<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 September 30, 2000
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 November 1, 2000 were as follows:
NUMBER OF SHARES
----------------
20,537,209
<PAGE> 2
LOCAL FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
September 30, 2000 (unaudited) and December 31, 1999........................................... 1
Consolidated Statements of Operations-
For the Three Months and Nine Months Ended September 30, 2000
and 1999 (unaudited)........................................................................... 2
Consolidated Statements of Cash Flows-
For the Nine Months Ended September 30, 2000 and 1999 (unaudited).............................. 3
Notes to Consolidated Financial Statements..................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................................................. 14
Signatures .............................................................................................. 15
Index to Exhibits .............................................................................................. 16
</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>
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,091 $ 48,122
Interest bearing deposits with other banks 16,500 7,700
Securities available for sale 404,078 529,230
Loans receivable, net of allowance for loan losses of $28,455 at
September 30, 2000 and $28,297 at December 31, 1999 1,866,674 1,685,550
Federal Home Loan Bank of Topeka stock
and Federal Reserve Bank stock, at cost 19,417 24,820
Premises and equipment, net 37,863 31,805
Assets acquired through foreclosure and repossession, net 458 723
Intangible assets, net 17,223 18,227
Deferred tax asset 10,690 14,217
Other assets 22,735 21,213
------------------ ------------------
Total assets $ 2,429,729 $ 2,381,607
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 505,385 $ 458,824
Savings 65,657 73,546
Time 1,313,592 1,315,970
------------------ ------------------
Total deposits 1,884,634 1,848,340
Advances from the Federal Home Loan Bank of Topeka 305,563 302,035
Securities sold under agreements to repurchase 32,084 --
Senior Notes 43,160 75,250
Other liabilities 18,336 27,688
------------------ ------------------
Total liabilities 2,283,777 2,253,313
------------------ ------------------
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
September 30, 2000 and December 31, 1999 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 89,479 72,189
Treasury stock, 60 shares, at cost (151,274) (151,274)
Accumulated other comprehensive income 784 416
------------------ ------------------
Total stockholders' equity 145,952 128,294
------------------ ------------------
Total liabilities and stockholders' equity $ 2,429,729 $ 2,381,607
================== ==================
</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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 40,712 $ 33,868 $ 114,441 $ 95,288
Securities available for sale 6,642 9,100 22,689 25,558
Federal Home Loan Bank of Topeka and Federal
Reserve Bank stock 373 492 1,122 1,701
Other investments 160 148 961 728
------------ ------------ ------------ ------------
Total interest and dividend income 47,887 43,608 139,213 123,275
------------ ------------ ------------ ------------
Interest expense:
Deposit accounts 22,394 16,936 64,262 50,849
Advances from the Federal Home Loan Bank of Topeka 4,382 5,257 12,072 11,107
Securities sold under agreements to repurchase 365 -- 555 --
Notes payable 1,274 2,333 4,802 7,059
------------ ------------ ------------ ------------
Total interest expense 28,415 24,526 81,691 69,015
------------ ------------ ------------ ------------
Net interest and dividend income 19,472 19,082 57,522 54,260
Provision for loan losses (500) (500) (1,500) (1,500)
------------ ------------ ------------ ------------
Net interest and dividend income after provision
for loan losses 18,972 18,582 56,022 52,760
------------ ------------ ------------ ------------
Noninterest income:
Deposit related income 3,275 3,415 10,094 9,987
Loan fees and loan service charges 434 719 1,322 2,079
Net gains on sale of assets 223 356 534 902
Other 504 231 1,433 815
------------ ------------ ------------ ------------
Total noninterest income 4,436 4,721 13,383 13,783
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 7,871 7,155 23,498 21,077
Deposit insurance premiums 94 200 281 679
Equipment and data processing 1,628 1,675 4,987 4,372
Occupancy 1,039 1,076 2,807 3,007
Advertising 153 405 453 1,063
Professional fees 217 697 745 1,871
Other 2,749 3,107 8,191 8,723
------------ ------------ ------------ ------------
Total noninterest expense 13,751 14,315 40,962 40,792
------------ ------------ ------------ ------------
Income before income taxes and extraordinary item 9,657 8,988 28,443 25,751
Provision for income taxes 3,496 3,251 10,282 9,328
------------ ------------ ------------ ------------
Income before extraordinary item 6,161 5,737 18,161 16,423
Extraordinary item - purchase and retirement of 11%
Senior Notes, net of tax -- (182) (871) (182)
------------ ------------ ------------ ------------
Net income $ 6,161 $ 5,555 $ 17,290 $ 16,241
============ ============ ============ ============
Earnings per share:
Income before extraordinary item
Basic $ 0.30 $ 0.28 $ 0.88 $ 0.80
============ ============ ============ ============
Diluted $ 0.30 $ 0.28 $ 0.88 $ 0.80
============ ============ ============ ============
Net income
Basic $ 0.30 $ 0.27 $ 0.84 $ 0.79
============ ============ ============ ============
Diluted $ 0.30 $ 0.27 $ 0.84 $ 0.79
============ ============ ============ ============
Average shares outstanding
Basic 20,537,209 20,537,209 20,537,209 20,537,209
============ ============ ============ ============
Diluted 20,537,209 20,537,209 20,537,209 20,537,209
============ ============ ============ ============
</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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income $ 17,290 $ 16,241
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans 1,500 1,500
Deferred income tax expense 3,835 9,230
Accretion of discounts on loans acquired (648) (1,075)
Net amortization (accretion) of premium (discount) on securities
available for sale (808) (2,472)
Depreciation and amortization 2,890 3,033
Net change in loans held for sale 2,515 11,416
Net gains on sale of assets (534) (902)
Stock dividends received from Federal Home Loan Bank -- (1,613)
Change in other assets (1,036) 7,944
Change in all other liabilities (9,981) (14,144)
------------ ------------
Net cash provided by operating activities 15,023 29,158
------------ ------------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 190,460 152,814
Proceeds from principal collections on securities available for sale 45,992 215,738
Purchases of securities available for sale (73,165) (257,849)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (6,632) (4,318)
Proceeds from the sale of Federal Home Loan Bank stock 12,035 19,408
Change in loans receivable, net (221,334) (291,604)
Proceeds from disposal of assets acquired through foreclosure and repossession 1,304 1,118
Purchases of premises and equipment (8,798) (9,109)
Proceeds from sales of premises and equipment 68 435
------------ ------------
Net cash (absorbed) by investing activities (60,070) (173,367)
------------ ------------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 38,672 59,035
Change in time deposits (2,378) 2,399
Change in securities sold under agreements to repurchase 32,084 --
Proceeds from advances from the Federal Home Loan Bank 2,646,634 509,783
Repayments of advances from the Federal Home Loan Bank (2,643,106) (426,922)
Purchase of Senior Notes (32,090) (3,250)
------------ ------------
Net cash provided by financing activities 39,816 141,045
------------ ------------
Net change in cash and cash equivalents (5,231) (3,164)
Cash and cash equivalents at beginning of period 55,822 54,880
------------ ------------
Cash and cash equivalents at end of period $ 50,591 $ 51,716
============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 84,384 $ 70,167
============ ============
Income taxes $ 7,588 $ (11,857)
============ ============
Supplemental schedule of noncash investing and financing activities:
Transfers of loans to assets acquired through foreclosure and repossession $ 1,039 $ 1,130
============ ============
Transfer from other assets to treasury stock $ -- $ 1,838
============ ============
Transfer of loans securitized to investments available for sale $ 36,504 $ --
============ ============
Transfer of loans securitized to other assets $ 364 $ --
============ ============
</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
September 30, 2000 and December 31, 1999
(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 year ended December
31, 1999 as filed with the Securities and Exchange Commission ("SEC").
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate loans $ 307,646 $ 362,351
Commercial 1,392,911 1,183,368
Held for sale 4,286 6,801
Consumer loans 190,286 161,327
------------------ -----------------
Total loans 1,895,129 1,713,847
Less:
Allowance for loan losses (28,455) (28,297)
------------------ -----------------
Loans receivable, net $ 1,866,674 $ 1,685,550
================== =================
</TABLE>
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
----------------- ------------------ ------------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Variable rate $ -- --% $ 237,005 5.86%
Fixed rate 305,563 6.35 65,030 5.50
------------ ------------
$ 305,563 6.35% $ 302,035 5.78%
============ =========== ============ ===========
</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 to the FHLB at September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Amount Contractual Rate
----------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Year Ending December 31,
2000 $ 280,535 6.54%
2001 -- --
2002 -- --
2003 25,000 4.29
2004 and thereafter 28 --
-----------
$ 305,563 6.35%
=========== =====
</TABLE>
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at September 30, 2000
and December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Average outstanding balance $ 12,890 --
Weighted average interest rate during the period 5.75% --
Maximum month-end balance $ 32,084 --
Outstanding balance at end of period 32,084 --
Mortgage-backed securities securing the agreements
at period-end:
Carrying value 43,807 --
Estimated market value 43,439 --
Accrued interest payable at the end of the period -- --
</TABLE>
Periodically, the Company provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations.
5
<PAGE> 8
(5) COMPREHENSIVE INCOME
Comprehensive income for the periods ended September 30, 2000 and 1999
consists of:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net income $ 6,161 $ 5,555 $ 17,290 $ 16,241
Other comprehensive income (loss), net of tax:
Unrealized gains or (losses) on securities, net
of reclassification adjustment 2,415 (4,745) 368 (8,440)
---------- ---------- ---------- ----------
Comprehensive income $ 8,576 $ 810 $ 17,658 $ 7,801
========== ========== ========== ==========
</TABLE>
(6) NET INCOME PER SHARE
Stock options and warrants to purchase 2,680,005 and 2,069,005 shares
of common stock were outstanding as of September 30, 2000 and 1999,
respectively, but were not included in the computation of diluted net
income per share because they were antidilutive.
(7) SENIOR NOTES
During the first quarter of 2000, the Company purchased and retired
approximately $32.1 million of Senior Notes which had been issued in
connection with the Company's recapitalization in 1997. As a result,
there is an extraordinary item charge to income amounting to $871,000,
net of tax.
(8) 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 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".
(9) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
6
<PAGE> 9
value. This statement is required to be adopted by the Company in 2001
as set forth in SFAS 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133". Management has determined the impact of this statement will
not have a material impact on the consolidated financial position or
the future results of operations of the Company.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In this Form 10-Q, the Company, when discussing the future, may use
words like "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 10-K for the year ended December 31, 1999, 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, 1999 TO SEPTEMBER 30, 2000
During the nine months ended September 30, 2000, total assets increased
$48.1 million or 2.02%. The $48.1 million increase was due primarily to
commercial and consumer loan growth offset by reductions in the Bank's
investment portfolio where the Bank continued proactive measures to counter
further interest rate increases and the margin compression that could result
from such increases by shedding lower yielding investments. Commercial and
consumer loan balances during the nine months ended September 30, 2000 rose
$209.5 million or 17.71% and $29.0 million or 17.95%, respectively.
Total liabilities increased $30.5 million or 1.35% for the nine months
ended September 30, 2000 primarily due to an increase in demand deposits and
securities sold under agreements to repurchase which were partially offset by a
decrease in Senior Notes outstanding. The Bank's total deposit portfolio grew
$36.3 million, of which demand deposits increased by $46.6 million or 10.15%.
Securities sold under agreements to repurchase, which amounted to $32.1 million
at September 30, 2000, consisted solely of commercial customer sweep accounts.
This new product was introduced in March of 2000 to enhance the Bank's
initiative to provide competitive commercial services. During the first quarter,
the Company purchased and retired $32.1 million of Senior Notes, which had been
issued in connection with the Company's recapitalization in 1997.
Total stockholders' equity increased $17.7 million during the nine
months ended September 30, 2000 which represented net income during the period
of $17.3 million adjusted for a $0.4 million increase in unrealized holding
gains on securities net of tax.
8
<PAGE> 11
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Net Income. The Company reported income before extraordinary item of
$18.2 million or $0.88 basic earnings per share for the nine months ended
September 30, 2000 (based on 20.5 million average shares outstanding), compared
to income before extraordinary item of $16.4 million or $0.80 basic earnings per
share (based on 20.5 million average shares outstanding) for the nine months
ended September 30, 1999. Likewise, income before extraordinary item rose to
$6.2 million or $0.30 basic earnings per share for the three months ended
September 30, 2000 (based on 20.5 million average shares outstanding) from $5.7
million income before extraordinary item or $0.28 basic earnings per share for
the three months ended September 30, 1999 (based on 20.5 million average share
outstanding). The extraordinary item charge to income amounting to $871,000, net
of tax, occurred in the first quarter of 2000 as a result of the Company's
purchase and retirement of $32.1 million of Senior Notes.
Net Interest and Dividend Income. Net interest and dividend income
totaled $57.5 million in the nine months ended September 30, 2000 as compared to
$54.3 million during the same period in the prior year. Likewise, net interest
and dividend income in the three-month comparative periods totaled $19.5 million
and $19.1 million, respectively. Net interest income increases in both the nine
and three-month comparative periods were principally due to volume increases in
commercial and consumer loan originations which drove interest income up which
was partially offset by increases in interest expense on interest-bearing
liabilities.
Interest Income. Total interest and dividend income increased by $15.9
million or 12.93% during the nine months ended September 30, 2000 as compared to
the same period in the prior year and rose by $4.3 million or 9.81% during the
three months ended September 30, 2000 compared to the same period in the prior
year. The increases in interest income during both the nine and three-month
comparative periods were due primarily to growth in the Bank's commercial loan
portfolio where balances rose $209.5 million from December 31, 1999 to September
30, 2000. The full interest income effect of this loan growth was partially
offset by declines in interest income on the security portfolio.
Interest Expense. Total interest expense increased $12.7 million or
18.37% in the nine months ended September 30, 2000 as compared to the same
period in the prior year. Likewise, total interest expense increased $3.9
million or 15.86% during the three months ended September 30, 2000 as compared
to the same period in the prior year. These increases were driven primarily by
rate and volume increases in term certificates of deposits offset by a decline
in interest expense on Senior Notes as a result of the Company's purchase and
retirement of a portion of those Notes.
Provision for Loan Losses. The Bank established provisions for loan
losses of $1.5 million and $500,000 during the nine months and three months
ended September 30, 2000, respectively. Charge-offs (net of recoveries) during
the same periods were $1.3 million and $358,000, respectively. The Company's
basis for provisions was 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 decreased
$400,000 or 2.90% during the nine months ended September 30, 2000 as compared to
the same period in the prior year. Likewise, total noninterest income decreased
$285,000 or 6.04% during the three months ended September 30, 2000 as compared
to the same period in the prior year.
9
<PAGE> 12
Noninterest Expense. Total noninterest expense remained virtually
unchanged at $41.0 million in the nine months ended September 30, 2000 and
September 30, 1999. Noninterest expense in the three-month period decreased by
3.9% to $13.8 million at September 30, 2000 from $14.3 million at September 30,
1999. The decrease in noninterest expense in both the three and nine month
periods resulted primarily from decreases in advertising and professional fees.
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 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 September 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- -------- ----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 1,865,844 $ 40,712 8.73% $ 1,639,659 $ 33,868 8.26%
Securities(2) 379,308 6,642 7.00% 531,559 9,100 6.85%
Other earning assets(3) 29,767 533 7.16% 29,645 640 8.64%
----------- ----------- ----------- ----------
Total interest-earning assets 2,274,919 47,887 8.42% 2,200,863 43,608 7.93%
----------- -------- ---------- --------
Noninterest-earning assets 93,668 94,170
----------- -----------
Total assets $ 2,368,587 $ 2,295,033
=========== ===========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 420,087 3,856 3.65% $ 365,515 2,660 2.89%
Term certificates of deposit 1,298,159 18,538 5.68% 1,150,450 14,276 4.92%
----------- ----------- ----------- ----------
Total interest bearing deposits 1,718,246 22,394 5.18% 1,515,965 16,936 4.43%
Borrowings:
FHLB advances 272,759 4,382 6.29% 409,342 5,257 5.10%
Securities sold under agreements
to repurchase 24,364 365 5.96% -- -- --
Senior notes 43,160 1,274 11.81% 78,251 2,333 11.81%
----------- ----------- ----------- ----------
Total interest-bearing liabilities 2,058,529 28,415 5.49% 2,003,558 24,526 4.86%
----------- -------- ---------- --------
Noninterest-bearing liabilities 168,852 166,144
----------- -----------
Total liabilities 2,227,381 2,169,702
Stockholders' equity 141,206 125,331
----------- -----------
Total liabilities and stockholders'
equity $ 2,368,587 $ 2,295,033
=========== ===========
Net interest-earning assets $ 216,390 $ 197,305
=========== ===========
Net interest income/interest rate spread $ 19,472 2.93% $ 19,082 3.07%
=========== ======== ========== ========
Net interest margin 3.42% 3.47%
======== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.51% 109.85%
======== ==========
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------
2000 1999
--------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- --------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $ 1,788,276 $ 114,441 8.53% $1,532,134 $ 95,288 8.29%
Securities(2) 430,172 22,689 7.03% 510,201 25,558 6.68%
Other earning assets(3) 42,632 2,083 6.51% 48,412 2,429 6.69%
----------- ----------- ---------- ----------
Total interest-earning assets 2,261,080 139,213 8.21% 2,090,747 123,275 7.86%
----------- ---------- ---------- ------
Noninterest-earning assets 94,558 92,384
----------- ----------
Total assets $ 2,355,638 $2,183,131
=========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 419,323 10,629 3.39% $ 341,299 6,924 2.71%
Term certificates of deposit 1,309,359 53,633 5.47% 1,175,862 43,925 4.99%
----------- ----------- ---------- ----------
Total interest bearing deposits 1,728,682 64,262 4.97% 1,517,161 50,849 4.48%
Borrowings:
FHLB advances 263,715 12,072 6.01% 298,882 11,107 4.97%
Securities sold under agreements
to repurchase 12,890 555 5.75% 2 -- --
Senior notes 52,767 4,802 11.81% 79,300 7,059 11.81%
----------- ----------- ---------- ----------
Total interest-bearing liabilities 2,058,054 81,691 5.30% 1,895,345 69,015 4.87%
----------- ---------- ---------- ------
Noninterest-bearing liabilities 163,043 164,139
----------- ----------
Total liabilities 2,221,097 2,059,484
Stockholders' equity 134,541 123,647
----------- ----------
Total liabilities and stockholders'
equity $ 2,355,638 $2,183,131
=========== ==========
Net interest-earning assets $ 203,026 $ 195,402
=========== ==========
Net interest income/interest rate spread $ 57,522 2.91% $ 54,260 2.99%
=========== ========== ========== =======
Net interest margin 3.39% 3.46%
========== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.86% 110.31%
========== =======
</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 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
September 30, 2000, 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) $ 657,438 $ 298,687 $ 448,508 $ 319,612 $ 162,649 $1,886,894
Securities(3) 64,381 38,271 110,157 96,955 93,108 402,872
Other interest-earning
Assets(4) 70,008 -- -- -- -- 70,008
------------ ---------- ----------- ----------- ---------- ----------
Total $ 791,827 $ 336,958 $ 558,665 $ 416,567 $ 255,757 $2,359,774
============ ========== =========== =========== ========== ==========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
Accounts $ 167,136 $ 18,140 $ 36,908 $ 26,597 $ 107,982 $ 356,763
Passbook accounts 3,900 11,700 20,961 12,184 16,912 65,657
Certificates of deposit 342,254 756,261 185,629 28,663 785 1,313,592
Borrowings:
FHLB advances(6) 305,535 -- -- -- 28 305,563
Securities sold under
agreements to repurchase 32,084 -- -- -- -- 32,084
Senior Notes -- -- -- 43,160 -- 43,160
------------ ---------- ----------- ----------- ---------- ----------
Total $ 850,909 $ 786,101 $ 243,498 $ 110,604 $ 125,707 $2,116,819
============ ========== =========== =========== ========== ==========
Excess (deficiency) of
Interest-earning assets over
Interest-bearing liabilities $ (59,082) $ (449,143) $ 315,167 $ 305,963 $ 130,050 $ 242,955
============ ========== =========== =========== ========== ==========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing liabilities $ (59,082) $ (508,225) $ (193,058) $ 112,905 $ 242,955 $ 242,955
============ ========== =========== =========== ========== ==========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing liabilities
as a percent of total assets (2.43)% (20.92)% (7.95)% 4.65% 10.00% 10.00%
============ ========== =========== =========== ========== ==========
</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 net unrealized gain on securities classified as available
for sale.
(4) Comprised of cash and due from banks, deposits with other banks, FHLB 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 and/or 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
12
<PAGE> 15
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 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 September 30, 2000, the Company had $584.4
million in borrowing capacity with the FHLB, of which $300.0 million was
available under a collateralized line of credit. As of that date, total
borrowings with the FHLB totaled $305.6 million.
At September 30, 2000, the Bank had approximately $241.2 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 $1.1 billion at
September 30, 2000, and borrowings which are scheduled to mature or reprice
within the same period amounted to $337.6 million. The Bank anticipates that
sufficient funds will be 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.
On September 8, 1997 and in connection with the Company's
recapitalization, the Company issued $80.0 million of Senior Notes. Since that
time, the Company has purchased and retired $36.8 million of those outstanding
Senior Notes. This move will reduce future interest costs associated with those
notes. The remaining $43.2 million of Senior Notes have an annual debt service
requirement of $4.8 million (or $2.4 million for each semi-annual period).
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 September 30, 2000, the Company exceeded all applicable capital
requirements by having a total risk-based capital ratio of 8.60%, a Tier I
risk-based capital ratio of 7.35% and a leverage ratio of 5.44%.
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
13
<PAGE> 16
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" for Quantitative and
Qualitative Disclosures about Market Risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In its Annual Report on Form 10-K for the year ended December 31, 1999,
the Company disclosed legal proceedings between the Bank and the Federal Deposit
Insurance Corporation. No material developments have occurred 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. In the ordinary course of business, the Company is
subject to other legal actions and complaints, none of which is expected to
impact the Company's business, financial condition or results of operations
materially.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
The Company filed the following Form 8-K's during the quarter ended
September 30, 2000:
1. A Form 8-K dated July 25, 2000, including information relating to
second quarter of 2000 earnings.
14
<PAGE> 17
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: November 13, 2000 By /s/ Edward A. Townsend
-------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: November 13, 2000 By /s/ Richard L. Park
----------------------
Richard L. Park
Chief Financial Officer
15
<PAGE> 18
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
16
