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 quarterly period ended September 30, 2002
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 October 29, 2002 were as follows:
NUMBER OF SHARES
------------------
18,753,323
LOCAL FINANCIAL CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 2002 (unaudited) and December 31, 2001...........................................1
Consolidated Statements of Operations -
For the Three Months and Nine Months Ended September 30, 2002 and 2001
(unaudited)....................................................................................2
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2002 and 2001 (unaudited)..............................3
Notes to Consolidated Financial Statements.....................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................17
Item 4. Controls and Procedures.......................................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................18
Item 6. Exhibits and Reports on Form 8-K..............................................................18
Signatures ..............................................................................................19
Certifications ..............................................................................................20
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(unaudited)
ASSETS
Cash and due from banks $ 49,145 $ 50,791
Interest bearing deposits with other banks 5,100 9,700
Securities:
Available for sale 170,189 193,736
Held to maturity 449,636 430,956
--------------- ---------------
Total securities 619,825 624,692
Loans receivable, net of allowance for loan losses of $28,474 at
September 30, 2002 and $27,621 at December 31, 2001 1,958,333 1,972,145
Federal Home Loan Bank of Topeka and Federal Reserve Bank stock, at cost 34,866 42,213
Premises and equipment, net 41,026 38,751
Assets acquired through foreclosure and repossession, net 882 1,910
Intangible assets, net 15,548 15,548
Current and deferred taxes, net 8,229 7,408
Other assets 59,294 56,893
--------------- ---------------
Total assets $ 2,792,248 $ 2,820,051
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 711,798 $ 636,315
Savings 78,338 70,932
Time 1,073,476 1,102,115
--------------- ---------------
Total deposits 1,863,612 1,809,362
Advances from the Federal Home Loan Bank of Topeka 608,143 728,205
Securities sold under agreements to repurchase 48,134 38,694
Senior Notes 21,545 21,545
Other liabilities 24,268 18,459
Mandatorily redeemable trust preferred securities 50,250 40,250
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized; 20,749,967
shares issued and 18,873,323 shares outstanding at September 30, 2002 and
20,539,269 shares issued and 19,199,925
shares outstanding at December 31, 2001 207 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none issued or outstanding - -
Additional paid-in capital 207,156 205,773
Retained earnings 144,394 122,480
Treasury stock, 1,876,644 shares at September 30, 2002 and 1,339,344
shares at December 31, 2001, at cost (176,915) (169,031)
Accumulated other comprehensive income, net of tax 1,454 4,109
--------------- ---------------
Total stockholders' equity 176,296 163,536
--------------- ---------------
Total liabilities and stockholders' equity $ 2,792,248 $ 2,820,051
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
2
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited)
Interest income:
Loans $ 34,745 $ 37,725 $ 104,224 $ 115,039
Securities available for sale 2,437 8,956 7,722 26,192
Securities held to maturity 6,759 - 19,743 -
Federal Home Loan Bank of Topeka and
Federal Reserve Bank stock 430 524 1,396 1,440
Other investments 171 687 620 2,061
---------- ---------- ---------- ----------
Total interest income 44,542 47,892 133,705 144,732
Interest expense:
Deposit accounts 12,573 18,152 39,497 60,030
Advances from the Federal Home Loan Bank of Topeka 6,353 5,620 19,137 15,185
Securities sold under agreements to repurchase and
other borrowings 129 419 377 1,435
Senior Notes 636 1,212 1,909 3,637
Trust preferred securities 1,020 97 2,863 97
---------- ---------- ---------- ----------
Total interest expense 20,711 25,500 63,783 80,384
Net interest income 23,831 22,392 69,922 64,348
Provision for loan losses (1,500) (1,775) (5,100) (3,675)
---------- ---------- ---------- ----------
Net interest income after provision for loan 22,331 20,617 64,822 60,673
losses
Noninterest income:
Deposit related income 4,996 3,802 14,114 10,724
Loan fees and loan service charges 489 458 1,645 1,637
Net gains on sale of assets 97 222 771 528
Other 908 815 2,789 2,530
---------- ---------- ---------- ----------
Total noninterest income 6,490 5,297 19,319 15,419
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 10,316 8,357 30,311 24,809
Equipment and data processing 1,516 1,633 4,734 4,872
Occupancy 1,242 999 3,506 2,890
Advertising 182 125 503 314
Professional fees 339 329 912 993
Other 3,748 3,638 10,941 10,811
---------- ---------- ---------- ----------
Total noninterest expense 17,343 15,081 50,907 44,689
---------- ---------- ---------- ----------
Income before provision for income taxes and 11,478 10,833 33,234 31,403
extraordinary item
Provision for income taxes 4,108 3,639 11,320 10,382
---------- ---------- ---------- ----------
Income before extraordinary item 7,370 7,194 21,914 21,021
Extraordinary item - purchase and retirement of
Senior Notes, net of tax - - - (4)
---------- ---------- ---------- ----------
Net income $ 7,370 $ 7,194 $ 21,914 $ 21,017
========== ========== ========== ==========
Earnings per share:
Income before extraordinary item:
Basic $ 0.39 $ 0.35 $ 1.15 $ 1.02
========== ========== ========== ==========
Diluted $ 0.37 $ 0.34 $ 1.10 $ 0.99
========== ========== ========== ==========
Net income:
Basic $ 0.39 $ 0.35 $ 1.15 $ 1.02
========== ========== ========== ==========
Diluted $ 0.37 $ 0.34 $ 1.10 $ 0.99
========== ========== ========== ==========
Average shares outstanding:
Basic 18,991,744 20,539,209 19,111,419 20,539,091
========== ========== ========== ==========
Diluted 19,681,824 21,349,796 19,859,763 21,238,203
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2002 2001
--------------- ---------------
(unaudited)
Cash provided (absorbed) by operating activities:
Net income $ 21,914 $ 21,017
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5,100 3,675
Deferred income tax expense (benefit) (249) 186
Accretion of discounts and amortization of deferred fees on
loans acquired and securities, net (2,193) (2,446)
Depreciation and amortization 3,111 3,990
Net change in loans held for sale 262 1,093
Net gains on sale of assets (771) (528)
Change in other assets (1,885) (5,607)
Change in other liabilities 5,809 (2,132)
--------------- ---------------
Net cash provided by operating activities 31,098 19,248
--------------- ---------------
Cash provided (absorbed) by investing activities:
Proceeds from sales of securities available for sale 54,239 19,813
Proceeds from principal collections on securities 215,060 179,378
Purchases of securities (266,112) (376,178)
Purchases of Federal Home Loan Bank and Federal Reserve Bank stock (932) (14,367)
Proceeds from the sale of Federal Home Loan Bank stock 8,279 -
Change in loans receivable, net 8,264 (82,048)
Proceeds from disposal of assets acquired through foreclosure and
repossession 2,330 1,525
Purchases of premises and equipment (5,449) (3,550)
Proceeds from sales of premises and equipment 63 51
--------------- ---------------
Net cash provided (absorbed) by investing activities 15,742 (275,376)
--------------- ----------------
Cash provided (absorbed) by financing activities:
Change in transaction accounts 82,889 18,102
Change in time deposits (28,639) (131,698)
Change in securities sold under agreements to repurchase 9,440 6,868
Proceeds from advances from the Federal Home Loan Bank 888,195 1,049,365
Repayments of advances from the Federal Home Loan Bank (1,008,257) (639,368)
Proceeds from the issuance of common stock 2,106 19
Proceeds from the issuance of trust preferred securities 10,000 35,000
Payment of trust preferred securities issuance costs (215) (1,400)
Purchase of Senior Notes - (150)
Purchase of treasury stock (7,884) -
Purchase of stock warrants and options (721) -
--------------- ---------------
Net cash provided (absorbed) by financing activities (53,086) 336,738
--------------- ---------------
Net change in cash and cash equivalents (6,246) 80,610
Cash and cash equivalents at beginning of period 60,491 43,971
--------------- ---------------
Cash and cash equivalents at end of period $ 54,245 $ 124,581
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 63,719 $ 80,527
=============== ===============
Income taxes $ 10,750 $ 11,083
=============== ===============
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to assets acquired through foreclosure
and repossession $ 1,302 $ 2,438
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002 and December 31, 2001
(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 the Local Financial Corporation (the "Company") Form
10-K for the year ended December 31, 2001 as filed with the Securities
and Exchange Commission (the "SEC").
(2) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost (dollars in
thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Residential real estate $ 212,766 $ 215,408
Commercial 1,571,574 1,593,432
Held for sale 6,001 6,263
Consumer 196,466 184,663
---------------- ----------------
Total loans 1,986,807 1,999,766
Less:
Allowance for loan losses (28,474) (27,621)
---------------- ----------------
Loans receivable, net $ 1,958,333 $ 1,972,145
================ ================
(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")
Advances from the FHLB are summarized as follows (dollars in
thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------------- -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE CONTRACTUAL RATE BALANCE CONTRACTUAL RATE
------------ ---------------- ------------ ----------------
Fixed rate $ 608,143 4.12% $ 728,205 3.75%
============ =========== ============ ===========
4
Additionally, the Company had outstanding letters of credit with the
FHLB of approximately $103.6 million and $77.1 million at September 30,
2002 and December 31, 2001, respectively. The letters of credit have
terms of one year or less and were pledged to secure certain deposits.
The FHLB requires the Company to hold eligible assets with a lending
value, as defined, at least equal to FHLB advances and letters of
credit issued. Eligible assets can include such items as first and
second mortgage loans, multifamily mortgage loans, commercial and
construction real estate loans, small business loans and investment
securities, which are not already pledged or otherwise encumbered. At
September 30, 2002, the Company had approximately $730.6 million in
eligible assets pledged against FHLB advances.
At September 30, 2002, the Company had additional borrowing capacity of
approximately $424.8 million under the FHLB credit policy.
Scheduled principal repayments to the FHLB at September 30, 2002 are as
follows (dollars in thousands):
WEIGHTED
AVERAGE
YEAR ENDING DECEMBER 31, AMOUNT CONTRACTUAL RATE
--------------- -------------------
2002 $ 8,120 2.15%
2006 and thereafter 600,023 4.14
---------------
$ 608,143 4.12%
=============== ================
(4) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Periodically, the Company provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations.
The securities underlying the agreements were under the Company's
control at September 30, 2002 and December 31, 2001 and are summarized
as follows (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
Average outstanding balance $ 38,633 $ 42,987
Weighted average interest rate during the period 1.30% 3.39%
Maximum month-end balance $ 49,093 $ 53,622
Outstanding balance at end of period $ 48,134 $ 38,694
Weighted average interest rate at end of period 1.30% 1.29%
Mortgage-backed securities securing the agreements
at period-end:
Carrying value $ 49,804 $ 53,885
Estimated market value $ 50,847 $ 54,978
Accrued interest payable at the end of the period $ -- $ --
(5) MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
On July 30, 2002, Local Financial Capital Trust II (the "Trust II"), a
newly formed Delaware business trust and wholly-owned finance
subsidiary of the Company, joined in a pooled issuance of trust
preferred securities. Trust II issued 10,000 shares of its trust
preferred securities ("Trust
5
II Preferred Securities") at $1,000 per share for an aggregate price of
approximately $10.0 million, all of which was outstanding at September
30, 2002. The Trust II Preferred Securities will mature on July 30,
2032. The proceeds from the sale of the Trust II Preferred Securities
and the issuance of $310,000 in Trust II's common securities to the
Company were used by the Trust II to purchase approximately $10.3
million of floating rate junior subordinated debentures (the "Trust II
Debentures") of the Company which have the same payment terms as the
Trust II Preferred Securities. Distributions on the Trust II Preferred
Securities and on the common securities issued to the Company are
payable on January 30 and July 30 of each year beginning January 30,
2003. Interest on the Trust II Debentures and the Trust II Preferred
Securities will be paid at a rate equal to LIBOR plus 3.625% per annum,
provided that the applicable interest rate shall not exceed 12% through
the interest payment date in July 2007.
The Trust II Preferred Securities are included in Tier 1 capital, to
the extent permitted, for regulatory capital adequacy determination
purposes. The obligations of the Company with respect to the issuance
of the Trust II Preferred Securities constitute a full and
unconditional guarantee by the Company of the Trust II's obligation
with respect to the Trust II Preferred Securities subject to certain
limitations.
On October 29, 2002, the Company formed Local Financial Capital Trust
III (the "Trust III") and joined in an issue of a pooled offering based
on trust preferred securities issuing an additional $10 million. The
securities were issued at a rate of 3.45% over three- month LIBOR and
mature in October 2032.
(6) STOCKHOLDERS' EQUITY
In connection with the Company's private placement in 1997, warrants to
buy 591,000 shares of common stock of the Company at $10 per share were
issued to the placement agent. During the nine months ended September
30, 2002, 128,333 warrants were exercised for proceeds of $1.3 million.
During the third quarter of 2002, the Company purchased the remaining
125,000 warrants at a cost of $615,000, which represented the intrinsic
value of the warrants.
During the nine months ended September 30, 2002, the Company
repurchased 537,300 shares of the Company's common stock at market
price of approximately $7.9 million. Of those shares repurchased,
150,000 shares were from an officer of the Company.
(7) COMPREHENSIVE INCOME
Comprehensive income for the three and nine-month periods ended
September 30, 2002 and 2001 consists of (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ----------- ------------
Net income $ 7,370 $ 7,194 $ 21,914 $ 21,017
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment (803) 4,001 (2,655) 5,626
------------ ------------ ----------- ------------
Comprehensive income $ 6,567 $ 11,195 $ 19,259 $ 26,643
============ ============ =========== ============
6
(8) NET INCOME PER SHARE
Stock options to purchase 2,005,640 shares of common stock were
outstanding as of September 30, 2002 and were included in the
computation of diluted net income per share for 2002. Stock options and
warrants to purchase 2,689,005 shares of common stock were outstanding
as of September 30, 2001 and were included in the computation of
diluted net income per share for 2001.
(9) 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, (the "Bank") a national banking association. 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.
In September 2001 and July 2002, the Company formed Local Financial
Capital Trust I (the "Trust") and Local Financial Capital Trust II,
respectively, both wholly-owned finance subsidiaries. The trust
subsidiaries do not qualify as operating segments under SFAS No. 131
and have no independent operations and no other functions other than
the issuance of their securities and the related purchase of junior
subordinated debentures from the Company and to distribute payments
received thereon to the holders of their securities.
(10) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement No. 142, Goodwill and Other Intangible
Assets, as of January 1, 2002 and no longer amortizes goodwill. As of
the date of adoption, the Company had unamortized goodwill in the
amount of approximately $15.5 million, which was subject to the
transition provisions of Statement No. 142. The Company has determined
there was no transitional impairment loss at January 1, 2002. There was
no amortization expense for the three and nine months ended September
30, 2002, whereas this expense amounted to $335,000 and $1.0 million
for the three and nine months ended September 30, 2001, respectively.
The Company's net income for the three and nine months ended September
30, 2001, excluding the effects of goodwill amortization, would have
been $7.5 million and $22.0 million, respectively, compared to $7.4
million and $21.9 million for the three and nine months ended September
30, 2002, respectively. Excluding the effects of goodwill amortization,
the earnings per share for the three and nine months ended September
30, 2001 would have been $.37 basic and $.35 diluted, and $1.07 basic
and $1.04 diluted, respectively.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No.
121 and portions of APB Opinion No. 30. This statement addresses the
recognition of an impairment loss for long-lived assets to be held and
used or disposed of by sale or otherwise. This statement is effective
for financial statements
7
issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this statement as of
January 1, 2002 had no effect on the Company's consolidated financial
position or results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. The Statement updates, clarifies and simplifies
existing accounting pronouncements. As it relates to the Company, the
statement eliminates the extraordinary loss classification on early
debt extinguishments. Instead, the premiums and other costs associated
with the early extinguishment of debt would be reflected in pre-tax
results similar to other debt-related expenses, such as interest
expense and amortization of issuance costs. The statement will be
effective for fiscal years beginning after May 15, 2002 (January 1,
2003 for the Company). Upon adoption, the Company must reclassify the
extraordinary losses incurred in prior periods (including 2001 and
2000) as pre-tax items. The result of the adoption of this statement
will not modify or adjust net income for any period and does not impact
the Company's compliance with its various debt covenants.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Incurred in a Restructuring)." This statement requires that a liability
be recognized for costs associated with an exit or disposal activity
only when the liability is incurred. This statement is effective for
exit or disposal activities that are initiated after December 31, 2002.
Management has determined the impact of this statement will not have a
material impact on the Company's consolidated financial position or
results of operations.
In October 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions. This statement requires affected
institutions to reclassify their goodwill governed by SFAS Statement
No. 72, Accounting for Certain Acquisitions of Banking and Thrift
Institutions, as SFAS No. 142 goodwill as of the date that SFAS No. 142
is adopted. As of January 1 and September 30, 2002, the Company had no
goodwill governed by SFAS No. 72. This statement also requires that
long-term customer relationship intangible assets be reviewed for
impairment in accordance with SFAS No. 144. Management anticipates the
adoption of this statement will have no material impact on the
consolidated financial position or results of operations.
8
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.
A reader should 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, 2001, 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, 2001 TO SEPTEMBER 30, 2002
During the nine months ended September 30, 2002, total assets declined
slightly to $2.79 billion from $2.82 billion at December 31, 2001. The Company's
total net loan portfolio remained relatively unchanged, declining $13.8 million
or .7% as the weakened economy has resulted in slower loan demand and increased
prepayments. The Company's outstanding balance of securities also remained
relatively unchanged, declining $4.9 million or .8% as of September 30, 2002
when compared to December 31, 2001, as securities maturing during the periods
were replaced with similar instruments.
Total deposits rose $54.3 million or 3.0% during the nine months ended
September 30, 2002 with the majority of this growth occurring in demand
deposits. At September 30, 2002, advances from the FHLB of Topeka had declined
to $608.1 million from $728.2 million at December 31, 2002 as the Company
replaced maturing advances with other lower cost sources of funding.
On July 30, 2002, the Company through Local Financial Capital Trust II
issued in a private placement $10.0 million of trust preferred securities. The
securities bear interest at a rate of 3.625% over six-month LIBOR, mature in
2032 and are included in the Company's consolidated statement of financial
condition under the caption "Mandatorily Redeemable Trust Preferred Securities".
Subsequent to quarter end, the Company through Local Financial Capital Trust III
participated in a pooled issuance of an additional $10 million in trust
preferred securities bearing an interest rate of 3.45% over three-month LIBOR
and also maturing in 2032. See Note 5 to the Notes to Consolidated Financial
Statements included herein.
Total stockholders' equity increased $12.8 million or 7.8% during the
nine months ended September 30, 2002. This increase came primarily as a result
of earnings during the period, which was
9
partially offset by an increase in treasury shares and a decline in other
accumulated comprehensive income. During the period, the Company repurchased
537,300 of its shares at market price for $7.9 million as part of a stock
repurchase program, which began last year. Subsequent to quarter-end, the
Company completed the repurchase program begun last year and announced a new
repurchase program under which the Company is authorized to repurchase up to two
million additional shares of its stock. The shares repurchased by the Company
under the stock repurchase program are held as treasury shares. The increase in
additional paid-in capital of $1.4 million was the result of an exercise of
128,333 warrants, which were part of the original 591,000 warrants issued in
conjunction with the Company's 1997 private placement, and the exercise of
82,365 stock options issued under the Company's 1998 Stock Option Plan, less
warrants purchased. See Note 6 of the Notes to Consolidated Financial
Statements. At September 30, 2002, the Company and the Bank exceeded all
regulatory requirements to be considered well capitalized. See "-- Liquidity and
Capital Resources".
Subsequent to quarter-end, the Company's application to acquire U.S.
National Bank located in Midwest City, Oklahoma was approved by the Office of
the Comptroller of the Currency. With total assets of $34.9 million, deposits of
$30.8 million, liabilities of $31.0 million and stockholders' equity of $3.9
million, the acquisition will not have a material impact on the consolidated
financial condition of the Company. The transaction closed on November 5, 2002.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Income. Net income for the three and nine months ended September
30, 2002 was $7.4 million and $21.9 million, respectively, up from $7.2 million
and $21.0 million for the same periods last year. Diluted earnings per share for
the quarter were $.37, up 8.8% from the same quarter in the prior year. Diluted
earnings per share for the nine months ended September 30, 2002 were $1.10, up
11.1% from the same period last year. Earnings per share data gives effect to
the Company's purchase of 1.9 million of its outstanding shares in 2001 and 2002
as well as the elimination of goodwill in 2002. The Company discontinued its
amortization of goodwill following its January 1, 2002 adoption of Statement No.
142, Goodwill and Other Intangible Assets. See Note 10 of the Notes to
Consolidated Financial Statements. There was no amortization expense for the
three and nine months ended September 30, 2002, whereas this expense amounted to
$335,000 and $1.0 million for the three and nine months ended September 30,
2001, respectively. The Company's reported net income for the three months ended
September 30, 2001, excluding the effects of goodwill amortization, would have
been $7.5 million compared with $7.2 million as reported. Additionally, net
income for the nine months ended September 30, 2001, excluding the effects of
goodwill amortization, would have been $22.0 million compared with $21.0 million
as reported.
Net Interest Income. Net interest income totaled $23.8 million in the
three months ended September 30, 2002 versus $22.4 million for the same period
in 2001. Net interest income in the nine-month comparative period ended
September 30, 2002 and 2001 totaled $69.9 million and $64.3 million,
respectively. In both comparative periods, the increase was primarily
attributable to increasing spreads. Net interest margin declined slightly in the
three-month comparative periods from 3.61% to 3.58% and held stable during the
nine-month comparative period at 3.50%. Looking forward, the Company anticipates
lower spreads and further margin compression as yields on interest-earning
assets decline more rapidly than rates paid on interest-bearing liabilities. Low
interest rates, over a prolonged period of time, as well as soft loan demand,
will impact profitability adversely.
Interest Income. Total interest income declined 7.0% during the three
months ended September 30, 2002 from $47.9 million at September 30, 2001 to
$44.5 million. A decline was also seen in the nine-month comparative period
where interest income dropped 7.6% from $144.7 million to $133.7
10
million. The decline in interest income during the three and nine-month
comparative periods was due primarily to declines in the average yield on the
Company's loan portfolio, which dropped from 7.85% to 6.97% in the three-month
comparative period and from 8.14% to 6.97% in the nine-month comparative period.
Total interest income resulting from these rate declines was offset to a certain
extent by increases in the average balance of loans in both comparative periods.
Interest Expense. Total interest expense decreased $4.8 million or
18.8% in the three months ended September 30, 2002 as compared to the same
period in the prior year. Similarly, interest expense declined $16.6 million or
20.7% in the nine-month comparative period. The declines in both comparative
periods were primarily the result of the declining cost of deposits. The
Company's average cost of deposits in the three months ended September 30, 2002
was 2.91% as compared with 4.39% in the same period in the prior year. Likewise,
the average cost of deposits in the nine months ended September 30, 2002 was
3.10% versus 4.80% during the same period in the prior year. Declines in the
average cost of deposits in both periods offset modest increases in the average
balance of total deposits in those periods. Interest expense on FHLB advances
increased in the comparative three and nine-month periods primarily due to
increases in the average balance of borrowings during those periods, which
offset the decline in rates paid on those borrowings. During the periods
presented, interest expense on Senior Notes consisted of interest accrued with
respect to the Senior Notes issued in connection with the 1997 purchase and
recapitalization of the Company. During the past three years, the Company has
successfully purchased and retired $58.5 million of the original $80 million 11%
Senior Notes, resulting in the continued decrease in interest expense.
Additionally, during the three and nine-month periods ended September 2002, the
Company paid $1.0 million and $2.9 million, respectively, in interest expense on
its trust preferred securities.
Provision for Loan Losses. The Company's provision for loan losses was
$1.5 million during the third quarter compared to $1.8 million during the same
quarter last year, increasing the year-to-date provision to $5.1 million versus
$3.7 million at this date last year. Charge-offs (net of recoveries) in the
three and nine-month periods ended September 30, 2002 were $1.4 million and $4.2
million, respectively. The Company's basis for provision 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 are
deposit-related income, loan fees and loan service charges, net gains on sale of
assets and other income. Total noninterest income increased $1.2 million or
22.5% during the three months ended September 30, 2002 and $3.9 million or 25.3%
during the nine months ended September 30, 2002 when compared to the same period
in the prior year. The increase in both comparative periods was due to increases
in deposit-related income, primarily attributable to the success of our High
Performance Checking campaign.
Noninterest Expense. Total noninterest expense increased $2.3 million
or 15.0% during the three months ended September 30, 2002 and $6.2 million or
13.9% during the nine months ended September 30, 2002. The increases in
noninterest expense were primarily attributable to compensation and employee
benefits expense, including the cost of fully accruing the tax-offsetting bonus
feature of stock options issued to selected officers, as well as additional
lending and support staff considered necessary to support long-term strategic
and marketing initiatives.
11
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 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.
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
September 30, 2002, 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) $ 854,436 $ 308,333 $ 420,379 $ 204,815 $ 188,452 $1,976,415
Securities:
Available for sale(3) 31,478 47,459 42,412 24,219 22,386 167,954
Held to maturity 67,221 135,048 162,391 70,601 14,375 449,636
Other interest-earning
assets(4) 89,111 - - - - 89,111
---------- ---------- ---------- ---------- --------- ----------
Total $1,042,246 $ 490,840 $ 625,182 $ 299,635 $ 225,213 $2,683,116
========== ========== ========== ========== ========= ==========
Interest-bearing liabilities:
Deposits(5):
Money market and NOW
accounts $ 231,075 $ 27,136 $ 57,832 $ 43,695 $ 170,519 $ 530,257
Passbook accounts 3,220 9,659 19,754 13,793 31,912 78,338
Certificates of deposit 421,210 409,951 159,076 79,778 3,461 1,073,476
FHLB advances 8,120 - - 100,000 500,023 608,143
Securities sold under
agreements to repurchase 48,134 - - - - 48,134
Senior Notes - - 21,545 - - 21,545
Mandatorily redeemable
trust preferred
securities(6) - 10,000 - - 40,250 50,250
---------- ---------- ---------- ---------- --------- ----------
Total $ 711,759 $ 456,746 $ 258,207 $ 237,266 $ 746,165 $2,410,143
========== ========== ========== ========== ========= ==========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 330,487 $ 34,094 $ 366,975 $ 62,369 $(520,952) $ 272,973
========== ========== ========== ========== ========= ==========
Cumulative excess of
interest-earning
assets over
interest-bearing
liabilities $ 330,487 $ 364,581 $ 731,556 $ 793,925 $ 272,973 $ 272,973
========== ========== ========== ========== ========= ==========
Cumulative excess of
interest-earning assets
over interest-bearing
liabilities as a percent
of total assets 11.84% 13.06% 26.20% 28.43% 9.78% 9.78%
========== ========== ========== ========== ========== ==========
12
-------------------------
(1) Adjustable-rate loans and securities are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they mature and fixed-rate loans and securities are included in the
periods in which they are scheduled to be repaid, based on scheduled
amortization, in each case as adjusted to take into account estimated
prepayments based on, among other things, historical performance.
(2) Balances have been reduced for nonaccrual loans.
(3) Does not include unrealized gain on securities classified as available for
sale.
(4) Comprised of cash and due from banks, deposits with other banks, Federal
Home Loan Bank 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) Additionally, adjustable-rate trust preferred securities are included in
the period in which interest rates are next scheduled to adjust rather than
in the period in which they mature, while fixed rate trust preferred
securities are included in the period in which they are scheduled to
mature.
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 (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ---------- --------- ----------- ---------- ---------
ASSETS
Loans receivable(1) $ 1,993,483 $ 34,745 6.97% $ 1,921,171 $ 37,725 7.85%
Securities:
Available for sale(2) 116,880 2,437 8.34 511,849 8,956 7.00
Held to maturity 475,589 6,759 5.68 - - -
---------- ---------- ---------- ----------
Total securities 592,469 9,196 6.21 511,849 8,956 7.00
Other earning assets(3) 78,090 601 3.08 49,734 1,211 9.74
---------- ---------- ---------- ----------
Total interest-earning assets 2,664,042 44,542 6.69% 2,482,754 47,892 7.72%
---------- ====== ---------- =========
Noninterest-earning assets 128,944 116,367
---------- ----------
Total assets $ 2,792,986 $ 2,599,121
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts(4) $ 607,515 2,700 1.76% $ 515,993 3,632 2.79%
Term certificates of deposit 1,105,393 9,873 3.54 1,124,768 14,520 5.12
----------- ---------- ----------- ----------
Total deposits 1,712,908 12,573 2.91 1,640,761 18,152 4.39
FHLB advances 600,111 6,353 4.14 513,933 5,620 4.28
Securities sold under agreements to
repurchase and other borrowings 39,181 129 1.31 48,787 419 3.41
Senior Notes 21,545 636 11.81 41,010 1,212 11.81
Mandatorily redeemable trust preferred
Securities 47,098 1,020 8.82 4,185 97 9.27
---------- ---------- ---------- ----------
Total interest-bearing 2,420,843 20,711 3.39% 2,248,676 25,500 4.49%
---------- ====== ---------- =========
Noninterest-bearing liabilities 197,766 174,887
Stockholders' equity 174,377 175,558
---------- ----------
Total liabilities and
stockholders' equity $2,792,986 $2,599,121
========== ==========
Net interest-earning assets $ 243,199 $ 234,078
========== ==========
Net interest income/interest rate
spread $ 23,831 3.30% $ 22,392 3.23%
========== ====== ========== =========
Net interest margin 3.58% 3.61%
====== =========
Ratio of average interest-earning to
average interest-bearing 110.05% 110.41%
====== =========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ------------- -------- ----------- ---------- ---------
ASSETS
Loans receivable(1) $1,995,062 $ 104,224 6.97% $1,894,335 $ 115,039 8.14%
Securities:
Available for sale(2) 130,163 7,722 7.91 482,925 26,192 7.23
Held to maturity 446,100 19,743 5.90 - - -
---------- ---------- ---------- ----------
Total securities 576,263 27,465 6.35 482,925 26,192 7.23
Other earning assets(3) 89,162 2,016 3.01 70,281 3,501 6.64
---------- ---------- ---------- ----------
Total interest-earning assets 2,660,487 133,705 6.71% 2,447,541 144,732 7.91%
---------- ======= ---------- =========
Noninterest-earning assets 127,072 117,309
---------- ----------
Total assets $2,787,559 $2,564,850
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts(4) $ 587,756 7,997 1.82% $ 516,447 11,882 3.08%
Term certificates of deposit 1,115,241 31,500 3.78 1,154,737 48,148 5.57
----------- ---------- ----------- ----------
Total deposits 1,702,997 39,497 3.10 1,671,184 60,030 4.80
FHLB advances 621,066 19,137 4.06 462,862 15,185 4.33
Securities sold under agreements to
repurchase and other borrowings 38,675 377 1.30 46,612 1,435 4.12
Senior Notes 21,545 1,909 11.81 41,036 3,637 11.81
Mandatorily redeemable trust preferred
Securities 42,558 2,863 8.82 1,410 97 9.17
---------- ---------- ---------- ----------
Total interest-bearing 2,426,841 63,783 3.51% 2,223,104 80,384 4.83%
---------- ======= ---------- =========
Noninterest-bearing liabilities 190,939 174,545
Stockholders' equity 169,779 167,201
---------- ----------
Total liabilities and
stockholders' equity $2,787,559 $2,564,850
========== ==========
Net interest-earning assets $ 233,646 $ 224,437
========== ==========
Net interest income/interest rate
spread $ 69,922 3.20% $ 64,348 3.08%
========== ======= ========== =========
Net interest margin 3.50% 3.50%
======= =========
Ratio of average interest-earning to
average interest-bearing 109.63% 110.11%
====== =========
-------------------------
(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 the market valuation accounts.
(3) Includes interest-bearing deposits, Federal Home Loan Bank of Topeka
stock and Federal Reserve Bank stock.
(4) Includes passbook, NOW and money market accounts.
14
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
originations, to meet withdrawals from deposit accounts, to make principal and
interest payments with respect to outstanding borrowings and to make investments
that take advantage of interest rate spreads. The Company monitors its liquidity
in accordance with guidelines established by the Company and applicable
regulatory requirements. The Company's need for liquidity is affected by loan
demand, net changes in deposit levels and the scheduled maturities of its
borrowings. The Company can minimize the cash required during the times of heavy
loan demand by modifying its credit policies or reducing its marketing effort.
Liquidity demand caused by net reductions in deposits is 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 September 30, 2002, the Company had $424.8
million in available borrowing capacity with the FHLB.
At September 30, 2002, the Company had approximately $331.8 million of
outstanding loan commitments (including unused lines of credit) for home equity,
commercial real estate and commercial business loans and an additional $7.9
million in performance standby letters of credit. Certificates of deposit, which
are scheduled to mature or reprice within one year, totaled $831.2 million at
September 30, 2002, and borrowings, including trust preferred securities, which
are scheduled to mature or reprice within the same period, amounted to $66.3
million. The Company 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.
In September 1997, in connection with the Company's recapitalization,
the Company issued $80.0 million of Senior Notes. As of September 30, 2002, the
Company has purchased and retired $58.5 million of those outstanding Senior
Notes. These transactions reduced future interest costs associated with those
notes. The remaining $21.5 million of Senior Notes have an annual debt service
requirement of $2.4 million (or $1.2 million for each semi-annual period).
Capital Resources. In September 2001, the Company, through a wholly
owned trust, issued $35 million in Trust Preferred Securities with an additional
issuance of $5.3 million in October 2001. In July 2002 and again in October
2002, the Company participated in pooled issuances of additional trust preferred
securities, through wholly owned trusts, in the amount of $10 million each,
bringing the Company's total issued and outstanding trust preferred securities
to $60.3 million as of November 2002. These securities increase the Company's
regulatory capital, which facilitates continued growth of its banking franchise.
The ability to treat these securities as regulatory capital under Federal
Reserve
15
guidelines, coupled with the Federal income tax deductibility of the related
expense, provides the Company with a cost-effective form of capital.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Bank. The guidelines
are commonly known as Risk-Based Capital Guidelines. On September 30, 2002, the
Company exceeded all applicable capital requirements pursuant to the Risk-Based
Capital Guidelines and was considered "well capitalized" by having a total
risk-based capital ratio of 12.06%, a tier I risk-based capital ratio of 10.81%
and a leverage ratio of 7.53%.
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 inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables present contractual cash obligations and
commercial commitments of the Company as of September 30, 2002. See Notes 3, 4
and 5 of the Notes to the Consolidated Financial Statements and "-- Liquidity
and Capital Resources" (dollars in thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
MORE THAN
LESS THAN ONE TO THREE YEARS OVER
CONTRACTUAL CASH OBLIGATIONS TOTAL ONE YEAR THREE YEARS TO FIVE YEARS FIVE YEARS
----------------------------------------------- ------------- ------------- ------------- ------------- -------------
FHLB advances $ 608,143 $ 8,120 $ - $ 100,000 $ 500,023
Securities sold under agreements to repurchase 48,134 48,134 - - -
Senior Notes 21,545 - 21,545 - -
Mandatorily redeemable trust preferred
securities 50,250 - - - 50,250
Operating leases 7,052 967 1,225 557 4,303
Data processing maintenance obligation 1,060 265 530 265 -
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 736,184 $ 57,486 $ 23,300 $ 100,822 $ 554,576
========== ========== ========== ========== ==========
In order to support strategic objectives, management initiated a
project to return its mainframe operations to an internally supported function.
The Company's mainframe processing had been operated in a data center operated
by a third-party servicer. During the first quarter of 2002, the Company brought
its mainframe processing in-house. The Company does not anticipate this action
will have a material impact on its consolidated financial condition and the
contractual obligations are reflected above.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------------------
MORE THAN
UNFUNDED LESS THAN ONE TO THREE YEARS OVER
COMMITMENTS COMMITMENTS ONE YEAR THREE YEARS TO FIVE YEARS FIVE YEARS
----------------------------------------------- ------------- ------------- ------------- ------------- -------------
Lines of credit $ 247,775 $ 138,106 $ 91,660 $ 17,202 $ 807
Standby letters of credit 7,870 6,421 1,449 - -
Other commitments 84,023 10,904 8,715 19,304 45,100
---------- ---------- ---------- ---------- ----------
Total commitments $ 339,668 $ 155,431 $ 101,824 $ 36,506 $ 45,907
========== ========== ========== ========== ==========
16
RECENT LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "SOA"). The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
some time. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). Given the extensive SEC
role in implementing rules relating to many of the SOA's new requirements, the
final scope of these requirements remains to be determined.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of certain issues by the SEC and the
Comptroller General. The SOA represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
The SOA addresses, among other matters: audit committees; certification
of financial statements by the chief executive office and the chief financial
officer; the forfeiture of bonuses and profits made by directors and senior
officers in the twelve month period covered by restated financial statements; a
prohibition on insider trading during pension plan back out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers (excluding Federally insured financial institutions); expedited
filing requirements for stock transaction reports by officers and directors;
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of
such code; "real time" filing of periodic reports; the formation of a public
accounting oversight board; auditor independence; and various increased criminal
penalties for violations of securities laws.
The SOA contains provisions that became effective upon enactment on
July 30, 2002 and provisions that will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various of the provisions with respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.
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" included in the
Company's Form 10-K for the year ended December 31, 2001 for Quantitative and
Qualitative Disclosures about Market Risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
the Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in
17
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the Company's internal
controls or in other factors, which could significantly affect these controls
subsequent to the date the Company carried out its evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that the Company files under the Exchange Act is accumulated and communicated to
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The registrant is involved in routine legal proceedings occurring
in the ordinary course of business, which, in the aggregate, are believed by
management to be immaterial to the financial condition and results of operations
of the registrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
b. Reports on Form 8-K
The Company filed the following Form 8-Ks during the quarter ended
September 30, 2002:
1. A Form 8-K dated July 18, 2002 was filed pursuant to the release of
earnings for the second quarter of 2002.
2. On July 31, 2002, Local Financial Corporation issued a press release
announcing the July 30, 2002 private placement of $10 million of trust preferred
securities.
3. On July 31, 2002, Local Financial Corporation issued a press release
announcing the Chairman of Local Financial Corporation's plan to sell a portion
of his shares and exercise stock options on a periodic basis over the course of
the next twelve months.
18
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 14, 2002 By/s/ Edward A. Townsend
------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer
LOCAL FINANCIAL CORPORATION
Date: November 14, 2002 By/s/ Richard L. Park
---------------------
Richard L. Park
Chief Financial Officer
19
CERTIFICATION
PURSUANT TO RULE 13A-14
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
1. I have reviewed the report being filed;
2. Based on my knowledge, the report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the periods
presented in the report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in the report, fairly present in all
material respects the consolidated financial condition and results of
operations and cash flows of the issuer as of, and for, the periods
presented in the report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the issuer, including
its consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which
the periodic report is being prepared;
(b) Evaluated the effectiveness of the issuer's disclosure
controls and procedures within 90 days of the date of the
report (the "Evaluation Date"); and
(c) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based
on their evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on their most recent evaluation, to the issuer's auditors and to the
audit committee of the board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal controls.
6. The registrant's other certifying officers and I have indicated in the
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
20
Dated this 14th day of November 2002.
LOCAL FINANCIAL CORPORATION
("Company")
/s/Edward A. Townsend
------------------------------------
Edward A. Townsend
Chief Executive Officer
21
CERTIFICATION
PURSUANT TO RULE 13A-14
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
1. I have reviewed the report being filed;
2. Based on my knowledge, the report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the periods
presented in the report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in the report, fairly present in all
material respects the consolidated financial condition and results of
operations and cash flows of the issuer as of, and for, the periods
presented in the report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the issuer, including
its consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which
the periodic report is being prepared;
(b) Evaluated the effectiveness of the issuer's disclosure
controls and procedures within 90 days of the date of the
report (the "Evaluation Date"); and
(c) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based
on their evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on their most recent evaluation, to the issuer's auditors and to the
audit committee of the board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal controls.
6. The registrant's other certifying officers and I have indicated in the
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
22
Dated this 14th day of November 2002.
LOCAL FINANCIAL CORPORATION
("Company")
/s/Richard L. Park
---------------------------------------
Richard L. Park
Chief Financial Officer
23