<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, 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 August 4, 2000 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, 2000 (unaudited) and December 31, 1999................................... 1
Consolidated Statements of Operations-
For the Three Months and Six Months Ended June 30, 2000 and 1999 (unaudited)...... 2
Consolidated Statements of Cash Flows-
For the Six Months Ended June 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............................................................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............................... 13
Item 6. Exhibits and Reports on Form 8-K.................................................. 13
Signatures.................................................................................. 14
Index to Exhibits........................................................................... 15
</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, 2000 December 31, 1999
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,444 $ 48,122
Interest bearing deposits with other banks 6,000 7,700
Securities available for sale 413,052 529,230
Loans receivable, net of allowance for loan losses of $28,313 at
June 30, 2000 and $28,297 at December 31, 1999 1,804,824 1,685,550
Federal Home Loan Bank of Topeka stock
and Federal Reserve Bank stock, at cost 17,591 24,820
Premises and equipment, net 37,442 31,805
Assets acquired through foreclosure and repossession, net 418 723
Intangible assets, net 17,557 18,227
Deferred tax asset 14,247 14,217
Other assets 21,086 21,213
----------- -----------
Total assets $ 2,367,661 $ 2,381,607
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 480,312 $ 458,824
Savings 70,566 73,546
Time 1,314,728 1,315,970
----------- -----------
Total deposits 1,865,606 1,848,340
Advances from the Federal Home Loan Bank of Topeka 276,156 302,035
Securities sold under agreements to repurchase 20,135 --
Senior Notes 43,160 75,250
Other liabilities 25,228 27,688
----------- -----------
Total liabilities 2,230,285 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
June 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 83,318 72,189
Treasury stock, 60 shares, at cost (151,274) (151,274)
Accumulated other comprehensive income (loss) (1,631) 416
----------- -----------
Total stockholders' equity 137,376 128,294
----------- -----------
Total liabilities and stockholders' equity $ 2,367,661 $ 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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 37,490 $ 31,672 $ 73,729 $ 61,420
Securities available for sale 7,199 7,966 16,047 16,458
Federal Home Loan Bank of Topeka and Federal
Reserve Bank stock 326 544 749 1,209
Other investments 511 285 801 580
------------ ------------ ------------ ------------
Total interest and dividend income 45,526 40,467 91,326 79,667
------------ ------------ ------------ ------------
Interest expense:
Deposit accounts 21,468 16,729 41,868 33,913
Advances from the Federal Home Loan Bank of Topeka 3,581 3,226 7,690 5,850
Securities sold under agreements to repurchase 190 -- 190 --
Notes payable 1,275 2,363 3,528 4,726
------------ ------------ ------------ ------------
Total interest expense 26,514 22,318 53,276 44,489
------------ ------------ ------------ ------------
Net interest and dividend income 19,012 18,149 38,050 35,178
Provision for loan losses (500) (500) (1,000) (1,000)
------------ ------------ ------------ ------------
Net interest and dividend income after provision
for loan losses 18,512 17,649 37,050 34,178
------------ ------------ ------------ ------------
Noninterest income:
Deposit related income 3,610 3,448 6,819 6,572
Loan fees and loan service charges 430 687 888 1,360
Net gains on sale of assets 147 219 311 546
Other 495 327 929 584
------------ ------------ ------------ ------------
Total noninterest income 4,682 4,681 8,947 9,062
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 7,869 7,075 15,627 13,922
Deposit insurance premiums 95 241 187 479
Equipment and data processing 1,881 1,454 3,359 2,697
Occupancy 884 1,105 1,768 1,931
Advertising 144 314 300 658
Professional fees 177 673 528 1,174
Other 2,719 2,774 5,442 5,616
------------ ------------ ------------ ------------
Total noninterest expense 13,769 13,636 27,211 26,477
------------ ------------ ------------ ------------
Income before income taxes and extraordinary item 9,425 8,694 18,786 16,763
Provision for income taxes 3,405 3,147 6,786 6,077
------------ ------------ ------------ ------------
Income before extraordinary item 6,020 5,547 12,000 10,686
Extraordinary item - purchase and retirement of 11% -- -- (871) --
Senior Notes, net of tax
------------ ------------ ------------ ------------
Net income $ 6,020 $ 5,547 $ 11,129 $ 10,686
============ ============ ============ ============
Earnings per share:
Income before extraordinary item
Basic $ 0.29 $ 0.27 $ 0.58 $ 0.52
============ ============ ============ ============
Diluted $ 0.29 $ 0.27 $ 0.58 $ 0.52
============ ============ ============ ============
Net income
Basic $ 0.29 $ 0.27 $ 0.54 $ 0.52
============ ============ ============ ============
Diluted $ 0.29 $ 0.27 $ 0.54 $ 0.52
============ ============ ============ ============
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>
Six Months Ended
June 30,
--------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 11,129 $ 10,686
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on loans 1,000 1,000
Deferred income tax expense 1,579 6,077
Accretion of discounts on loans acquired (374) (812)
Net amortization (accretion) of premium (discount) on securities available for sale (696) (1,721)
Depreciation and amortization 2,053 2,070
Net change in loans held for sale 5,547 3,461
Net gains on sale of assets (311) (546)
Stock dividends received from Federal Home Loan Bank -- (1,178)
Change in other assets 249 10,872
Change in all other liabilities (5,458) (5,186)
----------- -----------
Net cash provided by operating activities 14,718 24,723
----------- -----------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 150,480 10,786
Proceeds from principal collections on securities available for sale 32,160 175,922
Purchases of securities available for sale (68,816) (123,889)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (4,806) (3,783)
Proceeds from the sale of Federal Home Loan Bank and Federal Reserve Bank stock 12,035 19,407
Change in loans receivable, net (125,489) (194,563)
Proceeds from disposal of assets acquired through foreclosure and repossession 905 459
Purchases of premises and equipment (7,385) (6,157)
Proceeds from sales of premises and equipment 18 345
----------- -----------
Net cash (absorbed) by investing activities (10,898) (121,473)
----------- -----------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 18,508 (6,494)
Change in time deposits (1,242) (52,955)
Change in securities sold under agreements to repurchase 20,135 --
Proceeds from advances from the Federal Home Loan Bank 982,150 224,196
Repayments of advances from the Federal Home Loan Bank (1,008,029) (93,711)
Purchase of Senior Notes (32,090) --
Change in advances by borrowers for taxes and insurance 2,369 2,359
----------- -----------
Net cash provided (absorbed) by financing activities (18,198) 73,395
----------- -----------
Net change in cash and cash equivalents (14,378) (23,355)
Cash and cash equivalents at beginning of period 55,822 54,880
----------- -----------
Cash and cash equivalents at end of period $ 41,444 $ 31,525
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 54,575 $ 43,923
=========== ===========
Income taxes $ 4,838 $ (11,822)
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Transfers of loans to assets acquired through foreclosure and repossession $ 600 $ 643
=========== ===========
</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, 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>
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate loans $ 343,018 $ 362,351
Commercial 1,312,560 1,183,368
Held for sale 1,254 6,801
Consumer loans 176,305 161,327
----------- -----------
Total loans 1,833,137 1,713,847
Less:
Allowance for loan losses (28,313) (28,297)
----------- -----------
Loans receivable, net $ 1,804,824 $ 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>
June 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 $ 50,000 6.63% $237,005 5.86%
Fixed rate 226,156 6.30 65,030 5.50
-------- --------
$276,156 6.36% $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 June 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Amount Contractual Rate
-------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Year Ending December 31,
2000 $251,127 6.57%
2001 -- --
2002 -- --
2003 25,000 4.29
2004 and thereafter 29 --
--------
$276,156 6.36%
======== ====
</TABLE>
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at June 30, 2000 and
1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
(Dollars in Thousands)
<S> <C> <C>
Average outstanding balance $ 7,090 --
Weighted average interest rate during the period 5.39% --
Maximum month-end balance $21,412 --
Outstanding balance at end of period 20,135 --
Mortgage-backed securities securing the agreements
at period-end:
Carrying value 21,593 --
Estimated market value 20,997 --
Accrued interest payable at the end of the period 28 --
</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 June 30, 2000 and 1999
consists of:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net income $ 6,020 $ 5,547 $ 11,129 $ 10,686
Other comprehensive income (loss), net of tax:
Unrealized gains or (losses) on securities,
net of reclassification adjustment (126) (3,732) (2,047) (3,695)
-------- -------- -------- --------
Comprehensive income $ 5,894 $ 1,815 $ 9,082 $ 6,991
======== ======== ======== ========
</TABLE>
(6) NET INCOME PER SHARE
Stock options and warrants to purchase 2,290,005 and 2,089,005 shares
of common stock were outstanding as of June 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".
6
<PAGE> 9
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 JUNE 30, 2000
During the six months ended June 30, 2000, total assets decreased $13.9
million or 0.59%. The $13.9 million decrease was due primarily to 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. The Bank's
loan growth occurred in the commercial and consumer loan portfolios where loan
balances during the six months ended June 30, 2000 rose $129.2 million or 10.9%
and $15.0 million or 9.29%, respectively.
Total liabilities decreased for the six months ended June 30, 2000
primarily due to decreases in FHLB advances and Senior Notes outstanding which
decreased $25.9 million or 8.57% and $32.1 million or 42.6%, respectively.
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. The Bank's total deposit portfolio remained relatively
stable rising $17.3 million or 0.93% from December 31, 1999 to June 30, 2000.
Total stockholders' equity increased $9.1 million during the six months
ended June 30, 2000 which represented net income during the period of $11.1
million adjusted for a $2.0 million decline in unrealized holding gains on
securities net of tax.
7
<PAGE> 10
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
AND THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Net Income. The Company reported income before extraordinary item of
$12.0 million or $0.58 basic earnings per share for the six months ended June
30, 2000 (based on 20.5 million average shares outstanding), compared to income
before extraordinary item of $10.7 million or $0.52 basic earnings per share
(based on 20.5 million average shares outstanding) for the six months ended June
30, 1999. Likewise, income before extraordinary item rose to $6.0 million or
$0.29 basic earnings per share for the three months ended June 30, 2000 (based
on 20.5 million average shares outstanding) from $5.5 million income before
extraordinary item or $0.27 basic earnings per share for the three months ended
June 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 $38.1 million in the six months ended June 30, 2000 as compared to $35.2
million during the same period in the prior year. Likewise, net interest and
dividend income in the three-month comparative periods totaled $19.0 million and
$18.1 million, respectively. Net interest income increases in both the six and
three-month comparative periods were principally due to the net increase in
income on interest earning assets and interest earning liabilities. Volume
increases in commercial and consumer loan originations drove interest income up
which was partially offset by increases in interest expense on interest-bearing
deposit liabilities.
Interest Income. Total interest and dividend income increased by $11.7
million or 14.6% during the six months ended June 30, 2000 as compared to the
same period in the prior year and rose by $5.1 million or 12.5% during the three
months ended June 30, 2000 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 growth in the Bank's commercial loan portfolio
where balances rose $129.2 million from December 31, 1999 to June 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 $8.8 million or
19.75% in the six months ended June 30, 2000 as compared to the same period in
the prior year. Likewise, total interest expense increased $4.2 million or 18.8%
during the three months ended June 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 $1.0 million and $500,000 during the six months and three months ended
June 30, 2000, respectively. Charge-offs (net of recoveries) during these same
periods were $984,000 and $914,000, 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 was relatively
stable during the six months ended June 30, 2000 as compared to the same period
in the prior year declining only 1.27%. Likewise, total noninterest income
remained relatively stable during the three months ended June 30, 2000 as
compared to the same period in the prior year rising only 0.02%.
8
<PAGE> 11
Noninterest Expense. Total noninterest expense rose slightly to $27.2
million in the six months ended June 30, 2000 as compared to $26.5 million at
June 30, 1999. Likewise, noninterest expense in the three-month period rose only
slightly to $13.8 million at June 30, 2000 from $13.6 million at June 30, 1999.
The increases in noninterest expense resulted from relatively small increases in
compensation and employee benefits and equipment and data processing expenses
which were offset by declines in professional fees in both the three and
six-month comparative periods.
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.
9
<PAGE> 12
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,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) $1,777,200 $ 37,490 8.44% $1,533,152 $ 31,672 8.26%
Securities(2) 405,576 7,199 7.10% 473,088 7,966 6.74%
Other earning assets(3) 52,122 837 6.42% 44,224 829 7.50%
---------- ---------- ---------- ----------
Total interest-earning assets 2,234,898 45,526 8.15% 2,050,464 40,467 7.89%
---------- ------ ---------- ------
Noninterest-earning assets 92,070 91,957
---------- ----------
Total assets $2,326,968 $2,142,421
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 420,888 2,719 2.60% $ 333,531 2,167 2.61%
Term certificates of deposit 1,318,194 18,749 5.72% 1,175,338 14,562 4.97%
---------- ---------- ---------- ----------
Total interest bearing deposits 1,739,082 21,468 4.96% 1,508,869 16,729 4.45%
Borrowings:
FHLB advances 233,875 3,581 6.06% 264,658 3,226 4.89%
Securities sold under agreements
to repurchase 13,970 190 5.47% -- -- --
Senior notes 43,160 1,275 11.81% 80,000 2,363 11.81%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,030,087 26,514 5.25% 1,853,527 22,318 4.83%
---------- ------ ---------- ------
Noninterest-bearing liabilities 163,251 163,123
---------- ----------
Total liabilities 2,193,338 2,016,650
Stockholders' equity 133,630 125,771
---------- ----------
Total liabilities and stockholders'
equity $2,326,968 $2,142,421
========== ==========
Net interest-earning assets $ 204,811 $ 196,937
========== ==========
Net interest income/interest rate spread $ 19,012 2.90% $ 18,149 3.06%
========== ====== ========== ======
Net interest margin 3.40% 3.54%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.09% 110.62%
====== ======
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------------
2000 1999
------------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) $1,749,066 $ 73,729 8.43% $1,477,509 $ 61,420 8.31%
Securities(2) 456,047 16,047 7.04% 499,344 16,458 6.59%
Other earning assets(3) 49,135 1,550 6.31% 57,953 1,789 6.17%
---------- ---------- ---------- ----------
Total interest-earning assets 2,254,248 91,326 8.10% 2,034,806 79,667 7.83%
---------- ------ ---------- ------
Noninterest-earning assets 94,458 91,834
---------- ----------
Total assets $2,348,706 $2,126,640
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 445,781 6,773 3.06% $ 328,961 4,267 2.62%
Term certificates of deposit 1,288,059 35,095 5.48% 1,188,775 29,646 5.03%
---------- ---------- ---------- ----------
Total interest bearing deposits 1,733,840 41,868 4.86% 1,517,736 33,913 4.51%
Borrowings:
FHLB advances 259,144 7,690 5.87% 242,740 5,850 4.86%
Securities sold under agreements
to repurchase 7,090 190 5.39% -- -- --
Senior notes 56,884 3,528 11.81% 80,000 4,726 11.81%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,056,958 53,276 5.21% 1,840,476 44,489 4.87%
---------- ------ ---------- ------
Noninterest-bearing liabilities 160,611 163,171
---------- ----------
Total liabilities 2,217,569 2,003,647
Stockholders' equity 131,137 122,993
---------- ----------
Total liabilities and stockholders'
equity $2,348,706 $2,126,640
========== ==========
Net interest-earning assets $ 197,290 $ 194,330
========== ==========
Net interest income/interest rate spread $ 38,050 2.89% $ 35,178 2.96%
========== ====== ========== ======
Net interest margin 3.38% 3.46%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.59% 110.56%
====== ======
</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.
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<PAGE> 13
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
June 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) $ 611,356 $ 269,433 $ 391,236 $ 371,280 $ 182,586 $ 1,825,891
Securities(3) 109,162 48,664 134,448 96,119 27,170 415,563
Other interest-earning
assets(4) 55,252 3,783 -- -- -- 59,035
------------ ------------ ------------ ------------ ------------ ------------
Total $ 775,770 $ 321,880 $ 525,684 $ 467,399 $ 209,756 $ 2,300,489
============ ============ ============ ============ ============ ============
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 127,861 $ 20,357 $ 41,513 $ 30,002 $ 122,625 $ 342,358
Passbook accounts 4,192 12,575 22,528 13,095 18,176 70,566
Certificates of deposit 498,277 603,899 184,372 27,254 926 1,314,728
Borrowings:
FHLB advances(6) 251,126 25,000 -- -- 30 276,156
Securities sold under
agreements to repurchase 20,135 -- -- -- -- 20,135
Senior Notes -- -- -- 43,160 -- 43,160
------------ ------------ ------------ ------------ ------------ ------------
Total $ 901,591 $ 661,831 $ 248,413 $ 113,511 $ 141,757 $ 2,067,103
============ ============ ============ ============ ============ ============
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (125,821) $ (339,951) $ 277,271 $ 353,888 $ 67,999 $ 233,386
============ ============ ============ ============ ============ ============
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing liabilities $ (125,821) $ (465,772) $ (188,501) $ 165,387 $ 233,386 $ 233,386
============ ============ ============ ============ ============ ============
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing liabilities
as a percent of total assets (5.31)% (19.67)% (7.96)% 6.99% 9.86% 9.86%
============ ============ ============ ============ ============ ============
</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 (loss) 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
11
<PAGE> 14
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 June 30, 2000, the Company had $460.7 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 $276.2 million.
At June 30, 2000, the Bank had approximately $237.1 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
June 30, 2000, and borrowings which are scheduled to mature or reprice within
the same period amounted to $296.3 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 June 30, 2000, the Company exceeded all applicable capital
requirements by having a total risk-based capital ratio of 8.33%, a Tier I
risk-based capital ratio of 7.07% and a leverage ratio of 5.25%.
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
12
<PAGE> 15
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the Annual Meeting of Stockholders on April 27, 2000.
Proxies were solicited for the meeting pursuant to Regulation 14, and there was
no solicitation in opposition to management's nominees as listed in the Proxy
Statement. All nominees were re-elected for a three-year term. Votes were cast
as follows:
<TABLE>
<CAPTION>
Nominee For Against Abstain
------- --- ------- -------
<S> <C> <C> <C>
Jan A. Norton 17,136,095 0 0
Joseph A. Leone 17,136,095 0 0
</TABLE>
The stockholders also ratified the appointment of KPMG, LLP, independent
auditors, to audit the Company's financial statements for the year ending
December 31, 2000. Votes were cast as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
17,294,320 5,300 0
</TABLE>
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
June 30, 2000:
1. A Form 8-K dated April 28, 2000, including information relating to
first quarter of 2000 earnings.
13
<PAGE> 16
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 14, 2000 By /s/ Edward A. Townsend
--------------------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: August 14, 2000 By /s/ Richard L. Park
--------------------------------------
Richard L. Park
Chief Financial Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
