 830 14,156
----------- ----------- ----------- ----------- ----------- -----------
Total loans 1,390,173 973,954 1,025,259 1,021,363 809,203 712,255
Less:
Allowance for loan losses (27,901) (20,484) (11,435) (3,228) (4,593) (3,689)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net $ 1,362,272 $ 953,470 $ 1,013,824 $ 1,018,135 $ 804,610 $ 708,566
=========== =========== =========== =========== =========== ===========
</TABLE>
- -------------------------
(1) Includes loans secured by multi-family residential properties.
Loan Origination and Review. The lending activities of the Bank are
subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
direct customer solicitations, referrals from real estate brokers, mortgage
bankers, unaffiliated financial institutions, existing customers, walk-in
customers and advertising. In its present marketing efforts, the Bank emphasizes
its customized personal service, competitive rates, and an efficient
underwriting and approval process.
46
<PAGE>
The Bank has revised its underwriting procedures to streamline the
credit approval process. It historically utilized a loan committee review
procedure, which could take several weeks to approve a credit application. The
Bank's increasing emphasis on commercial and consumer loans and its desire to
meet customer needs require quicker response times. The Bank has implemented
procedures that rely, in the case of residential real estate and consumer loans,
on a credit scoring system and, in the case of commercial loans, on a peer or
senior officer approval process, depending on the size of the loan. The Bank has
also revised its credit review procedures to ensure the overall integrity of its
loan portfolio. Management believes its credit approval and review processes are
comparable to those used by other regional and national banks.
Commercial Business Loans. At December 31, 1998, the Bank's commercial
business loans amounted to $232.9 million or 16.8% of the total loan portfolio.
Management believes this lending segment affords the Bank the greatest
opportunity for market growth. At June 30, 1997, the Bank had no commercial
business loans. The portfolio increase results from the Bank's creation in 1998
of a new corporate lending unit and the addition of 38 commercial lending
officers and supporting staff. The added lending officers have an average of 18
years experience in the banking industry and most have strong community ties and
banking relationships.
Local's corporate lending activities are generally directed towards
small to medium size Oklahoma companies with annual sales up to $100 million.
Local's corporate lending division makes both secured and unsecured loans,
although the majority of such lending is done on a secured basis. The average
loan amount for new commercial business loans ranges from $1 to $3 million. Such
loans are generally secured by the receivables, inventory, equipment, and/or
general corporate assets of the borrowers. These loans are originated on both a
one year line of credit basis and on a fixed-term basis ranging from one to five
years. Commercial business loans generally have annual maturities and
prime-based interest rates.
The Bank imposes an in-house lending limit which is below the statutory
lending limit. While the OTS statutory limit is 15% of an institution's
unimpaired capital and surplus (or with respect to Bank, approximately $28.0
million at December 31, 1998), management of the Bank generally restricts single
loans to $15 million in size, but may have exposure to any single borrower up to
the legal lending limit.
Commercial lending entails different and significant risks when
compared to traditional thrift residential lending. These loans typically
involve large loan balances to single borrowers and payment is typically
dependent on the successful operation of the project or the borrower's business.
These loans are also more likely to be adversely affected by unfavorable
economic conditions. The Bank attempts to minimize its risk exposure by imposing
stringent underwriting standards and continually monitoring the operation and
physical condition of the collateral.
Commercial Real Estate Loans. Under prior management, the Bank
originated and purchased commercial real estate loans secured by properties
located throughout the United States.
47
<PAGE>
While new management expects to continue the origination and purchase of
commercial and multi-family residential loans throughout the United States, it
plans to emphasize the origination and purchase of loans secured by multi-family
and commercial real estate located within the State of Oklahoma and surrounding
states. The Bank recently added an experienced commercial real estate lender
with over 15 years of experience in the Oklahoma City market. As a result, the
Bank has expanded its origination of commercial real estate loans within its
local market area.
As of December 31, 1998, commercial real estate loans (which include
multi-family residential loans) amounted to $694.8 million or 50.0% of the
Bank's total loan portfolio. The Bank originates loans directly and through a
network of mortgage bankers and correspondent banks throughout the country with
whom the Bank has relationships. All originations and purchases undergo a
three-step underwriting and evaluation process. First, an initial review of the
loan is conducted by the originator to determine conformity to guidelines and
consistency with the Bank's lending philosophy. An indication of pricing and
terms may be issued in the case of loans which have already been originated.
Second, once the indication is accepted by the borrower and a completed
application submitted, a detailed underwriting is conducted in which both the
originator and the Bank's in-house appraiser conduct an onsite inspection and
analysis. Property valuations are performed by the Bank's staff as well as by
independent outside appraisers approved by the Bank's Board of Directors. The
Bank generally requires title, hazard and, to the extent applicable, flood
insurance on its security property. Rent rates are analyzed and compared to
market rents, reported occupancy is checked against evidence onsite,
environmental issues are identified and the appropriate level of investigation
is conducted and a final credit write-up is prepared. Finally, the Bank's
closing department reviews the totality of work, including completeness of
analysis and documentation, title searches, borrower background checks,
appraisal and environmental reports and other pertinent data. Only after these
three broad steps is a final approval and disbursement made.
The Bank originates both fixed-rate and adjustable-rate commercial real
estate loans. Fixed-rate commercial real estate loans generally have terms to
maturity of between five and ten years and amortize over a period of up to 30
years. Adjustable-rate commercial real estate loans have similar terms and
interest rates which generally adjust every six months, one-year, three years
and five years in accordance with a designated index (either the London
Interbank Offer Rate, the prime rate quoted in the Wall Street Journal or U.S.
Treasury rates).
Loan-to-value ratios on commercial real estate loans are generally
limited to a maximum of 80% for apartments and manufactured housing communities
(loans on real estate as distinguished from manufactured homes), 75% on
mini-storage units and multi-tenant warehouses, 70% for offices and 65% for
hotels and retail properties.
Single-Family Residential Real Estate Loans. At December 31, 1998, the
Bank's single-family residential mortgage loan portfolio amounted to $344.6
million or 24.8% of the total loan portfolio. All of the Bank's single-family
residential mortgage loans are secured by properties located in the State of
Oklahoma. The majority of the single-family residential loan portfolio
48
<PAGE>
consist of conforming loans (i.e., not insured or guaranteed by a federal
agency) with an average balance of below $100,000 per loan. The single-family
residential loan portfolio was originated through a centralized residential loan
origination center. The Bank intends to sell virtually all of its new single
family loan originations.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with market
conditions and underwriting standards established by the Bank. The Bank's
lending policies on single-family residential mortgage loans generally limit the
maximum loan-to-value ratio to 95% of the lesser of the appraised value or
purchase price of the property and generally all single-family residential loans
in excess of an 80% loan-to-value ratio require private mortgage insurance.
The Bank offers fixed-rate and adjustable-rate single-family
residential loans with terms of 15 to 30 years. Such loans are amortized on a
monthly basis with principal and interest due each month and customarily include
"due-on-sale" clauses, which are provisions giving the Bank the right to declare
a loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid.
Consumer Loans. Consumer loans totaled $101.7 million or 7.3% of the
total loan portfolio as of December 31, 1998 and consisted of home equity loans,
deposit secured loans, guaranteed student loans, automobile finance loans and
property improvement and personal loans. Local originates consumer loans bearing
both fixed and prime-based interest rates, primarily with terms of up to five
years, other than second mortgage loans which may have longer terms. Under the
Bank's home equity underwriting guidelines, loans are restricted to not more
than $100,000, and the loan-to-value may not exceed 100% at origination, but
this is not typical of most loans. Loans are originated directly through the
branch network. Management expects increases in the volume of consumer loans and
has directed advertising campaigns and new products toward this market segment,
as well as making internal changes at the branch level to increase customer
responsiveness.
Asset Quality
Loan Delinquencies. When a borrower fails to make a required payment on
a loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the 15th day after a
payment is due (30th day in the case of commercial loans), at which time a late
payment is assessed. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days (30 days in the case of commercial loans),
the loan and payment history are reviewed and efforts are made to collect the
loan. While the Bank generally prefers to work with borrowers to resolve such
problems, when it appears no other alternatives are available, legal action is
instituted.
49
<PAGE>
Nonperforming Assets. All loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, the Bank does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection efforts
are deemed sufficient to ensure full recovery. Consumer loans generally are
written down when the loan becomes over 120 days delinquent. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Changes in
Financial Condition from December 31, 1997 to December 31, 1998--Nonperforming
Assets and Allowance for Loan Losses."
Assets acquired through foreclosure and repossession are recorded at
estimated fair value, net of estimated selling costs at the date of foreclosure
or repossession. The values of assets acquired through foreclosure and
repossession are monitored by the Bank continually through sales and rental
activities, and by updated appraisals and other valuation methods when needed.
The allowance for losses on assets acquired through foreclosure and repossession
represents an amount which management believes will be adequate to absorb losses
from the disposition and/or revaluation of these assets. Additions or reversals
of the allowance for losses on assets acquired through foreclosure and
repossession are provided as an expense or a benefit, respectively, through the
provisions for uninsured risks and losses on assets acquired through foreclosure
and repossession in the accompanying Consolidated Statements of Operations. The
allowance for losses is charged or reduced as losses through sales or
revaluations are incurred.
Classified Assets. The Bank adheres to internal procedures and controls
to review and classify its assets. All assets are reviewed on a periodic basis.
If warranted, all or a portion of any assets exhibiting the characteristics of
risk associated with specific classifications are assigned those
classifications. To monitor loans and to establish loss reserves, the Bank
classifies its assets into the following five categories: pass, special mention,
substandard, doubtful, and loss. Under federal regulations, each insured savings
institution must classify its assets on a regular basis. In connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. Substandard assets
have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Special mention
assets is a category established and maintained for assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets classified as
substandard or doubtful require the institution to provide general allowances
for loan losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for loan
50
<PAGE>
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital up to certain amounts, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved.
Allowance for Loan Losses. The Bank has established valuation
allowances for estimated inherent losses in its loan portfolio by charging
earnings for estimated losses on loans, including the related accrued interest,
using a specific and percentage reserve method. The allowance for loan losses is
established and maintained through a periodic review and evaluation of various
elements which affect the loans' collectibility and any additional allowances
required result in provisions for loan losses.
The Bank's allowance for loan loss is assessed on a loan-by-loan basis
for all commercial loans and on a portfolio basis for residential and consumer
loans based on delinquency status. As described above, each individual
commercial loan is assigned a risk classification by the responsible loan
manager. Depending upon their risk classification, these loans are placed on a
review cycle either annually or quarterly. All loans with risk classifications
of substandard or doubtful are reviewed quarterly and all large loans are
reviewed at least annually by officers of the loan review department. These
officers are independent of the loan origination and underwriting process.
During this review, the appropriateness of the assigned risk classification is
assessed giving consideration to numerous factors including a review of
individual borrowers' financial status, credit standing, available collateral
and other relevant factors. On a quarterly basis, loss factors are applied to
the basic risk classifications to determine the allowance for loan loss. The
loss factors are established by management through consideration of historical
loss experience, regulatory guidance, as well as other elements likely to cause
estimated credit losses to differ from historical losses. Although the risk
classification and loss factor process set forth above is used as a discipline
in the establishment of the minimum allowance required, it is not a substitute
for sound judgment. Prevailing and anticipated economic conditions, portfolio
trends and other relevant factors are considered in management's assessment of
the overall adequacy of the allowance. These other relevant factors include (i)
change in lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices, (ii) changes in the nature and
volume of the portfolio, (iii) changes in the experience, ability and depth of
lending management and staff, (iv) change in the quality of the Bank's loan
review system and the degree of oversight by the institution's board of
directors, (v) the existence and effect of any concentration of credit and
changes in the level of such concentration and (vi) the effect of external
factors such as competition on the Bank's current portfolio.
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<PAGE>
Investment Activities
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and administered by the
Bank's Investment Committee. All transactions must be approved by the Investment
Committee and reported to the Board of Directors.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations, certain
time deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt securities
and other specified investments such as mortgage-backed and related securities.
The Bank invests in mortgage-backed and related securities, including
mortgage participation certificates, which are insured or guaranteed by U.S.
Government agencies and government sponsored enterprises. Mortgage-backed
securities (which also are known as mortgage participation certificates or
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus approximates
the term of the underlying mortgages.
The Bank's mortgage-backed and related securities include CMOs, which
include securities issued by entities which have qualified under the Internal
Revenue Code of 1986, as amended (the "Code"), as real estate mortgage
investment conduits ("REMICs"). CMOs and REMICs (collectively CMOs) have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by governmental agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by
FNMA, FHLMC or GNMA. In contrast to pass-through mortgage-backed securities, in
which cash flow is received pro rata by all security holders, the cash flow from
the mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating
the principal and interest cash flows from the underlying
52
<PAGE>
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
In late 1996 and in anticipation of the proposed sale of the Company,
prior management began reducing its securities, particularly its CMO holdings,
through periodic bulk sale transactions. During the year ended June 30, 1997,
the Bank sold $743.9 million of securities and recognized $29.6 million of
losses with respect to such sales. At June 30, 1997, the Bank'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 Bank had $32.0
million of unrealized losses with respect to its securities portfolio (net of
applicable tax benefits).
After the Company's purchase, new management determined that its CMO
portfolio was "other than temporarily impaired" and, in accordance with
generally accepted accounting principles ("GAAP"), wrote-down its remaining CMO
portfolio by $54.7 million. In addition, new management further reduced the
Bank's securities portfolio, particularly its COFI-based CMOs. See "Prospectus
Summary--The Company--Strategy for Growth" and Note 5 of the Notes to
Consolidated Financial Statements.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and advances from the FHLB of Topeka. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer-term basis for general business purposes.
Deposits. As of December 31, 1998, the Bank accepted deposits through
its 50 branch offices. Deposits are solicited on a regular basis directly
through the Bank's customer base and through various advertising media within
its market. The Bank offers several savings account and checking account plans
to its customers. Among savings account plans, the Bank offers basic savings,
short-term and long-term certificates of deposit, a variable rate IRA/Keogh and
regular IRAs and Keoghs. The Bank offers checking account plans that range from
a no-fee, no-interest plan to a variable-fee, bundled product plan that includes
services or products such as personalized checks, ATM cards, overdraft
protection, no annual fee Visa/MasterCard membership, safe deposit box
discounts, cash management, lock box services and assistance with travelers
checks.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank, on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations.
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<PAGE>
The Bank does not advertise for deposits outside its local market area
or utilize the services of deposit brokers.
As of December 31, 1998, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $138.6 million. The following table presents the maturity of these
time certificates of deposit at such date:
December 31, 1998)
----------------------
(Dollars In Thousands
3 months or less $ 41,389
Over 3 months through 6 months 28,637
Over 6 months through 12 months 47,371
Over 12 months 21,208
--------
$138,605
========
Borrowings. The Bank is a member of the FHLB and is authorized to apply
for secured advances from the FHLB of Topeka. See "Regulation." The Bank uses
advances from the FHLB to repay borrowings, meet deposit withdrawals and expand
its lending and short-term investment activities.
In the Private Placement, the Company issued $80.0 million of senior
notes which are due in September 2004 and which bear interest at the rate of
11.0%, payable semi-annually. Unamortized debt issuance costs of approximately
$3.7 million at December 31, 1998 was capitalized and is included in Other
Assets as of such date. For additional information, see Note 12 of the Notes to
Consolidated Financial Statements.
Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Bank is permitted
to make an unlimited investment in one or more operating subsidiaries, which are
permitted to engage only in activities that the Bank may undertake directly. As
of December 31, 1998, the Bank maintained 5 direct or indirect subsidiaries,
consisting of Local Acceptance Company ("Local Acceptance"), Star Financial
Services Corporation ("Star Financial"), Local Mortgage Corporation ("Local
Mortgage"), Local Securities Corporation ("Local Securities"), and Star
Properties, Incorporated ("Star Properties"). At December 31, 1998, the Bank's
investment in its subsidiaries amounted to $2.6 million in the aggregate.
54
<PAGE>
Local Acceptance and Star Financial previously operated as indirect
automobile finance subsidiaries. As discussed herein, the loan origination
infrastructure of Local Acceptance and Star Financial has been dismantled and
the automobile receivables have been sold.
Local Mortgage was organized in 1995 as a Connecticut corporation for
the primary purpose of originating commercial real estate loans. Local Mortgage
is licensed to do business in Connecticut, Illinois and Texas. Local Mortgage's
offices in Connecticut, Illinois and Texas are currently closed (and the
corporation is currently inactive).
Star Properties was organized in 1981 as an Oklahoma corporation for
the purpose of acquiring, maintaining and managing real estate to be used for
offices and related facilities of the Bank, as well as other fixed assets. Star
Properties leases to the Bank, pursuant to certain written agreements, office
furniture and fixtures at the Bank's branch offices. Star Properties has not
made any purchases of real estate or office furniture and fixtures since 1985.
Offices and Other Material Properties
The following table provides information on the Company's consolidated
branch network as of December 31, 1998:
<TABLE>
<CAPTION>
Branch Office Information Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1998 December 31, 1998
----------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Oklahoma City Metro:
Bethany Office Owned - 2,650 $45,742 $ 75
7723 N.W. 23rd Street
Bethany, OK 73008
Corporate Headquarters Owned - 70,000 48,521 5,139
3601 N.W. 63rd
Oklahoma City, OK 73116
Crown Heights Office Owned - 1,800 20,566 149
4716 North Western
Oklahoma City, OK 73118
Downtown Office Leased $1,358.00/mo. 1,164 15,846 7
100 West Park Avenue 5 Years
Oklahoma City, OK 73102 Expires 1/31/04
55
<PAGE>
<CAPTION>
Branch Office Information Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1998 December 31, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Edmond Office Leased $1,530/mo. 2,160 $30,666 $ 88
301 South Bryant 10 Years
Edmond, OK 73034 Expires 1/31/2008
Santa Fe Office - Note(1) - - - - 196
412 S. Santa Fe
Edmond, OK 73003
May Avenue Office Owned - 14,090 71,673 305
5701 North May Avenue
Oklahoma City, OK 73112
Midwest City Office Owned - 5,500 83,385 412
414 North Air Depot
Midwest City, OK 73110
Moore Office Owned - 1,500 18,496 62
513 Northeast 12th Street
Moore, OK 73160
Norman Office Leased Rent-See Note(2) 2,740 60,397 575
2403 West Main Street 10 Years
Norman, OK 73069-6499 Expires 3/31/05
Norman Office - Note(6) Owned - 5,000 - 170
2201 West Main Street
Norman, OK 73069-6499
Penn South Office Owned - 2,650 44,393 52
8700 South Pennsylvania
Oklahoma City, OK 73159
Portland Office Owned - 1,800 40,057 221
1924 North Portland
Oklahoma City, OK 73107
Quail Creek Office Owned - 3,250 29,959 629
12241 North May Avenue
Oklahoma City, OK 73120
Springbrook Office Owned - 5,200 43,104 282
6233 N.W. Expressway
Oklahoma City, OK 73132
Yukon Office Leased $1,500/mo. 1,500 18,783 4
1203 Cornwell 5 Years
Yukon, OK 73099 Expires 6/30/99
56
<PAGE>
<CAPTION>
Branch Office Information Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Tulsa: Status Lease Terms (Square Feet) 12/31/1998 December 31, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Downtown Office Leased $2,418.00/mo 3,316 $13,099 $ 4
111 West 5th Street 5 Years
Tulsa, OK 74103 Expires 01/31/04
Note(3)
Harvard Office Leased $2,291.67/mo 2,500 42,608 89
3332 East 51st Street Note(4)
Tulsa, OK 74135 5 Years
Expires 5/31/03
Hudson Office Leased $6,676.17/mo. 6,374 24,417 -
5801 East 41st Street Note(4)
Tulsa, OK 74135 5 Years
Expires 6/30/99
Lewis Office Leased Rent: See Note(5) 4,685 20,967 -
2250 East 73rd Street 5 Years
Tulsa, OK 74136 Expires 11/30/01
Memorial Office Leased $3,060/mo. 3,060 25,682 34
8202 East 71st Street 5 Years
Tulsa, OK 74133 Expires 5/31/02
Yale Office Leased $1,300/mo. 2,400 63,398 -
2118 South Yale 5 Years
Tulsa, OK 74114 Expires 2/28/00
Other Locations:
Ardmore Office Owned - 7,066 38,933 133
313 W. Broadway
Ardmore, OK 73401
Broken Arrow Office Leased $2,020/mo. 2,424 25,891 6
3359 South Elm Place 3 Years
Broken Arrow, OK 74012 Expires 5/31/99
Chandler Office Owned - 1,600 16,297 141
1804 East First Street
Chandler, OK 74834
Chickasha Office Owned - 3,143 41,855 102
628 Grand Avenue
Chickasha, OK 73018
Claremore Office Owned - 15,100 52,079 865
1050 Lynn Riggs Blvd.
Claremore, OK 74017
57
<PAGE>
<CAPTION>
Branch Office Information Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1998 December 31, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Clinton Office Owned - 2,000 $34,882 $ 49
1002 West Frisco
Clinton, OK 73601
Commerce Office Owned - 4,608 21,180 696
101 N. Mickey Mantle Blvd.
Commerce, OK 74339
Duncan Downtown Office Owned - 2,500 46,051 112
1006 West Main Street
Duncan, OK 73533
Duncan North Office Owned - 3,000 26,370 84
2210 North Highway 81
Duncan, OK 73533
Elk City Office Owned - 10,300 52,847 192
200 Broadway
Elk City, OK 73644
Grove Office Owned - 8,300 25,770 1,339
100 East Third
Grove, OK 74344
Lawton Downtown Office Leased $5,156/mo. 5,200 81,893 -
1 S. W. 11th Street 10 Years
Lawton, OK 73501 Expires 3/31/03
Lawton Mall Office Leased $2,744.61/mo. 3,400 21,517 83
#10 Central Mall 10 Year Extension
Lawton, OK 73501 Expires 6/30/04
Lawton Financial Centre Owned - 25,900 58,344 2,919
6425 NW Cache Road
Lawton, OK 73505
Lawton Lee Blvd. Owned - 12,000 65,689 1,129
1420 West Lee Blvd.
Lawton, OK 73501
Lawton Cache Road Office Leased $2,500/mo. 3,000 14,754 50
2601 Cache Road 25 Years
Lawton, OK 73505 Expires 5/01/05
Lindsay Office Owned - 1,200 19,441 16
420 South Main
Lindsay, OK 73052
Miami Office Owned - 7,410 34,860 887
123 East Central
Miami, OK 74354
58
<PAGE>
<CAPTION>
Branch Office Information Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1998 December 31, 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Monkey Island Office - Note(1) Leased $2,625/mo. 3,600 $ - $ -
Rt 3, Box 1133, Hwy 125 5 Years
Monkey Island, OK 74331 Expires: 4/15/04
Muskogee Office Leased $3,200/mo. 3,400 26,659 -
2401 East Chandler 5 Years
Muskogee, OK 74403 Expires 7/31/03
Owasso Office Owned - 1,100 15,473 84
201 East 2nd Street
Owasso, OK 74055
Pauls Valley Office Owned - 2,280 22,562 95
700 West Grant
Pauls Valley, OK 73075
Purcell Office Leased $600/mo. 722 16,153 -
422 West Main 2 Years
Purcell, OK 73080 Expires 7/31/99
Sand Springs Office Leased $2,167.50/mo. 3,214 41,285 1
800 East Charles Page Blvd. 10 Years
Sand Springs, OK 74063 Expires 3/31/03
Springs Village Leased $1,368.50/mo. 1,642 15,238 2
3973 South Highway 97 3 Years
Sand Springs, OK 74063 Expires 5/31/99
Shawnee Office Owned - 2,650 30,947 78
2512 North Harrison
Shawnee, OK 74801
Sulphur Office Owned - 3,000 17,320 74
2009 West Broadway
Sulphur, OK 73086
Sapulpa Office Owned - 1,300 24,353 466
911 East Taft
Sapulpa, OK 74066
Weatherford Office Owned - 3,000 15,672 100
109 East Franklin
Weatherford, OK 73096
</TABLE>
- -------------------------
(1) These branches are currently under construction. The Monkey Island
branch is scheduled to open in April 1999.
(2) Monthly rent derived as follows: $4,000.00 (1st five years) and
$4,200.00 (2nd five years).
59
<PAGE>
(3) Monthly rent derived as follows: $2,418.00 (from 01/01/99 to 01/31/01);
$2,556.00 (from 02/01/01 to 01/31/03) and $2,695.00 (from 02/01/03 to
01/31/04).
(4) Subject to rent increases each year on July 1.
(5) Monthly rent derived as follows: $3,768 (1st year); $4,003.50 (2nd
year); $4,239 (3rd year); $4,474.50 (4th year) and $4,710 (5th year).
(6) This branch is scheduled for closure in early 1999.
Legal Proceedings
General. The Company and the Bank are involved in two significant legal
proceedings. The first legal proceeding is pending between the Bank and the FDIC
and concerns claims and liabilities arising out of an Assistance Agreement which
was entered into by the Bank in conjunction with its acquisition of a
predecessor institution during 1989 (the "FDIC Case"). The second legal
proceeding is pending between the Company and the Selling Stockholders, prior to
the Redemption in September 1997 pursuant to the terms and conditions of the
Redemption Agreement, and concerns certain disputes and claims which have arisen
with regard to the terms and conditions of the Redemption Agreement ("Redemption
Agreement Case"). Each of these legal proceedings is discussed below.
FDIC Case. The Bank's predecessor entities entered into an Assistance
Agreement with the Federal Savings and Loan Insurance Corporation ("FSLIC"), the
former government agency which administered the fund which previously insured
all savings bank deposits, in December 1989 ("Assistance Agreement"). Federal
law subsequently abolished the FSLIC and established a fund to assume all
reserves, assets, debts, obligations and other liabilities of the FSLIC. The
FDIC manages that fund and accordingly, assumed all of FSLIC's rights and
obligations under the Assistance Agreement.
In 1996, the Bank filed a lawsuit against the United States in the
United States Court of Federal Claims in which it asserted that the United
States had breached the terms of the Assistance Agreement and other related
agreements by, among other things, pursuing and attaining the enactment of
Section 13224 of the Omnibus Budget Reconciliation Act of 1993 ("OBRA"). Section
13224 of OBRA changed certain federal income tax laws that had provided
financial assistance and incentives to the Bank in connection with the
Assistance Agreement (and possibly certain related agreements). In the lawsuit,
the Bank seeks to recover for the loss of these tax benefits and for certain
other claims relating to OBRA (the "FDIC Claim").
Under the provisions of the Assistance Agreement, the FDIC is entitled
to receive payments from the Bank for certain portions of tax benefits
attributable to the acquired net operating loss carry forwards and other tax
benefits which were realized by the Bank from certain items for which the
FSLIC/FDIC provided assistance to the Bank under the Assistance Agreement. The
FDIC has filed a counterclaim against the Bank in the FDIC Case ("FDIC
Counterclaim") claiming that the Bank owes the FDIC a substantial amount of
money with regard to the tax benefits realized by the Bank for which it has
failed to make payment to the FDIC pursuant to the terms of the Assistance
60
<PAGE>
Agreement ("Tax Benefits Payment"). Management, after consultation with legal
counsel and based on available proceedings to date, has determined that the Bank
will have some significant liability to the FDIC with respect to the FDIC
Counterclaim. At December 31, 1998, the Company estimated this liability to be
approximately $13 million, which has been reserved and is included in other
liabilities in the Consolidated Statements of Financial Condition included
herein (the "FDIC Reserve Amount").
The Company believes that as of December 31, 1998, the FDIC's estimate
of this liability was approximately $23.0 million. Pursuant to the terms of the
Redemption Agreement, the Selling Stockholders have agreed to indemnify the
Company with respect to the Assistance Agreement to the extent the Company is
found to be liable to the FDIC on the FDIC Counterclaim for the Tax Benefits
Payment in an amount in excess of the FDIC Reserve Amount. As an express term of
the Redemption Agreement, upon consummation of the Redemption, the Company
deposited $10 million of the purchase price to be paid to the Selling
Stockholders for the Redemption of their stock into an escrow account to be
available for such payment by the Selling Stockholders of the FDIC Counterclaim,
if necessary.
Since the Selling Stockholders have ultimate liability on the FDIC
Counterclaim for the Tax Benefits Payment, the Redemption Agreement requires
that all actions taken by the Company with regard to the litigation of the FDIC
Case be consented to by the Selling Stockholders and that any settlement of the
FDIC Case and/or of the FDIC Counterclaim be mutually agreed to by the Company
and the Selling Stockholders. Because of the ongoing litigation between the
Company and the Selling Stockholders with regard to the Redemption Agreement and
certain positions taken by the Selling Stockholders concerning the resolution of
the FDIC Counterclaim, as described below, this requirement for mutual consent
has made it unfeasible for a settlement of the FDIC Case to be obtained, to
date.
In response to the Company's efforts to pursue a settlement proposal
with the FDIC, the Selling Stockholders recently informed the Company that they
believe that the more than $3.1 million amount, which is still owing by the FDIC
to the Bank as an additional assistance payment under the terms and provisions
of the Assistance Agreement (the "Remaining Assistance Amount"), should be
offset against any net liability ultimately owing to the FDIC on the FDIC
Counterclaim and thereby used to reduce the ultimate obligation of the Selling
Stockholders to pay any amount of that liability which is in excess of the FDIC
Reserve Amount. The Company vigorously disputes the position taken by the
Selling Stockholders in this regard as the amount of the liability reflected in
the FDIC Reserve Amount was determined without regard to (or any corresponding
credit for) the FDIC Remaining Assistance Amount receivable and thus the
purchase price which was paid by the Company to the Selling Stockholders was
determined on the basis of a stockholders' equity which included the value of
this Remaining Assistance Amount receivable of the Company. As a result, the
Company has sought to amend its complaint in the Redemption Agreement Case, as
described below, to add a cause of action seeking a declaratory judgment by the
court that the Company is entitled to receive the payment of the Remaining
Assistance Amount and that the
61
<PAGE>
Selling Stockholders are not entitled to receive the economic benefit of
offsetting that sum against their indemnity obligation. Settlement discussions
of the FDIC Case may be delayed until that matter is resolved.
Redemption Agreement Case. The Company has filed a lawsuit against the
Selling Stockholders in the United States District Court for the Western
District of Oklahoma pertaining to certain disputes and issues which have arisen
under the Redemption Agreement. Initially, the lawsuit was filed by the Company
in order to collect amounts which the Selling Stockholders owe to the Company
pursuant to the Redemption Agreement with regard to excess losses experienced by
the Company in the liquidation of the Company's hedging contracts which the
Selling Stockholders are required to pay for pursuant to the terms and
provisions of the Redemption Agreement. Subsequently, a cause of action was
added to that lawsuit in order to have the court appoint an arbitrator to
resolve disagreements between the Company and the Selling Stockholders as to the
final closing date balance sheet of the Company. The final closing balance sheet
was needed in order to be able to finally determine the "Adjusted Closing
Equity" of the Company, as defined, as of the closing date of the Redemption,
and thus calculate the purchase price adjustment which the Redemption Agreement
requires be made based on that Adjusted Closing Equity.
Pursuant to the Redemption Agreement, if the Company's unaudited
consolidated stockholders' equity on the closing date of the Redemption (after
adding back to total stockholders' equity, as determined on the final closing
date balance sheet, certain amounts specified in the Redemption Agreement) i.e.
the "Adjusted Closing Equity," is determined to be less than $144.5 million,
then the purchase price paid to the Selling Stockholders would be reduced by the
amount of such shortfall and the Selling Stockholders would, in such event, have
to pay to the Company the amount of such shortfall. Five million dollars of the
purchase price to be paid to the Selling Stockholders by the Company for the
Redemption of their stock was deposited by the Company into an escrow account to
be available to pay any amount that might be owing by the Selling Stockholders
to the Company for such purchase price adjustment. If, on the other hand, the
Adjusted Closing Equity is finally determined to be greater than $144.5 million,
then the purchase price payable by the Company to the Selling Stockholders for
the redemption would be increased by the amount of such excess, and the Company
would be required to pay the Selling Stockholders such excess amount.
The Company and Selling Stockholders were unable to agree on the amount
of total stockholders' equity in the closing date balance sheet prepared by the
Company and, in accordance with the procedures set forth in the Redemption
Agreement, those disagreements were referred to binding arbitration before an
independent certified public accountant who was ultimately designated for that
purpose by the United States District Judge presiding over the Redemption
Agreement Case. The arbitrator rendered his decision to the court and the
parties on September 18, 1998 determining the amount of the total stockholders'
equity in the final closing date balance sheet of the Company as of September 8,
1997. If, upon final determination by the court, the Adjusted Closing Equity is
calculated on the basis of the amount of total stockholders' equity as
determined by the arbitrator,
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<PAGE>
the Company would anticipate that it would be obligated to pay an amount of less
than $400,000 to the Selling Stockholders as additional purchase price under the
Redemption Agreement. However, because of the positions taken by the Selling
Stockholders (i) in defense of the Company's claim against them for recovery of
the excess open hedges losses, and (ii) with regard to their entitlement to
receive the economic benefit of the Remaining Assistance Amount, as discussed
above, the Company contends that there can be no proper final determination of
Adjusted Closing Equity until such time as all of these issues have been finally
resolved by the court in the Redemption Agreement Case and thus that there
should be no purchase price adjustment payment made, or related escrow account
distributed, to the Selling Stockholders until then.
In furtherance of that position, the Company has sought to amend its
complaint in the Redemption Agreement Case to add as causes of action (i) the
dispute as to whether the Company or the Selling Stockholders are entitled to
the economic benefit of the Remaining Assistance Amount and (ii) that the court
should make the final determination of Adjusted Closing Equity after all of the
interrelated disputes under the Redemption Agreement are fully resolved. The
Selling Stockholders have objected to the Company's proposed amendments to its
complaint and have moved for partial summary judgment seeking to calculate
Adjusted Closing Equity now in a manner that would result in a payment to them
by the Company of an amount of less than $400,000, as additional purchase price,
and the release to them of the $5 million escrow account. The Company has
vigorously contested the Selling Stockholders' motion for partial summary
judgment and their objections to the Company's amended complaint. As of this
date, the United States District Judge has not ruled upon either the Company's
or the Selling Stockholders' pending motions.
In the ordinary course of business, the Company is subject to other
legal actions and complaints. Management, after consultation with legal counsel,
and based on available facts and proceedings to date, believes the ultimate
liability, if any, arising from such legal actions or complaints, will not have
a material adverse effect on the Company's consolidated financial position or
future results of operations.
Competition and Segments
Competition. As reported by an independent statistical reporting
service, Local is currently the largest savings bank and fifth largest financial
institution in Oklahoma based on deposits at May 20, 1998. Its deposits
represent approximately five percent of the state's deposit market share.
Local's operating goal is to provide a broad range of financial services with a
strong emphasis on customer service.
Local has substantial competition in lending funds and attracting and
retaining deposits. The primary factors in competing for loans are the range and
quality of lending services offered, interest rates and loan origination fees.
In competing for commercial loans, Local's targeted growth segment, it believes
that the personal relationships between lending officers and commercial
borrowers is a primary factor. Competition for the origination of real estate
loans normally comes
63
<PAGE>
from other savings and loans, commercial banks, mortgage bankers, finance and
insurance companies. The primary factors in competing for deposits are the range
and quality of financial services offered, the ability to offer attractive rates
and the availability of convenient locations. There is direct competition for
deposits from credit unions and commercial banks and other savings and loans.
Additional significant competition for savings deposits comes from other
investment alternatives, such as money market funds, credit unions, and
corporate and government securities.
Local expects increased competition. For a variety of reasons including
legislative developments relating to interstate branching and the ownership of
financial institutions, the consolidation within the financial services industry
will likely continue. For Local, this trend means that the number of
locally-owned financial institutions will decrease and that the Bank will
increasingly compete against larger regional and national banks. While these
larger regional and national banks will likely attract the largest Oklahoma
businesses (sales over $100 million), Local believes that these large banks are
unable to provide the relationship-oriented, customer service that Local
provides its target customer base of small and medium-sized businesses,
professionals and other individuals. Although the Bank has been able to compete
effectively in its market areas to date, it can offer no assurance that the Bank
will continue to do so in the future, especially with the rapid changes
occurring within the financial services industry.
Segments. The Company operates as one segment. The operating
information used by the Company's chief operating decision maker for purposes of
assessing performance and making operating decisions about the Company is the
consolidated financial statements presented herein. Local has one active
operating subsidiary, Local Securities Corporation ("Local Securities"), which
is a registered broker-dealer under the Securities Exchange Act of 1934 and
provides retail investment products to customers of Local. While Local
Securities qualifies as a separate operating segment, it is not considered
material to the consolidated financial statements for the purposes of making
operating decisions and does not meet the 10% threshold for disclosure under
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosure About
Segments of an Enterprise and Related Information."
Personnel
As of December 31, 1998, the Company (on a consolidated basis) has 694
full-time employees and 133 part-time employees. The employees are not
represented by a collective bargaining agreement and the Company believes that
it has good relations with its employees.
Forward Looking Statements
Certain statements contained in this Prospectus which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act (the "Act"), including,
without limitation, the statements specifically identified as forward-looking
statements within this Prospectus. In addition, certain statements in future
filings
64
<PAGE>
by the Company with the Commission, in press releases, and in oral and written
statements made by or with the approval of the Company which are not statements
of historical fact constitute forward-looking statements within the meaning of
the Act. Examples of forward-looking statements include, but are not limited to:
(i) projections of revenues, income or loss, earnings or loss per share, the
payment or nonpayment of dividends, capital structure and other financial items,
(ii) statements of plans and objectives of the Company or its management or
Board of Directors, including those relating to products or services, (iii)
statements of future economic performance and (iv) statements of assumptions
underlying such statements. Words such as "believes," "anticipates," "expects,"
"intends," "targeted" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
In particular, this Prospectus contains forward-looking statements
which include but are not limited to: management's efforts to refocus the
Company's operations and implement new initiatives; the adequacy of the
allowance for credit losses; interest rate risk management; Year 2000 data
systems compliance issues; and the effect of legal proceedings on the Company's
consolidated financial position, liquidity or results of operations.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Factors
that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (ii) the effects of and changes in trade, monetary and
fiscal policies and laws, including interest rate policies of the Federal
Reserve Board; (iii) inflation, interest rate, market and monetary fluctuations;
(iv) the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users; (v) changes in
consumer spending, borrowing and savings habits; (vi) technological changes
(including Year 2000 data systems compliance issues); (vii) acquisitions and
integration of acquired businesses; (viii) the ability to increase market share
and control expenses; (ix) the effect of changes in laws and regulations
(including laws and regulations concerning taxes, banking, securities and
insurance) with which the Company and its subsidiaries must comply; (x) the
effect of changes in accounting policies and practices, as may be adopted by the
regulatory agencies as well as the FASB; (xi) changes in the Company's
organization, compensation and benefit plans; (xii) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; (xiii) the
risks described in the "Risk Factors" Section; and (xiv) the success of the
Company at managing the risks involved in the foregoing.
65
<PAGE>
MANAGEMENT
Directors
The following table sets forth information with respect to the
directors of the Company. Except as described above, there were and are no
arrangements or understandings between the Company and any person pursuant to
which such person has been elected as a director, and no director is related to
any other director or executive officer of the Company by blood, marriage or
adoption. At March 19, 1999, all directors and executive officers of the Company
as a group owned 514,780 shares or 2.5% of the issued and outstanding Common
Stock. For information with respect to the number of shares held by individual
directors and officers, see "Selling Holders."
Director Term
Name Age Since Expires Position
---- --- -------- ------- --------
Edward A. Townsend 57 1997 2001 Chairman of the Board
Jan A. Norton 52 1997 2000 Director
Robert A. Kotecki 34 1997 2001 Director
George P. Nigh 71 1997 1999 Director
Kenneth W. Townsend 55 1997 1999 Director
Dr. Joseph A. Leone 65 1973 2000 Director
J. David Rosenberg 49 1998 2001 Director
Andrew M. Coats 64 -- -- Director nominee
Biographical Information
Information concerning the principal position and principal occupation
of each director of the Company during the past five years is set forth below.
Edward A. Townsend. Mr. Townsend was elected as a director of the
Company and the Bank immediately upon consummation of the Private Placement. At
the same time, Mr. Townsend became Chairman and Chief Executive Officer of the
Company and the Bank. From April 1994 until February 1998, Mr. Townsend served
as Chairman and Chief Executive Officer of Green Country Bank, FSB, and Chief
Executive Officer of its parent corporation, Green Country Banking Corporation.
From January 1993 through March 1994, Mr. Townsend served as Senior Vice
President of Stifel, Nicolaus & Company, an investment banking firm located in
St. Louis, Missouri.
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<PAGE>
From October 1988 through September 1992, Mr. Townsend served as Chairman and
President of the Bank. From 1967 to 1987, Mr. Townsend was employed in various
positions at First National Bank and later InterFirst Corporation, both in
Dallas, Texas.
Jan A. Norton. Mr. Norton was elected as a director of the Company and
the Bank immediately upon consummation of the Private Placement. At the same
time, Mr. Norton became President of the Company and the Bank. Mr. Norton served
as President of Green Country Bank from May 1994 until it was acquired by the
Company.
Robert A. Kotecki. Mr. Kotecki was elected as a director of the Company
and the Bank immediately following the Private Placement in 1997. Since March
1993, Mr. Kotecki has served as Managing Director of Friedman, Billings, Ramsey
& Co., Inc., an Arlington, Virginia investment banking firm specializing in
financial institutions. From November 1988 through March 1993, Mr. Kotecki
served as an Associate with Trident Financial Corp., an investment banking firm
located in Raleigh, North Carolina.
George P. Nigh. Governor Nigh was elected as a director of the Company
and the Bank immediately following the consummation of the Private Placement in
1997. From July 1992 through June 1997, Governor Nigh served as President of the
University of Central Oklahoma, where he had served as Distinguished Statesman
in Residence for the previous five years. From January 1979 through 1987,
Governor Nigh served as Governor of the State of Oklahoma. Prior to 1979,
Governor Nigh served 16 years as Lt. Governor and eight years in the House of
Representatives of the State of Oklahoma. Governor Nigh currently serves as a
consultant for the Company in the area of community relations.
Kenneth W. Townsend. Mr. Townsend was elected as a director of the
Company and the Bank immediately following consummation of the Private
Placement. Mr. Townsend has served as Executive Director of the National Cowboy
Hall of Fame, Oklahoma City, Oklahoma, since January 1997. From August 1991
through June 1997, Mr. Townsend served as President of Boatsmen's First National
Bank of Oklahoma, Oklahoma City, Oklahoma.
Joseph A. Leone. Mr. Leone has served as a Director of the Company and
the Bank since 1973. Since 1987, Mr. Leone has served as managing partner with
MBI, Inc., a limited partnership which owns several commercial real estate
properties located within Oklahoma. From 1978 through 1987, Mr. Leone served as
Executive Vice Chancellor and Chancellor of the Oklahoma State System of Higher
Education.
J. David Rosenberg. Mr. Rosenberg is a practicing attorney and has been
a partner of Keating Muthing & Klekamp, a Cincinnati, Ohio law firm, since prior
to 1992. Mr. Rosenberg was elected as a director of the Company in February
1998.
67
<PAGE>
Andrew M. Coats. In October 1997, Mr. Coats was elected as a director
of the Bank. Mr. Coats is a nominee for election to the Board of Directors at
the Company's 1999 Annual Meeting of Stockholders. Mr. Coats served as the
District Attorney of Oklahoma County from 1976 to 1980. He won the Democratic
nomination for U.S. Senate from Oklahoma in 1980. In 1983, Mr. Coats was elected
Mayor of Oklahoma City where he served until April 1987. Mr. Coats served as
President of the law firm of Crowe & Dunlevy in 1987 and 1988 and served as
President of the Oklahoma Bar Association in 1992. Mr. Coats is currently
serving as the President of the American College of Trial Lawyers. On July 1,
1996, Mr. Coats became the Dean of the University of Oklahoma College of Law.
Executive Officers Who Are Not Directors
Set forth below is information concerning the executive officers of the
Company and the Bank who do not serve on the Board of Directors of the Company.
No executive officer is related to any director or other executive officer of
the Company or the Bank by blood, marriage or adoption, and there are no
arrangements or understandings between a director of the Company or the Bank and
any other person pursuant to which such person was elected an executive officer.
Officer
Name Age Since Position
---- --- ------- --------
Robert L. Vanden 52 1990 Executive Vice President of the Bank
Richard L. Park 67 1997 Executive Vice President
and Chief Financial Officer
Christopher C. Turner 40 1983 Executive Vice President of the Bank
James N. Young 50 1998 Executive Vice President, President
Tulsa Regional, and Manager of
Commercial Lending of the Bank
Harold A. Bowers 55 1998 Executive Vice President
and Chief Credit Officer of the Bank
William C. Lee 59 1998 Executive Vice President
Operations Division of the Bank
The executive officers serve until their successors are elected and
qualified. No executive officer is related to any director or other executive
office of the Company by blood, marriage or adoption. There are no arrangements
or understandings between any director of the Company and any other person
pursuant to which such person was elected an executive officer.
Robert L. Vanden. Mr. Vanden, who is 52 years old, was elected as a
director of the Bank immediately following consummation of the Private
Placement. In addition, Mr. Vanden began serving as Executive Vice President of
the Bank upon consummation of the Private Placement. From January 1997 until
September 1997, Mr. Vanden served as President and Chief Executive Officer of
the Bank. Since February 1990 through December 1996, Mr. Vanden served as
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<PAGE>
Executive Vice President of the Bank in charge of wholesale commercial lending.
Prior to joining the Bank in February 1990, Mr. Vanden served as Executive Vice
President of the Richard Gill Company and Gill Savings.
Richard L. Park. Mr. Park, who is 67 years old, began serving as
Executive Vice President and Chief Financial Officer of the Company and the Bank
in charge of finance following consummation of the Private Placement. Mr. Park
served as Chief Financial Officer of Green Country Bank from October 1996 until
it was acquired by the Company. From January 1991 through May 1996, Mr. Park was
Chief Financial Officer of Western Farm Credit Bank in Sacramento, California,
the Eleventh District Bank in the Federal Farm Credit System. Mr. Park is a
Certified Public Accountant.
Christopher C. Turner. Mr. Turner, who is 40 years old, has served as
Executive Vice President of the Bank in charge of residential and consumer
lending, branch administration and marketing since October 1996. Prior to
October 1996, Mr. Turner held various positions in the Internal Audit Department
of the Company which he joined in November 1980.
James N. Young. Mr. Young, who is 50 years old, serves as President,
Tulsa Region and manager of Commercial Lending for the Tulsa and Oklahoma City
markets. From 1973 to 1994, Mr. Young served in various commercial lending
capacities with Bank of Oklahoma in both Tulsa and Oklahoma City, his last
assignment being President, Oklahoma City. From 1994 to January 1998, he served
as Senior Commercial Lending Manager for BankIV and its successors, Boatmen's
Bank and NationsBank in Oklahoma City. His last position with NationsBank was
President, Oklahoma City, and Senior Commercial Lending Manager for the state of
Oklahoma. Mr. Young joined the Bank in February 1998.
Harold A. Bowers. Mr. Bowers, who is 55 years old, serves as Executive
Vice President and Chief Credit Officer. After serving four years as an officer
in the United States Air Force, Mr. Bowers started his banking career with
Liberty National Bank in Oklahoma City, Oklahoma. From 1970 to 1980 he served in
various credit capacities ultimately serving six years as Manager of Loan
Administration. In 1980 and 1981, he managed the Credit Department for Bank of
Oklahoma, Tulsa, Oklahoma. From 1981 to 1998, Mr. Bowers served with NationsBank
and its predecessor banks with both senior credit and commercial lending
management responsibilities.
William C. Lee. Mr. Lee, who is 59 years old, serves as Executive Vice
President and is the Bank's principal Operations Officer. Mr. Lee joined the
Bank in May 1998. Prior to joining the Bank, Mr. Lee was Executive Vice
President and Chief Financial Officer of the Annuity Board of the Southern
Baptist Convention, a pension and insurance management company, joining that
institution in July 1991. Mr. Lee is a Director of Ultrak, Inc. and is a
Certified Public Accountant.
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<PAGE>
Board of Directors Meetings and Committees of the Company
Board Meetings and Committees. The Board of Directors held six meetings
in 1998. Management also periodically conferred with directors between meetings
regarding Company affairs. During 1998, all directors attended 75% or more of
the total aggregate number of meetings of the Board of Directors and meetings of
the committees of the Board on which they served.
The Audit Committee is currently composed of Dr. Joseph A. Leone and
Mr. Kenneth W. Townsend. It met five times in 1998 with all members attending
75% or more of these meetings. The Audit Committee recommends to the whole Board
of Directors the selection of independent certified public accountants to audit
annually the books and records of the Company, reviews the activities and report
of the independent certified public accountants, and reports the results of the
review to the whole Board of Directors. The Audit Committee also monitors the
internal controls of the Company.
The Compensation and Retirement Committee is currently composed of Dr.
Joseph A. Leone, Chairman, Mr. Andrew M. Coats and Mr. Gene C. Howard. It met
seven times in 1998 with all members participating. It sets the compensation
levels of the Chief Executive Officer and the President, establishes a general
framework for the short-term incentive program and administers Local Oklahoma's
defined benefit pension plan.
The Board has not delegated its functions to any other standing
committees, and thus has not created executive, nominating or other similar
committees.
Board of Directors Fees
The Company pays its non-employee directors a quarterly retainer of
$2,500. Those directors who are also a director of the Bank receive a per
meeting fee of $500 (which includes telephonic board meetings) for service as a
Bank director. The Company reimburses all ordinary and necessary expenses
incurred in the conduct of its business. Non-employee committee members receive
$300 per committee meeting. Mr. George P. Nigh also serves as public relations
consultant to the Bank, for which he receives $48,000 per year, an office and an
automobile allowance.
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<PAGE>
Executive Compensation
Summary Compensation Table. The following table includes individual
compensation information with respect to the Chairman of the Board and Chief
Executive Officer of the Company and the four other most highly compensated
executive officers of the Company, including officers of the Bank (the five are
sometimes called the "named executive officers") for services performed in 1998,
1997 and 1996.
<TABLE>
<CAPTION>
Long Term
Compen-
sation
Annual Compensation(1) Awards
------------------------------------------------ ---------------
Other All Other
Name and Annual Compen-
Principal Position Year Salary($) Bonus($) Compensation(2) Options(#)(3) sation($)(4)
- --------------------------- ------- ---------- --------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Edward A. Townsend 1998 320,000 175,000 -- 811,640 --
Chief Executive Officer(5) 1997 100,711 -- -- -- 100,000
Jan A. Norton 1998 240,000 160,000 -- 304,365 --
President(5) 1997 75,533 -- -- -- 50,000
Robert L. Vanden 1998 225,000 175,000 -- 25,000 --
Executive Vice President 1997 212,502 175,000 -- -- --
1996 175,000 140,000 -- -- --
James N. Young 1998 136,347 100,000 -- 25,000 25,858
Executive Vice President(5)
Christopher C. Turner 1998 149,000 50,000 -- 25,000 --
Executive Vice President 1997 118,503 30,000 -- -- --
1996 91,252 35,000 -- -- --
</TABLE>
- -------------
(1) Amounts shown include cash and non-cash compensation earned and received
by the named executive officers as well as amounts earned but deferred at
their election.
(2) The Company provides various perquisites to certain employees including
the named executive officers. In each case, the aggregate value of the
perquisites provided to the named executive officers did not exceed the
lesser of $50,000 or 10% of such named executive officers' annual salary
and bonus.
(3) The options in this column were originally granted in 1997 and were
replaced by options granted under the 1998 Plan.
(4) Amounts under this column reflect moving expense/housing allowance paid
when these named executive officers began their service with the Company.
See "Employment Agreements" below.
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<PAGE>
(5) Mr. Townsend and Mr. Norton became executive officers of the Company in
September 1997. Mr. Young became an executive officer of the Company in
February 1998. Prior to becoming executive officers of the Company,
Messrs. Townsend, Norton and Young were not employed by the Company or its
subsidiaries during the two years prior to that time.
Benefits
Employment Agreements. The Company and the Bank (the "Employers") have
entered into employment agreements with Mr. Edward A. Townsend and Mr. Jan A.
Norton (the "Executives"). Under such employment agreements, the Employers will
employ the Executives for a term of three years, which term shall be extended
each year beginning at the end of the first anniversary of the effective date
for a successive additional one-year period upon approval of the Employers'
Board of Directors, unless either party elects, not less than 60 days prior to
the annual anniversary date, not to extend the employment term. In addition, the
annual base salaries for Messrs. Townsend and Norton will be $320,000 and
$240,000, respectively, which is to be paid in monthly installments. The
employment agreements further provide each of the Executives with the same
employee benefits that are provided by the Bank to executive employees
generally, provide for vacation and participation in the Bank's benefit plans,
membership in a golf and country club in Oklahoma City, an automobile of a type
and kind comparable to that which the Bank provides to its other executive
officers, and a one time moving/housing allowance of $100,000 and $50,000 to
Messrs. Townsend and Norton, respectively.
Each of the foregoing employment agreements are terminable with or
without cause by the Employers. The Executives will have no right to
compensation or other benefits pursuant to the employment agreements for any
period after voluntary termination or termination by the Employers for cause.
The employment agreements provide for certain benefits comparable to those of
the severance agreements described below if the employment agreements are
terminated by the Employers other than for cause or as a result of the
Executive's death or disability.
Severance Agreements. The Bank has entered into severance agreements
with Mr. Robert L. Vanden, Mr. Christopher C. Turner and Mr. James N. Young to
encourage their continued employment. The Bank also has entered into severance
agreements with three other executive officers and amended the employment
agreements of Mr. Edward A. Townsend and Mr. Jan A. Norton to add comparable
severance provisions. These agreements provide for certain severance benefits if
the executive's employment is terminated by the Bank without "cause" or by the
executive for "good reason" (as those terms are defined in the severance
agreements). Upon such termination of employment, the executive will be entitled
to receive a lump sum severance payment equal to the executive's base salary. In
addition, any vesting or other restrictions on the executive's stock options or
other equity compensation benefit shall lapse and the option shall become
immediately exercisable. Each severance agreement has a three-year term, which
can be extended for up to two years after a change of control.
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<PAGE>
Stock Option Plan. On September 23, 1998, the Company's Board of
Directors adopted the Local Financial Corporation 1998 Stock Option Plan (the
"1998 Plan"). Under the 1998 Plan, the Company may grant to eligible employees
incentive and non-qualified stock options and stock appreciation rights. The
Board adopted the 1998 Plan to align the interest of its executive management
with those of the Company's stockholders by providing incentives that are
directly linked to the proofitability of the Company's business and increases in
stockholder value. The Company's ability to issue incentive stock options is
subject to approval by the Company's stockholders.
The Stock Option Plan will be administered and interpreted by a
committee of the Board or Directors ("Committee"), which will interpret the plan
and determine the number of shares subject to each option, whether such options
may be exercised by delivering other shares of Common Stock and when such
options become exercisable.
The following table sets forth information concerning the grant of
stock options during 1998 to the named executive officers.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------------------------------------- Value at Assumed
% of Total Annual Rates of Stock
Number of Options Price Appreciation for
Securities Granted Option Terms(1)
Underlying Employees Exercise Expiration ----------------------------
Name Options(2) in 1998 Price($/sh) Date(2) 5%($) 10%($)
- --------------------- ------------- ------------ --------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward A. Townsend 811,640 60.8 10.00 9/23/08 5,104,360 12,935,451
Jan A. Norton 304,365 22.8 10.00 9/23/08 1,914,135 4,850,794
Robert L. Vanden 25,000 1.9 10.00 9/23/08 157,224 398,436
James N. Young 25,000 1.9 10.00 9/23/08 157,224 398,436
Christopher C. Turner 25,000 1.9 10.00 9/23/08 157,224 398,436
</TABLE>
- --------------------
(1) The assumed annual rates of increase are based on an annually
compounded increase of the exercise price through the ten year option
term.
(2) The options in this column were originally granted in 1997 and were
replaced by options granted under the 1998 Plan.
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<PAGE>
The following table set forth the number of unexercised options held by
named executive officers as of December 31, 1998.
Number of Unexercised
Options at 12/31/98(1)
----------------------------------------
Name Exercisable Unexercisable
- --------------------- --------------- -----------------
Edward A. Townsend 270,547 541,093
Jan A. Norton 101,455 202,910
Robert L. Vanden 5,000 20,000
James N. Young 8,333 16,667
Christopher C. Turner 5,000 20,000
- ------------------------
(1) These options are exercisable at $10.00 per share.
Retirement Plan. The Bank has a defined benefit pension plan
("Retirement Plan") for all salaried and hourly employees who have completed one
year of service with the Bank, its subsidiaries and any acquired company. In
general, the Retirement Plan provides a benefit at an employee's "Normal
Retirement Age" (age 65) according to the following formula: (a) 1.0% of Average
Monthly Compensation times Years of Credited Service, plus (b) .65% of Average
Monthly Compensation in excess of Covered Compensation, times years of Credited
Service up to 35 years. "Average Monthly Compensation" equals the highest
average of an employee's basic rate of compensation for any five consecutive
plan anniversaries (July 1st) preceding retirement. "Covered Compensation" is
the average annual compensation with respect to which Social Security retirement
benefits would be provided at Social Security retirement age.
During the year ended December 31, 1998, the Bank did not make a
contribution to the Retirement Plan, as the plan was adequately funded and
subject to the IRS "Full Funding Limitation." When subject to the Full Funding
Limitation, no contribution is either required or deductible.
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<PAGE>
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of Credited Service.
Years of Credited Service
--------------------------------------------------------
Final Average
Compensation 15 20 25 30 35
- ----------------- --------- --------- --------- --------- ---------
$ 80,000 $ 16,943 $ 22,590 $ 28,238 $ 33,886 $ 39,533
90,000 19,418 25,890 32,363 38,836 45,308
100,000 21,893 29,190 36,488 43,786 51,083
110,000 24,368 32,490 40,613 48,736 56,858
120,000 26,843 35,790 44,738 53,686 62,633
140,000 31,793 42,390 52,988 63,586 74,183
160,000 36,248 48,495 60,743 72,991 85,238
180,000 40,208 54,105 68,003 81,901 95,798
200,000 44,168 59,715 75,263 90,811 106,358
220,000 48,128 65,325 82,523 99,721 116,918
The figures in the above table assume that the Retirement Plan
continues in its present form and that the participants elect a 10-year certain
and life annuity form of benefit.
The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the IRS) for calculating benefits and
contributions under qualified defined benefit plans currently is $160,000 and
the maximum annual benefit permitted under such plans currently is $130,000.
The pension benefits listed in the table are not subject to any
deduction for Social Security or other offset amounts.
At December 31, 1998, Messrs. Townsend, Norton, Vanden, Turner and
Young had 5, 1, 8, 18 and 1 years of Credited Service, respectively, under the
Retirement Plan. Some of Mr. Townsend's years of Credited Service result from
his prior employment by the Company from 1988 through 1992.
Certain Transactions
Loans to Directors and Officers. The Bank provides loans to its
directors and officers in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. Such loans do not involve
more than the normal risk of collectibility or present other unfavorable
features. As of December 31, 1998, and combining all loans to directors and
executive officers in excess of
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$60,000, the Bank had an amount outstanding of $716,063. This amount represented
0.6% of the Company's consolidated stockholders' equity as of that date.
Investment Banking Arrangements. FBR acted as the placement agent for
the Company in its 1997 sale of $197.0 million of Common Stock and $80.0 million
of Senior Notes. For its services, FBR received placement fees of approximately
$18.2 million, reimbursement of its out-of-pocket expenses, including legal
fees, and indemnification against certain liabilities, including those under the
securities laws. FBR also received warrants to purchase 591,000 shares at $10.00
per share, which equals the per share price of the Common Stock in the Private
Placement. FBR has the right to cause the shares underlying these warrants to be
registered for public sale. In addition, the Company retained FBR as its
exclusive financial advisor in connection with various transactions, such as
mergers, acquisitions, securitizations and tender offers, as well as capital
markets financing for an initial period ending September 1999. It has received
fees totaling $75,000 for these services.
Acquisition of Green Country. On February 16, 1998, the Company
acquired Green Country Banking Corporation in a merger for 837,209 shares of its
common stock. The shares were issued to three Green Country stockholders, two of
whom were Mr. Edward A. Townsend and Mr. Jan A. Norton, the Chairman and Chief
Executive Officer of the Company and the President and Chief Operating Officer
of the Company, respectively. Mr. Townsend received 415,027 shares and Mr.
Norton received 29,052 shares in the merger. Under an agreement with the three
Green Country stockholders, FBR purchased simultaneously 115,027 shares from Mr.
Townsend, 4,052 shares from Mr. Norton and 273,130 shares from the third
stockholder at $10.75 per share. The Company also agreed to register the shares
issued in the merger for public sale. FBR acted as the Company's financial
advisor in the merger and issued its fairness opinion to the Company.
REGULATION
General
The Bank is currently a federally chartered and insured stock savings
bank subject to extensive regulation and supervision by the OTS, as the primary
federal regulator of savings institutions, and the FDIC, as the administrator of
the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Bank, is qualified in its entirety by
reference to the particular statutory or regulatory provisions or proposals.
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Regulation of Savings and Loan Holding Companies
Holding Company Acquisitions. The Company is currently a registered
savings and loan holding company. The Home Owners' Loan Act, as amended (the
"HOLA"), and OTS regulations generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "--Regulation of Federal
Savings Institutions--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company,
which is generally subject to further restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guaranteed, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See "--Regulation
of Federal Savings Institutions--Capital Distribution Regulation."
Affiliate Restrictions. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings
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association's holding company and companies that are under common control with
the savings association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulations generally exclude all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulations also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provide that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Regulation of Federal Savings Institutions
Regulatory System. As a federally insured savings bank, lending
activities and other investments of the Bank must comply with various statutory
and regulatory requirements. The Bank is regularly examined by the OTS and must
file periodic reports concerning its activities and financial condition.
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Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings).
Liquid Assets. Under OTS regulations, for each calendar month, a
savings institution is required to maintain an average daily balance of liquid
assets (including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at 4%,
may be changed from time to time by the OTS to any amount between 4% to 10%,
depending upon certain factors. The Bank maintains liquid assets in compliance
with this regulation.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings institutions to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based
capital requirement of total capital (core capital plus supplementary capital)
equal to 8% of risk-weighted assets (which includes the credit risk equivalents
of certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. In
addition, under the prompt corrective action provisions of the OTS regulations,
all but the most highly-rated institutions must maintain a minimum leverage
ratio of 4% in order to be adequately capitalized. See "--Prompt Corrective
Action." A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its circumstances.
The OTS regulations
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provide that higher individual minimum regulatory capital requirements may be
appropriate under certain circumstances. Local is not subject to any such
individual minimum regulatory capital requirement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings institution's failure to maintain capital at or above
the minimum capital requirements may be deemed an unsafe and unsound practice
and may subject the savings institution to enforcement actions and other
proceedings.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
institution that falls within certain undercapitalized capital categories
specified in the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1998, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or rollover
brokered deposits.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings institutions,
including authority to bring various enforcement actions against a savings
institution and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings institution's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings institution or an
institution-affiliated party to take affirmative action to correct conditions
resulting
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from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings institutions. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
In January 1999, the OTS amended its capital distribution regulations
to bring such regulations into greater conformity with the other bank regulatory
agencies. Under the amended regulations, certain savings associations would not
be required to make any filings with the OTS in connection with a capital
distribution. Specifically, savings associations that would be well capitalized
following a capital distribution would not be subject to any requirement for
notice or application unless the total amount of all capital distributions,
including any proposed capital distribution, for the applicable calendar year
would exceed an amount equal to the savings association's net income for that
year to date plus the savings association's retained net income for the
preceding two years.
Qualified Thrift Lender Test. In general, savings institutions are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). Credit card and
educational loans may now be made by savings associations without regard to any
percentage-of-assets limit, and commercial loans may be made in an amount up to
10 percent of total assets, plus an additional 10 percent for small business
loans. Loans for personal, family and household purposes (other than credit
card, small business and educational loans) are now included without limit with
other assets that, in the aggregate, may account for up to 20% of total assets.
A savings institution that fails the QTL test is subject to substantial
restrictions on activities and to other significant penalties. Savings
associations may also qualify as a QTL not only by maintaining 65% of portfolio
assets in qualified thrift investments but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan associations as defined in the Code and, at
December 31, 1998, met the QTL Test.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three
capital groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and "undercapitalized"--which
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are defined in the same manner as the regulations establishing the prompt
corrective action system, as discussed below. These three groups are then
divided into subgroups which are based on supervisory evaluations by the
institution's primary federal regulator, resulting in nine assessment
classifications. Effective January 1, 1997, assessment rates for both
SAIF-insured institutions and Bank Insurance Fund ("BIF")-insured institutions
ranged from 0% of insured deposits for well capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points is added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, until December 31,
1999 in order to cover Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the
required reserve ratio, and as a result, the FDIC previously reduced the average
deposit insurance premium paid by BIF-insured banks to a level substantially
below the average premium previously paid by savings institutions. Banking
legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. Based upon its level of SAIF deposits as of March 31,
1995, the Bank paid a special assessment of $10.3 million. The assessment was
accrued in the quarter ended September 30, 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
Community Reinvestment Act and the Fair Lending Laws. Savings
institutions have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low-and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply
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with the Fair Lending Laws could result in enforcement actions by the OTS, as
well as other federal regulatory agencies and the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act of 1956, as amended
(the "BHCA"), that acquire or own savings associations are no longer defined as
savings and loan holding companies under the HOLA and, therefore, are not
generally subject to supervision and regulation by the OTS. OTS approval is no
longer required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the Federal Reserve
Board in examination, enforcement and acquisition matters.
Effect of Possible Charter Conversion
Bank Holding Company Regulation. In the event that the Bank completes
the conversion of its charter to that of a commercial bank, the Company would
become subject to the BHCA, would be required to register as a bank holding
company, and would be subject to regulation and supervision by the Federal
Reserve System and by the Comptroller of the Currency (the "Comptroller"). The
Company has filed it application with the Federal Reserve Board in connection
with the Bank's charter conversion. The Company also would be required to file
annually a report of its operations with, and would be subject to examination
by, the Federal Reserve System and the Comptroller.
The BHCA prohibits a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any bank,
or increasing such ownership or control
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of any bank, without prior approval of the Federal Reserve Board. The BHCA also
generally prohibits a bank holding company from acquiring any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless specifically authorized by applicable state law. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
A thrift holding company is not subject to any regulatory capital
requirements. However, if the Company were to become a bank holding company, it
would become subject to the capital adequacy rules of the Federal Reserve Board.
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of capital in examining and supervising a bank
holding company and in analyzing applications to it under the BHCA. The Federal
Reserve Board capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8% of total risk-adjusted assets,
with at least one-half of that amount consisting of Tier I or core capital and
up to one-half of that amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stocks which may be
included as Tier I capital), less goodwill and, with certain exceptions,
intangibles. Tier II capital generally consists of hybrid
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capital instruments; perpetual preferred stock which is not eligible to be
included as Tier I capital; term subordinated debt and intermediate-term
preferred stock; and subject to limitations, general allowances for loan losses.
Assets are adjusted under the risk-based guidelines to take into account
different risk characteristics, with the categories ranging from 0% (requiring
no additional capital) for assets such as cash to 100% for the bulk of assets
which are typically held by a bank holding company, including multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Single-family residential first mortgage loans which are not
past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
The Company expects that upon conversion to a bank holding company it
will be in compliance with the above-described Federal Reserve Board regulatory
capital requirements.
Commercial Bank Regulation. In the event that the Bank completes the
conversion of its charter to that of a commercial bank, the Bank would become
subject to extensive regulation and examination by the Comptroller. The Bank
would continue to be subject to regulation and examination by the FDIC, which
will continue to insure the deposits of the Bank. Additionally,
contemporaneously with the Bank's conversion to a national banking association,
the Company will become subject to extensive regulation and examination by the
Federal Reserve System. At the same time, the Bank will become a member of the
Federal Reserve System. The Bank has not yet been notified of the cost of
acquiring its membership in the Federal Reserve System but does not believe it
will be material. The Comptroller will supervise and regulate all areas of the
Bank's operations including, without limitation, the making of loans, the
issuance of securities, the conduct of the bank's corporate affairs, merger with
or acquisition of other banks, capital adequacy requirements (which are very
similar to the OTS' capital adequacy requirements), the payment of dividends and
the establishment or closing of branches.
Upon its conversion to a commercial bank regulated by the Comptroller
of the Currency, the Bank will be required to maintain the minimum levels of
regulatory capital required for commercial banks which consists of (i) Tier 1
core capital to net risk weighted assets ratio of 4.00%; (ii) Total
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capital (Tier 1 + Tier 2 [supplementary capital]) to net risk weighted assets
ratio of 8.00%; and (iii) Leverage ratio (Tier 1 capital to total consolidated
assets, as defined) of 3.00%. The Company expects that, upon the Bank's
conversion to a commercial bank, the Bank will have capital which is well in
excess of the above-described Comptroller of the Currency regulatory capital
requirements.
TAXATION
Federal
General. The Company and its subsidiaries, including the Bank, are
subject to federal income taxation under the Code in the same general manner as
other corporations with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Bank. The Company's and its subsidiaries' consolidated
federal income tax returns have been audited or closed without audit by the
Internal Revenue Service ("IRS") through tax year 1993.
Method of Accounting. For federal income tax purposes, the Company and
its subsidiaries, including the Bank, currently report their income and expenses
on the accrual method of accounting and use a tax year ending June 30 for filing
their consolidated federal income tax returns. The Small Business Protection Act
of 1996 (the "1996 Act") eliminated the use of the reserve method of accounting
for bad debt reserves by savings institutions, effective for taxable years
beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific chargeoff method in computing its bad debt deduction beginning with its
1996 Federal tax return. In addition, the 1996 Act requires the recapture (over
a six year period) of the excess of tax bad debt reserves at June 30, 1996 over
those established as of June 30, 1988. The amount of the Bank's reserves subject
to recapture as of December 31, 1998 amounted to approximately $17.2 million.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to July 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
Federal legislation eliminated these thrift related recapture rules. However,
under current law, pre-1988 reserves remain subject to recapture should the Bank
make certain non-dividend distributions or cease to maintain a bank charter.
86
<PAGE>
At December 31, 1998, the Bank's total federal pre-1988 reserves was
approximately $13.3 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A corporation may carry back net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1998, the Company and its
subsidiaries had $19.1 million of net operating loss carryforwards for federal
income tax purposes which expire in 2013. For taxable years beginning after
August 5, 1997, a corporation may carry back net operating losses to the two
preceding taxable years and carry forward and deduct from taxable income for the
20 succeeding taxable years.
Consummation of the Private Placement and the Redemption in September
1997 caused an "ownership change" with respect to the Company for federal income
tax purposes. As a result, the Company is subject to certain limitations in its
ability to use any unrealized built-in losses and any net operating losses it
may have had immediately prior to the ownership change to offset taxable income
generated in taxable periods ending after the ownership change. Specifically,
the Company's ability to use (i) any net unrealized built-in-losses possessed by
the Company immediately before the ownership change to offset taxable income
generated in taxable periods ending after the ownership change will be subject
to an annual limitation (as described below) (the "Annual Limitation"), and (ii)
any net operating losses, tax credits, or certain other losses and deductions
possessed by the Company immediately before the ownership change to offset
taxable income generated in taxable periods ending after the ownership change
will be similarly subject to the Annual Limitation. The Annual Limitation is
generally equal to the product of the value of the Company's outstanding stock
immediately before the Private Placement (less certain capital contributions and
after taking into account the value of certain redemptions or other corporate
contractions that occur in connection with the ownership change) and the
"long-term tax-exempt rate" (as defined in Section 382(f) of the Code).
At the present time, the Company believes that it will be able to apply
any tax attributes described in (i) and (ii) above that were possessed by the
Company immediately before the ownership change in their entirety against
taxable income in the succeeding taxable years. As such, the Company does not
believe it will be subject to the Annual Limitation.
87
<PAGE>
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from its subsidiaries, including the Bank,
as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
State and Local
Oklahoma State Taxation. The Company and its subsidiaries, including
the Bank, are subject to an annual Oklahoma corporate income tax of 6% of their
federal taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition to the Oklahoma corporate income tax, the Company and
its subsidiaries are subject to an annual Oklahoma franchise tax, which is
imposed at a rate of .125% on the capital used, invested or employed in
Oklahoma, with a maximum franchise tax equal to $20,000 per annum. At December
31, 1998, the Company had approximately $176.4 million of net operating loss
carryforwards available for Oklahoma state income tax purposes. The state net
operating loss carryforwards expire in varying amounts between 2006 and 2013.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The Delaware franchise tax is based on the Company's
authorized capital stock or on its assumed par and no-par capital, whichever
yields a lower result. Under the authorized capital method, each share is taxed
at a graduated rate based on the number of authorized shares with a maximum
aggregate tax of $150,000 per year. Under the assumed par value capital method,
Delaware taxes each $1,000,000 of assumed par-capital at the rate of $200.
88
<PAGE>
SELLING HOLDERS
The Local Securities were originally issued and sold by the Company in
the Private Placement in transactions exempt from the registration requirements
of the Securities Act, to persons reasonably believed by the Company to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) or other "accredited investors" (as defined in Rule 501(a) under the
Securities Act). The Local Securities issued to the stockholders of Green
Country in connection with the Company's acquisition of Green Country on
February 16, 1998, also are persons reasonably believed by the Company to be
"accredited investors." The Selling Holders (which term includes their
transferees, pledgees, donees or their successors) may from time to time offer
and sell pursuant to this Prospectus any or all of the Local Securities owned by
each of them.
The following table sets forth information with respect to the Selling
Holders named herein and the shares of Common Stock and/or Senior Notes
beneficially owned and offered hereby by such Selling Holders. Such information
has been obtained from such Selling Holders. Except as otherwise disclosed
herein, such Selling Holders do not have, or within the past three years have
not had, any position, office or other material relationship with the Company or
affiliates. Because such Selling Holders may offer all or some portion of the
Common Stock or Senior Notes pursuant to this Prospectus, no estimate can be
given as to the amount of the Common Stock or Senior Notes that will be held by
such Selling Holders upon termination of any such sales. In addition, the
Selling Holders identified below may have sold, transferred or otherwise
disposed of all or a portion of their Common Stock and/or Senior Notes since the
date on which it provided the information regarding their Common Stock and/or
Senior Notes in transactions exempt from the registration requirements of the
Securities Act. Finally, if required, additional Selling Holders may from time
to time be identified and information with respect to such Selling Holders be
provided in a Prospectus Supplement.
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Albert Abramson 100,000 --
Jay B. Abramson 15,000 --
Acamas Anstalt 40,000 --
American Express Company 68,700 --
Angelo Gordon & Co., L.P. 750,000 --
Frank E. Antin 1,500 --
Lewis J. Antin 1,000 --
Norman B. Antin(1) 7,500 --
Bank West Financial Corporation 20,000 --
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Roger L. Benson, IRA 5,000 --
Paul Berger 10,000 --
Robert F. Berish 1,000 --
Phoebe Berman -- 25,000
Philip R. Bevan(1) 1,500 --
O. Francis Biendi, Jr. 50,000 --
Boston Partners Asset 1,726,600 --
Management, L.P., as
investment advisor for various
clients
Boston Provident Partners, L.P. 7,900 --
BP Institutional Partners, L.P. 2,500 --
The Brown & Williamson -- 125,000
Master Retirement Trust
Robert L. Bunnen Jr. 3,500 30,000
Butterfield Trust -- 500,000
Charles H. Byrd -- 100,000
Alfred R. Camner 10,000 --
Capra Global Managed Assets -- 315,000
Lt
CGMA Special Accounts LLC -- 35,000
Bill Cline 5,000 --
College Retirement Equities 20,000 --
Fund
Community Interests 2,000 --
Continental Casualty Company 1,600,000 6,000,000
Gerald B. Cramer 45,000 --
Cramer Rosenthal McGlynn, 449 7,000
Inc.
Cramer Rosenthal McGlynn, 5,000 --
LLC.
William W. Crawford, Jr. 5,000 --
CRM 1997 Enterprise Fund, LP 50,000 --
CRM EFO Partners, L.P. 13,500 400,000
CRM Madison Partners, L.P. 62,300 --
CRM Partners, L.P. 191,000 --
CRM Retirement Partners, L.P. 153,200 --
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
CRM US Value Fund, Ltd. 13,700 250,000
David S. Croyder 1,000 25,000
The Demoss Foundation 25,000 --
Diversified Long Term Growth 10,000 --
Fund, L.P.
Dolphin Offshore Partners, L.P. 400,000 --
Drake Associates, L.P. 35,000 --
EBS Microcap Partners, L.P. 4,000 --
EBS Partners, L.P. 11,000 --
Edgewater Private Equity Fund 192,500 --
II, L.P.
Elsa Benson, Inc. 5,000 --
Emerson Electric Co. 82,200 --
Encinal Partners 8,000 --
Endicott Partners LP 20,000 --
EOS Partners, L.P. 100,000 --
Ernst Equities 10,000 --
Fall Creek Management 10,000 --
Manuel V. Fernandez 20,000 --
Fred M. Filoon 5,000 --
Financial Stocks, L.P. 1,842,300 --
First Security Fed Financial, 10,000 --
Inc.
Eileen Fitzsimons 2,500 --
FMI Focus Fund 10,000 --
FPA Crescent Portfolio -- 1,000,000
Frank Russell Investment 129,300 --
Management Company
Diversified Equity Fund
Frank Russell Investment 157,900 --
Management Company Equity
Fund I
FBR Private Equity Fund, L.P. 325,200 --
FBR 591,000(2) --
Victor J. Galan 5,000 --
Georgia Pacific 302,500 --
Sidney Greenberg 10,000 --
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Gross Foundation, Inc. 20,000 --
Jeffrey D. Haas(1) 5,000 --
Rodney L. Hale -- 10,000
John Hancock Advisors, Inc. 400,000 --
Hartford Capital Appreciation 100,000 --
Fund
Heartland Value Plus Fund, a -- 3,100,000
Series of Heartland Group, Inc.
Heritage Interests 700 --
Highbridge International LLC 425,000 --
Richard A. Horstmann 100,000 --
John H. F. Hoving, Inc. 1,000 25,000
Ingleside & Company 100,000 --
Inland Steel Industries, Inc. 108,000 --
International Charitable Interests 2,500 --
II Trust
International Paper 135,000 --
John Colquitt Jackson 20,000 --
Janus Aspen Series High-Yield -- 30,000
Portfolio
Janus Aspen Series Flexible -- 350,000
Income Portfolio
Janus High-Yield Fund -- 2,000,000
Gloria Jean Jones 2,500 --
Kaplan Nathan & Co. -- 250,000
Karfunkel Family Foundation -- 500,000
Lena Khatcherian 2,500 --
King Street Capital Management, 50,000 --
LLC
Jeffrey A. and April R. Koeppel(1) 1,000 --
Robert A. Kotecki(3) 30,000 --
Landmark Bancshares Inc. 20,000 50,000
Lakeview Partners 7,500 --
Joe A. Leone(3) 5,000 --
Eli Levitan 10,000 --
Lorraine & Urethane Employees 10,000 --
Pension Plan
Lorraine & Urethane Employees -- 100,000
Pension Voluntary Contribution
Mainstay VP Series Fund On -- 2,400,000
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Behalf of its Highyield
Corporate Bond Fund
The Mainstay Funds on Behalf of
its Strategic Income Fund -- 135,000
The Mainstay Funds on Behalf of -- 14,790,000
its Highyield Corporate Bond
Fund
Greg Manocherian 5,000 --
Maverick Fund LDC 447,300 --
Maverick Fund USA, Ltd. 252,700 --
McColl Partners Limited 75,000 --
Partnership
Clement C. Moore II 10,000 --
Mutual Beacon Fund (a Franklin -- 1,400,000
Mutual Series Fund)
Mutual Discovery Fund (a Franklin -- 1,000,000
Mutual Series Fund)
Mutual Financial Services Fund -- 750,000
(a Franklin Mutual Series Fund)
Mutual Qualified Fund (a Franklin -- 1,000,000
Mutual Series Fund)
Mutual Shares Fund (a Franklin -- 1,850,000
Mutual Series Fund)
New South Capital Management, 155,000 2,000,000
Inc.
George Nigh(3) 2,500 --
Northaven Partners, L.P. 60,000 --
Northaven Partners II, L.P. 96,000 --
Northaven Partners III, L.P. 44,000 --
Jan A. Norton(3) 25,000 --
Oppenheimer Strategic Income -- 10,000,000
Fund
Oppenheimer Total Return Fund, 400,000 --
Inc.
Oppenheimer VA High Income -- 800,000
Fund
Oppenheimer VA Strategic Bond -- 150,000
Fund
Ratnam A. and Amita Oza 5,000 --
Pamela Equities Corp. 200,000 --
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Paribas Corporation 100,000 --
Richard L. Park(3) 3,000 --
Pequot Offshore Private Equity 33,715 --
Fund, Inc.
Pequot Private Equity Fund, L.P. 266,285 --
Martin Perlmutter 7,500 --
Joseph R. Piselli 2,000 25,000
Police Officers Pension System of -- 325,000
the City of Houston
Glen T. Presley 6,000 --
Michael Prober 2,500 --
Prospect Street High Income 25,000 500,000
Portfolio Inc.
Putnam High Yield Trust -- 6,700,000
Putnam High Yield Advantage -- 5,500,000
Fund
Putnam Diversified Income Trust -- 2,800,000
Putnam Funds Trust-Putnam High -- 1,300,000
Yield Trust II
Putnam High Yield Fixed Income -- 200,000
Fund, LLC
R & D Investment Partnership 11,000 --
RJR Nabisco Defined Benefit 162,800 --
Master Trust
The Raptor Global Fund Ltd. 324,800 --
The Raptor Global Fund L.P. 119,400 --
Reams Equity Fund, L.P. 200,000 --
Rising Stars Offshore Fund 15,000 --
Ernest M. Rochester 7,250 --
Mark L. Rochester 7,250 --
Rose Foundation -- 575,000
J. David Rosenberg(3) 80,000 --
Edward J. Rosenthal Keogh 10,000 --
Peter Rozema IRA 10,000 --
Jacob Safren 10,000 --
Wayne Saker 20,000 --
Charla Sasha Foundation 10,000 --
Scott Scher 2,500 --
Jeff A. Schugart and Mary L. 20,000 --
Schugart
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Kathryn Sue Schugart 5,000 --
Irene Sinclair -- 25,000
Robert S. Sinclair 1,000 --
Skat Capital, L.P. 20,000 --
Donald C. Smith -- 50,000
Gordon V. and Helen C. Smith 25,000 1,000,000
Foundation
Tildon W. Smith -- 200,000
John P. Soukenik(1) 5,000 --
Jay Spellman -- 1,000
Spring Street Partners, LP 25,000 500,000
John W. Tabner 1,000 --
Jack Thompson High Yield -- 20,000
Jack Thompson IRA Rollover -- 20,000
Raymond A. Tiernan(1) 10,000 --
Philip E. Timyan, Trustee for the 40,000 --
Philip E. Timyan Trust
Philip J. and Nancy L. Timyan 60,000 --
Edward A. Townsend(3) 300,000 --
Kenneth W. Townsend(3) 2,500 --
Eugene Trainor III 2,500 --
Tudor Arbitrage Partners L.P. 63,300 --
Tudor BVI Futures, Ltd. 222,400 --
Chaya Unger 20,000 --
University of Notre Dame 20,600 --
The Upper Mill Capital 60,100 --
Appreciation Fund Ltd.
DeWayne R. VonFeldt 120,000 --
Vulcan Materials Company -- 50,000
Highyield Account
Weitz Series Fund, Inc. - Fixed -- 250,000
Income Portfolio
Weitz Series Fund, Inc. - Value -- 750,000
Portfolio
Daniel P. and Georgia H. 2,800 --
Weitzel(1)
West Broadway Partners, LP 140,000 250,000
West Broadway Securities 160,000 --
George W. Wehrlin -- 20,000
Whitehall Properties, LLC 100,000 --
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Principal Amount of Senior
Stock Beneficially Owned and Notes Beneficially Owned and
Name of Selling Holder Offered Hereby Offered Hereby
- ---------------------------------------- --------------------------------------- -----------------------------------------
<S> <C> <C>
Whiting & Co. 900,000 2,000,000
Shelby G. Willcox(4) 4,000 50,000
Aaron Wolfson 10,000 --
Ziff Asset Management, L.P. 900,000 --
Harold Zirkin 10,000 --
Zweig-DiMenna Partners, L.P. 349,000 --
Zweig-DiMenna Special 220,000 --
Opportunities, LPC
</TABLE>
- ---------------------
(1) Norman B. Antin, Philip R. Bevan, Jeffrey D. Haas, Jeffrey A. Koeppel, John
P. Soukenik, Raymond A. Tiernan and Daniel P. Weitzel are partners in
Elias, Matz, Tiernan & Herrick L.L.P., which serves as special counsel to
the Company and served as special counsel to the Company in connection with
the Private Placement and this offering.
(2) In connection with the Private Placement, FBR received warrants to purchase
591,000 shares of Common Stock as consideration for its efforts as
Placement Agent.
(3) Consists of a director and/or executive officer of the Company.
(4) Includes 1,000 shares of Common Stock as co-trustee with Lawrence Willcox.
The Company has agreed to indemnify the Selling Holders against certain
liabilities arising out of any actual or alleged material misstatements or
omissions in the Registration Statement, other than liabilities arising from
information supplied by the Selling Holders for use in the Registration
Statement. Each Selling Holder, severally, but not jointly, has agreed to
indemnify the Company against liabilities arising out of any actual or alleged
material misstatements or omissions in the Registration Statement insofar as
such misstatements or omissions were made in reliance upon written information
furnished to the Company by such Selling Holder expressly for use in the
Registration Statement.
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<PAGE>
DESCRIPTION OF SENIOR NOTES
General
The Senior Notes have been issued pursuant to the Indenture between the
Company and The Bank of New York, as trustee (the "Trustee"). The Indenture was
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), upon effectiveness of the Registration Statement of which this
Prospectus forms a part. This summary of certain terms and provisions of the
Senior Notes and the Indenture does not purport to be complete, and where
reference is made to particular provisions of the Indenture, such provisions,
including the definitions of certain terms, some of which are not otherwise
defined herein, are qualified in their entirety by reference to all of the
provisions of the Indenture and those terms made a part of the Indenture by the
Trust Indenture Act. See "Additional Information." Capitalized terms not
otherwise defined herein have the meanings specified in the Indenture. The
Indenture has been filed as in exhibit to the Registration Statement.
The Senior Notes will mature on September 8, 2004. The Senior Notes are
general unsecured obligations of the Company and rank senior to such other
Indebtedness as the Company may incur that is not expressly subordinated to the
Senior Notes. The Indenture generally restricts the incurrence of additional
Indebtedness by the Company, except for certain Junior Indebtedness. See
"--Certain Covenants--Limitations on Indebtedness."
The Senior Notes are issuable and transferable only in registered form
without coupons and only in denominations of $1,000 and any integral multiple
above that amount.
The Senior Notes bear interest from the date of their initial issuance,
September 8, 1997, at the rate of 11.0% per annum, payable semi-annually in
arrears on March 1 and September 1 of each year (each an "Interest Payment
Date"), commencing March 1, 1998, to the holders of record at the close of
business on the February 15 or August 15 (whether or not a business day), as the
case may be, next preceding such Interest Payment Date (each, a "Regular Record
Date"). Interest will be computed on the basis of a 360-day year of twelve
30-day months.
The Senior Notes are not savings accounts or deposits and are not
insured by the FDIC or by the United States or any agency or fund thereof. The
Senior Notes are not secured by the assets of the Company or any of its
Subsidiaries, including the Bank, or otherwise and do not have the benefit of a
sinking fund for the retirement of principal or interest. Because the Company is
a holding company that currently conducts substantially all of its operations
through the Bank, the right of the Company to participate in any distribution of
assets of the Bank, upon their liquidation or reorganization or otherwise (and
thus the ability of Holders to benefit indirectly from such distribution), are
subject to the prior claims of creditors of the Bank, including claims of
depositors of the Bank. Additionally, distributions to the Company by the Bank,
whether in liquidation,
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<PAGE>
reorganization or otherwise, are subject to regulatory restrictions and, under
certain circumstances, may be prohibited.
No Sinking Fund, Mandatory Redemption or Optional Redemption
The Senior Notes are not entitled to the benefit of any sinking fund,
mandatory redemption or optional redemption.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitations on Indebtedness. The Company may not create, incur, issue,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for or with respect to, or otherwise permit to exist any Indebtedness,
except: (i) Indebtedness represented by the Senior Notes; (ii) Junior
Indebtedness with a Stated Maturity of principal (or any required repurchase,
redemption, defeasance or sinking fund payments) which is after the final Stated
Maturity of the Senior Notes; (iii) Indebtedness the proceeds of which are
immediately applied to redeem or repurchase Senior Notes and provided that if
such Indebtedness is used to redeem or repurchase only a portion of the Senior
Notes, such Indebtedness has a Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) which is after the
final Stated Maturity of the Senior Notes and (iv) Indebtedness specified in
paragraph (b) of the definition of "Permitted Payment."
The Company may not create, incur, assume, guarantee or otherwise in
any manner become directly or indirectly liable for or with respect to, or
otherwise permit to exist, any Indebtedness (including any Indebtedness assumed
in connection with the acquisition of assets from another Person or as a result
of the merger of any Person with or into the Company) unless, at the time of
such event, the principal amount of total Indebtedness of the Company would not
exceed 100% of the Company's Consolidated Tangible Net Worth; provided that for
purposes of this requirement, Indebtedness shall be net of any fund or interest
reserve account which has been established to fund the payment of principal
and/or interest on Indebtedness.
Limitations on Restricted Payments. The Company may not, and may not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment
if, at the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be
continuing; or
(b) the Company would fail to maintain sufficient Liquid Assets to
comply with the terms of the covenant described below under "--Liquidity
Maintenance;"
98
<PAGE>
(c) the Bank would fail to meet any of their respective applicable
minimum capital requirements under the regulations of the OTS which are
necessary to enable the Bank to qualify as an "adequately capitalized"
institution under such regulations; or
(d) the aggregate amount of all Restricted Payments (the amount of such
payments, if other than in cash, having been determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution filed with the Trustee) declared and made after the Issue Date
would exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the
Company accrued on a cumulative basis during the period beginning on
the first day of the fiscal quarter during which the Issue Date
occurred and ending on the last day of the Company's last fiscal
quarter ending prior to the date of such proposed Restricted Payment,
plus
(ii) the aggregate Net Cash Proceeds received by the Company as
capital contributions (other than from a Subsidiary) after the Issue
Date, plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company
from the issuance or sale (other than to a Subsidiary) of Qualified
Capital Stock after the Issue Date; plus
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is converted into or exchanged for Qualified Capital
Stock of the Company after the Issue Date;
provided, however, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at the
date of declaration such payment was permitted by the foregoing provisions, (y)
any Permitted Payment; or (z) the redemption of all of the shares of Common
Stock of the Company which are issued and outstanding immediately prior to the
date of the Indenture.
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company may not, and may not permit any of its Subsidiaries
to, create, assume or otherwise cause or suffer to exist or to become effective
any consensual encumbrance or restriction on the ability of any such Subsidiary
to:
(a) pay any dividends or make any other distribution on its Capital
Stock;
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<PAGE>
(b) make payments in respect of any Indebtedness owed to the Company or
any other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to
guarantee Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable laws and regulations;
(2) restrictions existing under agreements in effect on the date of the
Indenture;
(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions on the transfer of assets which are subject to Liens;
(5) restrictions existing under agreements evidencing Indebtedness
which is incurred after the date of the Indenture as permitted by the covenants
described above under "--Limitations on Indebtedness," provided that the terms
and conditions of any such restrictions are no more restrictive than those
contained in the Indenture; and
(6) restrictions existing under any agreement which refinances or
replaces any of the agreements containing the restrictions in clauses (2), (3)
and (5); provided that the terms and conditions of any such restrictions are not
less favorable to the Holders than those under the agreement evidencing or
relating to the Indebtedness refinanced.
Restrictions on Issuance and Sale or Disposition of Capital Stock of
Subsidiaries. The Company (a) may not permit any Subsidiary to issue or sell any
shares of its Capital Stock (other than to the Company or a Wholly Owned
Subsidiary) and (b) except pursuant to existing agreements, options or option
plans, may not permit any Person to own any shares of Capital Stock of any
Subsidiary.
Limitations on Transactions with Affiliates. The Company may not, and
may not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company (except that the Company and any of its Subsidiaries
may enter into any transaction or series of related transactions with any
Subsidiary of the Company without limitation under this covenant) unless: such
transactions or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than would be
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available in a comparable transaction in an arm's length dealing with a Person
that is not such an Affiliate; with respect to any transaction or series of
related transactions involving aggregate payments in excess of $500,000, the
Company delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of transactions complies with clause (i) above and has
been approved by a majority of the Board of Directors of the Company; and with
respect to any transaction or series of related transaction involving aggregate
payments in excess of $2 million, the Company delivers to the Trustee a written
opinion of a nationally-recognized investment banking firm to the effect that
the transaction or series of transactions are fair to the Company or such
Subsidiary from a financial point of view. The limitations set forth in this
paragraph will not apply to (a) transactions entered into pursuant to any
agreement already in effect on the date of the Indenture, (b) any employment
agreement, stock option, employee benefit, indemnification, compensation,
business expense reimbursement or other employment-related agreement,
arrangement or plan entered into by the Company or any of its Subsidiaries
either (A) in the ordinary course of business and consistent with the past
practice of the Company or such Subsidiary or (B) which agreement, arrangement
or plan was adopted by the Board of Directors of the Company or such Subsidiary,
as the case may be, (c) residential mortgage, credit card and other consumer
loans to an Affiliate who is an officer, director or employee of the Company or
any of its Subsidiaries and which comply with the applicable provisions of 12
U.S.C. ss. 1468(b) and any rules and regulations of the OTS thereunder, (d) any
Restricted Payments, (e) any issuance of capital stock to Messrs. Townsend and
Norton in connection with the acquisition by the Company of Green Country, or
(f) any transaction or series of transactions in which the total amount involved
does not exceed $250,000.
Limitations on Liens and Guarantees. The Company may not create,
assume, incur or suffer to exist any Lien upon (i) the Capital Stock of the Bank
or (ii) any of the Company's property or assets (other than the Capital Stock of
the Bank) now owned, or acquired after the date of the Indenture, or any income
or profits from any such property or assets, as security for Indebtedness which
may be incurred by the Company under the Indenture and having a contractual time
to maturity greater than one year (other than the Senior Notes), without, in the
case of either (i) or (ii), effectively providing that the Senior Notes will be
equally and ratably secured with (or prior to) such Indebtedness, provided that
if such Indebtedness is Junior Indebtedness, any security interest with respect
to such Junior Indebtedness shall be subordinated to the security interest with
respect to the Senior Notes to the same extent as such Junior Indebtedness is
subordinated to the Senior Notes.
The Company may not permit any Subsidiary of the Company, directly or
indirectly, to guarantee or assume, or subject any of its assets to a Lien to
secure, any Indebtedness which may be incurred by the Company under the
Indenture (other than the Senior Notes) unless (i) such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of, or pledge of assets to secure, the Senior Notes by
such Subsidiary on terms at least as favorable to the Holders as such guarantee
or security interest in such assets is to the holders of such Indebtedness,
except that in the event of a guarantee or security interest in such assets with
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respect to Junior Indebtedness, any such guarantee or security interest in such
assets with respect to such Junior Indebtedness shall be subordinated to such
Subsidiary's guarantee or security interest in such assets with respect to the
Senior Notes to the same extent as such Junior Indebtedness is subordinated to
the Senior Notes and (ii) such Subsidiary waives, and agrees that it and will
not in any manner whatsoever claim, or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Subsidiary of the Company as a result of any payment by
such Subsidiary under its guarantees.
Liquidity Maintenance. The Company will, at all times when the Senior
Notes are not rated in an investment grade category by one or more nationally
recognized statistical rating organizations, maintain Liquid Assets with a value
equal to at least 100% of the required interest payments due on the Senior Notes
on the next succeeding semi-annual Interest Payment Date.
Offer to Purchase upon a Change of Control. The Company will, upon the
occurrence of a Change of Control, make an offer to purchase (an "Offer to
Purchase"), and will, subject to the provisions described below, purchase, on a
Business Day (the "Change of Control Purchase Date") not more than 60 days nor
less than 30 days following the occurrence of the Change of Control, all of the
then outstanding Senior Notes at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to (but excluding) the Change of Control Purchase Date.
The Company will, subject to the provisions described below, purchase all Senior
Notes properly tendered in the Offer to Purchase and not withdrawn. Prior to the
mailing of the notice to Holders provided for, as described below, the Company
must (i) offer to repay in full all Indebtedness which by its terms requires
repayment by the Company prior to any repurchase by the Company of the Senior
Notes and repay the Indebtedness of each lender who has accepted such offer or
(ii) obtain the requisite consent under such Indebtedness to permit the
repurchase of the Senior Notes. If a notice has been mailed when such condition
precedent has not been satisfied, the Company will have no obligation to (and
shall not) effect the purchase of Senior Notes until such time as such condition
precedent is satisfied. Failure to mail the notice on the date specified below
or to have satisfied the foregoing condition precedent by the date that the
notice is required to be mailed shall in any event constitute a covenant Default
under the Indenture. The Offer to Purchase is required to remain open for at
least 20 Business Days and until the close of business on the Change of Control
Purchase Date.
In order to effect such Offer to Purchase, the Company will, not later
than the 30th day after the Change of Control, mail to each Holder a notice,
which shall govern the terms of the Offer to Purchase and shall state, among
other things: (i) that a Change of Control has occurred and an Offer to Purchase
is being made, and that, although Holders are not required to tender their
Senior Notes, all Senior Notes that are timely tendered will be accepted for
payment; (ii) the purchase price and the Change of Control Purchase Date, which
will be no earlier than 30 days nor later than 60 days from the date such notice
is mailed; (iii) that any Senior Note not tendered will continue to accrue
interest; (iv) that any Senior Note accepted for payment pursuant to the Offer
to Purchase will cease to accrue interest on and after the Change of Control
Purchase Date; (v) the instructions that Holders
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will be required to follow in order to have such Holders' Senior Notes
repurchased; (vi) that Holders will be entitled to withdraw their election not
later than the close of business on the third Business Day preceding the Change
of Control Purchase Date and the instructions that Holders must follow in order
to withdraw such election; and (vii) any other information necessary to enable
Holders to tender their Senior Notes and to have such Senior Notes repurchased.
On the Change of Control Purchase Date, the Company will (i) accept for
payment Senior Notes tendered pursuant to the Offer to Purchase, (ii) deposit
with the Paying Agent money sufficient to pay the purchase price of all Senior
Notes so tendered and (iii) deliver to the Trustee all Senior Notes so accepted
together with an Officers' Certificate stating the principal amount of Senior
Notes tendered to and accepted for payment by the Company. The Company will
publicly announce the results of the Offer to Purchase on or as soon as
practicable after the Change of Control Purchase Date. There can be no assurance
that the Company will have sufficient financial resources to repurchase any or
all of the Senior Notes at such time as it might be required to do so.
Notwithstanding the foregoing, if any Senior Note accepted for payment
is not so paid pursuant to the foregoing provisions of the Indenture, then, from
the Change of Control Purchase Date until the principal and interest on such
Senior Note is paid, interest will be paid on the unpaid principal and, to the
extent permitted by law, on any accrued but unpaid interest thereon, in each
case at the rate or rates prescribed therefor in the Senior Notes.
Maintenance of Depository Institution Subsidiary. The Company will,
subject to requirements governing consolidations, merges and conveyances,
maintain at all times as a Wholly Owned Subsidiary an entity that is a bank or
thrift or substantially similar institution subject to regulation by federal or
state authorities and do all things necessary to ensure that savings accounts of
the Bank or such other institution are insured by the FDIC or any successor
organization up to the maximum amount permitted by the Federal Deposit Insurance
Act and regulations thereunder or any succeeding federal law hereinafter
enacted.
Additional Covenants. The Indenture also contains covenants with
respect to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment of
taxes and other claims; (iv) maintenance of properties; (v) maintenance of
insurance; and (vi) maintenance of books and records.
Merger and Consolidation
The Indenture provides that the Company will not, in a single
transaction or a series of transactions, consolidate or merge with or into or
transfer, sell, lease or convey all or substantially all of its assets to
another Person unless: (i) either the Company will be the entity surviving such
merger or consolidation or the corporation formed by or surviving such
consolidation or merger, or the Person to which such transfer, sale, lease or
conveyance shall have been made, shall be a corporation duly organized and
existing under the laws of the United States, any state thereof or the
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District of Columbia and will unconditionally expressly assume by a supplemental
indenture hereto, executed and delivered to the Trustee, in form satisfactory to
the Trustee, all the obligations of the Company under the Senior Notes and the
Indenture; (ii) immediately before and immediately after giving effect to the
transaction or series of transactions, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to the
transaction or series of transactions, the Company or the surviving entity, as
applicable, and their respective banking and thrift subsidiaries, as applicable,
will be in compliance with all applicable regulatory capital requirements; (iv)
immediately after giving effect to the transaction or series of transactions,
the Company or the surviving entity, as applicable, could incur at least $1.00
of additional Indebtedness without violating the limitations on Indebtedness
provisions of the Indenture; and (v) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel each stating that such
consolidation, merger, business combination, transfer, sale, lease or conveyance
and such supplemental indenture complies with the Indenture and that all
conditions precedent therein relating to such transaction have been complied
with.
Modification of the Indenture; Waiver of Covenants
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of greater than 50% in
aggregate principal amount of the Senior Notes then Outstanding; provided,
however, that no such modification or amendment may, without the consent of the
Holder of each outstanding Senior Note affected thereby, (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Senior Note
or reduce the principal amount thereof, premium, if any, or the rate of interest
thereon or change any Place of Payment, or change the coin or currency in which
any Senior Note or any premium or the interest thereon is payable or impair the
right to institute suit for the enforcement of any such payment after the Stated
Maturity thereof; (ii) reduce the percentage in principal amount of the
outstanding Senior Notes, the consent of whose Holders is required for any such
amendment or modification, or the consent of whose Holders is required for any
waiver of compliance with the Indenture or certain defaults thereunder; and
(iii) modify any of the provisions relating to supplemental indentures requiring
the consent of Holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage in principal
amount of outstanding Senior Notes required for such action or to provide that
certain other provisions of the Indenture may not be modified or waived without
the consent of the Holder of each Senior Note affected thereby.
Notwithstanding the foregoing, without the consent of any Holders, the
Company and the Trustee may modify or amend the Indenture (i) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Senior
Notes in accordance with the provisions of the Indenture described above under
"--Merger and Consolidation;" (ii) to add any additional covenants of the
Company for the benefit of the Holders, or to surrender any right or power
conferred upon the Company in the Indenture or in the Senior Notes; (iii) to
secure the Senior Notes or to add a guarantor; (iv) to comply with any
requirements of the Commission in order to effect and maintain the qualification
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of the Indenture under the Trust Indenture Act; or (v) to cure any ambiguity, to
correct or supplement any provision of the Indenture which may be defective or
inconsistent with any other provision of the Indenture, or to make any other
provisions with respect to matters or questions arising under the Indenture
which shall not be inconsistent with the provisions of the Indenture, provided
such action pursuant to clause (v) shall not adversely affect the interests of
the Holders in any material respect.
The Holders of greater than 50% in aggregate principal amount of the
Senior Notes outstanding may waive compliance with certain restrictive covenants
and provisions of the Indenture.
Events of Default
An Event of Default is defined in the Indenture to include:
(i) failure by the Company to pay the principal of, or
premium, if any, on any Senior Note when due and payable at maturity or
upon redemption, acceleration or otherwise;
(ii) failure by the Company to pay interest on any Senior Note
when due and payable, if such failure continues for a period of 30
days;
(iii) default in the performance, or breach, of the provisions
described above under "--Merger and Consolidation;"
(iv) default, on the Change of Control Purchase Date, in the
purchase of Senior Notes required to be purchased by the Company
pursuant to an Offer to Purchase;
(v) failure by the Company to comply with any other agreement
or covenant contained in the Indenture if such failure continues for a
period of 30 days after notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in principal
amount of the Senior Notes then Outstanding;
(vi) default by the Company or any Subsidiary of the Company
in the payment of any Indebtedness of the Company or any Subsidiary of
the Company after any applicable grace period after final maturity or
in the event that final maturity is accelerated because of a default,
which default is not cured, waived or consented to for 30 days and the
total amount of such Indebtedness unpaid or accelerated is equal to or
greater than 5% of the Company's Consolidated Tangible Net Worth;
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(vii) the existence of certain events of bankruptcy or
insolvency of the Company or the Bank;
(viii) one or more final judgments, decrees or orders has been
rendered against the Company or any Subsidiary for the payment of an
amount of money which, individually or in the aggregate, is equal to or
greater than 5% of the Company's Consolidated Tangible Net Worth and
which remains unsatisfied for a period of 60 days without a stay of
execution of any such judgment, decree or order; and
(ix) failure by the Bank to comply with any of its respective
Regulatory Capital Requirements; provided, that an Event of Default
under this paragraph (ix) shall not be deemed to have occurred (a)
during the 45-day period following the first day on which the Bank
fails to comply with any of its Regulatory Capital Requirements, if
within such 45-day period the Bank files a capital plan with the OTS,
(b) during the 60-day period following the initial submission of a
capital plan to the OTS by the Bank (or, if the OTS notifies the Bank
in writing that it needs a longer period of time to determine whether
to approve such capital plan, such longer period as is so specified by
the OTS), unless prior to such date the OTS shall have notified the
Bank of its determination not to approve such capital plan, or (c)
during the period that the Bank is operating in material compliance
with a capital plan approved by the OTS; provided, further, that if the
Bank meets the minimum amount of capital required to meet each of the
industry-wide regulatory capital requirements pursuant to 12 U.S.C.
Section 1464(t) and 12 C.F.R. Part 567 (and any amendment to either
thereof) or any successor law or regulation, notwithstanding the Bank's
failure to meet an individual minimum capital requirement pursuant to
12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and any
amendment to either thereof) or any successor law or regulation, no
Event of Default shall have occurred pursuant to this clause unless
written notice thereof shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the Holders of 25% in
aggregate principal amount of the Senior Notes then outstanding.
The Company has covenanted in the Indenture to file annually with the
Trustee a statement regarding compliance by the Company with the terms of the
Indenture and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of not less than 25% in principal amount of the Senior Notes then
outstanding may declare all the Senior Notes to be immediately due and payable
by notice to the Company (and to the Trustee if given by the Holders). Under
certain circumstances, the Holders of a majority in principal amount of the
Senior Notes then Outstanding may rescind such a declaration.
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Defeasance
The Indenture provides that (A) if applicable, the Company will be
discharged from any and all obligations in respect of then Outstanding Senior
Notes, other than the obligation to duly and punctually pay the principal of,
premium, if any, and interest on, the Senior Notes in accordance with the terms
of the Senior Notes and the Indenture, or (B) if applicable, the Company may
omit to comply with certain restrictive covenants, and that such omission shall
not be deemed to be an Event of Default under the Indenture or the Senior Notes,
in either case (A) or (B); upon irrevocable deposit with the Trustee, in trust,
of money and/or U.S. Government Obligations which will provide money in an
amount sufficient in the opinion of a nationally-recognized accounting firm to
pay the principal of and premium, if any, and each installment of interest, if
any, on the Outstanding Senior Notes. With respect to clause (B), the
obligations under the Indenture other than with respect to such covenants shall
remain in full force and effect. Such trust may only be established if, among
other things, (i) with respect to clause (A), the Company has received from, or
there has been published by, the IRS a ruling or there has been a change in law,
which in an Opinion of Counsel provides that Holders of the Senior Notes will
not recognize gain or loss for federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to federal income tax on
the same amount, in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred; or with respect
to clause (B), the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Senior Note will not recognize gain or loss
for Federal income tax purposes as a result of such deposit and defeasance and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred; (ii) no Event of Default or event that with the passing of time or
the giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing; and (iii) certain other customary conditions
precedent are satisfied.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to
surviving rights of registration of transfer or exchange of the Senior Notes, as
expressly provided for in the Indenture) as to all outstanding Senior Notes when
(i) either (a) all the Senior Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Senior Notes which have been replaced or paid)
have been delivered to the Trustee for cancellation or (b) all Senior Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable, or will become due and payable or are to be called for redemption
within one year, and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the Senior Notes not theretofore delivered to the
Trustee for cancellation, for principal of, and premium, if any, and interest on
the Senior Notes to the date of deposit together with irrevocable instructions
to the Trustee from the Company directing the Trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be; (ii) the Company
has paid all other sums payable under the Indenture by the Company; and (iii)
the Company has
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delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
The Indenture, and provisions of the Trust Indenture Act incorporated
by reference, contain limitations on the rights of the Trustee, should it become
a creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
Governing Law
The Indenture provides that it and the Senior Notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
Certain Definitions
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings corresponding to the
foregoing.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of this Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
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"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents in the equity (however designated) of such
Person and any rights (other than debt securities convertible into an equity
interest), warrants or options to acquire an equity interest in such Person.
"Change of Control" means the occurrence of any of the following
events: (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 25% of the total
Voting Stock of the Company, (ii) the Company consolidates with, or merges into,
another person, or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any person, or any person
consolidates with, or merges into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction between the Company and a Wholly Owned Subsidiary, or (iii) during
any period of two consecutive years, individuals who at the beginning of such
period constituted the Company's Board of Directors (together with any new
directors whose elections by the Company's Board of Directors or whose
nomination for elections by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the directors then in office.
"Consolidated Net Income (Loss)" of any Person means, for any period,
the consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward), less all
fees and expenses relating thereto, net of taxes, (ii) the portion of net income
(or loss) of any other Person (other than any of such Person's consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan or (v) the net income of any consolidated Subsidiary of such Person
to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; provided that,
upon the termination or expiration of such dividend or distribution
restrictions, the portion of net income (or loss) of such consolidated
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income
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(Loss) of such Person to the extent of the amount of dividends or other
distributions available to be paid to such Person in cash by such Subsidiary.
"Consolidated Tangible Net Worth" of any Person and its Subsidiaries
means as of the date of determination all amounts that would be included under
stockholders' equity on a consolidated balance sheet of such Person and its
Subsidiaries determined in accordance with GAAP, less an amount equal to the
consolidated intangible assets (other than capitalized mortgage servicing
rights) of such Person and its Subsidiaries determined in accordance with GAAP.
"Default" means any event that upon notice or the passage of time or
both would be an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part on, or prior to, or is
exchangeable for debt securities of the Company or its Subsidiaries prior to,
the final Stated Maturity of principal of the Senior Notes; provided that only
the amount of such Capital Stock that matures or is redeemable prior to the
Stated Maturity of principal of the Senior Notes shall be deemed to be
Disqualified Capital Stock.
"Fair Market Value" means, with respect to any asset, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of which is under
compulsion to complete the transaction as determined by the Board of Directors
of the Company, acting in good faith, and shall be evidenced by a Board
Resolution delivered to the Trustee.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness; (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss; (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered); (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor; or (v) otherwise to assure a
creditor with respect to Indebtedness against loss; provided that the term
"guarantee" shall not include endorsements for collection of deposit, in the
ordinary course of business.
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"Holder" when used with respect to any Senior Note means a Noteholder.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of such
Person in connection with any letters of credit issued under letter of credit
facilities, and in connection with any agreement by such Person to purchase,
redeem, exchange, convert or otherwise acquire for value any Capital Stock of
such Person now or hereafter outstanding; (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments; (iii) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business; (iv) all
obligations under interest rate agreements of such Person; (v) all Capital Lease
Obligations of such Person; (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends payable by other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien, upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or asset
or the amount of the obligations so secured); (vii) all guarantees by such
Person of Guaranteed Indebtedness; (viii) all Disqualified Capital Stock (valued
at the greater of book value and voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends) of such Person; and (ix) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing or any liability of the types referred to in clauses (i) through
(viii) above. For purposes hereof, (x) the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value is to be determined in good
faith by the board of directors (or any duly authorized committee thereof) of
the issuer of such Disqualified Capital Stock, and (y) Indebtedness is deemed to
be incurred pursuant to a revolving credit facility each time an advance is made
thereunder.
"Issue Date" means September 8, 1997.
"Junior Indebtedness" means any Indebtedness of the Company
subordinated in right of payment of either principal, premium (if any) or
interest thereon to the Senior Notes.
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"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days from
the determination date: (a) repurchase agreements on obligations of, or are
guaranteed as to timely receipt of principal and interest by, the United States
or any agency or instrumentality thereof when such obligations are backed by the
full faith and credit of the United States, provided that the party agreeing to
repurchase such obligations is a primary dealer in U.S. government securities,
(b) federal funds and deposit accounts, including but not limited to
certificates of deposit, time deposits and bankers' acceptances of any U.S.
depository institution or trust company incorporated under the laws of the
United States or any state, provided that the debt of such depository
institution or trust company at the date of acquisition thereof has been rated
by Standard & Poor's Corporation in the highest short-term rating category or
has an equivalent rating from another nationally recognized rating agency, or
(c) commercial paper of any corporation incorporated under the laws of the
United States or any state thereof that on the date of acquisition is rated
investment grade by Standard & Poor's Corporation or has an equivalent rating
from another nationally recognized rating agency; (iii) any debt instrument
which is an obligation of, or is guaranteed as to the receipt of principal and
interest by the United States, its agencies or any U.S. government sponsored
enterprise, or (iv) any mortgage-backed or mortgage-related security issued by
the United States, its agencies, or any U.S. government sponsored enterprise, as
to which the payment of principal and interest from the mortgages underlying
such securities will be passed through to the holder thereof and which has a
remaining weighted average maturity of 15 years or less. Notwithstanding the
forgoing, Liquid Assets shall not include any debt instruments, securities or
collateralized mortgage obligations (real estate mortgage investment conduits)
that would be classified as a "High-Risk Mortgage Security" pursuant to the
policy statement adopted by the Federal Financial Institutions Examination
Counsel on February 10, 1992, as reflected in Volume I of the Federal Reserve
Report Service, Part 3-1562.
"Net Cash Proceeds" means, with respect to any issuance or sale of
Capital Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, the
proceeds of such issuance or sale or capital contribution in the form of cash or
cash equivalents, including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed for, cash
or cash equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary of the Company), net of
attorney's fees, accountant's fees and brokerage, consulting, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale or capital contribution and net of taxes paid or payable by the Company as
a result thereof.
"Noteholder" means a Person is whose name a Senior Note is registered
in the Note Register.
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"Permitted Investments" means one or more of the following types of
investments:
(i) interest-bearing deposit accounts of any "insured
depository institution," as defined in Section 3(c) of the Federal
Deposit Insurance Act, as amended;
(ii) direct obligations of, or obligations the principal and
interest on which are unconditionally guaranteed by, the United States
of America or any agency or instrumentality thereof;
(iii) obligations of any corporate issuer which are rated in
one of the two highest rating categories of any nationally-recognized
statistical rating organization;
(iv) repurchase agreements with banks, brokers or dealers
involving any of the foregoing types of securities; and
(v) money market mutual funds;
provided that, notwithstanding anything to the contrary contained herein,
Permitted Investments shall not include any of the foregoing investments to the
extent that any such investment, in the good faith business judgment of the
Board of Directors of the Company, involves at the time of acquisition or
thereafter a reasonable likelihood of a loss of principal.
"Permitted Payment" means, so long as no Default or Event of Default is
continuing,
(a) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Capital Stock of the Company or any Affiliate (other
than a Wholly-Owned Subsidiary, which is unrestricted) of the Company, or any
Junior Indebtedness of the Company which may be incurred pursuant to the
covenant described above under "--Certain Covenants--Limitations of
Indebtedness" in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege where, in connection therewith, cash
is paid in lieu of the issuance of fractional shares or scrip), or out of the
Net Cash Proceeds or Fair Market Value of property not constituting Net Cash
Proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company or to an employee benefit plan of the Company or any
of its Subsidiaries) of Qualified Capital Stock of the Company; provided that
the Net Cash Proceeds or Fair Market Value of such property received by the
Company from the issuance of such shares of Qualified Capital Stock, to the
extent so utilized, shall be excluded from clause (c)(iii) of the covenant
described above under "--Certain Covenants--Limitations on Restricted
Payments;" and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness of the Company which may be
incurred pursuant to the covenant
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described under "--Certain Covenants--Limitations on Indebtedness" above in
exchange for, or out of the Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of new Indebtedness
to the Company (such a transaction, a "refinancing"); provided, that any such
new Indebtedness of the Company (i) shall be in a principal amount that does not
exceed an amount equal to the sum of (A) the principal amount of the Junior
Indebtedness so refinanced less any discount from the face amount of such Junior
Indebtedness to be refinanced expected to be deducted from the amount payable to
the holders of such Junior Indebtedness in connection with such refinancing, (B)
the amount of any premium expected to be paid in connection with such
refinancing pursuant to the terms of any Junior Indebtedness of the Company
which may be incurred pursuant to the covenant described above under "--Certain
Covenants--Limitations on Indebtedness" refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such refinancing
by means of a tender offer, privately negotiated repurchase or otherwise and (C)
the amount of legal, accounting, printing and other similar expenses of the
Company incurred in connection with such refinancing; provided, further, that
for purposes of this clause (i), the principal amount of any Indebtedness shall
be deemed to mean the principal amount thereof or, if such Indebtedness provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, such lesser amount as of the date of
determination; (ii) each Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) of such new
Indebtedness shall be after the final Stated Maturity of principal of the Senior
Notes then outstanding; and (iii) is made expressly subordinated to the Senior
Notes to substantially the same extent as the Junior Indebtedness being
refinanced or expressly subordinate to such refinanced Indebtedness.
"Person" means any natural person, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Qualified Capital Stock" of any Person means any and all Capital Stock
of such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means (i) the minimum amount of
capital required to meet each of the industry-wide regulatory capital
requirements applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12
C.F.R. Part 567 (and any amendment to either thereof) or any successor law or
regulation, and (ii) such higher amount of capital as the Bank, is required to
maintain in order to meet any individual minimum capital standard applicable to
the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and
any amendment to either thereof) or any successor law or regulation.
"Restricted Payment" means:
(a) the declaration, payment or setting apart of any funds for the
payment of any dividend on, or making of any distribution to holders of, the
Capital Stock of the Company or any
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Subsidiary of the Company (other than (i) dividends or distributions in
Qualified Capital Stock of the Company and, and (ii) dividends or distributions
payable on or in respect of any class or series of Capital Stock of a Subsidiary
of the Company as long as the Company receives at least its pro rata share of
such dividends or distributions in accordance with its ownership interests in
such class or series of Capital Stock);
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any Capital Stock of the Company or any
Affiliate of the Company (other than a Wholly Owned Subsidiary); or
(c) the making of any principal payments on, or repurchase, redemption,
defeasance, retirement or other acquisition for value, directly or indirectly,
of any Junior Indebtedness, prior to the Stated Maturity of principal or
scheduled redemption or defeasance of, or any scheduled sinking fund payment on,
such Junior Indebtedness.
"Stated Maturity" when used with respect to any Senior Note or any
installment of interest thereon means the date specified in such Senior Note as
the fixed date on which the principal of such Senior Note or such installment of
interest is due and payable.
"Subsidiary" means any corporation of which at least a majority of the
outstanding stock having ordinary voting power to elect a majority of the
directors of such corporation, irrespective of whether or not at the time stock
of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency, is at the time
directly or indirectly owned by the Company, by one or more Subsidiaries of the
Company, or by the Company and one or more Subsidiaries.
"Voting Stock" means Capital Stock of any class or classes, however
designated, having ordinary voting power for the election of a majority of the
board of directors, other than stock having such power only by reason of the
occurrence of a contingency.
"Wholly Owned Subsidiary" means a Subsidiary of which all of the
outstanding Capital Stock (other than directors' qualifying shares) is at the
time directly or indirectly owned by the Company, or by one or more Wholly Owned
Subsidiaries or by the Company and one or more Wholly Owned Subsidiaries.
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DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 30,000,000 shares of capital stock,
of which 25,000,000 are shares of Common Stock, par value $.01 per share, and
5,000,000 are shares of preferred stock, par value $.01 per share. As of April
16, 1999, an aggregate of 20,537,209 shares of Common Stock were outstanding and
no shares of preferred stock were outstanding. Each share of Common Stock has
the same relative rights as, and is identical in all respects with, each other
share of Common Stock. The Common Stock is not subject to call for redemption.
The capital stock of the Company does not represent nonwithdrawable
capital, is not an account of an insurable type, and is not insured by the FDIC.
Common Stock
Dividends. Although there are no present plans to do so, the Company
can pay dividends if, as and when declared by its Board of Directors, subject to
compliance with limitations which are imposed by law. See "Dividends and Market
for Common Stock" and "Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation." The holders of Common Stock of
the Company are entitled to receive and share equally in such dividends as may
be declared by the Board of Directors of the Company out of funds legally
available therefor. If the Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Voting Rights. The holders of Common Stock of the Company possess
exclusive voting rights in the Company. They elect the Company's Board of
Directors and act on such other matters as are required to be presented to them
under Delaware law or the Company's Certificate of Incorporation or as are
otherwise presented to them by the Board of Directors. Each holder of Common
Stock is entitled to one vote per share and does not have any right to cumulate
votes in the election of directors. Although there are no present plans to do
so, if the Company issues preferred stock, holders of the preferred stock may
also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as the sole holder of the Bank's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon), all assets of the Bank available for distribution. In the event of any
liquidation, dissolution or winding up of the Company, the holders of its Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, including the Senior Notes, all of the assets of
the Company available for distribution. If preferred stock is issued, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
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Preemptive Rights. Holders of the Common Stock of the Company generally
are not entitled to preemptive rights with respect to any shares which may be
issued in the future. However, pursuant to the terms of the Purchase Agreement,
the Company has agreed not to issue any capital securities or permit the Bank to
issue any capital securities to any person without first offering to purchasers
of the Common Stock in the Private Placement who continue to hold such Common
Stock the opportunity to purchase all or part of such capital securities being
issued at the same purchase price and on the same terms as are proposed to be
offered to such third party purchaser. This right does not apply to the issuance
of capital securities pursuant to or in connection with (i) a reorganization,
merger or consolidation of the Company or the Bank or a sale, disposition or
other transfer of all or substantially all of the assets of the Company or the
Bank, (ii) any conversion or exchange of any capital securities in accordance
with the terms of such securities, (iii) any employee benefit plans of the
Company, (iv) any stock dividends, or pro rata (as to any class) split-ups,
combinations or exchanges of or similar transactions involving capital
securities, (v) any bona fide public offering of capital securities which is
registered under the Securities Act, and (vi) any issuance of capital securities
to Edward A. Townsend or Jan A. Norton pursuant to the acquisition by the
Company of Green Country.
Preferred Stock
None of the shares of the Company's authorized preferred stock has been
issued. The Board of Directors of the Company is authorized to issue preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The preferred stock may be issued in distinctly designated
series, may be convertible into Common Stock and may rank prior to the Common
Stock as to dividend rights, liquidation preferences, or both.
The authorized but unissued shares of preferred stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available for
issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in which the additional authorized shares of
preferred stock would be issued, stockholder approval generally would not be
required for the issuance of these shares. Depending on the circumstances,
however, stockholder approval may be required pursuant to the requirements for
listing the Common Stock on the Nasdaq Stock Market or any exchange on which the
Common Stock may then be listed, if any.
Restrictions on Acquisition of the Company
Restrictions in the Company's Certificate of Incorporation and Bylaws.
A number of provisions of the Company's Certificate of Incorporation, as amended
("Certificate of Incorporation"), and Bylaws ("Bylaws") deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of the Company's
Certificate of Incorporation and Bylaws which might be deemed to have a
potential
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"anti-takeover" effect. Reference should be made in each case to such
Certificate of Incorporation and Bylaws. See "Additional Information."
Board of Directors. Article 6 of the Certificate of Incorporation and
Article III of the Bylaws of the Company contain provisions relating to the
Board of Directors and provides, among other things, that the Board of Directors
shall be divided into three classes as nearly equal in number as possible with
the term of office of one class expiring each year. See "Management." Cumulative
voting in the election of directors is prohibited by Article 4 of the
Certificate of Incorporation. Directors may be removed only with cause at a duly
constituted meeting of stockholders called expressly for that purpose. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the concurring
vote of a majority of the Directors then in office, though less than a quorum of
the Board, and a director appointed to fill a vacancy shall serve for the
remainder of the term to which the director has been elected, and until his
successor has been elected and qualified.
The Bylaws govern nominations for election to the Board, and provide
that nominations for election to the Board of Directors may be made at a meeting
of stockholders by or at the direction of the Board of Directors or by any
stockholder eligible to vote at an annual meeting of stockholders who has
complied with specified notice requirements. Written notice of a stockholder
nomination must be delivered to, or mailed to and received at, the Company's
principal executive offices not less than forty-five days or more than ninety
days prior to the meeting. In the event that less than sixty days' notice of the
date of the meeting is given to stockholders or prior public disclosure of the
date of the meeting is made, notice by the stockholder to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made.
Limitation of Liability. The Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable for
monetary damages for any breach of fiduciary duty by such director as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law ("DGCL")
for approval of an unlawful dividend or an unlawful stock purchase or
redemption, or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification of Directors, Officers, Employees and Agents. The
Company's Bylaws provide that the Company shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, except actions by or in right of the
Company, whether civil, criminal, administrative or investigative, by reason of
the fact that such person is or was a director, officer, employee or agent of
the Company against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if the person
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acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The Company's Bylaws also provide that reasonable expenses incurred by
a director, officer, employee or agent of the Company in defending any civil,
criminal, suit or proceeding described above shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding to the
fullest extent permitted under Delaware law.
Special Meetings of Stockholders and Stockholder Proposals. The
Company's Certificate of Incorporation provides that special meetings of the
Company's stockholders, for any purpose or purposes, may be called by the
Chairman of the Board, the President, the affirmative vote of a majority of the
Board of Directors then in office at a duly constituted meeting of the Board of
Directors of the Company called for such purpose, or by the President of the
Company upon written request of the holders of at least a majority of the shares
of any class of capital stock then outstanding. The Company's Bylaws provide
that only such business as shall have been properly brought before an annual
meeting of stockholders shall be conducted at the annual meeting. In order to be
properly brought before an annual meeting, business must be (a) specified in the
notice given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For stockholder proposals to be included in the Company's proxy
materials, the stockholder must comply with all the timing and informational
requirements of Rule 14a-8 of the Securities Exchange Act of 1934, as amended
("Exchange Act"). With respect to stockholder proposals to be considered at the
annual meeting of stockholders but not included in the Company's proxy
materials, the stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Company not less than 45 days or more
than 90 days prior to the meeting. In the event that less than 60 days' notice
of the date of the meeting is given to stockholders or prior public disclosure
of the date of the meeting is made, notice by the stockholder to be timely must
be so received not later than the close of business on the 15th day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made.
Amendment of Certificate of Incorporation and Bylaws. The Company's
Certificate of Incorporation generally provides that any amendment of the
Certificate of Incorporation must be first approved by a majority of the Board
of Directors and, to the extent required by law, then by the holders of a
majority of the shares of the Company entitled to vote in an election of
directors. The Company's Bylaws may be amended either by a vote of at least
two-thirds of the Board of Directors then in office or by the vote of at least a
majority of the shares eligible to be voted at a duly constituted meeting of
stockholders for such purpose.
Other Restrictions on Acquisition of the Company. Several provisions of
the DGCL could affect the acquisition of Common Stock or control of the Company.
Section 203 of the DGCL generally provides that a Delaware corporation shall not
engage in any "business combination" with an "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder unless (1) prior to such date the board of directors of
the
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corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; or (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for this purpose, shares owned by persons who are directors
and also officers and shares owned by employee stock ownership plans in which
employee participants do not have the right to determine confidentially whether
the shares held subject to the plan will be tendered in a tender offer or
exchange offer; or (3) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. The
three-year prohibition on business combinations with an interested stockholder
does not apply under certain circumstances, including business combinations with
a corporation which does not have a class of voting stock that is (i) listed on
a national securities exchange, (ii) authorized for quotation on an inter-dealer
quotation system of a registered national securities association, or (iii) held
of record by more than 2,000 stockholders, unless in each case this result was
directly or indirectly caused by the interested stockholder.
An "interested stockholder" generally means any person that (i) is the
owner of 15% of more of the outstanding voting stock of the corporation or (ii)
is an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various other
transactions which may benefit an interested stockholder.
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings association unless the OTS has been given 60 days'
prior written notice. The HOLA provides that no company may acquire "control" of
a savings association without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. See "Regulation--Regulation
of Savings and Loan Holding Companies--Holding Company Acquisitions."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company, New York, New York.
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REGISTRATION RIGHTS
In connection with the Private Placement, the Company on September 8,
1997 entered into the Registration Rights Agreement with the initial purchasers
of the Local Securities and with FBR, the Placement Agent in the Private
Placement, pursuant to which the Company agreed to (i) cause to be filed with
the Commission within 120 days after the original issuance of the Local
Securities pursuant to the Purchase Agreement, a shelf registration statement
providing for the offer and sale of the Local Securities issued in the Private
Placement, including Common Stock which is issuable pursuant to the exercise of
warrants granted to the Placement Agent, (ii) use its best efforts to cause the
shelf registration statement to be declared effective under the Securities Act
as promptly as possible and (iii) use its best efforts to keep effective the
shelf registration statement until the earlier of the second anniversary of the
date such shelf registration statement is declared effective by the Commission
or such time as all of the Local Securities and the Placement Agent's warrants
have been sold thereunder or otherwise may be sold without the need for the
shelf registration statement, as set forth in the Registration Rights Agreement.
In addition, pursuant to the Merger Agreement with Green Country, the Company
has agreed to register under the Securities Act the Common Stock to be issued in
connection with the Merger pursuant to the same terms and conditions as are set
forth in the Registration Rights Agreement. The Company agreed to bear the
expenses arising out of the filing of such shelf registration statement. The
Registration Statement of which this Prospectus forms a part has been filed to
satisfy the Company's obligations under the Registration Rights Agreement and
the Merger Agreement.
Pursuant to the terms of the Registration Rights Agreement, a holder of
Local Securities and the Placement Agent desiring to sell some or all of such
securities pursuant to the shelf registration statement shall give the Company
not less than five days' prior written notice, and the Company will use its best
efforts to promptly file any required amendment(s) to the shelf registration
statement in order to facilitate such sales. Initiating Holders, as defined in
the Registration Rights Agreement to mean one or more holders of either not less
than 35% in aggregate principal amount of Senior Notes or not less than 25% of
the then-outstanding Common Stock, may elect that the offering of Local
Securities be in the form of an underwritten offering. Under such circumstances,
the Company will provide written notice to all holders of the Local Securities
and the Placement Agent of such underwritten offering and will provide them with
an opportunity to participate in such underwritten offering, under terms and
with such conditions as set forth in the Registration Rights Agreement.
Under the Registration Rights Agreement, a holder that sells Local
Securities pursuant to the shelf registration statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification rights and
obligations). Each holder of Local Securities may be required to deliver
information to be used in connection with the shelf registration statement in
order to have
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such holder's Local Securities included in the shelf registration statement and
to benefit from the provisions of the succeeding paragraph.
Each of the Local Securities and the Placement Agent's warrants contain
a legend to the effect that the holder thereof, by its acceptance thereof, is
deemed to have agreed to be bound by the provisions of the Registration Rights
Agreement. In that regard, each holder is deemed to have agreed that, upon
receipt of notice from the Company of the occurrence of any event which makes a
statement in the prospectus which is part of the shelf registration statement
untrue in any material respect or which requires the making of any changes in
such prospectus in order to make the statements therein not misleading, such
holder will suspend the sale of Local Securities pursuant to such prospectus
until the Company has amended or supplemented such prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
prospectus to such holder or the Company has given notice that the sale of the
Local Securities may be resumed.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of Delaware. The summary herein of
certain provisions of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement.
PLAN OF DISTRIBUTION
The Local Securities offered hereby may be sold from time to time to
purchasers directly by the Selling Holders at market prices or at negotiated
prices. Alternatively, the Selling Holders may from time to time offer the Local
Securities to or through underwriters, dealers or agents who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Holders or the purchasers of Local Securities, for whom they
may act as agents. The Selling Holders and any underwriters, dealers or agents
which participate in the distribution of Local Securities may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Local Securities by them and any discounts, commissions, concessions or
other compensation received by any such underwriter, dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Local Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Local Securities may be effected in transactions (which may involve
crosses or block transactions) (i) on any national securities exchange or
quotation service on which the Local Securities may be listed or quoted at the
time of sale, (ii) in the over-the-counter market or (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market. At the time
a particular offering of the Local Securities is made, a Prospectus Supplement,
if required, will be distributed which will set forth the aggregate amount and
type of Local Securities being offered and the terms of the offering, including
the name or names of any underwriters,
122
<PAGE>
dealers or agents, any discounts, commissions and other terms constituting
compensation from the Selling Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the Local Securities will be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Local Securities may not be offered or sold unless they have
been registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Local Securities may not simultaneously
engage in market-making activities with respect to such securities for a
restricted period prior to the commencement of such distribution. In addition to
and without limiting the foregoing, each Selling Holder and any other person
participating in a distribution will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Rules 102, 103 and 104, which provisions may limit the timing of
purchases and sales of any of the securities by the Selling Holders or any such
other person. All of the foregoing may affect the marketability of the Local
Securities and brokers' and dealers' ability to engage in market-making
activities with respect to these securities.
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Local Securities will be paid by the Company, including,
without limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts and selling commissions, if any. The Selling
Holders will be indemnified by the Company against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith. The Company will indemnified by the
Selling Holders against certain civil liabilities, including certain liabilities
under the Securities Act, or will be entitled to contribution in connection
therewith.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 16, 1999, there were 20,537,209 shares of Common Stock of
the Company outstanding (not including 60 shares held in the Company's
treasury). All shares of Common Stock sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by affiliates of the Company, as that term is
defined in Rule 144 under the Securities Act, may generally only be resold in
compliance with applicable provisions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year is entitled to sell
123
<PAGE>
within any three-month period, a number of such shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date of the notice filed pursuant to Rule 144. Sales under Rule
144 are also subject to certain manner of sale restrictions and notice
requirements and to the availability of current public information about the
Company. In addition, a person who is deemed an "affiliate" of the Company must
comply with Rule 144 in any sale of shares of Common Stock not covered by a
registration statement (except, in the case of registered shares acquired by the
affiliate on the open market, for the holding period requirement). A person (or
person whose shares are aggregated) who is not deemed an "affiliate" of the
Company and who has beneficially owned restricted shares for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the volume,
notice and other limitations of Rule 144. In meeting the one and two year
holding periods described above, a holder of restricted shares can include the
holding periods of a prior owner who was not an affiliate.
The Company has reserved 1,720,370 shares for grants under its existing
Stock Option Plan. As of April 16, 1999, the Company had options outstanding to
purchase up to 1,460,005 shares of Common Stock. See "Management--Stock Option
Plan." The Company intends to file a registration statement under the Securities
Act to register all shares of Common Stock issuable under such Stock Option
Plan. Shares covered by this registration statement will be eligible for sale in
the public market after the effective date of such registration statement.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1998 and 1997 and for the year ended December 31, 1998, and for the six month
period ended December 31, 1997, have been included herein in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
The consolidated statements of operations, stockholders' equity and
cash flows of the Company for each of the years in the two-year period ended
June 30, 1997, included in this Prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report, with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
CHANGE IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On October 8, 1997, pursuant to authorization of its Board of
Directors, the Company dismissed the firm of Arthur Andersen LLP ("Arthur
Andersen") as its auditors and retained KPMG LLP. Arthur Andersen's report for
each of the three fiscal years ended June 30, 1997 did not contain
124
<PAGE>
an adverse opinion or a disclaimer of opinion and was not qualified or modified
as to audit scope or accounting principles.
During the Company's two most recent fiscal years and the subsequent
interim period immediately preceding the change in accountants, there were no
disagreements with Arthur Andersen on any matter of accounting principles or
practice, financial statement disclosure, or auditing scope or procedure, which
if not resolved to the satisfaction of Arthur Andersen would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports on the Company's financial statements. During the Company's two
most recent fiscal years and the subsequent interim period immediately preceding
the change in accountants, there was one reportable event (as that term is used
in Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the Exchange Act), as
discussed in the next paragraph.
In connection with its audit of the Company's consolidated financial
statements as of and for the year ended June 30, 1997, Arthur Andersen reported
to the audit committee of the Company's board of directors that a material
weakness existed in the system of internal control, specifically that an
adequate system of control was not in effect at June 30, 1997, to provide
reasonable assurance that The Bank was able to estimate and establish an
adequate allowance for loan losses with respect to its indirect automobile loan
portfolio. Management reported and Arthur Andersen concurred with management's
assertion in the reports required by the FDICIA that the Bank maintained an
effective internal control structure over financial reporting as of June 30,
1997, except for the internal control structure over estimating and establishing
an adequate allowance for loan losses with respect to its indirect automobile
loan portfolio.
During fiscal 1997 and 1996, prior to their appointment as certifying
accountants, the Company did not consult KPMG LLP regarding any of the matters
or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
CERTAIN LEGAL MATTERS
The validity of the Local Securities offered hereby was passed upon for
the Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C. Certain
members of Elias, Matz, Tiernan & Herrick L.L.P. beneficially own shares of the
Company's Common Stock. The aggregate amount of such holdings of Common Stock do
not exceed 22,800 shares.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part) on Form S-1 (the "Registration Statement")
under the Securities Act, with respect to the Local Securities offered hereby.
This Prospectus does not contain all the information
125
<PAGE>
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. The terms
of all material contracts or other documents with respect to the Company are
discussed in all material respects herein. For further information regarding the
Company and the Local Securities offered hereby, reference is made to the
Registration Statement and the exhibits thereto.
As a result of the Offering, the Company became subject to the
reporting requirements of the Exchange Act, and in accordance therewith, files
reports and other information with the Commission. The Registration Statement
and the exhibits forming a part thereof filed by the Company with the
Commission, and reports and other information filed by the Company with the
Commission, can be inspected without charge at, and copies can be obtained from
the Commission, at prescribed rates, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
126
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-1
Report of Independent Public Accountants.................................. F-2
Audited Consolidated Financial Statements:
Consolidated Statements of Financial Condition................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity.................. F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-9
127
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Local Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Local Financial Corporation and subsidiary (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1998 and
for the six months ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Local Financial
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the year ended December 31, 1998 and
for the six months ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
---------
KPMG LLP
Oklahoma City, Oklahoma
February 4, 1999
F-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of Local Financial Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Local Financial Corporation and
subsidiary (the "Company"), for each of the two years in the period ended June
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, stockholders' equity
and cash flows referred to above present fairly, in all material respects, the
results of operations and cash flows of Local Financial Corporation and
subsidiary for each of the two years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
August 27, 1997 (except with
respect to the matter discussed
in Note 2, as to which the date
is September 8, 1997)
F-2
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets 1998 1997
----------- -----------
<S> <C> <C>
Cash and due from banks $ 27,180 34,152
Interest bearing deposits with other banks 27,700 20,000
Securities purchased under agreements to resell -- 178,000
Securities available for sale 570,964 518,107
Loans receivable, net of allowance for loan losses of $27,901
at December 31, 1998 and $20,484 at December 31, 1997 1,362,272 953,470
Federal Home Loan Bank of Topeka stock, at cost 42,693 45,147
Premises and equipment, net 23,959 10,646
Assets acquired through foreclosure and repossession, net 693 260
Intangible assets, net 17,843 1,779
Deferred tax asset, net 10,959 26,058
Current income taxes receivable 18,291 28,427
Other assets 26,425 65,319
----------- -----------
Total assets $ 2,128,979 1,881,365
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 379,796 247,264
Savings 74,963 68,937
Time 1,213,315 1,286,332
----------- -----------
Total deposits 1,668,074 1,602,533
Advances from borrowers for taxes and insurance 4,400 5,046
Advances from the Federal Home Loan Bank of Topeka 220,033 80,136
Senior notes 80,000 80,000
Other liabilities 37,666 31,025
----------- -----------
Total liabilities 2,010,173 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 December 31, 1998;
19,700,060 shares issued and
19,700,000 shares outstanding at December 31, 1997 205 197
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,758 197,766
Retained earnings 50,197 31,760
Treasury stock, 60 shares, at cost (149,436) (149,436)
Accumulated other comprehensive income 11,082 2,338
----------- -----------
Total stockholders' equity 118,806 82,625
----------- -----------
Total liabilities and stockholders' equity $ 2,128,979 1,881,365
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, ---------------------------
1998 1997 1997 1996
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 96,851 49,788 107,715 95,839
Securities available for sale 41,862 28,113 81,861 61,939
Securities held to maturity -- 3,193 27,363 72,822
Federal Home Loan Bank of Topeka stock 3,474 1,677 3,658 3,220
Other investments 5,017 2,433 2,067 2,336
--------- --------- --------- ---------
Total interest and dividend income 147,204 85,204 222,664 236,156
Interest expense:
Deposit accounts 74,743 40,672 83,091 81,173
Advances from the Federal Home Loan
Bank of Topeka 7,547 14,005 57,442 58,309
Securities sold under agreements to
repurchase 678 2,073 28,202 46,400
Notes payable 9,470 3,073 1,026 1,606
--------- --------- --------- ---------
Total interest expense 92,438 59,823 169,761 187,488
Net interest and dividend income 54,766 25,381 52,903 48,668
Provision for loan losses (1,450) (25,578) (28,428) (5,117)
--------- --------- --------- ---------
Net interest and dividend income (loss)
after provision for loan losses 53,316 (197) 24,475 43,551
--------- --------- --------- ---------
Noninterest income:
Deposit related income 10,389 4,105 7,410 5,800
Loan fees and loan service charges 1,737 981 2,730 2,197
Net gains (losses) on sale of assets 932 (112,669) (29,183) 1,248
Other 1,724 434 1,919 1,071
--------- --------- --------- ---------
Total noninterest income (loss) 14,782 (107,149) (17,124) 10,316
--------- --------- --------- ---------
Noninterest expense:
Compensation and employee benefits 19,287 7,731 14,588 14,177
Deposit insurance premiums 1,323 522 12,470 3,617
Provision for uninsured risk -- -- 3,300 1,372
Equipment and data processing 4,276 1,485 3,080 2,847
Occupancy 3,029 1,416 2,873 2,595
Advertising 2,080 522 1,556 1,131
Professional fees 2,142 984 1,152 825
Other 7,270 10,025 10,237 8,863
--------- --------- --------- ---------
Total noninterest expense 39,407 22,685 49,256 35,427
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes 28,691 (130,031) (41,905) 18,440
Provision (benefit) for income taxes 10,254 (44,075) (11,860) 4,872
--------- --------- --------- ---------
Net income (loss) $ 18,437 (85,956) (30,045) 13,568
========= ========= ========= =========
Basic net income (loss) per share $ 0.90 (4.76) (1.95) 0.88
========= ========= ========= =========
Diluted net income (loss) per share $ 0.89 (4.76) (1.95) 0.88
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Year ended December 31, 1998, Six Months ended December 31, 1997 and
For the Years ended June 30, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
-------- ---------- ----------
<S> <C> <C> <C>
Balance, June 30, 1995 $ -- 8,797 134,193
Comprehensive income (loss):
Net income -- -- 13,568
Unrealized losses on securities
transferred from held to maturity to available for sale,
net of income tax -- -- --
Net change in unrealized losses on securities available
for sale, net of reclassification adjustment -- -- --
Comprehensive income (loss)
---- -------- --------
Balance, June 30, 1996 -- 8,797 147,761
Comprehensive income (loss):
Net loss -- -- (30,045)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- --
Comprehensive income (loss)
Capital contribution -- 8,099 --
---- -------- --------
Balance, June 30, 1997 -- 16,896 117,716
Comprehensive income (loss):
Net loss -- -- (85,956)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- --
Comprehensive income (loss)
Issuance of common stock 197 180,870 --
Purchase of treasury stock -- -- --
---- -------- --------
Balance, December 31, 1997 197 197,766 31,760
Comprehensive income:
Net income -- -- 18,437
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- --
Comprehensive income
Issuance of common stock 8 8,992 --
---- -------- --------
Balance, December 31, 1998 $205 206,758 50,197
==== ======== ========
<CAPTION>
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income (loss) Equity
--------- ------------- --------------
<S> <C> <C> <C>
Balance, June 30, 1995 -- 229 143,219
Comprehensive income (loss):
Net income -- -- 13,568
Unrealized losses on securities
transferred from held to maturity to available for sale,
net of income tax -- (10,831) (10,831)
Net change in unrealized losses on securities available
for sale, net of reclassification adjustment -- (37,897) (37,897)
--------
Comprehensive income (loss) (35,160)
-------- -------- --------
Balance, June 30, 1996 -- (48,499) 108,059
Comprehensive income (loss):
Net loss -- -- (30,045)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- 16,516 16,516
--------
Comprehensive income (loss) (13,529)
Capital contribution -- -- 8,099
-------- -------- --------
Balance, June 30, 1997 -- (31,983) 102,629
Comprehensive income (loss):
Net loss -- -- (85,956)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- 34,321 34,321
--------
Comprehensive income (loss) (51,635)
Issuance of common stock -- -- 181,067
Purchase of treasury stock (149,436) -- (149,436)
-------- -------- --------
Balance, December 31, 1997 (149,436) 2,338 82,625
Comprehensive income:
Net income -- -- 18,437
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- 8,744 8,744
--------
Comprehensive income 27,181
Issuance of common stock -- -- 9,000
-------- -------- --------
Balance, December 31, 1998 (149,436) 11,082 118,806
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, -------------------------------
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash provided by operating activities:
Net income (loss) $ 18,437 (85,956) (30,045) 13,568
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provisions for loan losses and
uninsured risk and losses on
assets acquired through
foreclosure and repossession 1,450 25,641 31,804 6,673
Deferred income tax expense (benefit) 11,259 (27,585) (1,429) 1,961
Accretion of discounts on loans
acquired (2,836) (2,963) (6,019) (4,281)
Amortization of deferred (gains)
losses on interest rate swaps -- 806 73 (671)
Amortization (accretion) of
premium (discount) on securities
available for sale, net (5,390) (95) 8,265 11,905
Net amortization of premium on
securities held to maturity -- 97 2,090 --
Depreciation and amortization 3,448 1,347 2,688 2,450
Proceeds from the sales of loans 82,890 11,416 12,132 15,155
(Gain) loss on sale of assets (932) 112,669 29,183 (1,248)
Stock dividends received from
Federal Home Loan Bank stock (3,474) (1,677) (3,658) --
Change in other assets 20,862 (15,299) (5,332) (1,504)
Change in other liabilities (1,140) 9,282 (9,296) (3,013)
--------- --------- --------- ---------
Net cash provided by
operating activities 124,574 27,683 30,456 40,995
--------- --------- --------- ---------
Cash provided (absorbed) by investing activities:
Proceeds from sales of securities
available for sale 47,764 865,146 730,957 50,321
Proceeds from principal collections
on securities available for sale 233,323 52,735 13,245 80,977
Proceeds from principal collections
on securities held to maturity -- 28,054 52,161 --
Purchase of securities available for sale (272,937) (6,001) -- (5,320)
Purchase of securities held to maturity -- (74,440) (73,389) --
Purchase of interest rate caps -- -- -- (3,720)
Payments on termination of interest
rate swap agreements -- (47,283) -- (3,344)
Proceeds from termination of interest
rate swap agreements -- -- -- 3,637
Proceeds from sales of equity
securities available for sale -- -- 12,986 --
F-6 (Continued)
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, -------------------------------
1998 1997 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Purchases of securities under
agreements to resell $(1,139,462) (424,000) -- --
Proceeds from maturity of securities
purchased under agreements to resell 1,317,462 246,000 -- --
Purchases of Federal Home Loan
Bank stock -- (3,424) (80,850) (71,425)
Proceeds from the sale of Federal
Home Loan Bank stock 8,797 -- 67,883 83,400
Loans made by non-bank subsidiary -- (26) (29,213) (133,914)
Repayments of loans made by
non-bank subsidiary -- 13,710 49,755 39,411
Proceeds from the sales of loans 29,592 -- -- --
Change in loans receivable, net (276,251) (24,814) (63,247) (142,412)
Proceeds from disposal of assets
acquired through foreclosure and
repossession 738 6,381 18,257 5,806
Purchases of premises and equipment (4,923) (465) (1,480) (1,649)
Proceeds from sales of premises and
equipment 130 25 9 72
Cash acquired in acquisition of
Green Country Banking Corporation 2,512 -- -- --
Cash paid in acquisition of BankSouth
Corporation, net of cash and
cash equivalents received (12,966) -- -- --
----------- ----------- ----------- -----------
Net cash provided
(absorbed) by
investing activities (66,221) 631,598 697,074 (98,160)
----------- ----------- ----------- -----------
Cash provided (absorbed) by financing activities:
Change in transaction accounts 39,809 (3,697) 7,635 (20,256)
Change in time deposits (212,923) (38,126) 34,261 44,894
Change in securities sold under
agreements to repurchase -- (312,774) (770,223) 299,568
Preceeds from advances from the
Federal Home Loan Bank 918,905 1,303,599 9,978,290 4,679,967
Repayments of advances from the
Federal Home Loan Bank (799,608) (1,757,377) (9,886,271) (4,941,297)
Proceeds from issuance of common
stock -- 181,067 -- --
Proceeds from issuance of senior notes -- 80,000 -- --
Payments of debt issuance costs -- (4,344) -- --
Repayments of note payable -- (7,010) -- (7,010)
Purchase of treasury stock -- (149,436) -- --
Payment of liability assumed from
Green Country Banking Corporation (3,162) -- -- --
Change in advances by borrowers for
taxes and insurance (646) (2,435) 542 442
----------- ----------- ----------- -----------
Net cash provided
(absorbed) by
financing activities (57,625) (710,533) (635,766) 56,308
----------- ----------- ----------- -----------
F-7 (Continued)
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(dollars in thousands)
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, ---------------------------
1998 1997 1997 1996
-------------- -------------- --------- ------------
<S> <C> <C> <C> <C>
Net change in cash and cash equivalents $ 728 (51,252) 91,764 (857)
Cash and cash equivalents at beginning of
period 54,152 105,404 13,640 14,497
-------- ------- ------- ----------
Cash and cash equivalents at end of period $ 54,880 54,152 105,404 13,640
======== ======= ======= ==========
Supplemental disclosures of cash flow
information:
Cash paid (received) during the period for:
Interest $ 90,636 60,190 173,920 186,052
======== ======= ======= ==========
Income taxes $(12,042) (1,631) -- 9,250
======== ======= ======= ==========
Supplemental schedule of noncash
investing and financing activities:
Loans made to facilitate the sale of
assets acquired through
foreclosure and repossession $ -- -- 79 592
======== ======= ======= ==========
Transfers of loans to assets acquired
through foreclosure and repossession $ 797 4,273 16,000 8,137
======== ======= ======= ==========
Transfer of investments from held to
maturity to available for sale at
estimated market value (amortized
cost of $454,496 for the six months
ended December 31, 1997 and $1,500,793
for the year ended June 30, 1996) $ -- 448,180 -- 1,484,130
======== ======= ======= ==========
Transfer of debt securities to
available for sale loans $ -- 1,425 -- --
======== ======= ======= ==========
Repayment of note payable and
accrued interest by shareholders $ -- -- 8,099 --
======== ======= ======= ==========
Transfer of assets acquired through
foreclosure and repossessions to
other assets $ -- 6,045 -- --
======== ======= ======= ==========
Receivable on loans sold in other
assets $ -- 34,594 -- --
======== ======= ======= ==========
Stock issued in acquisition of Green
Country Banking Corporation
(See note 3) $ 9,000 -- -- --
======== ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(1) Organization and Summary of Significant Accounting Policies
Local Financial Corporation (Local Financial) is a thrift holding company
which owns 100% of the outstanding common stock of Local Federal Bank,
F.S.B. (Local). Subsequent to December 31, 1998, Local's name was changed
to Local Oklahoma Bank, F.S.B. On November 30, 1998, Local Financial
merged Local America Bank of Tulsa (LAB) into its parent company, Local,
and they now operate under one name as Local Oklahoma Bank. The merger
was accounted for at historical cost as a combination of entities under
common control similar to a pooling of interests. The accounting and
reporting practices of Local Financial and its subsidiary reflect
industry practices and are in accordance with generally accepted
accounting principles. The more significant policies are described below.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Local Financial and its wholly owned subsidiary,
Local, as well as Local's subsidiaries, Local Acceptance Company
(Local Acceptance), Star Financial Services Corporation (Star
Financial), Local Mortgage Corporation (Local Mortgage), Local
Securities Corporation (Local Securities), and Star Properties,
Incorporated (Star Properties). Local is an insured depository
institution which obtains deposit funds primarily through retail
branches throughout the State of Oklahoma and lends those funds
throughout the United States. Local Acceptance's and Star
Financial's principal activities were originating auto loan
contracts through dealerships in Florida and Oklahoma,
respectively (operations ceased as of December 31, 1997). Local
Mortgage and Star Properties are currently inactive. Local
Securities is a registered broker-dealer under the Securities
Exchange Act of 1934 and provides retail investment products to
customers of Local. Local Financial and its subsidiary, Local, are
collectively referred to as the Company. All significant
intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions. Those estimates and
assumptions relate principally to the determination of the
allowance for loan losses, income taxes, the valuation of assets
acquired through foreclosure and repossession and the fair value
of financial instruments. Actual results could differ from those
estimates. The accounting policies for these items and other
significant accounting policies are presented below.
(b) Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, the
Company defines cash and cash equivalents as cash and due from
banks and interest bearing deposits with other banks.
F-9
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(c) Securities
Federal regulations require Local to maintain average monthly
liquid assets, primarily cash and U. S. Government and other
approved securities, in an amount at least equal to 4% of deposit
accounts (net of loans on deposit accounts) plus short-term
borrowings. For the year ended December 31, 1998 and the six
months ended December 31, 1997, Local's average liquidity totaled
approximately 41% and 10%, respectively.
The Company's securities consist primarily of mortgage-backed
certificates and U. S. Government and agencies securities.
Mortgage-backed certificates consist of mortgage-backed
pass-through certificates (MBS) and mortgage-derivative securities
(MDS) such as collateralized mortgage obligations and real estate
mortgage investment conduits. The Company does not own any
principal only, interest only or residual tranches of
mortgage-backed certificates. The Company classifies its
securities as held to maturity, available for sale and held for
trading. Trading securities are bought and held principally for
the purpose of selling them in the near term. Held to maturity
securities are those securities for which the Company has the
ability and intent to hold until maturity. No investment
securities within the portfolio are considered trading or held to
maturity at December 31, 1998 and 1997. The Company has classified
all of its securities as available for sale. At the time of
purchase, the Company classifies securities as available for sale
when such securities may be sold at a future date or if there are
foreseeable circumstances under which the Company would sell such
securities prior to maturity.
Securities classified as available for sale are recorded at their
estimated market value. Changes in the estimated market value of
securities available for sale are included in stockholders'
equity, net of deferred taxes, as accumulated other comprehensive
income. Unrealized losses on available for sale securities, which
are judged to be other than temporary, are charged to earnings in
the consolidated statements of operations (see Note 5). Gains and
losses on available for sale securities are computed on a specific
identification basis. Premiums and discounts are amortized or
accreted in the consolidated statements of operations to
approximate a level yield over the life of the related security.
(d) Loans Receivable
Loans receivable are recorded at the contractual amounts owed by
borrowers, less deferred fees, unearned interest, the allowance
for loan losses, undisbursed funds, and discounts on loans
acquired or originated. Interest on loans is credited to income as
earned, to the extent deemed collectible. Discounts on loans and
unearned interest on consumer loans are accreted into interest
income to approximate a level yield over the contractual lives of
the loans, adjusted for actual prepayments.
Loans are placed on nonaccrual status when they become 90 days
past due. Previously accrued but uncollected interest on loans
placed on nonaccrual status is reversed unless determined to be
F-10
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
fully collectible. Payments received on nonaccrual loans are
generally applied to principal as they are received. Upon full
collection of the principal balance or determination that future
collection of principal is probable, interest income is recognized
as received.
(e) Provision and Allowance for Loan Losses
Each period the provision for loan losses in the consolidated
statements of operations results from the combination of a) an
estimate by management of loan losses that occurred during the
current period and b) the ongoing adjustment of prior estimates of
losses occurring in prior periods.
To serve as a basis for making this provision each quarter, the
Company maintains an extensive credit risk monitoring process that
considers several factors including: current economic conditions
affecting the Company's customers, the payment performance of
individual large loans and pools of homogeneous small loans,
portfolio seasoning, changes in collateral values, and detailed
reviews of specific large loan relationships. For large loans
deemed to be impaired due to an expectation that all contractual
payments will probably not be received, impairment is measured by
comparing the Company's recorded investment in the loan to the
present value of expected cash flows discounted at the loan's
effective interest rate, the fair value of the collateral or the
loan's observable market price.
The provision for loan losses increases the allowance for loan
losses, a valuation account which is netted against loans on the
consolidated statements of financial condition. As the specific
customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial
settlement of the loan, bankruptcy of the borrower, etc., the loan
is written down, reducing the allowance for loan losses. If,
subsequent to a writedown, the Company is able to collect
additional amounts from the customer or obtain control of
collateral worth more than previously estimated, a recovery is
recorded, thus increasing the allowance for loan losses.
(f) Loan Origination Fees, Loan Commitment Fees and Related Costs
The Company defers loan origination fees, loan commitment fees and
the incremental direct costs (principally compensation and
benefits relating to successful underwriting efforts) relative to
loans originated. These deferred fees and costs are amortized into
interest income to approximate a level yield over the life of the
related loans, adjusted for actual prepayments.
Other loan fees such as loan servicing fees, late payment fees and
prepayment penalties are included as a component of noninterest
income in the accompanying consolidated statements of operations.
F-11
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(g) Loans Held for Sale and Gains and Losses from the Sale of Loans
Loans originated and intended for sale are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by charges to
income. There were no loans other than residential real estate and
student loans held for sale at December 31, 1998. At December 31,
1997, there were no loans other than student loans held for sale.
Gains and losses resulting from the sale of loans are determined
by the specific identification method and reflect the extent that
sales proceeds exceed or are less than the carrying value of the
loans sold. In some cases, the Company sells loans and continues
to service such loans for the investor. In these cases, the
Company recognizes either a servicing asset, at its allocated
previous carrying amount based on relative fair value, or a
servicing liability at fair value. Any servicing assets recognized
as part of the sale are amortized as a deduction from servicing
income in proportion to and over the period of estimated net
servicing income. To the extent sales of loans involve the sale of
part of a loan or a pool of loans, the cost basis is allocated
based upon the relative fair value of the portion sold and the
portion retained. Impairment of servicing assets is assessed based
on the fair value of those assets. Fair values are estimated using
discounted cash flows based on a current market interest rate. At
December 31, 1998 and 1997, the carrying value of servicing assets
was not impaired.
(h) Loan Servicing
Loans serviced by the Company for others are primarily the result
of the Company selling loans while retaining the servicing of
those loans. These loans are not included with loans receivable or
any other asset in the accompanying consolidated statements of
financial condition. Fees earned for servicing loans owned by
investors are reported as income when the related loan payments
are collected. Loan servicing costs are charged to expense as
incurred. Loans serviced for others totaled approximately
$121,232,000 and $124,525,000, at December 31, 1998 and 1997,
respectively. Servicing fees earned totaled approximately
$466,000, $291,000, $521,000, and $581,000 for the year ended
December 31, 1998, the six months ended December 31, 1997, and for
the years ended June 30, 1997 and 1996, respectively, and are
included as a component of loan fees and loan service charges in
the accompanying consolidated statements of operations.
At December 31, 1998 and 1997, unamortized servicing assets were
approximately $1,924,000 and $1,363,000, respectively, and are
included in other assets. Amortization of these assets totaling
approximately $1,024,000, $363,000, $1,006,000, and $1,262,000 was
charged against loan servicing income for the year ended December
31, 1998, the six months ended December 31, 1997, and the years
ended June 30, 1997 and 1996, respectively.
F-12
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(i) Premises and Equipment
Buildings, building improvements, furniture, fixtures and
equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the
related assets. Estimated lives range from 25 to 30 years for
buildings and building improvements and 3 to 10 years for
furniture, fixtures and equipment.
Maintenance and repairs are charged to expense as incurred and
building improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated from the accounts and any
resulting gains or losses are credited or charged to income.
(j) Assets Acquired Through Foreclosure and Repossession
Assets acquired through foreclosure and repossession are recorded
at estimated fair value, net of estimated selling costs at the
date of foreclosure or repossession. The values of assets acquired
through foreclosure and repossession are monitored by the Company
continually through sales and rental activities, and by updated
appraisals and other valuation methods when needed. The allowance
for losses on assets acquired through foreclosure and repossession
is an amount which management believes will be adequate to absorb
losses from the disposition and/or revaluation of these assets.
Additions or reversals of the allowance for losses on assets
acquired through foreclosure and repossession are provided as an
expense or a benefit, respectively, through other expense in the
accompanying consolidated statements of operations. The allowance
for losses is charged or reduced as losses through sales or
revaluations are incurred.
(k) Debt Issuance Costs
The Company capitalizes all costs related to the issuance of debt.
Unamortized debt issuance costs at December 31, 1998, of
approximately $3,689,000, are included in other assets in the
consolidated statements of financial condition. Debt issuance
costs are amortized over the life of the senior notes as a yield
adjustment to notes payable interest expense in the consolidated
statements of operations.
(l) Intangible Assets
Intangible assets consist of goodwill and core deposit premiums.
Goodwill represents the excess cost over fair value of net assets
acquired in 1998 and is being amortized on a straight-line basis
over a 15-year period. Core deposit premiums were paid in the
acquisitions of other depository institutions and are capitalized
and amortized over the expected lives of the core deposits,
estimated to be eight to ten years, using the straight-line
method. The Company evaluates the recoverability of these
intangible assets by assessing whether the amortization of the
asset
F-13
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
balances over their remaining lives can be recovered through
projected cash flows. The amount of impairment, if any, is
measured based on projected discounted cash flows. No impairment
was recognized at December 31, 1998 and 1997.
Amortization expense totaled approximately $1,934,000 for the year
ended December 31, 1998, $619,000 for the six months ended
December 31, 1997, and $1,238,000 for each of the years ended June
30, 1997 and 1996. Accumulated amortization of goodwill and core
deposit premiums at December 31, 1998 and 1997, totaled
approximately $11,473,000 and $9,539,000, respectively.
(m) Interest Rate Swap, Cap and Floor Agreements
Interest rate swap, cap and floor agreements are entered into as a
hedge to stabilize the Company's funding cost and to stabilize the
Company's yield on floating rate debt securities, and as part of
the Company's overall asset/liability management program. The most
frequently used derivative products are various types of interest
rate swaps. However, interest rate caps and floors are also
utilized. These derivatives are typically classified as either
hedges or synthetic alterations. The criteria that must be
satisfied for each of these classifications are as follows: (i)
Hedge the asset or liability to be hedged exposes the Company, as
a whole, to interest rate risk; (ii) Synthetic alteration - the
asset or liability converted exposes the Company, as a whole, to
interest rate risk and the derivative is designed and effective as
a synthetic alteration of a statement of financial condition item.
Net interest income or expense from the interest rate swap, cap
and floor agreements is recorded as an adjustment to the interest
income/expense of the hedged asset/liability, respectively.
Premiums paid for caps and floors are amortized over their
contractual lives using the straight-line method. When interest
rate swap agreements are sold or settled without the simultaneous
disposition of a hedged item, any gain or loss is deferred and
amortized into interest income or expense over the remaining term
of the swap agreement or until disposition of the hedged item. As
the assets or liabilities being hedged are sold or liquidated, a
proportionate amount of the deferred gain or loss and unamortized
premiums is also recognized. Deferred gains or losses and
unamortized premiums are reflected as an adjustment to the
carrying value of the hedged item in the accompanying consolidated
statements of financial condition. There were no such agreements
outstanding at December 31, 1998 and 1997.
(n) Income Taxes
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.
F-14
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(o) Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted
average number of shares outstanding during the period. Stock
options and warrants to purchase common stock are considered in
diluted income per share calculations, if dilutive, and are
computed using the treasury stock method. As a result of the
recapitalization discussed in Note 2, the weighted average number
of shares used in the computation of income (loss) per share is
15,400,000 for the years ended June 30, 1997 and 1996 (based on an
equivalent number of shares for the 60 shares outstanding prior to
the recapitalization). For the six months ended December 31, 1997
the weighted average number of shares is 18,066,000. Stock options
and warrants to purchase common stock discussed in Notes 2 and 18
were outstanding during the six months ended December 31, 1997,
but were not included in the computation of diluted income (loss)
per share because of the net loss for the six months ended
December 31, 1997.
The following table reconciles the net income and weighted average
shares outstanding used in the calculation of basic and diluted
net income per share for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average
Shares Per Share
Net Income Outstanding Amount
------------------ ------------------ -----------------
<S> <C> <C> <C>
Basic net income per share $18,437,000 20,431,698 $ .90
========
Effect of dilutive securities:
Warrants -- 52,599
Options -- 122,822
----------- ----------
Diluted net income per share $18,437,000 20,607,119 $ .89
=========== ========== ========
</TABLE>
(p) New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," in 1998. SFAS
No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income (loss) consists of net income
(loss) and net unrealized gains (losses) on securities available
for sale and is presented in the consolidated statements of
stockholders' equity. SFAS No. 130 requires only additional
disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform
to the requirements of SFAS No. 130.
F-15
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
In July 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information." This statement requires disclosure for
each segment that are similar to those required under previous
standards with the addition of quarterly disclosure requirements
and a finer partitioning of geographic disclosures. It requires
limited segment data on a quarterly basis. It also requires
geographic data by country, as opposed to broader geographic
regions as permitted under previous standards. The Company
operates as one segment and the adoption of this statement in 1998
had no impact on the Company's disclosures.
On January 1, 1998, the Company adopted SFAS No 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." SFAS
No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans. Prior year disclosures in the
notes to the financial statements have been revised to conform to
the requirements of SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that a company
recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at
fair value. This statement is required to be adopted by the
Company in 2000. Management does not anticipate this statement to
have a material adverse impact on the consolidated financial
position or the future results of operations of the Company.
(2) Change in Ownership and Management
On September 8, 1997, the Company completed a securities offering in
which, after increasing the number of authorized shares from 2,000 to
25,000,000, 19,700,000 shares of common stock totaling $197,000,000 and
$80,000,000 of 11% Senior Notes were issued to individual investors. Of
the total net proceeds received in the offering ($257,300,000),
$7,200,000 was used to repay the note payable and associated accrued
interest and approximately $154,000,000 was used to redeem all of the
previously issued and outstanding shares of the Company's common stock.
The redemption amount is subject to adjustment under terms set forth in
the Redemption Agreement, as defined. Subsequent to September 8, 1997,
adjustments totaling approximately $5,000,000 were assessed against the
Selling Shareholders and were reflected as a reduction to the cost of
treasury stock with a corresponding receivable from the Selling
Shareholders of approximately $5,000,000 recorded in other assets in the
consolidated statements of financial condition. The remainder of the
proceeds was used to make capital contributions to Local of approximately
$83,839,000, establish an interest reserve account for the Senior Notes
of approximately $8,800,000 and establish a cash account of approximately
$3,000,000.
F-16
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
In connection with the securities offering and redemption, the existing
board of directors resigned and a new board of directors was appointed.
In addition, a new chief executive officer and a new president of the
Company were appointed. Prior to the securities offering and change in
management, the Company's strategy had been to operate a low cost
institution structured around the following areas: (i) a nationally
diversified wholesale commercial real estate mortgage portfolio; (ii) a
retail deposit franchise within Oklahoma operated on a low-overhead basis
delivering a traditional set of thrift products and services, including
conforming single-family residential home loans, equity, student
guaranteed, direct automobile and installment loans through its branch
network; (iii) a wholesale securities portfolio involving derivative
mortgage securities funded both by retail, as well as, wholesale funding
through advances from the Federal Home Loan Bank of Topeka (FHLB) and
securities sold under agreements to repurchase; and (iv) origination of
indirect subprime automobile finance contracts through dealerships in
Oklahoma and Florida (originations ceased in fiscal 1997). New management
has among other things, (i) ceased the wholesale securities strategy
previously employed by the Company and caused the Company to sell all or
a substantial portion of its derivative mortgage portfolio and (ii)
utilized the proceeds to repay outstanding advances from the FHLB and
securities sold under agreements to repurchase, as well as terminated and
liquidated the Company's interest rate contracts associated with the
derivative mortgage portfolio and the advances from the FHLB and
securities sold under agreements to repurchase.
In connection with the securities offering, warrants to buy 591,000
shares of common stock of the Company were issued to the placement agent.
The warrants will be exercisable for a five year period commencing upon
the date of consummation, September 8, 1997, at an exercise price of $10
per share.
The issuance of new shares of common stock and Senior Notes and
redemption of all previously issued common stock have been accounted for
as a recapitalization with no adjustments to the carrying amounts of
assets and liabilities since none of the new investors individually or in
concert control the Company. Regulatory approval of the change in
ownership was not required as the Office of Thrift Supervision (OTS) does
not require regulatory approval unless an investor or group of investors
in concert own more than 9.9% of the voting common stock.
(3) Acquisitions
On February 16, 1998, Green Country Banking Corporation (Green Country)
and its subsidiary, Green Country Bank, F.S.B., were acquired and merged
into the Company. The acquisition was accounted for as a purchase in
which the purchase price was allocated to the net assets acquired based
upon their fair market values at the date of acquisition. Concurrent with
the acquisition, the Company issued 837,209 shares of its Common Stock
for approximately $9,000,000 to the three existing shareholders of Green
Country; two of the Green Country shareholders are officers and directors
of the Company.
F-17
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
On October 9, 1998, the Company acquired BankSouth Corporation
(BankSouth) for approximately $20,334,000 in cash, which included the
redemption of its preferred stock. This acquisition was accounted for
under the purchase method of accounting in which the purchase price was
allocated to the net assets acquired based upon their fair market values
at the date of acquisition.
Unaudited combined balance sheet information for Green Country and
BankSouth, at fair value, on the dates of acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Cash and due from banks $ 9,880
Securities available for sale 39,982
Loans receivable, net 211,040
Premises and equipment, net 10,251
Assets acquired through foreclosure and repossession, net 374
Federal Home Loan Bank of
Topeka stock 2,869
Current tax receivable 901
Deferred tax asset, net 867
Other assets 5,370
--------
Total assets 281,534
--------
Deposits 238,655
Advances from the Federal
Home Loan Bank of Topeka 20,600
Other liabilities 10,943
--------
Total liabilities 270,198
--------
Net assets at fair value $ 11,336
========
</TABLE>
The excess of the purchase price of approximately $29,334,000 over the
net assets acquired of approximately $11,336,000, was allocated to
goodwill. The resulting goodwill of approximately $17,998,000 is being
amortized on a straight-line basis over 15 years.
The following unaudited pro forma information presents the combined
results of operations as if the acquisitions had occurred as of July 1,
1997, after giving effect to amortization of goodwill. The pro forma
financial information does not necessarily reflect the results of
operations that would have occurred had the companies been combined
during such periods.
F-18
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, December 31,
1998 1997
---------------- --------------
<S> <C> <C>
Net income (loss) $19,287,000 (85,131,000)
=========== ===========
Basic net income (loss) per share $ .94 (4.71)
=========== ===========
Diluted net income (loss) per share $ .93 (4.71)
=========== ===========
</TABLE>
(4) Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell at December 31, 1998 and
1997, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Average outstanding balance $ 70,369 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
broker-dealers who arranged the transactions. The agreements generally
mature within one month.
F-19
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(5) Securities
A comparative summary of securities available for sale is as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and agency
securities $ 38,988 104 -- 39,092
Municipal securities 965 -- -- 965
Collateralized mortgage obligations 505,310 17,231 413 522,128
Mortgage-backed securities 8,653 128 2 8,779
-------- ------ ----- -------
$553,916 17,463 415 570,964
======== ====== ===== =======
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Government and agency
securities $ 6,001 -- 1 6,000
Collateralized mortgage obligations 425,835 4,221 1,180 428,876
Mortgage-backed securities 82,674 559 2 83,231
-------- ------ ----- -------
$514,510 4,780 1,183 518,107
======== ====== ===== =======
</TABLE>
Maturities of investment securities classified as available for sale at
December 31, 1998, are shown below (in thousands). Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
F-20
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
----------------- --------------------
<S> <C> <C>
Due in one year or less $ 7,536 7,536
Due from one to five years 22,445 22,512
Due from five to ten years 9,972 10,009
-------- -------
39,953 40,057
Mortgage-backed securities 8,653 8,779
Collateralized mortgage obligations 505,310 522,128
-------- -------
$553,916 570,964
======== =======
</TABLE>
During the period following June 30, 1997, and prior to the change in
ownership of the Company on September 8, 1997, the Company purchased
approximately $74,440,000 in agency securities for the held to maturity
portfolio. These short-term securities were purchased to meet liquidity
requirements. Subsequent to the change in ownership of the Company, new
management elected to classify the held to maturity portfolio as
available for sale. The amortized cost of securities held to maturity
transferred to securities available for sale was approximately
$454,496,000 with an unrealized loss of approximately $6,316,000. Also,
soon after the change in ownership, the Company sold approximately
$118,480,000 in agency securities, approximately $75,482,000 in mortgage
backed certificates and approximately $345,176,000 in floating rate
securities for a gross loss of approximately $17,336,000. Management was
of the opinion that the fair value of the floating rate security
portfolio would not fully recover the amortized cost of the portfolio
prior to the time of sale. As a result, the Company recognized through
earnings the unrealized loss on the remaining floating rate portfolio of
$54,724,000 which is included in net gains (losses) on sale of assets in
the accompanying consolidated statements of operations for the six months
ended December 31, 1997.
At December 31, 1998 and 1997, securities available for sale included
floating rate securities with an amortized cost of approximately
$299,746,000 and $425,491,000, respectively, and fixed-rate securities of
approximately $254,169,000 and $83,018,000, respectively. The
floating-rate securities' weighted average yield was 7.6% and 6.97% at
December 31, 1998 and 1997, respectively. The fixed rate securities'
weighted average yield was 6.36% and 6.51% at December 31, 1998 and 1997,
respectively. The overall weighted average yield of securities was 7.05%
and 6.83% at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, securities with a total par amount of
$276,566,000 and $73,957,000, respectively, were pledged to secure
various deposits, borrowings, and securitization transactions. Accrued
interest receivable on securities of approximately $3,307,000 and
$2,842,000 was included in other assets at December 31, 1998 and 1997,
respectively.
F-21
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
Proceeds from sales of securities available for sale for the year ended
December 31, 1998, the six months ended December 31, 1997, and for the
years ended June 30, 1997 and 1996, were approximately $47,764,000,
$865,146,000, $730,957,000, and $50,321,000, respectively. Gross gains of
approximately $2,189,000, $12,788,000, and $1,000 were realized for the
year ended December 31, 1998, for the six months ended December 31, 1997,
and for the year ended June 30, 1996, respectively. No gross gains were
realized for the year ended June 30, 1997. Gross losses of $5,000,
$17,398,000, $29,889,000, and $182,000 were realized for the year ended
December 31, 1998, the six months ended December 31, 1997, and for the
years ended June 30, 1997 and 1996, respectively, and are included in net
gains (losses) on sale of assets in the accompanying consolidated
statements of operations. Gains and (losses) from loans securitized and
sold are not included above.
In prior years the Company owned Student Loan Marketing Association
Preferred Stock which was sold during 1997. Proceeds from the sale of
those securities during 1997 were approximately $12,986,000 with gross
gains of approximately $307,000 realized in 1997.
In December 1995, concurrent with the adoption of its implementation
guide on SFAS No. 115, the FASB allowed a one-time reassessment of the
SFAS No. 115 classifications of all securities currently held. Any
reclassifications would be accounted for at estimated market value in
accordance with SFAS No. 115 and any reclassifications from the held to
maturity portfolio that resulted from this one-time reassessment would
not call into question the Company's intent to hold other securities to
maturity in the future. The Company used the opportunity under this
one-time reassessment to reclassify $1,500,793,000 in securities from
held to maturity to the available for sale portfolio. In connection with
this reclassification, gross unrealized losses of $16,663,000 were
recorded in available for sale securities. This reclassification resulted
in a reduction of stockholders' equity of $10,831,000 (net of tax).
(6) Loans Receivable
Loans receivable are summarized below at amortized cost (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- --------
<S> <C> <C>
Residential real estate loans $ 344,565 281,565
Commercial 927,682 646,539
Held for sale 16,188 7,133
Consumer loans 101,738 38,717
---------- --------
Total loans 1,390,173 973,954
Less:
Allowance for loan losses (27,901) (20,484)
---------- --------
Loans receivable, net $1,362,272 953,470
========== ========
</TABLE>
F-22
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
Accrued interest receivable on loans of approximately $8,586,000 and
$7,129,000 was included in other assets at December 31, 1998 and 1997,
respectively.
An analysis of the allowance for loan losses is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Six months
ended ended Years ended June 30,
December 31, December 31, ------------------------
1998 1997 1997 1996
-------- ------ ------ -----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 20,484 11,435 3,228 4,593
Allowance acquired 7,284 -- -- --
Loans charged off (1,504) (16,554) (20,293) (6,537)
Recoveries 187 25 72 55
-------- ------ ------ -----
Net loans charged off (1,317) (16,529) (20,221) (6,482)
Provision for loan losses, primarily
related to indirect automobile
loans prior to 1998 1,450 25,578 28,428 5,117
-------- ------ ------ -----
Balance at end of period $ 27,901 20,484 11,435 3,228
======== ====== ====== =====
</TABLE>
Beginning in fiscal 1994, the Company initiated a subprime indirect
automobile financing program, through dealerships in Oklahoma and
Florida. Loans were generated through a network of principally used
automobile dealers and were extended to borrowers who typically were not
eligible for traditional bank financing, due to past credit problems or
inadequate credit history. Loans were typically extended in amounts to
include the purchase price of the automobile, tag, tax and license fees
and optional credit life and vehicle maintenance warranty insurance
coverage. Loan terms included interest rates ranging from 13.9% to 30.9%
and payment periods ranging from 12 months to 60 months. Due to the
nature of the borrowers involved, a higher than normal risk of borrower
default and inability to collect all amounts due was likely. During
fiscal 1997, the Company experienced greater than expected borrower
defaults and resultant losses and chose to cease all further origination
activities. At June 30, 1997, the subprime loan portfolio totaled
approximately $75,545,000, net of discounts and unearned interest, in
which an allowance for loan losses of approximately $7,684,000, or 10%,
of the carrying value of the subprime loan portfolio had been
established. From inception of the program through December 31, 1997,
loan originations totaled approximately $187,832,000 with associated
charge offs of approximately $28,650,000 or 15%. The allowance for loan
losses was established for estimated inherent losses that existed in the
auto loan portfolio at June 30, 1997, based primarily on the delinquency
status of the loan portfolio, the estimated value of the underlying
collateral and historical loss experience. In December 1997, the Company
sold the subprime loan portfolio for approximately $43,968,000 which
approximated the Company's book value less the valuation allowance.
F-23
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
In connection with the BankSouth acquisition in 1998 (see note 3), the
Company acquired a portfolio of indirect automobile loans of
approximately $20,000,000. Management believes that this portfolio, while
containing more risk than direct automobile loans, represents less risk
than the program previously conducted prior to the change in ownership.
In management's opinion, adequate allowances have been established to
properly reflect the losses inherent in these loans at December 31, 1998.
At December 31, 1998 and 1997, the Company classified approximately
$1,176,000 and $655,000, respectively, of loans as impaired, as defined
by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The
average recorded investment in impaired loans for the year ended December
31, 1998 and for the six months ended December 31, 1997, was
approximately $1,179,000 and $655,000, respectively. Interest payments
received on impaired loans are recorded as interest income, unless
collection of the remaining recorded investment is doubtful, at which
time the loan is placed on nonaccrual status and payments received are
recorded as reductions of principal. The Company recognized interest
income on impaired loans of approximately $48,000 and $52,000 for the
year ended December 31, 1998 and for the six months ended December 31,
1997, respectively.
At December 31, 1998 and 1997, loans to directors, officers and employees
of the Company aggregated approximately $3,662,000 and $1,500,000,
respectively. In management's opinion, such transactions were made on
substantially the same terms as those prevailing at the time for
comparable transactions with other persons and did not involve more than
normal risk.
(7) Premises and Equipment
Premises and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
-------- ------
<S> <C> <C>
Land $ 4,711 3,033
Buildings and building improvements 20,739 11,920
Furniture, fixtures and equipment 15,474 10,938
-------- ------
40,924 25,891
Less accumulated depreciation and amortization (16,965) (15,245)
-------- ------
$ 23,959 10,646
======== ======
</TABLE>
Depreciation and amortization expense relating to premises and equipment
for the year ended December 31, 1998, the six months ended December 31,
1997 and the years ended June 30, 1997 and 1996 was approximately
$1,730,000, $692,000, $1,450,000, and $1,213,000, respectively.
F-24
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(8) Assets Acquired Through Foreclosure and Repossession
Assets acquired through foreclosure and repossession amounted to $693,000
and $260,000 at December 31, 1998 and 1997, net of allowances of $139,000
and $35,000, respectively. For the year ended December 31, 1998, the six
months ended December 31, 1997, and for the years ended June 30, 1997 and
1996, income (expense) from assets acquired through foreclosure and
repossession totaled approximately $(127,000), $69,000, $873,000, and
$1,902,000, respectively. The Company records net income (expense) from
assets acquired through foreclosure and repossessions in other
noninterest income if in a net income position or in other noninterest
expense if in a net expense position, while the gain or loss portion is
included in net gains (losses) on sale of assets.
(9) Deposit Accounts
Accrued interest on deposit accounts of approximately $4,206,000 and
$3,865,000 was included in other liabilities in the accompanying
consolidated statements of financial condition at December 31, 1998 and
1997, respectively.
The aggregate amount of certificates of deposit with a denomination
greater than $100,000 was approximately $93,000,000 and $86,000,000 at
December 31, 1998 and 1997, respectively.
Contractual maturities of time deposits at December 31, 1998, are
summarized as follows (dollars in thousands):
Year ending December 31, Amount
----------
1999 $ 961,389
2000 190,009
2001 37,901
2002 10,088
2003 and thereafter 13,928
----------
$1,213,315
==========
Legislation was enacted in fiscal 1997 which required institutions
holding deposits insured by the Savings Association Insurance Fund (SAIF)
to pay a one-time fee of approximately 65 cents for each $100 of SAIF
insured deposits. The Company accrued its one-time assessment of
approximately $10,311,000 during September 1996.
F-25
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(10) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
June 30,
December 31, ----------------------
1997 1997 1996
------------ ------- -------
<S> <C> <C> <C>
Average outstanding balance $ 57,579 421,706 685,601
Weighted average interest rate during the period 5.61% 5.45% 5.83%
Maximum month-end balance $239,914 942,315 1,079,194
Outstanding balance at the end of the period -- 310,801 1,079,194
Weighted average rate at the end of the period -- 5.55% 5.36%
Mortgage-backed securities securing the agreements
at period-end:
Carrying value $ -- 335,202 1,171,395
Estimated market value -- 322,451 1,115,428
Accrued interest payable at the end of the period -- 1,327 5,799
</TABLE>
Securities sold under agreements to repurchase were delivered to the
broker-dealers who arranged the transactions. The agreements generally
matured within one month.
Additional interest expense incurred on interest rate swaps not included
in the above average rates totaled approximately $444,000, $5,227,000,
and $6,428,000 for the six months ended December 31, 1997, and the years
ended June 30, 1997 and 1996, respectively.
There are no securities sold under agreements to repurchase at December
31, 1998 and 1997. All agreements outstanding at June 30, 1997, were
either retired or replaced with FHLB advances as part of the Company's
ongoing asset/liability management strategy.
(11) Advances from the Federal Home Loan Bank of Topeka
Advances from the FHLB are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997
--------------------------- --------------------------
Weighted Weighted
Average Average
Contractual Contractual
Balance Rate Balance Rate
------- ----------- ------- -----------
<S> <C> <C> <C>
Variable rate $ -- --% $30,100 5.75%
Fixed rate 220,033 4.77 50,036 6.26
-------- -------
$220,033 4.77% $80,136 6.06%
======== ==== ======= ====
</TABLE>
F-26
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
At December 31, 1998, the Company had $130,000,000 in borrowing capacity
under a collateralized line of credit with the FHLB. The line of credit
was unadvanced at December 31, 1998. The line of credit expires on
October 22, 1999, and bears interest at a floating rate.
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 and interest bearing deposits, which are not
already pledged or encumbered.
Scheduled principal repayments of advances from the FHLB at December 31,
1998, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Contractual
Year ending December 31, Amount Rate
------ ----
<S> <C> <C>
1999 $ -- --%
2000 -- --
2001 -- --
2002 40,000 6.26
2003 and thereafter 180,033 4.44
-------- ----
$220,033 4.77%
======== ====
</TABLE>
(12) Senior Notes
Senior notes of $80,000,000 at 11% and issued to individual investors
were outstanding at December 31, 1998 and 1997. Senior notes are due
September 8, 2004 and pay interest semiannually. Senior notes are general
unsecured obligations of Local Financial and will rank senior to such
other indebtedness as the Company may incur that is not expressly
subordinated to the senior notes. The indenture generally restricts the
incurrence of additional indebtedness by the Company, except for certain
junior indebtedness.
(13) Interest Rate Swap, Cap and Floor Agreements
The Company is a party to financial instruments with off-balance sheet
risk, in the normal course of business, to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit,
options written, standby letters of credit and financial guarantees,
interest rate caps and floors written, interest rate
F-27
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
swaps, and forward and futures contracts. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated statements of financial
condition. The contract or notional amounts of those instruments reflect
the extent of the Company's involvement in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit, standby letters of credit, and financial guarantees written is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. For
interest rate caps, floors, and swap transactions, forward and futures
contracts, and options written, the contract or notional amounts do not
represent exposure to credit loss. The Company controls the credit risk
of its interest rate swap, cap and floor agreements, and forward and
futures contracts through credit approvals, limits, and monitoring
procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
The Company enters into a variety of interest-rate swap transactions in
managing its interest rate exposure. Interest rate swap transactions
generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal
amounts. The Company minimizes its credit exposure to interest rate
counterparties by entering into the transactions with counterparties that
have been rated in one of the top three investment ratings by at least
two nationally recognized credit rating agencies. The Company also
utilized interest rate caps and floors to manage its interest rate
exposure through the use of these instruments.
Effective with the change in ownership on September 8, 1997, all
outstanding interest rate swap, cap and floor agreements were terminated
and are included in net gains (losses) on sale of assets in the
consolidated statements of operations. The termination of the interest
rate swap agreements, totaling approximately $500,000,000 notional
principal amount, resulted in realized gross losses of approximately
$47,283,000. The termination of cap and floor agreements totaling
approximately $2,350,000,000 notional principal amount resulted in
realized gross losses of $2,234,000. Upon termination of the interest
rate swap, cap and floor agreements, and the corresponding liquidation of
the underlying hedged items, the Company recognized all remaining
deferred gains and losses which resulted in an additional loss of
approximately $3,920,000. The above losses resulted in a net tax benefit
of approximately $18,703,000.
During fiscal 1997, the Company terminated interest rate swaps used to
hedge securities sold under agreements to repurchase and FHLB advances
with a notional principal amount of $100,000,000 resulting in a loss of
approximately $3,825,000 which was being amortized over the life of the
original swap agreement of approximately 7 years. (See discussion above
on termination of interest rate swaps in connection with the change in
ownership on September 8, 1997.) During fiscal 1996, the Company
terminated interest rate swaps used to hedge a portion of the available
for sale portfolio with a notional
F-28
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
principal of $300,000,000 resulting in a gain of $3,637,000 which was
being amortized over the original swap agreement of approximately 3
years. The Company also terminated interest rate swaps during fiscal 1996
used to hedge a portion of the securities sold under agreements to
repurchase and FHLB advances with a notional principal amount of
$200,000,000 resulting in a loss of approximately $3,344,000 which was
being amortized over the original swap agreement of approximately 2
years. As a result of interest rate swap terminations, amortization of
deferred gains and losses resulted in the recognition of approximately
$73,000 in net losses during fiscal year 1997 and $671,000 in net gains
during fiscal year 1996.
The net effect of the interest rate swaps, caps and floors on net
interest income was a decrease of approximately $21,148,000 ($13,746,000
net of income tax) and $21,509,000 ($14,772,000 net of income tax) for
the years ended June 30, 1997 and 1996, respectively. Such decrease was
attributable primarily to interest rate swaps used to hedge a portion of
the Company's cost of borrowings in periods of rising interest rates.
(14) Other Comprehensive Income (Loss)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes for the periods indicated as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
--------------------------------------------------------
Pre-tax Tax Net
Amount Effect Amount
------------------ ----------------- ------------------
<S> <C> <C> <C>
Unrealized gain on securities:
Unrealized holding gain arising $15,636 (5,472) 10,164
during the period
Less: reclassification adjustment
for gains included in net income (2,184) 764 (1,420)
------- ------ ------
Other comprehensive income $13,452 (4,708) 8,744
======= ====== ======
</TABLE>
F-29
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
<TABLE>
<CAPTION>
Six months ended December 31, 1997
---------------------------------------------------------
Pre-tax Tax Net
Amount Effect Amount
------------------ ----------------- ------------------
<S> <C> <C> <C>
Unrealized loss on securities:
Unrealized holding loss arising
during the period $ (6,532) 2,286 (4,246)
Less: reclassification adjustment
for losses included in net income 59,334 (20,767) 38,567
-------- ------- -------
Other comprehensive income $ 52,802 (18,481) 34,321
======== ======= =======
<CAPTION>
Year ended June 30, 1997
---------------------------------------------------------
Pre-tax Tax Net
Amount Effect Amount
------------------ ----------------- ------------------
<S> <C> <C> <C>
Unrealized loss on securities:
Unrealized holding loss arising
during the period $ (4,174) 1,462 (2,712)
Less: reclassification adjustment
for losses included in net income 29,582 (10,354) 19,228
-------- ------- ------
Other comprehensive income $ 25,408 (8,892) 16,516
======== ======= =======
Year ended June 30, 1996
---------------------------------------------------------
Pre-tax Tax Net
Amount Effect Amount
------------------ ----------------- ------------------
<S> <C> <C> <C>
Unrealized loss on securities:
Unrealized holding loss arising
during the period $(75,147) 26,301 (48,846)
Less: reclassification adjustment
of losses included in net income 181 (63) 118
-------- ------- -------
Other comprehensive loss $(74,966) 26,238 (48,728)
======== ======= =======
</TABLE>
F-30
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(15) Income Taxes
The provision (benefit) for income taxes has been allocated as follows,
including the tax effect of the changes in unrealized gains (losses) on
available for sale securities (in thousands):
<TABLE>
<CAPTION>
Year Six months
ended ended Years ended June 30,
December 31, December 31, ------------------------
1998 1997 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Income (loss) from operations $10,254 (44,075) (11,860) 4,872
Stockholders' equity 4,708 18,481 8,892 (26,238)
------- ------- ------- -------
$14,962 (25,594) (2,968) (21,366)
======= ======= ======= =======
</TABLE>
Components of the provision (benefit) for income taxes from operations
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Six months
ended ended Years ended June 30,
December 31, December 31, ------------------------
1998 1997 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Current income tax expense
(benefit) $(1,005) (16,490) (10,431) 2,911
Deferred income tax expense
(benefit) 11,259 (27,585) (1,429) 1,961
------- ------- ------- -----
$10,254 (44,075) (11,860) 4,872
======= ======= ======= =====
</TABLE>
F-31
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
The effective income tax rates differ from the statutory federal income
tax rate of 35%. A reconciliation of the provision (benefit) for income
taxes based on the statutory rates with the effective rates is as follows
(in thousands):
<TABLE>
<CAPTION>
Year Six months
ended ended Years ended June 30,
December 31, December 31, ------------------------
1998 1997 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Income tax at statutory rate (35%) $ 10,042 (45,511) (14,667) 6,453
Provision for deferred tax assets -- 742 2,000 --
Effect of state income tax
(benefit), net of federal 549 (5,236) (3,013) (675)
Change in valuation allowance (384) 6,254 2,949 --
Other, net 47 (324) 871 (906)
-------- -------- -------- -----
Provision (benefit) for income
taxes $ 10,254 (44,075) (11,860) 4,872
======== ======= ======= =====
</TABLE>
Deferred income tax assets and liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997
----------------------- -----------------------
<S> <C> <C>
Deferred income tax assets:
Realized losses on available for sale securities $ 7,711 10,787
Federal net operating loss carryforwards 6,668 14,283
State net operating loss carryforwards 8,819 9,203
Allowance for loan losses 4,200 4,109
Other 4,432 1,365
-------- -------
31,830 39,747
-------- -------
Deferred income tax liabilities:
Stock dividends receivable (2,564) (1,602)
Depreciation and amortization (1,622) (364)
Deferred loan fees (1,287) (970)
Unrealized gains on available for sale securities (5,967) (1,259)
Other (612) (291)
-------- -------
(12,052) (4,486)
-------- -------
Net deferred tax asset 19,778 35,261
Valuation allowance on state NOL's (8,819) (9,203)
-------- -------
Deferred tax asset, net $ 10,959 26,058
======== =======
</TABLE>
F-32
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
At December 31, 1998, the Company had approximately $19,053,000 and
$176,387,000 of operating loss carryforwards available for federal and
state income tax purposes, respectively. The state net operating losses
expire in varying amounts between 2006 and 2013. The federal net
operating losses expire in 2013.
During 1997, the Company established a valuation allowance for the
portion of the available state net operating loss carryforwards for which
it was determined to be more likely than not that the benefit of the
deferred tax asset would not be realized. Historically, the Company has
generated income for federal income tax purposes. The tax loss for the
year ended June 30, 1997, and the six months ended December 31, 1997, was
a result of the Company exiting the indirect subprime automobile lending
program, terminating the interest rate swap agreements, and discontinuing
the wholesale securities strategy previously employed by former
management. Based on the current strategy of new management and current
taxable income for the year ended December 31, 1998, no valuation
allowance for other deferred tax assets has been established as the
Company believes it is more likely than not that sufficient income for
federal income tax purposes will be realized.
As a result of the Small Business Job Protection Act, the Company was
required to change its method of accounting for bad debts from the
reserve method to the direct charge-off method for income tax purposes
during 1997. The Company will be required to recapture the excess of the
qualifying and nonqualifying tax loan loss reserves over the base year
tax loan loss reserves over a six-year period. The recapture amount is
estimated to be $17,244,000 and the qualifying and nonqualifying base
year tax reserves totaled approximately $8,116,000 and $1,373,000,
respectively. The Company has deferred this recapture through its tax
year June 30, 1998.
In accordance with SFAS No. 109, "Accounting for Income Taxes," a
deferred tax liability has not been recognized for the tax bad debt
reserve and supplemental reserves of the Company that arose in tax years
that began prior to December 31, 1987. At December 31, 1998, the portion
of the tax bad debt reserve and supplemental reserves attributable to
pre-1988 tax years was approximately $13,329,000. The amount of
unrecognized deferred tax liability at December 31, 1998 was
approximately $4,665,000. This deferred tax liability could be recognized
if certain distributions are made with respect to the stock of Local, or
the bad debt reserve is used for any purpose other than absorbing bad
debt losses.
During 1997, the Company's federal income tax returns were examined by
and/or settled with the Internal Revenue Service through fiscal year
1993. As a result of these examinations and related claims for refund,
the Company received a refund of taxes previously paid of approximately
$800,000 which had not been anticipated by the Company prior to the
examination.
F-33
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(16) Commitments and Contingencies
In conjunction with the acquisition of LAB during fiscal 1989, the
Company and LAB entered into an Assistance Agreement with the Federal
Savings and Loan Insurance Corporation (the FSLIC). Under the terms of
the Assistance Agreement, the FSLIC Resolution Fund (the FUND), which is
managed by the Federal Deposit Insurance Corporation (the FDIC), is
entitled to receive 100% of the tax benefits attributable to acquired net
operating loss carryforwards and deductions resulting from certain items,
other than covered asset losses, for which the FUND has agreed to provide
assistance to the extent such tax benefits are realized by the
consolidated group. LAB is entitled to share in realized tax benefits of
a portion of the FUND assistance on a 50-50 basis.
Under the LAB Assistance Agreement, a dispute exists between LAB and the
FDIC regarding tax benefits which have been received. Management, after
consultation with legal counsel and based on available facts and
proceedings to date, has determined that it is probable that LAB has some
liability to the FDIC with regard to the tax benefits. The Company's
estimate of this liability is approximately $13,000,000, which is
included in other liabilities in the accompanying December 31, 1998 and
1997, consolidated statements of financial condition. The Company
provided for this liability through a provision for uninsured risk in the
consolidated statements of operations for the years ended June 30, 1997
and 1996. The FDIC's estimate of this liability is approximately
$23,000,000. Management of the Company is of the opinion that the FDIC's
estimate does not give credit to the Company for certain tax benefits
originally contracted for in the Assistance Agreement, but later
eliminated as a result of the Revenue Reconciliation Act of 1993.
Management intends to vigorously defend its estimate of the liability.
Pursuant to the terms of the Redemption Agreement discussed in Note 2,
the Selling Shareholders have agreed to indemnify the Company with
respect to the Assistance Agreement to the extent the Company is found to
be liable for an amount in excess of approximately $13,000,000. In
addition, the Selling Shareholders have agreed to be solely and
exclusively responsible for all reasonable litigation costs and expenses
which are incurred by the Company in connection with the prosecution,
defense and settlement with the FDIC.
In the ordinary course of business, the Company is subject to other legal
actions and complaints. Management, after consultation with legal
counsel, and based on available facts and proceedings to date, believes
the ultimate liability, if any, arising from such legal actions or
complaints, will not have a material adverse effect on the Company's
consolidated financial position or future results of operations.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary
F-34
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
by the Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties. At December 31, 1998, the Company
had approximately $133,333,000 of outstanding loan commitments consisting
of residential real estate, commercial real estate and commercial
business loans approved but unfunded.
During 1995, the Company securitized and sold approximately $62,147,000
of fixed rate multi-family commercial loans with recourse. The maximum
contractual recourse obligation of the Company is 10% of the total unpaid
principal balance of the mortgages on the settlement date. At December
31, 1998, the unpaid principal balance of loans sold totaled
approximately $18,543,000. The Company has pledged assets, consisting
primarily of mortgage-backed securities totaling approximately $6,458,000
under the recourse provision of the securitization transaction.
Management does not expect any material losses to be incurred as a result
of the recourse provision.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
Company holds marketable securities as collateral supporting those
commitments for which collateral is deemed necessary.
The Company leases certain real estate and equipment under operating
leases. For the year ended December 31, 1998, the six months ended
December 31, 1997, and for the years ended June 30, 1997 and 1996, lease
expense totaled approximately $594,000, $387,000, $730,000, and $618,000,
respectively. Future obligations under operating leases at December 31,
1998, are summarized as follows (in thousands):
Year ending December 31,
1999 $ 528
2000 397
2001 371
2002 303
2003 and thereafter 188
------
$1,787
======
F-35
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(17) Regulatory Matters
Local is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on Local's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Local must meet specific capital guidelines that
involve quantitative measures of Local's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Local's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Local to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), of core capital (as
defined) to adjusted tangible assets (as defined) and of tangible capital
(as defined) to tangible assets. Management believes, as of December 31,
1998 and 1997, that Local meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998 and 1997, the most recent notifications from the
OTS categorized Local as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized Local
must maintain minimum total capital, core capital, and Tier I capital as
set forth in the table. There are no conditions or events since that
notification that management believes have changed Local's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Minimum For Capital For Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets) $174,398 13.08% $106,669 8.00% $133,337 10.00%
Core capital (to adjusted tangible assets) 158,786 7.63% 62,448 3.00% 104,080 5.00%
Tangible capital (to tangible assets) 158,362 7.61% 31,218 1.50% N/A N/A
Tier I Capital (to risk weighted assets) 158,786 11.91% N/A N/A 80,002 6.00%
As of December 31, 1997:
Total capital (to risk weighted assets) $134,331 14.14% $ 76,022 8.00% $ 95,027 10.00%
Core capital (to adjusted tangible assets) 128,803 6.98% 55,384 3.00% 92,307 5.00%
Tangible capital (to tangible assets) 127,024 6.89% 27,665 1.50% N/A N/A
Tier I Capital (to risk weighted assets) 128,803 13.55% N/A N/A 57,016 6.00%
</TABLE>
Management intends to continue compliance with all regulatory capital
requirements.
F-36
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
Federal regulations allow Local to pay dividends during a calendar year
up to the amount that would reduce Local's surplus capital ratio, as
defined, to one-half of Local's surplus capital ratio at the beginning of
the calendar year, adjusted to reflect Local's net income to date during
the calendar year. At the beginning of calendar year 1999, under
applicable regulations of the OTS, the total capital available for the
payment of dividends by Local to the Company was $37.6 million.
(18) Stock Compensation
Effective with the securities offering and redemption in September 1997,
the board of directors adopted a stock option plan. The stock option plan
has 1,420,370 shares of common stock authorized and will provide for the
granting of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code as well as
non-incentive or compensatory stock options and stock appreciation
rights. On September 8, 1997, non-qualified stock options for 1,116,005
shares of common stock were granted to executive officers of the Company
at an exercise price of $10 per share. On December 31, 1997, incentive
stock options for 158,000 shares of common stock were granted to officers
and compensatory stock options for 60,000 shares of common stock were
granted to directors of the Company at an exercise price of $11.75 per
share. During the year ended December 31, 1998, all previously issued
options were rescinded and canceled in exchange for an equal number of
options at an exercise price of $10 per share and an additional 63,000
shares were issued at $10 per share during 1998. Stock options to buy
1,141,005 and 256,000 shares of common stock shall be exercisable in
three and five equal annual installments, respectively, commencing with
the end of the first twelve month period following the date the stock
options were granted. The stock options expire ten years from the
effective dates of the respective option agreements.
The per share weighted-average fair value of stock options granted for
the year ended December 31, 1998 and for the six months ended December
31, 1997, was $2.01 and $2.36, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 4.54% and 5.29%, respectively, expected life
of 5 years for both periods, and no expected dividend yield or volatility
for both periods.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost
has been recognized for its stock option rights. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, "Accounting for Stock Based
Compensation," the Company's net income (loss) for the year ended
December 31, 1998 and for the six months ended December 31, 1997, would
have been decreased and increased, respectively, to the pro forma amounts
below.
F-37
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
1998 1997
------- --------
Net income (loss) (in thousands) As reported $18,437 (85,956)
Pro forma 17,787 (86,148)
Basic net income (loss) per share As reported 0.90 (4.76)
Diluted net income (loss) per share As reported 0.89 (4.76)
Basic net income (loss) per share Pro forma 0.87 (4.77)
Diluted net income (loss) per share Pro forma 0.86 (4.77)
Stock options of 1,397,005 and 1,334,005 were outstanding at December 31,
1998 and 1997 respectively, with an exercise price of $10 and contractual
life of outstanding options of 10 years. At December 31, 1998, 418,935
options were exercisable. No options were exercisable at December 31,
1997.
(19) Employee Benefits
The Company has a retirement plan (the Plan), which is a noncontributory
defined benefit pension plan, covering substantially all of its full-time
employees. The benefits are based on years of service and the employees'
compensation during the last five years of employment. The Company's
policy, generally, is to fund pension costs unless the Plan is overfunded
and no contribution is required. Contributions are intended to provide
not only for benefits attributed to service to date but also for those
expected to be earned in the future. No contributions were made during
the year ended December 31, 1998, the six months ended December 31, 1997,
or the years ended June 30, 1997 or 1996, as the Plan is overfunded.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated statements of financial
condition and operations for the periods indicated (in thousands):
Year ended Six months ended
December 31, December 31,
1998 1997
------------ ----------------
Change in benefit obligation
Benefit obligation at beginning of period $ 9,126 8,930
Service cost 646 258
Interest cost 718 327
Recognized net gain from past experience
different from that assumed 2,139 (130)
Prior service cost (35) (17)
Transition asset (84) (42)
Benefits paid (369) (200)
------- -----
Benefit obligation at end of period 12,141 9,126
------- -----
F-38
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, December 31,
1998 1997
------------- ----------------
<S> <C> <C>
Change in plan assets
Fair value of plan assets at beginning of period $19,783 17,339
Actual return on plan assets 530 2,644
Benefits paid (369) (200)
------- --------
Fair value of plan assets at end of plan period 19,944 19,783
------- --------
Funded status 7,803 10,657
Unrecognized net gain from past experience different
from that assumed (5,663) (9,298)
Unrecognized prior service cost (478) (513)
Unrecognized transition asset being recognized over
15 years (127) (211)
------- --------
Prepaid benefit cost $ 1,535 635
======= ========
</TABLE>
<TABLE>
<CAPTION>
Year
ended Years ended June 30,
December 31, --------------------
1998 1997 1996
------------ ------- -------
<S> <C> <C> <C>
Components of net periodic pension benefit
Service cost $ 646 515 490
Interest cost 718 627 553
Expected return on plan assets (1,999) (3,820) (4,150)
Net amortization and deferral (265) 2,017 2,871
------- ------ -----
Net periodic pension benefit $ (900) (661) (236)
======= ====== ======
</TABLE>
The Company had a projected net periodic pension benefit for the
actuarial year ended June 30, 1998, based on the June 30, 1997,
valuation; however, the Company did not record any prepaid pension
benefit for the six months ended December 31, 1997, due to the
uncertainty of any changes made by new management.
A weighted average discount rate of 6.75% and 7.5% in 1998 and 1997,
respectively, and a rate of increase in future compensation levels of
5.5% was used in determining the actuarial present value of the projected
benefit obligation for 1998 and 1997. The expected long-term rate of
return on assets was 11.0% for 1998 and 1997.
F-39
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
The Company does not provide postretirement benefits other than pensions.
At June 30, 1998, the Company employed 629 full-time equivalent persons
compared to 481 at June 30, 1997.
As a result of the acquisition of Green Country (see note 3), the Company
adopted the Green Country Bank 401(k) plan with amendments effective
February 16, 1998. Eligible employees of the Company may elect to defer a
portion of their salary and contribute to the 401(k) plan to fund
retirement benefits. The Company currently does not participate with
matched or fixed contributions.
(20) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its
financial instruments. Fair value estimates, methods and assumptions set
forth below for the Company's financial instruments, are made solely to
comply with the requirements of SFAS No. 107.
Fair values are based on estimates or calculations at the transaction
level using present value techniques in instances where quoted market
prices are not available. Because broadly traded markets do not exist for
most of the Company's financial instruments, the fair value calculations
attempt to incorporate the effect of current market conditions at a
specific time. Fair valuations are management's estimates of the values,
and they are often calculated based on current pricing policy, the
economic and competitive environment, the characteristics of the
financial instruments, expected losses and other such factors. These
calculations are subjective in nature, involve uncertainties and matters
of significant judgment and do not include tax ramifications; therefore,
the results cannot be determined with precision, substantiated by
comparison to independent markets and may not be realized in an actual
sale or immediate settlement of the instruments. The Company has not
included certain material items in its disclosure, such as the value of
the long-term relationships with the Company's depositors, since this
intangible is not a financial instrument. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash
flows, could significantly affect the results. For all of these reasons,
the aggregation of the fair value calculations presented herein do not
represent, and should not be construed to represent, the underlying value
of the Company.
F-40
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
The following table presents a summary of the Company's financial
instruments, as defined by SFAS No. 107 (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 54,880 54,880 54,152 54,152
Securities purchased under
agreements to resell -- -- 178,000 178,000
Securities available for sale 570,964 570,964 518,107 518,107
Loans receivable, net 1,362,272 1,379,964 953,470 972,820
FHLB stock 42,693 42,693 45,147 45,147
Financial Liabilities:
Deposits 1,668,074 1,676,485 1,602,533 1,608,540
Advances from the FHLB 220,033 220,178 80,136 80,173
Senior notes 80,000 85,397 80,000 80,000
</TABLE>
The following are descriptions of the methods used to determine the
estimated fair values:
(a) Cash and Cash Equivalents and Securities Purchased Under
Agreements to Resell
The carrying amount is a reasonable estimate of fair value because
of the relatively short period of time between the origination of
the instrument and its expected realization.
(b) Securities
The carrying value and estimated fair value of securities at
December 31, 1998 and 1997, is set forth in Note 5. The estimated
fair value of FHLB stock approximates the carrying value as of
December 31, 1998 and 1997.
(c) Loans
The fair valuation calculation process differentiates loans based
on their financial characteristics, such as product
classification, loan category, pricing features and remaining
maturity. Prepayment estimates are evaluated by product and loan
rate. In establishing the credit risk component of the fair value
calculations for loans, the Company considered several approaches,
including the use of variable discount rates based on relative
credit quality, forecasting cash flows, net of projected losses
and secondary market pricing for certain third party loan sale
transactions. After evaluating such information, the Company
concluded that the allowance for
F-41
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
loan losses represented a reasonable estimate of the credit risk
component of the fair value of loans at December 31, 1998 and
1997.
The fair value of commercial real estate loans, other real estate
mortgage loans, real estate construction loans, and commercial
business loans is calculated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates that
reflect the Company's current pricing for loans with similar
characteristics and remaining maturity.
For real estate single family first and junior lien mortgages,
fair value is calculated by discounting contractual cash flows,
adjusted for prepayment estimates, using discount rates based on
the Company's current pricing for loans of similar size, type,
remaining maturity and repricing characteristics.
For other consumer loans, the fair value is calculated by
discounting the contractual cash flows, adjusted for prepayment
estimates, using discount rates based on the Company's current
pricing for loans of similar size, type, and remaining maturity.
(d) Deposit Liabilities
SFAS No. 107 states that the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits,
interest-bearing checking and savings deposits and market rate
savings, is equal to the amount payable on demand at the
measurement date. Although SFAS No. 107's requirements for these
categories are not consistent with the market practice of using
prevailing interest rates to value these amounts, the amount
included for these deposits in the previous table is their
carrying value at December 31, 1998 and 1997. The fair value of
certificates of deposit and other time deposits is calculated
based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for
similar duration deposits.
(e) Advances from the Federal Home Loan Bank of Topeka and Senior
Notes
The estimated fair value of FHLB advances is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the current market rate for similar duration
borrowings. Commitments are related primarily to variable rate
loans originated at current market rates. The estimate of fair
value of these commitments is considered to be immaterial. The
estimate of value of senior notes is based on the discounted value
of contractual cash flows.
(f) Limitations
The information presented in this note is based on market quotes
and fair value calculations as of December 31, 1998 and 1997.
These amounts have not been updated since these dates; therefore,
the valuations may have changed since that point in time.
F-42
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
(21) Supplemental Quarterly Financial Information (unaudited)
Following is a summary of the unaudited interim results of operations for
the year ended December 31, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Interest and dividend income $35,491 35,025 36,386 40,302 147,204
Net interest and dividend income $11,848 12,441 14,035 16,442 54,766
Provision for loan losses $ 150 300 500 500 1,450
Income before income taxes $ 6,580 6,952 7,398 7,761 28,691
Net income $ 4,249 4,525 4,725 4,938 18,437
Net income per common share:
Basic $ 0.21 0.22 0.23 0.24 0.90
Diluted $ 0.21 0.22 0.23 0.24 0.89
</TABLE>
(22) Parent Company Financial information
Condensed financial information for Local Financial Corporation is as
follows (in thousands):
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Cash and due from banks, substantially restricted
at December 31, 1997 $ 2,019 11,840
Investment in subsidiary 187,464 143,917
Other assets 12,743 10,061
--------- ---------
Total assets $ 202,226 165,818
========= =========
Liabilities and Stockholders' Equity:
Senior notes $ 80,000 80,000
Other liabilities 3,420 3,193
--------- ---------
Total liabilities 83,420 83,193
--------- ---------
Common stock 205 197
Additional paid-in capital 206,758 197,766
Retained earnings 50,197 31,760
Treasury stock (149,436) (149,436)
Accumulated other comprehensive income 11,082 2,338
--------- ---------
Total stockholders' equity 118,806 82,625
--------- ---------
Total liabilities and stockholders' equity $ 202,226 165,818
========= =========
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, -----------------------
1998 1997 1997 1996
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Dividend income from subsidiary $ 2,000 -- 500 10,600
Equity in undistributed earnings (losses)
of subsidiary 23,067 (83,925) (29,886) 5,124
Other 192 -- 200 43
-------- -------- -------- --------
Total income (loss) 25,259 (83,925) (29,186) 15,767
Expense:
Interest expense 9,470 3,073 1,026 1,606
Compensation and employee benefits -- -- -- 871
Other 922 52 145 828
-------- -------- -------- --------
Total expense 10,392 3,125 1,171 3,305
Provision (benefit) for income taxes (3,570) (1,094) (312) (1,106)
-------- -------- -------- --------
Net income (loss) $ 18,437 (85,956) (30,045) 13,568
======== ======== ======== ========
</TABLE>
F-44
<PAGE>
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, June 30, 1997 and 1996
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, --------------------------
1998 1997 1997 1996
-------------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Cash provided (absorbed) by operating activities:
Net income (loss) $ 18,437 (85,956) (30,045) 13,568
Adjustments to reconcile net income (loss) to
net cash provided (absorbed) by
operating activities:
Equity in undistributed losses
(earnings) of subsidiary (23,067) 83,925 29,886 (5,124)
Change in other liabilities 228 3,012 (558) 531
Change in other assets (2,682) (5,582) (398) (1,937)
-------- -------- -------- --------
Net cash provided (absorbed) by operating activities (7,084) (4,601) (1,115) 7,038
Cash provided (absorbed) by investing activities:
Investment in subsidiary (2,087) (83,839) -- --
Cash acquired in acquisition of Green Country 2,512 -- -- --
-------- -------- -------- --------
Net cash provided (absorbed) by investing activities 425 (83,839) -- --
Cash provided (absorbed) by financing activities:
Proceeds from issuance of common stock -- 181,067 -- --
Capital contribution -- -- 8,099 --
Purchase of treasury stock -- (149,436) -- --
Repayment of note payable -- (7,010) (7,010) (7,010)
Proceeds from issuance of senior notes -- 80,000 -- --
Payments of debt issuance costs -- (4,344) -- --
Payment of liability assumed from Green Country (3,162) -- -- --
-------- -------- -------- --------
Net cash provided (absorbed) by financing activities (3,162) 100,277 1,089 (7,010)
Net change in cash and cash equivalents (9,821) 11,837 (26) 28
Cash and cash equivalents at beginning of period 11,840 3 29 1
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 2,019 11,840 3 29
======== ======== ======== ========
Supplemental schedule of noncash investing activity:
Tax benefit contributed to subsidiary $ -- -- 535 1,752
======== ======== ======== ========
</TABLE>
F-45
<PAGE>
<TABLE>
<S> <C>
==================================================================== =========================================================
No dealer, salesman or any other person has been authorized to
give any information or to make any representation not contained
in this Prospectus, and, if given or made, such information and
representation must not be relied upon as having been authorized
by the Company, a Selling Holder or any other person. This
Prospectus does not constitute an offer to sell or a solicitation of 21,128,209 Shares of Common Stock
an offer to buy any of the securities offered hereby in any state to $80,000,000 of 11.0% Senior Notes due
any person to whom it is unlawful to make such offer in such September 8, 2004
state. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since
the date hereof.
LOCAL FINANCIAL CORPORATION
TABLE OF CONTENTS
Page
Prospectus Summary........................................... 1
Selected Consolidated Financial and Other Data............... 7
Risk Factors................................................. 9
Ratio of Earnings to Fixed Charges.......................... 15
Use of Proceeds............................................. 15 ------
Dividends and Market for Local Securities................... 15 PROSPECTUS
Capitalization.............................................. 17 ------
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 18
Business.................................................... 46
Management.................................................. 66
Regulation.................................................. 76
Taxation.................................................... 86
Selling Holders............................................. 89
Description of Senior Notes................................. 97
Description of Capital Stock............................... 116
Registration Rights........................................ 121
Plan of Distribution....................................... 122 April __, 1999
Shares Eligible For Future Sale............................ 123
Experts.................................................... 124
Change in Independent Certified Public Accountants......... 124
Certain Legal Matters...................................... 125
Additional Information..................................... 125
Index to Consolidated Financial Statements................. 127
==================================================================== =========================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following statement sets forth the estimated amount of expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance and distribution of the securities being registered. Except as
specifically indicated, all of such expenses are being borne by the Registrant.
SEC filing fees............................................. $ 90,603
Printing and distribution................................... 30,000
Legal fees and expenses..................................... 275,000
Blue Sky fees and expenses.................................. 20,000
Accounting fees and expenses................................ 110,700
Miscellaneous fees and expenses............................. 33,000
--------
Total....................................................... $559,303
========
Item 14. Indemnification of Directors and Officers.
Article IX of the Registrant's Bylaws provides as follows:
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article IX, the Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, and any appeal therein, whether civil, criminal,
administrative, arbitrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, trustee or employee of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, trustee, employee or agent of
another corporation, association, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding, and any appeal therein, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding, and any appeal
therein, by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not
<PAGE>
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Power to Indemnify in Actions, suits or Proceedings by or in
the Right of the Corporation. Subject to Section 3 of this Article IX, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, trustee or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; provided, however, that
no indemnification shall be made against expenses in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Corporation or against amounts paid in settlement unless and only to the extent
that there is a determination (as set forth in Section 3 of this Article IX)
that despite the adjudication of liability or the settlement, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or amounts paid in settlement.
Section 3. Authorization of Indemnification. Any indemnification under
this Article IX (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because such director, officer, trustee, employee or agent
has met the applicable standard of conduct set forth in Section 1 or Section 2
of this Article IX and, if applicable, is fairly and reasonably entitled to
indemnity as set forth in the proviso in Section 2 of this Article IX, as the
case may be. Such determination shall be made (i) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, (ii) if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders. To the extent,
however, that a director, officer, trustee, employee or agent of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire board of
directors.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article IX, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any
II-2
<PAGE>
criminal action or proceeding, to have had no reasonable cause to believe his
conduct was unlawful, if his action is based on the records or books of account
of the Corporation or another enterprise, or on information supplied to him by
the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any association, partnership, joint venture,
trust or other enterprise of which such person is or was serving at the request
of the Corporation as a director, officer, trustee, employee or agent. The
provisions of this section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be deemed to have met the
applicable standards of conduct set forth in Sections 1 or 2 of this Article IX,
as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. Notwithstanding any of
the foregoing, unless otherwise required by law, no director, officer trustee,
employee or agent of the Corporation shall be entitled to indemnification in
connection with any action, suit or proceeding voluntarily initiated by such
person unless the action, suit or proceeding was authorized by a majority of the
entire board of directors.
Section 6. Expense Payable in Advance. Expenses incurred in connection
with a threatened or pending action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, trustee, employee or agent to repay such amount if it shall be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article IX.
Section 7. Contract, Non-exclusivity and Survival of Indemnification.
The indemnification provided by this Article IX shall de deemed to be a contract
between the Corporation and each director, officer, employee and agent who
serves in such capacity at any time while this Article IX is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification and
II-3
<PAGE>
advancement of expenses may be entitled under any Certificate of Incorporation,
bylaw, agreement, contract, vote of stockholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 or 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, trustee,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent of another
corporation, association, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power or the obligation to indemnify him against such liability
under the provisions of this Article IX.
Section 9. Meaning of "Corporation" for Purposes of Article IX. For
purposes of this Article IX, references to "the Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article IX with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Item 15. Recent Sales of Unregistered Securities.
In accordance with Item 701 of Regulation S-K, the following
information is presented with respect to securities sold by the Registrant
within the past three years which were not registered under the Securities Act
of 1933, as amended ("Securities Act"):
II-4
<PAGE>
(a) On September 8, 1997, the Registrant sold in a private
placement an aggregate of 19.7 million shares of its common
stock, par value $.01 per share ("Common Stock"), and $80.0
million of its Senior Notes due 2004 ("Senior Notes").
(b) Friedman, Billings Ramsey & Co., Inc. ("FBR") acted as
Placement Agent for the Registrant in connection with the
private placement transaction. The securities were offered and
sold to institutional and accredited investors.
(c) The Registrant's Common Stock was sold for $10.00 per share and
the Senior Notes were sold at $1,000 aggregate principal amount
per Senior Note. FBR received $18.2 million as compensation in
the transaction (a 7.0% commission on the Common Stock sold and
a 5.5% commission on the Senior Notes sold), plus reimbursement
of expenses, and warrants entitling FBR to purchase from the
Registrant, for a period of five years from September 8, 1997,
an aggregate of up to 591,000 shares of Common Stock at $10.00
per share (the "Placement Agent Warrants").
(d) Based upon representations of the offerees and purchasers, the
Common Stock and the Senior Notes were offered and sold in
reliance upon an exemption from registration under Section 4(2)
of the Securities Act and in compliance with Rules 502 and 506
promulgated thereunder.
(e) As referenced in paragraph (c) above, the Placement Agent
Warrants may be exercised by FBR until September 8, 2002 at an
exercise price of $10.00 per share of Common Stock.
(f) Not applicable.
II-5
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits
<TABLE>
<S> <C>
2.0* Agreement and Plan of Merger among Local Financial Corporation ("Local Financial"),
Local America Bank of Tulsa, F.S.B, Green Country Banking Corporation, Green
Country Bank, F.S.B., Edward A. Townsend, Jan A. Norton and DeWayne R. Von
Feldt, dated October 22, 1997.
3.1* Certificate of Incorporation of Local Financial Corporation ("Local Financial")
3.2* Certificate of Amendment to Certificate of Incorporation of Local Financial
3.3* Bylaws of Local Financial
4.1* Purchase Agreement among Local Financial, Friedman, Billings, Ramsey & Co., Inc.
("FBR") and the Purchasers named therein, dated September 8, 1997
4.2* Registration Rights Agreement between Local Financial, FBR and the Purchasers named
therein, dated September 8, 1997
4.3* Indenture between Local Financial and The Bank of New York ("BONY"), as Trustee, dated
September 8, 1997
4.4* Form of Common Stock certificate of Local Financial
4.5* Form of Senior Note (included in Exhibit 4.3)
5.0* Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
10.1* Redemption Agreement between Local Financial and Barron Collier and Miles Collier
(collectively, the "Selling Stockholders"), dated August 25, 1997
10.2* Amendment to Redemption Agreement between Local Financial and the Selling
Stockholders, dated September 5, 1997
10.3* Security Agreement between Local Financial and BONY, as Trustee, dated September
8, 1997
10.4* Escrow Agreement between Local Financial, the Selling Stockholders and BONY, as Escrow
Agent, dated September 8, 1997
10.5* Common Interest Agreement between Local America, Inc., Local America Bank of Tulsa,
F.S.B., Local Federal Bank, F.S.B. and the Selling Stockholders, dated
September 8, 1997.
10.6* Warrant of Local Financial to FBR to purchase 591,000 shares of Common Stock, dated
September 8, 1997
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
10.7* Employment Agreement between Local Financial and Edward A. Townsend, dated September
8, 1997
10.8* Employment Agreement between Local Financial and Jan A. Norton, dated September 8,
1997
10.9* Local Financial Stock Option Plan
10.10* Local Financial Stock Option Agreement between Local Financial and Edward A.
Townsend, dated September 8, 1997
10.11* Local Financial Stock Option Agreement between Local Financial and Jan A. Norton,
dated September 8, 1997
10.12** Form of Severance Agreement, dated January 1, 1999
10.13** First Amendment to Employment Agreement between Local Financial and Edward A.
Townsend dated November 6, 1998
10.14** First Amendment to Employment Agreement between Local Financial and Jan A.
Norton dated November 6, 1998
10.15** 1998 Non-qualified Stock Option Agreement between Local Financial and Edward A.
Townsend dated September 23, 1998
10.16** 1998 Non-qualified Stock Option Agreement between Local Financial and Jan A.
Norton dated September 23, 1998
16.0* Letter re: Change in Certifying Accountant
21.0 Subsidiaries of the Registrant (see "Business--Subsidiaries" in the Prospectus)
23.1* Consent of Elias, Matz, Tiernan & Herrick L.L.P.
23.2 Consent of KPMG LLP
23.3 Consent of Arthur Andersen LLP
24.0 Power of Attorney (included in Signature Page of this Registration Statement)
25.0* Statement of Eligibility of Trustee
</TABLE>
- --------------
* Previously filed.
** Incorporated herein by reference from Registrant's Form 10-K filed with the
Commission on March 30, 1999.
II-7
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) (1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant
II-8
<PAGE>
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the Form S-1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Oklahoma City, Oklahoma on April 20, 1999.
LOCAL FINANCIAL CORPORATION
By: /s/ Edward A. Townsend
----------------------
Edward A. Townsend
Chairman of the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Edward A. Townsend Chairman of the Board and April 21, 1999
- -------------------------- Chief Executive Officer
Edward A. Townsend (principal executive officer)
/s/ Jan A. Norton* President and Director April 21, 1999
- -------------------------
Jan A. Norton
/s/ Richard L. Park* Executive Vice President April 21, 1999
- ------------------------- (Principal accounting officer)
Richard L. Park
/s/ Robert A. Kotecki* Director April 21, 1999
- -------------------------
Robert A. Kotecki
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Joseph A. Leone* Director April 21, 1999
- -------------------------
Joseph A. Leone
/s/ George Nigh* Director April 21, 1999
- -------------------------
George Nigh
/s/ Kenneth W. Townsend* Director April 21, 1999
- -------------------------
Kenneth W. Townsend
/s/ J. David Rosenberg* Director April 21, 1999
- -------------------------
J. David Rosenberg
</TABLE>
- ---------------------
*By Edward A. Townsend, Attorney-in-fact.
Exhibit 23.2
[KPMG LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Local Financial Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Oklahoma City, Oklahoma
April 21, 1999
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Oklahoma City, Oklahoma
April 20, 1999
