<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number:
001-13949
LOCAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0424192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3601 N.W. 63RD, OKLAHOMA CITY, OK 73116
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 841-2298
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the registrant's $0.01 par value common
stock as of August 11, 1999 were as follows:
NUMBER OF SHARES
-----------------------------
20,537,209
<PAGE> 2
LOCAL FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
June 30, 1999 (unaudited) and December 31, 1998.................... 1
Consolidated Statements of Operations-
For the Three Months and Six Months Ended June 30, 1999
and 1998 (unaudited)............................................... 2
Consolidated Statements of Cash Flows-
For the Six Months Ended June 30, 1999 and 1998 (unaudited)........ 3
Notes to Consolidated Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
Signatures.................................................................. 16
Index to Exhibits........................................................... 17
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,125 $ 27,180
Interest bearing deposits with other banks 400 27,700
Securities available for sale 504,163 570,964
Loans receivable, net of allowance for loan losses of $28,304 at
June 30, 1999 and $27,901 at December 31, 1998 1,553,306 1,362,272
Federal Home Loan Bank of Topeka stock and Federal Reserve
Bank stock, at cost 28,247 42,693
Premises and equipment, net 28,531 23,959
Assets acquired through foreclosure and repossession, net 877 693
Intangible assets, net 16,815 17,843
Deferred tax asset, net 12,485 10,959
Current income taxes receivable 1,080 18,291
Other assets 27,337 26,425
----------- -----------
Total assets $ 2,204,366 $ 2,128,979
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 370,190 $ 379,796
Savings 78,075 74,963
Time 1,160,360 1,213,315
----------- -----------
Total deposits 1,608,625 1,668,074
Advances from the Federal Home Loan Bank of Topeka 350,518 220,033
Senior notes 80,000 80,000
Other liabilities 39,426 42,066
----------- -----------
Total liabilities 2,078,569 2,010,173
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
20,537,269 shares issued and 20,537,209 shares outstanding at
June 30, 1999 and December 31, 1998 205 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,758 206,758
Retained earnings 60,883 50,197
Treasury stock, 60 shares, at cost (149,436) (149,436)
Accumulated other comprehensive income 7,387 11,082
----------- -----------
Total stockholders' equity 125,797 118,806
----------- -----------
Total liabilities and stockholders' equity $ 2,204,366 $ 2,128,979
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 31,672 $ 22,369 $ 61,420 $ 44,898
Securities available for sale 7,966 10,773 16,458 19,658
Federal Home Loan Bank of Topeka and Federal
Reserve Bank stock 544 890 1,209 1,741
Other investments 285 993 580 4,219
------------ ------------ ------------ ------------
Total interest and dividend income 40,467 35,025 79,667 70,516
------------ ------------ ------------ ------------
Interest expense:
Deposit accounts 16,729 18,893 33,913 38,399
Advances from the Federal Home Loan Bank of Topeka 3,226 1,328 5,850 2,837
Securities sold under agreements to repurchase -- -- -- 251
Notes payable 2,363 2,363 4,726 4,740
------------ ------------ ------------ ------------
Total interest expense 22,318 22,584 44,489 46,227
------------ ------------ ------------ ------------
Net interest and dividend income 18,149 12,441 35,178 24,289
Provision for loan losses (500) (300) (1,000) (450)
------------ ------------ ------------ ------------
Net interest and dividend income after provision for 17,649 12,141 34,178 23,839
loan losses ------------ ------------ ------------ ------------
Noninterest income:
Deposit related income 3,448 2,486 6,572 4,473
Loan fees and loan service charges 687 554 1,360 892
Net gains on sale of assets 219 334 546 359
Other 327 559 584 883
------------ ------------ ------------ ------------
Total noninterest income 4,681 3,933 9,062 6,607
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 7,075 3,986 13,922 7,630
Deposit insurance premiums 241 343 479 683
Equipment and data processing 1,454 808 2,697 1,537
Occupancy 1,105 691 1,931 1,318
Advertising 314 556 658 822
Professional fees 673 478 1,174 965
Other 2,774 2,260 5,616 3,959
------------ ------------ ------------ ------------
Total noninterest expense 13,636 9,122 26,477 16,914
------------ ------------ ------------ ------------
Income before provision for income taxes 8,694 6,952 16,763 13,532
Provision for income taxes 3,147 2,427 6,077 4,758
------------ ------------ ------------ ------------
Net income $ 5,547 $ 4,525 $ 10,686 $ 8,774
============ ============ ============ ============
Basic net income per share $ 0.27 $ 0.22 $ 0.52 $ 0.43
============ ============ ============ ============
Diluted net income per share $ 0.27 $ 0.22 $ 0.52 $ 0.42
============ ============ ============ ============
Weighted average shares outstanding - Basic 20,537,209 20,537,209 20,537,209 20,324,438
============ ============ ============ ============
Weighted average shares outstanding - Diluted 20,537,209 20,930,441 20,537,209 20,649,630
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 10,686 $ 8,774
Adjustments to reconcile net income to net cash provided
by operating activities-
Provisions for losses on loans 1,000 450
Deferred income tax expense 6,077 5,672
Accretion of discounts on loans acquired (812) (1,786)
Net amortization (accretion) of premium on securities
available for sale (1,721) (1,891)
Depreciation and amortization 2,070 1,765
Net change in loans held for sale 3,461 3,684
(Gain) on sale of assets (546) (359)
Stock dividends received from Federal Home Loan Bank (1,178) (1,741)
Change in other assets 10,872 19,089
Change in other liabilities (5,186) (10,166)
----------- -----------
Net cash provided by operating activities 24,723 23,491
----------- -----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 10,786 20,222
Proceeds from principal collections on securities
available for sale 175,922 84,144
Purchases of securities available for sale (123,889) (181,873)
Purchases of repurchase agreements -- (1,200,462)
Proceeds from maturity of repurchase agreements -- 1,378,462
Purchases of Federal Home Loan Bank and Federal Reserve
Bank stock (3,783) (1,643)
Proceeds from the sale of Federal Home Loan Bank and Federal
Reserve Bank stock 19,407 --
Change in loans receivable, net (194,563) (57,768)
Proceeds from disposal of assets acquired through
foreclosure and repossession 459 56
Purchases of premises and equipment (6,157) (5,469)
Proceeds from sales of premises and equipment 345 35
Cash acquired in acquisition of Green Country Banking
Corporation -- 2,512
----------- -----------
Net cash provided (absorbed) by investing activities (121,473) 38,216
----------- -----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts (6,494) 16,925
Change in time deposits (52,955) (144,956)
Proceeds from advances from the Federal Home Loan Bank 224,196 432,515
Repayments of advances from the Federal Home Loan Bank (93,711) (396,107)
Payment of liability assumed from Green Country Banking
Corporation -- (3,162)
Change in advances by borrowers for taxes and insurance 2,359 1,796
----------- -----------
Net cash provided (absorbed) by financing activities 73,395 (92,989)
----------- -----------
Net change in cash and cash equivalents (23,355) (31,282)
Cash and cash equivalents at beginning of period 54,880 54,152
----------- -----------
Cash and cash equivalents at end of period $ 31,525 $ 22,870
=========== ===========
Supplement disclosures of cashflow information:
Cash paid (received) during the period for:
Interest $ 43,923 $ 41,145
=========== ===========
Income taxes $ (11,822) $ (11,405)
=========== ===========
Supplemental schedule of noncash investing and financing
activities:
Transfers of loans to assets acquired through foreclosure
and repossession $ 643 $ 420
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999 and December 31, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared
in accordance with the instructions for Form 10-Q and, therefore, do not
include all disclosures necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments (consisting of
only normal recurring adjustments) that are necessary, in the opinion of
management, for a fair presentation of the interim financial statements
have been included. The interim financial information should be read in
conjunction with the audited Consolidated Financial Statements and Notes
included in Local Financial Corporation and Subsidiary's (the "Company")
Form 10-K for the period ended December 31, 1998 as filed with the
Securities and Exchange Commission ("SEC").
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate loans $ 346,875 $ 344,565
Commercial 1,092,600 927,682
Held for sale 12,727 16,188
Consumer loans 129,408 101,738
----------- -----------
Total loans 1,581,610 1,390,173
Less:
Allowance for loan losses (28,304) (27,901)
----------- -----------
Loans receivable, net $ 1,553,306 $ 1,362,272
=========== ===========
</TABLE>
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------- ---------------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
------- ---------------- ------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Variable rate $130,486 6.15% $ -- --
Fixed rate 220,032 4.77 220,033 4.77%
-------- --------
$350,518 5.29% $220,033 4.77%
======== ==== ======== ====
</TABLE>
4
<PAGE> 7
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 June 30, 1999
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEAR ENDING DECEMBER 31, AMOUNT CONTRACTUAL RATE
-------- ----------------
<S> <C> <C>
1999 $130,486 6.15%
2000 -- --
2001 -- --
2002 40,000 6.26
2003 and thereafter 180,032 4.44
--------
$350,518 5.29%
======== ====
</TABLE>
(4) COMPREHENSIVE INCOME
Comprehensive income for the periods ended June 30, 1999 and 1998 consists
of:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net income $ 5,547 $ 4,525 $ 10,686 $ 8,774
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment (3,732) (470) (3,695) 812
-------- -------- -------- --------
Comprehensive income $ 1,815 $ 4,055 $ 6,991 $ 9,586
======== ======== ======== ========
</TABLE>
(5) NET INCOME PER SHARE
Stock options and warrants to purchase 2,089,005 shares of common stock
were outstanding as of June 30, 1999, but were not included in the
computation of diluted net income per share because they are antidilutive.
(6) 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. The Company has one
active operating subsidiary namely Local Oklahoma Bank, National
Association, a national banking association (the "Bank"). The Bank, in
turn, 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 the Bank. While Local Securities qualifies as a separate
operating segment, it is not considered
5
<PAGE> 8
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".
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the last 21 months and in pursuit of the Company's strategic
growth initiatives, the Company has shifted the activities of the Bank 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. In order to accommodate this strategy,
the Company chose to convert the Bank to a national banking association,
accordingly, the Bank filed an application with the Office of the Comptroller of
the Currency for that purpose, and, in connection with the Bank's charter
conversion, the Company filed an application with the Federal Reserve Board (the
"FRB") to become registered as a bank holding company and received approval on
March 25, 1999. The Bank consummated its conversion to a national banking
association on May 11, 1999, and the Company was registered as a bank holding
company on that same day.
In this Form 10-Q, the Company, when discussing the future, may use
words like the words "anticipate", "believe", "estimate", "expect", "intend",
"should" and similar expressions, or the negative thereof. These words represent
forward-looking statements. In addition, any analysis of the adequacy of the
allowance for loan losses or the interest rate sensitivity of the Bank's assets
and liabilities represent attempts to predict future events and circumstances
and also represent forward-looking statements.
Many factors could cause future results to differ from what is
anticipated in the forward-looking statements. For example, future financial
results could be affected by (i) the Bank's shift from a savings institution to
a commercial bank; (ii) deterioration in local, regional, national or global
economic conditions which could cause an increase in loan delinquencies or a
decrease in collateral values; (iii) changes in market interest rates or changes
in the speed at which market interest rates change; (iv) changes in laws and
regulations affecting the financial service industry; (v) changes in competition
and (vi) changes in consumer preferences.
Please do not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and are not
guarantees, promises or assurances of what will happen in the future. Various
factors, including those described above and those described in the Company's
Form S-1, as amended April 30, 1999 (the "Risk Factors" of which are
incorporated into this Report), could affect the Company's financial performance
and could cause the Company's actual results or circumstances for future periods
to be materially different from what has been anticipated or projected.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1998 TO JUNE 30, 1999
During the six months ended June 30, 1999, total assets increased $75.4
million or 3.54%. The $75.4 million increase was due primarily to growth in the
Bank's loan portfolio. This loan growth, funded principally by paydowns in the
Bank's security portfolio as well as FHLB advances, occurred most significantly
in the Bank's commercial and consumer loan portfolios where loan balances during
the six months ended June 30, 1999 rose $164.9 million or 17.78% and $27.7
million or 27.2%, respectively.
Total liabilities increased during the quarter ended June 30, 1999,
primarily due to increases in FHLB advances which increased $130.5 million or
59.3% compared to prior quarter end.
Total stockholders' equity increased $7.0 million during the six months
ended June 30, 1999 which represented net income during the period of $10.7
million adjusted for a $3.7 million decline in unrealized holding gains on
securities net of tax.
7
<PAGE> 10
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
AND THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998.
Net Income. The Company reported net income of $10.7 million or $0.52
basic earnings per share for the six months ended June 30, 1999 (based on 20.5
million average shares outstanding), compared to net income of $8.8 million or
$0.43 basic earnings per share (based on 20.3 million average shares
outstanding) for the six months ended June 30, 1998. Likewise, net income rose
during the comparative three-month periods ended June 30, 1998 and 1999 rising
from $4.5 million or $0.22 basic earnings per share for the three months ended
June 30, 1998 to $5.5 million or $0.27 basic earnings per share for the three
months ended June 30, 1999 (based on 20.5 million average shares outstanding).
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 $35.2 million in the six
months ended June 30, 1999 as compared to $24.3 million during the same period
in the prior year. Similarly, net interest and dividend income totaled $18.1
million in the three months ended June 30, 1999 as compared to $12.4 million
during the same period in the prior year. The $10.9 million and $5.7 million
increases in net interest and dividend income during the comparative six and
three month periods ended June 30, 1999 were due primarily to the increases in
the Company's total interest earning assets which outpaced a similar increase in
total interest-bearing liabilities coupled with the declining costs of those
liabilities.
During both the six and three month comparative periods ended June 30,
1999 and June 30, 1998, the average yield of the Company's interest-earning
assets remained relatively stable while the average cost of the Company's
interest-bearing liabilities decreased resulting in a rise in the Company's
interest rate spread from 2.40% to 2.96% during the six month comparative
periods and 2.45% to 3.06% during the three month comparative periods.
Accordingly, the Company's net interest margin, which is determined by net
interest income as a percentage of average total interest-earning assets,
increased 76 and 78 basis points, respectively, during the comparative six and
three month periods.
Interest Income. Total interest and dividend income increased by $9.2
million or 12.98% during the six months ended June 30, 1999 as compared to the
same period in the prior year and rose by $5.4 million or 15.54% during the
three months ended June 30, 1999 as compared to the same period in the prior
year.
The increases in interest income during both the six and three month
comparative periods were due primarily to the growth in the Bank's commercial
loan portfolio where balances rose from $927.7 million at December 31, 1998 to
$1,092.6 million at June 30, 1999, respectively. The full interest income effect
of this loan growth was partially offset by reductions in the average balance of
the Bank's securities portfolio and, to a lesser extent, a reduction in the
yields received in the securities portfolio.
Interest Expense. Total interest expense declined $1.7 million or 3.76%
in the six months ended June 30, 1999 as compared to the same period in the
prior year. Likewise, total interest expense declined $266,000 or 1.18% during
the three months ended June 30, 1999 as compared to the same period in the prior
year. These declines were driven primarily by reductions in interest expense
paid on total deposits which, to an approximate equal extent, were due to both
rate and volume declines in the deposit base. Lower interest expense due to
depositors was partially offset by higher interest expense due to the FHLB
8
<PAGE> 11
as the Bank utilized FHLB Advances to help fund commercial loan growth in both
the six and three month comparative periods.
Provision for Loan Losses. The Bank established provisions for loan
losses of $1.0 million and $450,000 during the six months ended June 30, 1999
and June 30, 1998, respectively. During such respective periods, loan
charge-offs (net of recoveries) amounted to $597,000 and $341,000. The Company's
basis for provisions were a function of management's credit risk monitoring
process that considers several factors, including among other things, current
economic conditions affecting the Company's customers, the payment performance
of individual large loans and pools of homogeneous small loans, portfolio
seasoning, change in collateral values, and detailed review of specific large
loan relationships.
Noninterest Income. The components of noninterest income consist of
deposit-related income, loan fees and loan service charges, net gains on sale of
assets and other miscellaneous income. Total noninterest income rose $2.5
million or 37.16% during the six months ended June 30, 1999 as compared to the
same period in the prior year. Likewise, total noninterest income rose $748,000
or 19.02% during the three months ended June 30, 1999 as compared to the same
period in the prior year. Increases in noninterest income between both the six
and three month comparative periods were due to increases in deposit-related
income during those periods. Deposit-related income such as NSF fees and other
service charges rose $2.1 million or 46.93% and $962,000 or 38.70% during the
six and three months comparative periods ended June 30, 1999 and June 30, 1998,
respectively. Additionally, the Bank saw an increase in loan fees and service
charges in both the six and three month comparative periods ended June 30, 1999.
These increases were directly related to the increased origination loan volume
and the portfolio acquired in the BankSouth acquisition and related lending
activities.
Noninterest Expense. Total noninterest expense rose $9.6 million or
56.54% during the six months ended June 30, 1999 as compared with the same
period in the prior year. Likewise, noninterest expense in the three month
period ended June 30, 1999 as compared to the same three month period in the
prior year rose $4.5 million or 49.48%. These increases in noninterest expense
resulted from additional compensation, benefits, and other noninterest expenses
associated with the formation of the new corporate lending unit. During the past
21 months, the Company has strategically refocused its commercial lending
efforts towards growth of its Oklahoma-based commercial portfolio, hiring 40
experienced commercial lending officers and supporting staff and forming a new
corporate lending unit. Additional increases in noninterest expense were due to
the additional data processing expenses incurred as a result of the Company's
Year 2000 readiness efforts and the additional costs incurred in connection with
the acquisition and operation of BankSouth. The acquisition occurred effective
September 30, 1998.
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.
Management's methods for evaluating interest rate risk include an
analysis of the Company's interest rate sensitivity "gap", which is defined as
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of falling interest rates, a negative gap would tend to
result in an
9
<PAGE> 12
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
10
<PAGE> 13
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields, (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rates, (iii) net interest income, (iv) interest rate spread, and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1) $1,533,152 $ 31,672 8.26% $1,083,483 $ 22,369 8.28%
Securities(2) 473,088 7,966 6.74% 598,358 10,773 7.22%
Securities purchased under
agreements to resell -- -- -- 58,011 799 5.52%
Other earning assets(3) 44,224 829 7.50% 66,460 1,084 6.54%
---------- ---------- ---------- ----------
Total interest-earning assets 2,050,464 40,467 7.89% 1,806,312 35,025 7.78%
---------- ====== ---------- ======
Noninterest-earning assets 91,957 107,131
---------- ----------
Total assets $2,142,421 $1,913,443
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 333,531 $ 2,167 2.61% $ 272,594 $ 1,774 2.61%
Term certificates of deposit 1,175,338 14,562 4.97% 1,256,739 17,119 5.46%
---------- ---------- ---------- ----------
Total interest bearing
deposits 1,508,869 16,729 4.45% 1,529,333 18,893 4.96%
Borrowings:
FHLB advances 264,658 3,226 4.89% 90,865 1,328 5.86%
Securities sold under
agreements to repurchase
and other -- -- -- -- -- --
Senior notes 80,000 2,363 11.81% 80,000 2,363 11.81%
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,853,527 22,318 4.83% 1,700,198 22,584 5.33%
---------- ====== ---------- ======
Noninterest-bearing liabilities 163,123 112,616
---------- ----------
Total liabilities 2,016,650 1,812,814
Stockholders' equity 125,771 100,629
---------- ----------
Total liabilities and
stockholders' equity $2,142,421 $1,913,443
========== ==========
Net interest-earning assets $ 196,937 $ 106,114
========== ==========
Net interest income/interest
rate spread $ 18,149 3.06% $ 12,441 2.45%
========== ====== ========== ======
Net interest margin 3.54% 2.76%
====== ======
Ratio of average interest-
earning assets to Average
interest-bearing liabilities 110.62% 106.24%
====== ======
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1) $1,477,509 $ 61,420 8.31% $1,068,345 $ 44,898 8.47%
Securities(2) 499,344 16,458 6.59% 546,191 19,658 7.26%
Securities purchased under
agreements to resell -- -- -- 141,902 3,947 5.61%
Other earning assets(3) 57,953 1,789 6.17% 60,887 2,013 6.67%
---------- ---------- ---------- ----------
Total interest-earning assets 2,034,806 79,667 7.83% 1,817,325 70,516 7.82%
---------- ====== ---------- ======
Noninterest-earning assets 91,834 108,775
---------- ----------
Total assets $2,126,640 $1,926,100
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 328,961 $ 4,267 2.62% $ 270,884 $ 3,554 2.65%
Term certificates of deposit 1,188,775 29,646 5.03% 1,285,923 34,845 5.46%
---------- ---------- ---------- ----------
Total interest bearing
deposits 1,517,736 33,913 4.51% 1,556,807 38,399 4.97%
Borrowings:
FHLB advances 242,737 5,850 4.86% 84,323 2,837 6.78%
Securities sold under
agreements to repurchase
and other 3 -- -- -- 251 --
Senior notes 80,000 4,726 11.81% 80,000 4,740 11.81%
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,840,476 44,489 4.87% 1,721,130 46,227 5.42%
---------- ====== ---------- ======
Noninterest-bearing liabilities 163,171 108,732
---------- ----------
Total liabilities 2,003,647 1,829,862
Stockholders' equity 122,993 96,238
---------- ----------
Total liabilities and
stockholders' equity $2,126,640 $1,926,100
========== ==========
Net interest-earning assets $ 194,330 $ 96,195
========== ==========
Net interest income/interest
rate spread $ 35,178 2.96% $ 24,289 2.40%
========== ====== ========== ======
Net interest margin 3.46% 2.70%
====== ======
Ratio of average interest-
earning assets to Average
interest-bearing liabilities 110.56% 105.59%
====== ======
</TABLE>
- -------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and excludes the allowance
for loan losses which is included in noninterest-earning assets.
(2) Includes all securities classified as available for sale, including the
market valuation accounts.
(3) Includes cash and due from banks, interest-bearing deposits, and Federal
Home Loan Bank of Topeka and Federal Reserve Bank stock.
(4) Includes interest-bearing demand, passbook, NOW and money market accounts.
11
<PAGE> 14
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1999, 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)
Interest-earning assets(1):
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(2) $ 530,948 $ 260,670 $ 309,484 $ 270,791 $ 206,597 $1,578,490
Securities(3) 212,047 69,080 100,727 65,149 45,797 492,800
Other interest-earning
Assets(4) 55,989 3,783 - - - 59,772
---------- ---------- ---------- ---------- --------- ----------
Total $ 798,984 $ 333,533 $ 410,211 $ 335,940 $ 252,394 $2,131,062
========== ========== ========== ========== ========= ==========
Interest-bearing
liabilities:
Deposits(5):
Money market and NOW
accounts $ 33,696 $ 36,141 $ 65,629 $ 39,917 $ 72,988 $ 248,371
Passbook accounts 2,719 8,157 17,418 12,903 36,878 78,075
Certificates of deposit 419,791 500,011 214,668 25,092 798 1,160,360
Borrowings:
FHLB advances(6) 260,486 25,000 25,000 40,000 32 350,518
Senior Notes - - - - 80,000 80,000
---------- ---------- ---------- ---------- --------- ----------
Total $ 716,692 $ 569,309 $ 322,715 $ 117,912 $ 190,696 $1,917,324
========== ========== ========== ========== ========= ==========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 82,292 $ (235,776) $ 87,496 $ 218,028 $ 61,698 $ 213,738
========== ========== ========== ========== ========= ==========
Cumulative excess
(deficiency) of
interest-earning
assets over interest-
bearing liabilities $ 82,292 $ (153,484) $ (65,988) $ 152,040 $ 213,738 $ 213,738
========== =========== =========== ========== ========= ==========
Cumulative excess
(deficiency) of
interest-earning
assets over
interest-bearing
liabilities as a
percent of total assets 3.73% (6.96)% (2.99)% 6.90% 9.70% 9.70%
========== =========== =========== ========== ========== ==========
</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,
Federal Home Loan Bank of Topeka stock and Federal Reserve Bank 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 projected call date rather than actual maturity
date.
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
12
<PAGE> 15
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 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 placed in short-term
investments such as overnight money funds and short-term government agency
securities. If the Company requires funds beyond its ability to generate them
internally, various forms of both short and long-term borrowings provide an
additional source of funds. At June 30, 1999, the Company had $608 million in
borrowing capacity with the FHLB, of which $170 million was available under a
collateralized line of credit. Borrowings as of that date totaled $351 million
with $130 million from the line of credit.
At June 30, 1999, the Bank had approximately $159.8 million of
outstanding loan commitments consisting of residential real estate, commercial
real estate and commercial business loans approved but unfunded. Certificates
of deposit which are scheduled to mature within one year totaled $419.8 million
at June 30, 1999, and borrowings which are scheduled to mature or reprice
within the same period amounted to $285.5 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan commitments and
that, based upon past experience and current pricing policies, it can adjust
the rates of certificates of deposit to retain a substantial portion of its
maturing certificates and also, to the extent deemed necessary, refinance the
maturing borrowings.
As of March 1, 1998, the Company began making interest payments on its
Senior Notes. The Senior Notes have an annual debt service requirement of $8.8
million (or $4.4 million for each semi-annual period). The Company anticipates
that it will have sufficient funds available to meet the annual debt service
requirement.
Capital Resources. Bank holding companies are required to maintain
capital ratios in accordance with guidelines adopted by the FRB. The guidelines
are commonly known as Risk-Based Capital Guidelines.
On June 30, 1999, the Company exceeded all applicable capital
requirements by having a total risk-based capital ratio of 8.0%, a Tier I
risk-based capital ratio of 6.7% and a leverage ratio of 4.8%.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars (except with respect to available for
sale securities which are carried at market value), without considering changes
in the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, substantially all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest
13
<PAGE> 16
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
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 substantially completed its reprogramming as of December 31, 1998 and
testing efforts were complete as of June 30, 1999. Further validation through
testing will be continued 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 continues to test 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
business-critical Company 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 have not provided the Company with satisfactory
evidence of their readiness to handle Year 2000 issues, contingency plans have
been developed. Furthermore, large commercial borrowers have been contacted
regarding the potential business risks associated with the Year 2000 issue, and
they have responded affirmatively as to their awareness. 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 has completed an assessment of the Year 2000 compliance
status of all its information technology and non-information technology
equipment and will continue to address 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. 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.
14
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" for Quantitative and
Qualitative Disclosures about Market Risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various
legal actions and complaints. In its Annual Report on Form 10-K for the year
ended December 31, 1998, the Company disclosed legal proceedings between the
Bank and the Federal Deposit Insurance Corporation and between the Company and
its former shareholders. No material developments have occurred in either of
those legal proceedings since the Annual Report. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on May
26, 1999. At this meeting proxies were solicited under Regulation 14a of the
Securities and Exchange Act of 1934. Total shares issued and outstanding
entitled to vote at the meeting was 20,537,209. A total of 19,032,507 shares
were represented by shareholders in attendance or by proxy, representing a
quorum. The following matters were voted upon with the votes indicated:
<TABLE>
<CAPTION>
VOTES VOTES BROKER
FOR AGAINST ABSTAINED NONVOTES
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Approval of the Local Financial
1998 Stock Option Plan 11,982,210 3,476,524 46,830 3,526,943
Ratification of the selection of
KPMG, LLP, as independent auditors
of the Company for the year ending
December 31, 1999 19,012,507 17,000 3,000 0
</TABLE>
At the same meeting, shareholders elected three directors, each to
serve for a term of three years:
<TABLE>
<CAPTION>
VOTES VOTES BROKER
DIRECTOR TERM FOR AGAINST ABSTAINED NONVOTES
- -------------------- -------- ---------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Andrew M. Coats 3 years 19,032,007 0 500 0
George P. Nigh 3 years 19,032,007 0 500 0
Kenneth W. Townsend 3 years 19,032,007 0 500 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
15
<PAGE> 18
On April 1, 1999, the Company filed a Form 8-K covering a press
release, dated March 24, 1999, announcing the consolidation of Local Federal
Bank, F.S.B., and Local America Bank of Tulsa, F.S.B., into one statewide
banking entity operating under the name of Local Oklahoma Bank, F.S.B.
On April 28, 1999, the Company filed a Form 8-K covering a press
release, dated April 27, 1999, announcing the Company's first quarter earnings.
On May 18, 1999, the Company filed a Form 8-K covering a press
release, dated May 11, 1999, announcing the conversion of its operating
subsidiary, Local Oklahoma Bank, F.S.B., from a Federal Savings charter to a
National Bank charter.
On May 28, 1999, the Company filed a Form 8-K covering a press
release, dated May 26, 1999, announcing an agreement for Local Oklahoma Bank,
N.A., to acquire Guthrie Savings, Inc., the parent company of Guthrie Federal
Savings Bank.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCAL FINANCIAL CORPORATION
Date: August 11, 1999 By: /s/ Edward A. Townsend
------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: August 11, 1999 By: /s/ Richard L. Park
---------------------
Richard L. Park
Chief Financial Officer
17
<PAGE> 20
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,125
<INT-BEARING-DEPOSITS> 400
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 504,163
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,553,306
<ALLOWANCE> 28,304
<TOTAL-ASSETS> 2,204,366
<DEPOSITS> 1,608,625
<SHORT-TERM> 350,518
<LIABILITIES-OTHER> 39,426
<LONG-TERM> 80,000
0
0
<COMMON> 205
<OTHER-SE> 125,592
<TOTAL-LIABILITIES-AND-EQUITY> 2,204,366
<INTEREST-LOAN> 61,420
<INTEREST-INVEST> 18,247
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 79,667
<INTEREST-DEPOSIT> 33,913
<INTEREST-EXPENSE> 44,489
<INTEREST-INCOME-NET> 35,178
<LOAN-LOSSES> 1,000
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 5,616
<INCOME-PRETAX> 16,763
<INCOME-PRE-EXTRAORDINARY> 16,763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,686
<EPS-BASIC> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 7.83
<LOANS-NON> 3,869
<LOANS-PAST> 3,327
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,901
<CHARGE-OFFS> 1,090
<RECOVERIES> 493
<ALLOWANCE-CLOSE> 28,304
<ALLOWANCE-DOMESTIC> 28,304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
