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 March 31, 2001
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 May 10, 2001 were as follows:
NUMBER OF SHARES
----------------
20,539,209
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LOCAL FINANCIAL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition-
March 31, 2001 (unaudited) and December 31, 2000...............................................1
Consolidated Statements of Operations-
For the Three Months Ended March 31, 2001 and 2000 (unaudited).................................2
Consolidated Statements of Cash Flows-
For the Three Months Ended March 31, 2001 and 2000 (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....................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................12
Item 6. Exhibits and Reports on Form 8-K..............................................................12
Signatures ..............................................................................................13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
ASSETS
Cash and due from banks $ 34,426 39,571
Interest bearing deposits with other banks 38,600 4,400
Securities available for sale 496,579 354,048
Loans receivable, net of allowance for loan losses of $28,027 at
March 31, 2001 and $28,345 at December 31, 2000 1,860,431 1,848,876
Federal Home Loan Bank of Topeka and Federal Reserve Bank stock, at cost 28,785 19,417
Premises and equipment, net 38,013 37,865
Assets acquired through foreclosure and repossession, net 939 881
Intangible assets, net 16,553 16,888
Current and deferred taxes, net 6,035 6,976
Other assets 53,310 48,089
----------- -----------
Total assets $ 2,573,671 2,377,011
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 607,757 606,752
Savings 65,496 62,907
Time 1,125,077 1,262,134
----------- -----------
Total deposits 1,798,330 1,931,793
Advances from the Federal Home Loan Bank of Topeka 500,027 190,028
Securities sold under agreements to repurchase 48,126 38,214
Senior notes 41,060 41,160
Other liabilities 21,269 19,545
----------- -----------
Total liabilities 2,408,812 2,220,740
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized; 20,539,269
shares issued and 20,539,209 shares outstanding at March 31, 2001 and
20,537,269 shares issued and 20,537,209
shares outstanding at December 31, 2000 205 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,777 206,758
Retained earnings 102,775 96,003
Treasury stock, 60 shares, at cost (151,274) (151,274)
Accumulated other comprehensive income 6,376 4,579
----------- -----------
Total stockholders' equity 164,859 156,271
----------- -----------
Total liabilities and stockholders' equity $ 2,573,671 2,377,011
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
(unaudited)
Interest and dividend income:
Loans $ 39,311 36,239
Securities available for sale 8,165 8,848
Federal Home Loan Bank of Topeka and Federal Reserve
Bank stock 417 423
Other investments 998 290
------------ ------------
Total interest and dividend income 48,891 45,800
Interest expense:
Deposit accounts 22,417 20,400
Advances from the Federal Home Loan Bank of Topeka 4,130 4,109
Securities sold under agreements to repurchase 486 --
Notes payable 1,213 2,253
------------ ------------
Total interest expense 28,246 26,762
Net interest and dividend income 20,645 19,038
Provision for loan losses (750) (500)
------------ ------------
Net interest and dividend income after provision for
loan losses 19,895 18,538
Noninterest income:
Deposit related income 3,117 3,209
Loan fees and loan service charges 505 458
Net gains on sale of assets 105 164
Other 874 434
------------ ------------
Total noninterest income 4,601 4,265
------------ ------------
Noninterest expense:
Compensation and employee benefits 7,822 7,758
Deposit insurance premiums 90 92
Equipment and data processing 1,624 1,478
Occupancy 970 884
Advertising 103 156
Professional fees 411 351
Other 3,430 2,723
------------ ------------
Total noninterest expense 14,450 13,442
------------ ------------
Income before income taxes and extraordinary item 10,046 9,361
Provision for income taxes 3,271 3,381
------------ ------------
Income before extraordinary item 6,775 5,980
Extraordinary item - purchase and retirement of senior
notes, net of tax (3) (871)
------------ ------------
Net income $ 6,772 5,109
============ ============
Earnings per share:
Income before extraordinary item:
Basic $ 0.33 0.29
============ ============
Diluted $ 0.32 0.29
============ ============
Net income:
Basic $ 0.33 0.25
============ ============
Diluted $ 0.32 0.25
============ ============
Average shares outstanding:
Basic 20,538,853 20,537,209
============ ============
Diluted 21,131,920 20,537,209
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
(unaudited)
CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES:
Net income $ 6,772 5,109
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for loan losses 750 500
Deferred income tax expense 81 714
Accretion of discount on loans and securities available for sale, net (929) (828)
Depreciation and amortization 1,186 966
Net change in loans held for sale (1,848) (548)
Net gains on sale of assets (105) (164)
Change in other assets (5,266) 3,737
Change in other liabilities 710 (6,839)
--------- ---------
Net cash provided by operating activities 1,351 2,647
--------- ---------
CASH PROVIDED (ABSORBED) BY INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale -- 150,480
Proceeds from principal collections on securities available for sale 38,170 14,496
Purchases of securities available for sale (176,155) (16,838)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (9,368) --
Change in loans receivable, net (10,707) (23,903)
Proceeds from disposal of assets acquired through foreclosure and
repossession 528 490
Purchases of premises and equipment (1,131) (6,003)
Proceeds from sales of premises and equipment -- 11
--------- ---------
Net cash provided (absorbed) by investing activities (158,663) 118,733
--------- ---------
CASH PROVIDED (ABSORBED) BY FINANCING ACTIVITIES:
Change in transaction accounts 3,594 27,562
Change in time deposits (137,057) (15,651)
Change in securities sold under agreements to repurchase 9,912 --
Proceeds from advances from the Federal Home Loan Bank 813,113 535,186
Repayments of advances from the Federal Home Loan Bank (503,114) (602,191)
Proceeds from the issuance of common stock 19 --
Purchase of senior notes (100) --
--------- ---------
Net cash provided (absorbed) by financing activities 186,367 (55,094)
--------- ---------
Net change in cash and cash equivalents 29,055 66,286
Cash and cash equivalents at beginning of period 43,971 55,822
--------- ---------
Cash and cash equivalents at end of period $ 73,026 122,108
========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 28,510 29,754
========= =========
Income taxes $ (503) 100
========= =========
Supplemental schedule of noncash investing and financing activities:
Transfers of loans to assets acquired through foreclosure and
repossession $ 586 331
========= =========
Payable on senior notes purchased $ -- 32,090
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2001 and December 31, 2000
(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 accounting principles generally accepted in
the United States of America. 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 (the "Company") Form 10-K
for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission.
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost (dollars in
thousands):
March 31, 2001 December 31, 2000
-------------- -----------------
Residential real estate loans $ 241,836 250,487
Commercial 1,450,245 1,425,382
Held for sale 7,770 5,922
Consumer loans 188,607 195,430
----------- -----------
Total loans 1,888,458 1,877,221
Less:
Allowance for loan losses (28,027) (28,345)
----------- -----------
Loans receivable, net $ 1,860,431 1,848,876
=========== ===========
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows (dollars in
thousands):
March 31, 2001 December 31, 2000
--------------------------------- -----------------------------------
Weighted Weighted
Average Average
Balance Contractual Rate Balance Contractual Rate
------------ ---------------- ------------ -----------------
Fixed rate $ 500,027 4.30% $ 190,028 6.44%
============ =========== ============ ===========
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
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as first and second residential and commercial mortgage loans and
investment securities which are not already pledged or encumbered.
Scheduled principal repayments to the FHLB at March 31, 2001 are as
follows (dollars in thousands):
Weighted
Average
Amount Contractual Rate
--------------- ----------------
Year Ending December 31, 2005
and thereafter $ 500,027 4.30%
=============== ===========
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at March 31, 2001 and
December 31, 2000 are summarized as follows (dollars in thousands):
2001 2000
------- ------
Average outstanding balance $38,333 18,352
Weighted average interest rate during the period 5.14% 5.85
Maximum month-end balance $49,518 38,214
Outstanding balance at end of the period 48,126 38,214
Mortgage-backed securities securing the agreements
at period-end:
Carrying value $55,690 42,053
Estimated market value 55,690 42,053
Accrued interest payable at the end of the period 6 --
Periodically, the Company provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations.
(5) COMPREHENSIVE INCOME
Comprehensive income for the periods ended March 31, 2001 and 2000
consists of (dollars in thousands):
Three Months Ended
March 31,
------------------
2001 2000
-------- -------
Net income $6,772 5,109
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net
of reclassification adjustment 1,797 (2,173)
------ ------
Comprehensive income $8,569 2,936
====== ======
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(6) NET INCOME PER SHARE
Stock options and warrants to purchase 2,670,005 and 2,287,005 shares
of common stock were outstanding as of March 31, 2001 and 2000,
respectively. The stock options and warrants were included in the
computation of diluted net income per share for 2001, but were not
included in 2000 because they were antidilutive.
(7) SENIOR NOTES
During the first quarter of 2001 and 2000, the Company purchased and
retired approximately $100,000 and $32.1 million, respectively, 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 $3,000 and $871,000, respectively, 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
value. This statement was 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 this statement did not have an impact on the
consolidated financial position or the results of operations of the
Company upon implementation on January 1, 2001.
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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) deterioration in local, regional, national or
global economic conditions which could cause an increase in loan delinquencies
or a decrease in collateral values; (ii) changes in market interest rates or
changes in the speed at which market interest rates change; (iii) changes in
laws and regulations affecting the financial service industry; (iv) changes in
competition and (v) 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, 2000, 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, 2000 TO MARCH 31, 2001
During the three months ended March 31, 2001, total assets increased
$196.7 million or 8.27%. The $196.7 million increase was due primarily to a
combination of commercial loan growth as well as increases in the Bank's
investment portfolio where the Bank used proactive measures to lock in higher
yields in a declining rate environment. Commercial loan balances during the
three months ended March 31, 2001 rose $24.9 million or 1.74%. Securities
available for sale and Federal Home Loan Bank and Federal Reserve Bank stock
rose by $142.5 million or 40.26% and $9.4 million or 48.25%, respectively.
Total liabilities increased $188.1 million or 8.47% for the three
months ended March 31, 2001 primarily due to an increase in FHLB advances offset
by a decrease in time deposits. During the period, the Bank took advantage of
market-driven opportunities for lower cost borrowings at the FHLB resulting in
an increase of $310.0 million or 163.13%. This offset a $137.1 million or 10.86%
decrease in time deposits as some public and brokered deposits matured.
Securities sold under agreements to repurchase increased by $9.9 million or
25.94% and consisted solely of commercial customer sweep accounts. This new
product was introduced in March 2000 to enhance the Bank's initiative to provide
competitive commercial services.
Total stockholders' equity increased $8.6 million during the three
months ended March 31, 2001 which represented net income during the period of
$6.8 million and a $1.8 million increase in unrealized holding gains on
securities net of tax.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
MARCH 31, 2000
Net Income. The Company reported income before extraordinary item of
$6.8 million or $0.33 basic earnings per share for the three months ended March
31, 2001 (based on 20.5 million average shares
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outstanding), compared to income before extraordinary item of $6.0 million or
$0.29 basic earnings per share (based on 20.5 million average shares
outstanding) for the three months ended March 31, 2000. The extraordinary item
charge to income amounting to $3,000 and $871,000, net of tax, occurred in the
first quarter of 2001 and 2000, respectively, as a result of the Company's
purchase and retirement of $100,000 and $32.1 million, respectively, of senior
notes.
Net Interest and Dividend Income. Net interest and dividend income
totaled $20.6 million in the three months ended March 31, 2001 as compared to
$19.0 million during the same period in the prior year. The net interest income
increase in the three-month comparative period was principally due to volume
increases in commercial loan originations which drove interest income up and was
partially offset by net increases in interest expense on interest-bearing
liabilities.
Interest Income. Total interest and dividend income increased by $3.1
million or 6.75% during the three months ended March 31, 2001 as compared to the
same period in the prior year. The increase in interest income during the
three-month comparative period was due primarily to growth in the Bank's
commercial loan portfolio where balances rose from $1.215 billion at March 31,
2000 to $1.450 billion at March 31, 2001.
Interest Expense. Total interest expense increased $1.5 million or
5.55% in the three months ended March 31, 2001 as compared to the same period in
the prior year. The increase was driven primarily by rate increases in term
certificates of deposits and interest-bearing transaction accounts 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. During the quarter, the
Bank took advantage of market-driven opportunities by investing in lower cost
borrowings from the FHLB. The effect of this rate decrease was offset during the
period by a corresponding increase in average balance of borrowings.
Provision for Loan Losses. The Bank established provisions for loan
losses of $750,000 and $500,000 during the three months ended March 31, 2001 and
2000, respectively. Charge-offs (net of recoveries) during the same periods were
$1.1 million and $70,000, 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 increased
$336,000 or 7.88% during the three months ended March 31, 2001 as compared to
the same period in the prior year.
Noninterest Expense. Total noninterest expense increased $1.0 million
or 7.50% during the three months ended March 31, 2001 as compared to the same
period in the prior year. The increase in noninterest expense resulted primarily
from the hardware and software costs associated with the implementation of
branch platform automation as well as start-up costs related to a new marketing
program implemented in the first quarter designed to increase the Bank's core
deposit base.
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 evaluate asset and liability balances
within maturity categories to control 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
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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.
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 (dollars in thousands):
Three Months Ended March 31,
-----------------------------------------------------------------------------
2001 2000
------------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- ---------- ---------- ----------- -----------
Interest-earning assets:
Loans receivable(1) $1,872,716 $ 39,311 8.51% $1,721,363 $ 36,239 8.42%
Securities(2) 430,967 8,165 7.58 506,044 8,848 6.99
Other earning assets(3) 96,828 1,415 5.85 46,117 713 6.18
---------- ---------- ---------- ----------
Total interest-earning assets 2,400,511 48,891 8.23% 2,273,524 45,800 8.06%
---------- ========== ---------- ==========
Noninterest-earning assets 117,302 95,849
---------- ----------
Total assets $2,517,813 $2,369,373
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 513,071 4,450 3.52% $ 411,182 3,348 3.27%
Term certificates of deposit 1,221,566 17,967 5.96 1,311,855 17,052 5.23
---------- ---------- ---------- ----------
Total deposits 1,734,637 22,417 5.24 1,723,037 20,400 4.76
Borrowings:
FHLB advances 373,078 4,130 4.43 284,412 4,109 5.72
Securities sold under agreements to
repurchase 38,333 486 5.14 -- -- --
Senior notes 41,062 1,213 11.81 67,178 2,253 11.81
---------- ---------- ---------- ---------
Total interest-bearing liabilities 2,187,110 28,246 5.24% 2,074,627 26,762 5.18%
---------- ========== ---------- ==========
Noninterest-bearing liabilities 171,514 166,080
---------- ----------
Total liabilities 2,358,624 2,240,707
Stockholders' equity 159,189 128,666
---------- ----------
Total liabilities and stockholders'
equity $2,517,813 $2,369,373
========== ==========
Net interest-earning assets $ 213,401 $ 198,897
========== ==========
Net interest income/interest rate spread $ 20,645 2.99% $ 19,038 2.88%
========== ========== ========== ==========
Net interest margin 3.44% 3.35%
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.76% 109.59%
========== ==========
----------
(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, 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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The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
March 31, 2001, based on the information and assumptions set forth in the notes
below (dollars in thousands):
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
------------ -------- ----------- ----------- --------- ---------
Interest-earning assets(1):
Loans receivable(2) $ 755,926 293,534 448,691 257,437 124,644 1,880,232
Securities(3) 69,941 101,959 140,142 127,172 47,613 486,827
Other interest-earning
assets(4) 98,028 3,783 -- -- -- 101,811
--------- --------- --------- --------- --------- ---------
Total $ 923,895 399,276 588,833 384,609 172,257 2,468,870
========= ========= ========= ========= ========= =========
Interest-bearing
liabilities:
Deposits(5):
Money market and NOW
accounts $ 219,369 41,100 75,184 45,254 70,658 451,565
Passbook accounts 3,607 10,822 20,022 12,172 18,873 65,496
Certificates of deposit 340,952 569,691 184,260 29,220 954 1,125,077
Borrowings:
FHLB advances(6) -- -- -- -- 500,027 500,027
Securities sold under
agreements to repurchase 48,126 -- -- -- -- 48,126
Senior notes -- -- -- 41,060 -- 41,060
--------- --------- --------- --------- --------- ---------
Total $ 612,054 621,613 279,466 127,706 590,512 2,231,351
========= ========= ========= ========= ========= =========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 311,841 $(222,337) 309,367 256,903 (418,255) 237,519
========= ========= ========= ========= ========= =========
Cumulative excess
(deficiency) of
interest-earning
assets over
interest-bearing liabilities $ 311,841 $ 89,504 398,871 655,774 237,519 237,519
========= ========= ========= ========= ========= =========
Cumulative excess
(deficiency) of
interest-earning
assets over
interest-bearing
liabilities as a
percent of total assets 12.12% 3.48 15.50 25.48 9.23 9.23
========= ========= ========= ========= ========= =========
(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 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
greater liquidity than required in order to be in a position to fund loan
originations, to meet withdrawals
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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, securities sold under agreements to repurchase 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 March 31, 2001, the Company had unutilized
borrowing capacity with the FHLB, with a credit limit subject to the maximum
amount of credit available under the Federal Home Loan Bank System Credit
Policy.
At March 31, 2001, the Bank had approximately $236.3 million of
outstanding loan commitments (including unused lines of credit) for commercial
business loans. Certificates of deposit which are scheduled to mature within one
year totaled $910.6 million at March 31, 2001, and borrowings which are
scheduled to mature or reprice within the same period amounted to $48.1 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 $38.9 million of those outstanding
senior notes. This move will reduce future interest costs associated with those
notes. The remaining $41.1 million of senior notes have an annual debt service
requirement of $4.5 million (or $2.25 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 March 31, 2001, the Company exceeded all applicable capital
requirements by having a total risk-based capital ratio of 8.98%, a tier I
risk-based capital ratio of 7.72% and a leverage ratio of 5.69%.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America, 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
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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, 2000,
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
None
b. Reports on Form 8-K
The Company filed the following Form 8-K's during the quarter ended
March 31, 2001:
1. A Form 8-K dated February 5, 2001 was filed pursuant to the release
of 2000 earnings.
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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: May 14, 2001 By /s/ Edward A. Townsend
---------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: May 14, 2001 By /s/ Richard L. Park
---------------------------
Richard L. Park
Chief Financial Officer
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