Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
- ----- Act of 1934
For the fiscal year ended: December 31, 1999
or
Transition Report Pursuant to Section 13 or 15(D) of the Securities
- ----- Exchange Act of 1934
Commission File Number: 1-13949
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 Number)
3601 N. W. 63rd
Oklahoma City, OK 73116
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (405) 841-2100
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
SENIOR NOTES DUE 2004
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NOT APPLICABLE
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 6, 2000, the aggregate value of the 19,962,129 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
575,080 shares held by all directors and executive officers of the Registrant as
a group, was approximately $164.7 million. This figure is based on the last
known trade price of $8.25 per share of the Registrant's Common Stock on March
6, 2000.
Number of shares of Common Stock outstanding as of March 6, 2000: 20,537,209
2
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information
from the Registrant's definitive proxy statement for the 2000 Annual
Meeting of Stockholders.
3
LOCAL FINANCIAL CORPORATION
INDEX
Part I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Report of Management
Report of Independent Auditors
Consolidated Statements of Financial Condition--December 31, 1999 and 1998
Consolidated Statements of Operations--Years Ended December 31, 1999 and 1998,
Six Months Ended December 31, 1997 and Year Ended June 30, 1997
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1999
and 1998, Six Months Ended December 31, 1997 and Year Ended June 30, 1997
Consolidated Statements of Cash Flows--Years Ended December 31, 1999 and 1998,
Six Months Ended December 31, 1997 and Year Ended June 30, 1997
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on form 8-K
4
PART I
ITEM 1. BUSINESS
THE COMPANY
General. Local Financial Corporation ("Local Financial" or the
"Company") is the holding company for Local Oklahoma Bank, National Association,
("Local" or the "Bank"). The Company was chartered in 1992 as a Delaware
corporation. Local Financial and the Bank are headquartered in Oklahoma City,
Oklahoma. In order to accommodate its strategy for growth, the Company converted
the Bank from a savings bank to a national banking association on May 11, 1999,
and the Company was registered as a bank holding company on that same day.
References to the "Bank" or "Local" refer to Local and its subsidiaries on a
consolidated basis, as the context requires.
At December 31, 1999, the Company had consolidated assets of $2.4 billion,
substantially all of which is comprised of its 100% ownership interest in the
Bank, consolidated liabilities of $2.3 billion, including consolidated deposits
of $1.8 billion and consolidated stockholders' equity of $128.3 million.
The Bank offers a full range of commercial banking products and related
financial services through 51 branch offices within the state of Oklahoma. Its
offices are primarily located in the State's major metropolitan areas of
Oklahoma City, Tulsa and Lawton. The Bank is the third largest Oklahoma-based
financial institution in Oklahoma based on deposits at November 18, 1999. Its
deposits of $1.8 billion at December 31, 1999, represent approximately five
percent of the Oklahoma market.* The Company and/or Local are presently
regulated and examined by the Office of the Comptroller of the Currency (the
"OCC"), the Board of Governors of the Federal Reserve System (the "FRB"), and
the Federal Deposit Insurance Corporation ("FDIC") and Local's deposit accounts
are insured up to applicable limits by the FDIC.
The Company's executive offices are located at 3601 NW 63rd Street,
Oklahoma City, Oklahoma 73116-2087.
New Management. In August 1997, a group led by Mr. Edward A. Townsend, the
Company's present Chairman, negotiated a purchase of the Company from the then
owners. The Company financed the redemption of the prior owners' interest in the
Company through a private placement of $197.0 million of common stock and $80.0
million of senior notes due 2004. The private placement and redemption were
closed in September 1997. The Company subsequently registered the common stock
and senior notes for public resale, and the common stock and senior notes began
publicly trading on April 22, 1998.
Strategy for Growth. Management believes the ongoing consolidation among
financial institutions in Oklahoma has created significant gaps in the ability
of large regional and nationwide banks to serve certain customers, primarily the
Bank's targeted customer base of small and medium sized businesses (up to $100
million in annual sales), professionals and other individuals. The Bank's
business strategy is to provide its customers with the range of banking products
and services of a regional bank while retaining the appeal and level of
individualized service of a community bank. Management believes that as a result
of the Company's strong commitment to highly personalized, relationship-oriented
customer service, its varied products, its strategic branch locations and the
long-standing community presence of its managers, lending officers and branch
personnel, it is well positioned to attract new customers and to increase its
market share of loans and deposits.
- ----------------
* Information about institutional size and market share are based on data from
an independent statistical reporting service based on deposits at November 18,
1999, the most recent data used by the reporting service.
1
5
In pursuit of this strategy, the Bank has shifted its activities from those
of a traditional savings and loan to those generally associated with a
commercial bank. The Bank has increased its commercial and consumer lending and
expects further increases in these areas. To attract and serve its commercial
customers, the Bank in 1998 created a new corporate lending unit. To increase
consumer lending, the Bank has increased its advertising and made internal
changes to standardize credit evaluations and reduce branch response times to
customer loan applications. The Bank also has targeted increases in non-interest
income, increases in lending activities rather than investing activities, and
increases in direct lending rather than indirect lending.
Local Financial also intends to grow through selective acquisitions. In
October 1999, the Company acquired Guthrie Federal Savings Bank in Guthrie,
Oklahoma. Through this acquisition, the Company acquired assets of $45.0
million, $37.7 million of liabilities, including $36.7 million of deposits,
based on fair value as of the date of acquisition. In February 1998, the Company
acquired Green Country Bank, FSB, with three full-service locations in
northeastern Oklahoma. In October 1998, the Bank acquired Citizens Bank, with
six branch offices including five in Lawton, Oklahoma, which is in southwestern
Oklahoma. Through these two 1998 acquisitions, the Company acquired assets of
$281.5 million, $270.2 million of liabilities, including $238.7 million of
deposits, based on fair values as of the respective acquisition dates. The
Company will continue to make selective acquisitions to increase its deposits
and branch office locations.
The prior owners had operated the Bank by emphasizing traditional savings
institution products and services, indirect lending such as sub-prime automobile
financing, the acquisition of residential mortgage packages, and a wholesale
securities portfolio. New management has changed the Bank's activities
significantly. Since the change in ownership, management has reduced the level
of collateralized mortgage obligations ("CMOs") with interest rate adjustments
tied to the 11th District Cost of Funds Index ("COFI"), eliminated all swap and
hedging contracts which were used to manage interest rate risk and eliminated
the Bank's portfolio of sub-prime, indirect automobile loans. While these
measures reduced the Bank's assets by over $1 billion and resulted in
substantial losses on the sale and write-down of assets, management believes the
Bank's financial condition is greatly improved and it is better positioned for
future growth. For the years ended December 31, 1999 and 1998, the first two
full years of operations following management's restructuring initiatives, the
Bank had net income of $22.0 million and $18.4 million, growth in assets of
$252.6 million and $247.6 million and growth in stockholders' equity of $9.5
million and $36.2 million, respectively. See Item 7 hereof, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations".
LENDING ACTIVITIES
General. With the conversion of the Bank from a savings institution to a
national bank and a shift in its lending activities, it has focused increasingly
on the origination of commercial business loans within the Oklahoma market. The
Bank has pursued this market by adding experienced lending officers with strong
community ties and banking relationships, many of whom have left regional or
national banks in the growing industry consolidation and are attracted by the
Bank's relationship-oriented approach. The Bank will continue its historical
patterns of originating residential and consumer loans through its own branch
network and, in the case of commercial real estate loans, through a network of
real estate brokers, mortgage bankers and unaffiliated financial institutions.
2
6
The following table presents information on the Bank's consolidated loan
portfolio as of the dates indicated:
December 31, June 30,(1)
---------------------------------------- -----------------------------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------ ----------- ------------ -----------
(Dollars in Thousands)
Commercial (2) $ 1,183,368 $ 927,682 $ 646,539 $ 627,295 $ 594,151 $ 485,979
Residential real estate 362,351 344,565 281,565 281,606 280,264 281,986
Consumer 161,327 101,738 38,717 114,925 146,107 40,408
Held for sale 6,801 16,188 7,133 1,433 841 830
----------- ----------- ----------- ----------- ----------- -----------
Total loans 1,713,847 1,390,173 973,954 1,025,259 1,021,363 809,203
Less:
Allowance for loan losses (28,297) (27,901) (20,484) (11,435) (3,228) (4,593)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net $ 1,685,550 $ 1,362,272 $ 953,470 $ 1,013,824 $ 1,018,135 $ 804,610
=========== =========== =========== =========== =========== ===========
- -------------------------
(1) The Company and the Bank changed their fiscal year ends from June 30 to
December 31 in 1998.
(2) Commercial loans are composed of business loans and commercial real estate
loans (which includes loans secured by multi-family residential
properties).
Loan Origination and Review. The lending activities of the Bank are subject
to the written, non-discriminatory underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management. Loan
originations are obtained by a variety of sources, including direct customer
solicitations, referrals from real estate brokers, mortgage bankers,
unaffiliated financial institutions, existing customers, walk-in customers and
advertising. In its present marketing efforts, the Bank emphasizes its
customized personal service, competitive rates, and an efficient underwriting
and approval process.
The Bank has revised its underwriting procedures to streamline the credit
approval process. It historically utilized a loan committee review procedure,
which could take several weeks to approve a credit application. The Bank's
increasing emphasis on commercial and consumer loans and its desire to meet
customer needs require quicker response times. The Bank has implemented
procedures that rely, in the case of residential real estate and consumer loans,
on a credit scoring system and, in the case of commercial loans, on a peer or
senior officer approval process, depending on the size of the loan. The Bank has
also revised its credit review procedures to ensure the overall integrity of its
loan portfolio. Management believes its credit approval and review processes are
comparable to those used by other regional and national banks.
Commercial Business Loans. At December 31, 1999 and 1998, the Bank's
commercial business loans amounted to $376.6 million and $212.8 million or 22.0%
and 15.3%, respectively, of the total loan portfolio. Management believes this
lending unit affords the Bank the greatest opportunity for market growth. At
June 30, 1997, the Bank had no commercial business loans. The portfolio increase
results from the Bank's creation in 1998 of a new corporate lending unit, which
had a December 31, 1999, 41 commercial lending officers and supporting staff.
The added lending officers have an average of 18 years experience in the banking
industry and most have strong community ties and banking relationships.
Local's corporate lending activities are generally directed towards small
to medium size Oklahoma companies with annual sales up to $100 million. Local's
corporate lending division makes both secured and unsecured loans, although the
majority of such lending is done on a secured basis. The average loan amount for
new commercial business loans ranges from $1 to $3 million. Such loans are
generally secured by the receivables, inventory, equipment, and/or general
corporate assets of the borrowers. These loans are originated on both a one year
line of credit basis and on a fixed-term basis
3
7
ranging from one to five years. Commercial business loans generally have annual
maturities and prime-based interest rates.
The Bank imposes an in-house lending limit which is below the statutory
lending limit. While the OCC statutory limit is 15% of an institution's
unimpaired capital and surplus (or with respect to Bank, approximately $31.6
million at December 31, 1999), management of the Bank generally restricts single
loans to $15 million in size, but may have exposure to any single borrower up to
the legal lending limit.
Commercial lending entails different and significant risks when compared to
traditional thrift residential lending. These loans typically involve large loan
balances to single borrowers and payment is typically dependent on the
successful operation of the project or the borrower's business. These loans are
also more likely to be adversely affected by unfavorable economic conditions.
The Bank attempts to minimize its risk exposure by imposing stringent
underwriting standards and continually monitoring the operation and physical
condition of the collateral.
Commercial Real Estate Loans. Under prior management, the Bank originated
and purchased commercial real estate loans secured by properties located
throughout the United States. While new management expects to continue the
origination and purchase of commercial real estate and multi-family residential
loans throughout the United States, it plans to emphasize the origination and
purchase of loans secured by multi-family and commercial real estate located
within the State of Oklahoma and surrounding states.
As of December 31, 1999 and 1998, commercial real estate loans (which
include multi-family residential loans) amounted to $806.8 million and $714.9
million or 47.1% and 51.4%, respectively, of the Bank's total loan portfolio.
The Bank originates loans directly and through a network of mortgage bankers and
correspondent banks throughout the country with whom the Bank has relationships.
All originations and purchases undergo a three-step underwriting and evaluation
process. First, an initial review of the loan is conducted by the originator to
determine conformity to guidelines and consistency with the Bank's lending
philosophy. An indication of pricing and terms may be issued in the case of
loans which have already been originated. Second, once the indication is
accepted by the borrower and a completed application submitted, a detailed
underwriting is conducted in which both the originator and the Bank's in-house
appraiser conduct an onsite inspection and analysis. Property valuations are
performed by the Bank's staff as well as by independent outside appraisers
approved by the Bank's Board of Directors. The Bank generally requires title,
hazard and, to the extent applicable, flood insurance on its security property.
Rent rates are analyzed and compared to market rents, reported occupancy is
checked against evidence onsite, environmental issues are identified and the
appropriate level of investigation is conducted and a final credit write-up is
prepared. Finally, the Bank's closing department reviews the totality of work,
including completeness of analysis and documentation, title searches, borrower
background checks, appraisal and environmental reports and other pertinent data.
Only after these three broad steps is a final approval and disbursement made.
The Bank originates both fixed-rate and adjustable-rate commercial real
estate loans. Fixed-rate commercial real estate loans generally have terms to
maturity of between five and ten years and amortize over a period of up to 30
years. Adjustable-rate commercial real estate loans have similar terms and
interest rates which generally adjust every six months, one-year, three years
and five years in accordance with a designated index (either the London
Interbank Offer Rate, the prime rate quoted in the Wall Street Journal or U.S.
Treasury rates).
Loan-to-value ratios on commercial real estate loans are generally limited
to a maximum of 80% for apartments and manufactured housing communities (loans
on real estate as distinguished from manufactured homes), 75% on mini-storage
units and multi-tenant warehouses, 70% for offices and 65% for hotels and retail
properties.
4
8
Single-Family Residential Real Estate Loans. At December 31, 1999 and 1998,
the Bank's single-family residential mortgage loan portfolio amounted to $362.4
million and $344.6 million or 21.1% and 24.8%, respectively, of the total loan
portfolio. All of the Bank's single-family residential mortgage loans are
secured by properties located in the State of Oklahoma. The majority of the
single-family residential loan portfolio consist of conforming loans (i.e., not
insured or guaranteed by a federal agency) with an average balance of below
$100,000 per loan. The single-family residential loan portfolio was originated
through a centralized residential loan origination center. The Bank intends to
sell virtually all of its new single family loan originations.
The loan-to-value ratio, maturity and other provisions of the loans made by
the Bank generally have reflected the policy of making less than the maximum
loan permissible under applicable regulations, in accordance with market
conditions and underwriting standards established by the Bank. The Bank's
lending policies on single-family residential mortgage loans generally limit the
maximum loan-to-value ratio to 95% of the lesser of the appraised value or
purchase price of the property and generally all single-family residential loans
in excess of an 80% loan-to-value ratio require private mortgage insurance.
The Bank offers fixed-rate and adjustable-rate single-family residential
loans with terms of 15 to 30 years. Such loans are amortized on a monthly basis
with principal and interest due each month and customarily include "due-on-sale"
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid.
Consumer Loans. Consumer loans totaled $161.3 million and $101.7 million or
9.4% and 7.3% of the total loan portfolio as of December 31, 1999 and 1998,
respectively, and consisted of home equity loans, deposit secured loans,
guaranteed student loans, automobile finance loans and property improvement and
personal loans. Local originates consumer loans bearing both fixed and
prime-based interest rates, primarily with terms of up to five years, other than
second mortgage loans which may have longer terms. Under the Bank's home equity
underwriting guidelines, loans are restricted to not more than $100,000, and the
loan-to-value may not exceed 100% at origination (although this is not typical
of most loans). Loans are originated directly through the branch network.
Management expects increases in the volume of consumer loans and has directed
advertising campaigns and new products toward this market segment, as well as
making internal changes at the branch level to increase customer responsiveness.
ASSET QUALITY
Loan Delinquencies. When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the 15th day after a
payment is due (30th day in the case of commercial loans), at which time a late
payment is assessed. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days (30 days in the case of commercial loans),
the loan and payment history are reviewed and efforts are made to collect the
loan. While the Bank generally prefers to work with borrowers to resolve such
problems, when it appears no other alternatives are available, legal action is
instituted.
Nonperforming Assets. All loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, the Bank does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection efforts
are deemed sufficient to ensure full recovery. Consumer loans generally are
written down when the loan becomes over 120 days delinquent. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the
5
9
loan. See Item 7 hereof, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Nonperforming Assets and Allowances for
Loan Losses".
Assets acquired through foreclosure and repossession are recorded at
estimated fair value, net of estimated selling costs at the date of foreclosure
or repossession. The values of assets acquired through foreclosure and
repossession are monitored by the Bank continually through sales and rental
activities, and by updated appraisals and other valuation methods when needed.
The allowance for losses on assets acquired through foreclosure and repossession
represents an amount which management believes will be adequate to absorb losses
from the disposition and/or revaluation of these assets. Additions or reversals
of the allowance for losses on assets acquired through foreclosure and
repossession are provided as an expense or a benefit, respectively, through
other expense in the accompanying Consolidated Statements of Operations. The
allowance for losses is charged or reduced as losses through sales or
revaluations are incurred.
Classified Assets. The Bank adheres to internal procedures and controls to
review and classify its assets. All assets are reviewed on a periodic basis. If
warranted, all or a portion of any assets exhibiting the characteristics of risk
associated with specific classifications are assigned those classifications. To
monitor loans and to establish loss reserves, the Bank classifies its assets
into the following five categories: pass, special mention, substandard,
doubtful, and loss. Under federal regulations, each insured institution must
classify its assets on a regular basis. In connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, classify them. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets, with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Special mention assets is a category
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to provide general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital up to certain amounts, while specific valuation allowances
for loan losses do not qualify as regulatory capital. Federal examiners may
disagree with an insured institution's classifications and amounts reserved.
Allowance for Loan Losses. The Bank has established valuation allowances
for estimated inherent losses in its loan portfolio by charging earnings for
estimated losses on loans, including the related accrued interest, using a
specific and percentage reserve method. The allowance for loan losses is
established and maintained through a periodic review and evaluation of various
elements which affect the loans' collectibility and any additional allowances
required result in provisions for loan losses.
The Bank's allowance for loan loss is assessed on a loan-by-loan basis for
all commercial loans and on a portfolio basis for residential and consumer loans
based on delinquency status. As described above, each individual commercial loan
is assigned a risk classification by the responsible loan manager. Depending
upon their risk classification, these loans are placed on a review cycle either
annually or quarterly. All loans with risk classifications of substandard or
doubtful are reviewed quarterly and all large loans are reviewed at least
annually by officers of the loan review department. These officers are
independent of the loan origination and underwriting process. During this
review, the appropriateness of the assigned risk classification is assessed,
giving consideration to numerous factors, including a review of individual
borrowers' financial status, credit standing, available collateral and other
relevant factors. On a quarterly basis, loss factors are applied to the basic
risk classifications to determine the allowance
6
10
for loan loss. The loss factors are established by management through
consideration of historical loss experience and regulatory guidance, as well as
other elements likely to cause estimated credit losses to differ from historical
losses. Although the risk classification and loss factor process set forth above
is used as a discipline in the establishment of the minimum allowance required,
it is not a substitute for sound judgment. Prevailing and anticipated economic
conditions, portfolio trends and other relevant factors are considered in
management's assessment of the overall adequacy of the allowance. These other
relevant factors include (i) change in lending policies and procedures,
including underwriting standards and collection, charge-off and recovery
practices, (ii) changes in the nature and volume of the portfolio, (iii) changes
in the experience, ability and depth of lending management and staff, (iv)
change in the quality of the Bank's loan review system and the degree of
oversight by the institution's board of directors, (v) the existence and effect
of any concentration of credit and changes in the level of such concentration
and (vi) the effect of external factors such as competition on the Bank's
current portfolio.
INVESTMENT ACTIVITIES
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and administered by the
Bank's Investment Committee. All transactions must be approved by the
Asset/Liability Committee and reported to the Board of Directors.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the U.S. Government, certain federal agency obligations, certain time
deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt securities
and other specified investments such as mortgage-backed and related securities.
The Bank invests in mortgage-backed and related securities, including
mortgage participation certificates, which are insured or guaranteed by U.S.
Government agencies and government sponsored enterprises. Mortgage-backed
securities (which also are known as mortgage participation certificates or
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus approximates
the term of the underlying mortgages.
The Bank's mortgage-backed and related securities include CMOs, which
include securities issued by entities which have qualified under the Internal
Revenue Code of 1986, as amended (the "Code"), as real estate mortgage
investment conduits.
In late 1996 and in anticipation of the proposed sale of the Company, prior
management began reducing its securities, particularly its CMO holdings, through
periodic bulk sale transactions. During the year ended June 30, 1997, the Bank
sold $743.9 million of securities and recognized $29.6 million of losses with
respect to such sales. At June 30, 1997, the Bank's securities portfolio
amounted to $1.4 billion ($1.1 billion of which consisted of COFI-based CMOs) or
53.1% of total assets. As of such date, the Bank had $32.0 million of unrealized
losses with respect to its securities portfolio (net of applicable tax
benefits).
7
11
After the Company's purchase in September 1997, new management determined
that its CMO portfolio was "other than temporarily impaired" and, in accordance
with generally accepted accounting principles ("GAAP"), wrote-down its remaining
CMO portfolio by $54.7 million during the six months ended December 31, 1997. In
addition, new management further reduced the Bank's securities portfolio,
particularly its COFI-based CMOs. See "Business--The Company--Strategy for
Growth" and Note 5 of the Notes to Consolidated Financial Statements in Item 8
hereof.
SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and advances from the Federal Home Loan Bank of
Topeka ("FHLB"). Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They may also be used on a longer-term basis for general business purposes.
Deposits. As of December 31, 1999, the Bank accepted deposits through its
51 branch offices. Deposits are solicited on a regular basis directly through
the Bank's customer base and through various advertising media within its
market. The Bank offers several savings account and checking account plans to
its customers. Among savings account plans, the Bank offers basic savings,
short-term and long-term certificates of deposit, a variable rate IRA/Keogh and
regular IRAs and Keoghs. The Bank offers checking account plans that range from
a no-fee, no-interest plan to a variable-fee, bundled product plan that includes
services or products such as personalized checks, ATM cards, overdraft
protection, no annual fee Visa/MasterCard membership, safe deposit box
discounts, cash management, lock box services and assistance with travelers
checks.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank, on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals and federal regulations.
8
12
As of December 31, 1999, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $278.1 million. The following table presents the maturity of these
time certificates of deposit at such date:
December 31, 1999
----------------------
(Dollars In Thousands)
3 months or less $ 143,722
Over 3 months through 6 months 28,682
Over 6 months through 12 months 61,146
Over 12 months 44,633
---------
$ 278,183
=========
Borrowings. The Bank is a member of the Federal Home Loan Bank System ("the
FHLB") and is authorized to apply for secured advances from the FHLB of Topeka.
The Bank uses advances from the FHLB to repay borrowings, meet deposit
withdrawals and expand its lending and short-term investment activities.
In a 1997 private placement, the Company issued $80.0 million of senior
notes which are due in September 2004 and which bear interest at the rate of
11.0%, payable semi-annually. Unamortized debt issuance costs of approximately
$2.9 million at December 31, 1999 were capitalized and are included in other
assets as of such date. For additional information, see Note 12 of the Notes to
Consolidated Financial Statements in Item 8 hereof.
Segments. The Company operates as one segment. It uses primarily the
consolidated financial statements presented herein for purposes of assessing
performance and making operating decisions about the Company. Local 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 Local. 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".
COMPETITION AND THE COMPANY
As reported by an independent statistical reporting service, Local is
currently the third largest Oklahoma-based bank in Oklahoma based on deposits at
November 18, 1999. Its deposits represent approximately five percent of the
state's deposit market share. Local's operating goal is to provide a broad range
of financial services with a strong emphasis on customer service.
Local has substantial competition in lending funds and attracting and
retaining deposits. The primary factors in competing for loans are the range and
quality of lending services offered, interest rates and loan origination fees.
In competing for commercial loans (a targeted growth segment), Local believes
that the personal relationships between lending officers and commercial
borrowers is a primary factor. Competition for the origination of real estate
loans normally comes from other commercial banks, savings and loans, mortgage
bankers, finance and insurance companies. The primary factors in competing for
deposits are the range and quality of financial services offered, the ability to
offer attractive rates and the availability of convenient locations. There is
direct competition for deposits from commercial banks, credit unions and savings
and loans. Additional significant competition for savings deposits comes from
9
13
other investment alternatives, such as money market funds, credit unions, and
corporate and government securities.
Local expects increased competition. For a variety of reasons including
legislative developments relating to interstate branching and the ownership of
financial institutions, the consolidation within the financial services industry
will likely continue. For Local, this trend means that the number of
locally-owned financial institutions will decrease and that the Bank will
increasingly compete against larger regional and national banks. While these
larger regional and national banks will likely attract the largest Oklahoma
businesses (sales over $100 million), Local believes that these large banks are
unable to provide the relationship-oriented, customer service that Local
provides its target customer base of small and medium-sized businesses,
professionals and other individuals. Although the Bank has been able to compete
effectively in its market areas to date, it can offer no assurance that the Bank
will continue to do so in the future, especially with the rapid changes
occurring within the financial services industry
REGULATION AND SUPERVISION
The following discussion sets forth the material elements of the regulatory
framework applicable to bank holding companies and their subsidiaries, and
provides certain specific information relevant to Local Financial. This
regulatory framework primarily is intended for the protection of depositors and
the deposit insurance funds that insure deposits of banks, and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to those provisions. A change in the statutes, regulations or
regulatory policies applicable to Local Financial or its subsidiaries may have a
material effect on its business.
General. As a bank holding company, Local Financial is subject to
regulation under the Bank Holding Company Act of 1956, as amended, and to
inspection, examination and supervision by the FRB. Under the Bank Holding
Company Act, bank holding companies generally may not acquire ownership or
control of any company, including a bank, without the prior approval of the FRB.
In addition, bank holding companies generally may engage, directly or
indirectly, only in banking and those other activities as are determined by the
FRB to be closely related to banking. Under newly adopted legislation, certain
bank holding companies can elect to become financial holding companies and
engage in broader financial activities. See "Recent Legislation" below.
Various governmental requirements, including Sections 23A and 23B of the
Federal Reserve Act, as amended, limit borrowings by Local Financial and its
non-bank subsidiaries from Local (its affiliate insured depository institution),
and also limit various other transactions between Local Financial and its
non-bank subsidiaries, on the one hand, and Local, on the other. Section 23A of
the Federal Reserve Act also generally requires that an insured depository
institution's loans to its non-bank affiliates be secured, and Section 23B of
the Federal Reserve Act generally requires that an insured depository
institution's transactions with its non-bank affiliates be on arm's-length
terms.
Local, as a bank, is subject to extensive supervision, examination and
regulation by Federal bank regulatory authorities. Local Financial and its
subsidiaries are also affected by the fiscal and monetary policies of the
Federal government and the FRB, and by various other governmental requirements
and regulations.
Liability for Local. Under current FRB policy, a bank holding company is
expected to act as a source of financial and managerial strength to a subsidiary
bank and to maintain resources adequate to support the subsidiary bank. This
support may be required at times when the bank holding company may not have the
resources to provide it. In addition, Section 55 of the National Bank Act
permits the OCC to order the pro rata assessment of stockholders of a national
bank whose capital has become impaired. If a stockholder fails, within three
months, to pay that assessment, the board of directors has a duty to sell the
stockholder's stock to cover the deficiency. In the event of a bank holding
company's bankruptcy, any
10
14
commitment by the bank holding company to a Federal bank regulatory agency to
maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and entitled to priority of payment.
Any depository institution insured by the FDIC can be held liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC in connection
with:
o the default of a commonly controlled FDIC-insured depository institution;
or
o any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default.
"Default" generally is defined as the appointment of a conservator or
receiver and "In Danger of Default" generally is defined as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. Also, if a default occurred with respect to a bank,
any capital loans to the bank from its parent holding company would be
subordinate in right of payment to payment of the bank's depositors and certain
of its other obligations.
Capital Requirements. Local Financial is subject to risk-based capital
requirements and guidelines imposed by the FRB, which are substantially similar
to the capital requirements and guidelines imposed by the OCC and the FDIC on
Local. For this purpose, a depository institution's or holding company's assets
and certain specified off-balance sheet commitments are assigned to four risk
categories, each weighted differently based on the level of credit risk that is
ascribed to those assets or commitments. In addition, risk-weighted assets are
adjusted for low-level recourse and market-risk equivalent assets. A depository
institution's or holding company's capital, in turn, is divided into three
tiers:
o core, or "Tier 1", capital, which consists primarily of stockholders'
equity less certain identifiable intangible assets and certain other
assets;
o supplementary, or "Tier 2", capital, which includes, among other items,
certain other debt and equity investments that do not qualify as Tier 1
capital; and
o market risk, or "Tier 3", capital, which includes qualifying unsecured
subordinated debt.
Like other bank holding companies, Local Financial currently is required to
maintain Tier 1 and "Total Capital" (the sum of Tier 1, Tier 2 and Tier 3
capital) equal to at least 4% and 8% of its total risk-weighted assets
(including certain off-balance-sheet items, such as unused lending commitments
and standby letters of credit), respectively. At December 31, 1999, Local
Financial met both requirements, with Tier 1 and Total Capital equal to 6.81%
and 8.07% of its total risk-weighted assets.
The FRB, the FDIC and the OCC have adopted rules to incorporate market and
interest rate risk components into their risk-based capital standards.
Amendments to the risk-based capital requirements, incorporating market risk,
became effective January 1, 1998. Under the new market-risk requirements,
capital will be allocated to support the amount of market risk related to a
financial institution's ongoing trading activities.
The FRB also requires bank holding companies to maintain a minimum
"Leverage Ratio", defined as Tier 1 capital to average adjusted total assets, of
3%, if the bank holding company has the highest regulatory rating and meets
certain other requirements, or of 3% plus an additional cushion of at least 1%
to 2% if the bank holding company does not meet these requirements. At December
31, 1999, Local Financial's leverage ratio was 4.71%, which exceeded the minimum
leverage ratio to which it was subject.
The FRB may set capital requirements higher than the minimums noted above
for holding companies whose circumstances warrant it. For example, bank holding
companies experiencing or anticipating significant growth may be expected to
maintain strong capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets. Furthermore, the FRB
11
15
has indicated that it will consider a "Tangible Tier 1 Capital Leverage Ratio",
which would deduct all intangibles, and other indicia of capital strength in
evaluating proposals for expansion or new activities.
The Bank is subject to similar risk-based and leverage capital requirements
adopted by the OCC. Local was in compliance with the applicable minimum capital
requirements as of December 31, 1999.
Failure to meet capital requirements could subject Local to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business, which are described
immediately below.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions - well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
- - and requires Federal bank regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements based on these categories. FDICIA imposes progressively
more restrictive constraints on operations, management and capital
distributions, depending on the category in which an institution is classified.
Unless a bank is well-capitalized, it is subject to restrictions on its ability
to offer brokered deposits and on certain other aspects of its operations. An
undercapitalized bank must develop a capital restoration plan and its parent
bank holding company must guarantee the bank's compliance with the plan up to
the lesser of 5% of the bank's assets at the time it became undercapitalized and
the amount needed to comply with the plan.
As of December 31, 1999, Local was well-capitalized, based on the prompt
corrective action ratios and guidelines described above. It should be noted,
however, that a bank's capital category is determined solely for the purpose of
applying the OCC's, or the FDIC's, prompt corrective action regulations and that
the capital category may not constitute an accurate representation of the bank's
overall financial condition or prospects.
Dividend Restrictions. Federal and state statutory provisions limit the
amount of dividends that Local can pay to Local Financial without regulatory
approval. Dividend payments by national banks are limited to the lesser of:
o the level of undivided profits; and
o absent regulatory approval, an amount not in excess of net income for the
current year combined with retained net income for the preceding two years.
At December 31, 1999, approximately $44.0 million of the total
stockholders' equity of Local was available for payment of dividends to Local
Financial, without regulatory approval.
In addition, Federal bank regulatory authorities have authority to prohibit
Local from engaging in an unsafe or unsound practice in conducting their
business. The payment of dividends, depending upon Local's financial condition
at the time of the proposed dividend payment, could be deemed to constitute an
unsafe or unsound practice. Local's ability to pay dividends in the future is
currently, and could be further, influenced by bank regulatory policies and
capital guidelines.
Deposit Insurance Assessments. The deposits of Local are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund (the "BIF"), which is
administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each insured bank in one of nine risk categories based on (1)
the bank's capitalization and (2) supervisory evaluations provided to the FDIC
by the institution's primary Federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it is
classified by the FDIC.
Effective January 1, 1997, the annual insurance premiums on bank deposits
insured by the BIF vary between $0.00 per $100 of deposits for banks classified
in the highest capital and supervisory
12
16
evaluation categories to $0.27 per $100 of deposits for banks classified in the
lowest capital and supervisory evaluation categories.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF (in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits) to pay for the cost of Financing Corporation,
"FICO", funding. The FDIC established the FICO assessment rates effective
October 1, 1999, at $0.01184 per $100 annually for BIF-assessable deposits. The
FICO assessments do not vary depending upon a depository institution's
capitalization or supervisory evaluations.
Interstate Banking and Branching. Under the Riegle-Neal Interstate Banking
and Branching Efficiency Act, the "Interstate Act", subject to certain
concentration limits and other requirements:
o bank holding companies such as Local Financial, are permitted to acquire
banks and bank holding companies located in any state;
o any bank that is a subsidiary of a bank holding company is permitted to
receive deposits, renew time deposits, close loans, service loans and
receive loan payments as an agent for any other bank subsidiary of that
bank holding company; and
o banks are permitted to acquire branch offices outside their home states by
merging with out-of-state banks, purchasing branches in other states and
establishing de novo branch offices in other states. The ability of banks
to acquire branch offices through purchase or opening of other branches is
contingent, however, on the host state having adopted legislation "opting
in" to those provisions of the Interstate Act. In addition, the ability of
a bank to merge with a bank located in another state is contingent on the
host state not having adopted legislation "opting out" of that provision of
the Interstate Act.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company, unless the
FRB has been notified and has not objected to the transaction. Under a
rebuttable presumption established by the FRB, the acquisition of 10% or more of
a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as Local Financial, would,
under the circumstances set forth in the presumption, constitute acquisition of
control of the bank holding company.
In addition, a company is required to obtain the approval of the FRB under
the Bank Holding Company Act before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of any class of outstanding common stock
of a bank holding company, or otherwise obtaining control or a "controlling
influence" over that bank holding company.
Recent Legislation. On November 12, 1999, President Clinton signed into law
legislation that allows bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Gramm-Leach-Bliley Financial Modernization Act
of 1999 (the "GLBA"), a bank holding company that elects to become a financial
holding company may engage in any activity that the FRB, in consultation with
the Secretary of the Treasury, determines by regulation or order is (1)
financial in nature, (2) incidental to any such financial activity, or (3)
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. The GLBA makes significant changes in U.S. banking law,
principally by repealing the restrictive provisions of the 1933 Glass-Steagall
Act. The GLBA specifies certain activities that are deemed to be financial in
nature, including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment, or economic advisory services; underwriting, dealing in
or making a market in, securities; and any activity currently permitted for bank
holding companies by the FRB under section 4(c)(8) of the Bank Holding Company
Act. The GLBA does not authorize banks or their affiliates to engage in
commercial activities that are not financial in
13
17
nature. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are well-capitalized, well-managed and have at least a satisfactory rating under
the Community Reinvestment Act.
National banks are also authorized by the GLBA to engage, through
"financial subsidiaries", in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (1) insurance underwriting,
(2) real estate development or real estate investment activities (unless
otherwise permitted by law), (3) insurance company portfolio investments and (4)
merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from the bank's capital outstanding investments in financial
subsidiaries). The GLBA provides that state banks may invest in financial
subsidiaries (assuming they have the requisite investment authority under
applicable state law) subject to the same conditions that apply to national bank
investments in financial subsidiaries.
The GLBA also contains a number of other provisions that will affect Local
Financial's operations and the operations of all financial institutions. One of
the new provisions relates to the financial privacy of consumers, authorizing
federal banking regulators to adopt rules that will limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. These limitations will likely require more
disclosure to consumers, and in some circumstances will require consent by the
consumer before information is allowed to be provided to a third party.
The GLBA becomes effective on March 11, 2000. In January 2000, the FRB and
the OCC issued, respectively, an interim and a proposed rule governing the
application process for becoming a financial holding company or a financial
subsidiary. These agencies are expected to adopt additional regulations this
year for implementation of the GLBA. At this time, Local Financial is unable to
predict the impact the GLBA may have upon its or Local's financial condition or
results of operations.
Future Legislation. Changes in U.S. or state laws and regulations relating
to banks and other financial institutions can affect the operating environment
of bank holding companies and their subsidiaries in substantial and
unpredictable ways. Local Financial cannot accurately predict whether
legislation will ultimately be enacted, and, if enacted, the ultimate effect
that it, or implementing regulations, would have upon Local Financial's
financial condition or results of operations.
TAXATION--FEDERAL
General. The Company and its subsidiaries, including the Bank, are subject
to federal income taxation under the Code in the same general manner as other
corporations with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank. The Company's and its subsidiaries' consolidated federal income tax
returns have been audited or closed without audit by the Internal Revenue
Service ("IRS") through tax year 1993.
Method of Accounting. For federal income tax purposes, the Company and its
subsidiaries, including the Bank, currently report their income and expenses on
the accrual method of accounting and use a tax year ending June 30 for filing
their consolidated federal income tax returns.
Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the
"1996 Act"), the Bank was permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions could, within specified
formula limits, be deducted in arriving at the Bank's taxable income. As a
result of the 1996 Act, the Bank must use the specific chargeoff method in
computing its
14
18
bad debt deduction beginning with its 1996 Federal tax return. In addition, the
1996 Act requires the recapture (over a six year period) of the excess of tax
bad debt reserves at June 30, 1996 over those established as of June 30, 1988.
The amount of the Bank's reserves subject to recapture as of December 31, 1999
amounted to approximately $7.3 million.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to July 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
Federal legislation eliminated these thrift related recapture rules. However,
under current law, pre-1988 reserves remain subject to recapture should the Bank
make certain non-dividend distributions or cease to maintain a bank charter.
At December 31, 1999, the Bank's total federal pre-1988 reserves was
approximately $14.7 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. At December
31, 1999, the Company and its subsidiaries had $3.1 million of alternative
minimum tax credits available for carryover.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from its subsidiaries, including the Bank, as
a member of the same affiliated group of corporations. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
TAXATION--STATE AND LOCAL
Oklahoma State Taxation. The Company and its subsidiaries, including the
Bank, are subject to an annual Oklahoma corporate income tax of 6% of their
federal taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition to the Oklahoma corporate income tax, the Company and
its subsidiaries are subject to an annual Oklahoma franchise tax, which is
imposed at a rate of 0.125% on the capital used, invested or employed in
Oklahoma, with a maximum franchise tax equal to $20,000 per annum. At December
31, 1999, the Company had approximately $145.2 million of net operating loss
carryforwards available for Oklahoma state income tax purposes. The state net
operating loss carryforwards expire in varying amounts between 2006 and 2013.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The Delaware franchise tax is based on the Company's
authorized capital stock or on its assumed par and no-par capital, whichever
yields a lower result. Under the authorized capital method, each share is taxed
at a graduated rate based on the number of authorized shares with a maximum
aggregate tax of $150,000 per year. Under the assumed par value capital method,
Delaware taxes each $1,000,000 of assumed par-capital at the rate of $200.
PERSONNEL
As of December 31, 1999, the Company (on a consolidated basis) has 716
full-time employees and 121 part-time employees. The employees are not
represented by a collective bargaining agreement and the Company believes that
it has good relations with its employees.
15
19
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K which are
not statements of historical fact constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act (the "Act"),
including, without limitation, the statements specifically identified as
forward-looking statements within this document. In addition, certain statements
in future filings by the Company with the SEC, in press releases, and in oral
and written statements made by or with the approval of the Company which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Act. Examples of forward-looking statements include, but are not
limited to: (i) projections of revenues, income or loss, earnings or loss per
share, the payment or nonpayment of dividends, capital structure and other
financial items, (ii) statements of plans and objectives of the Company or its
management or Board of Directors, including those relating to products or
services, (iii) statements of future economic performance and (iv) statements of
assumptions underlying such statements. Words such as "believes," "anticipates,"
"expects," "intends," "targeted" and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements.
In particular, this Annual Report on Form 10-K contains forward-looking
statements which include but are not limited to: management's efforts to refocus
the Company's operations and implement new initiatives; the adequacy of the
allowance for credit losses; interest rate risk management; and the effect of
legal proceedings on the Company's consolidated financial position, liquidity or
results of operations.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the FRB; (iii) inflation,
interest rate, market and monetary fluctuations; (iv) the timely development of
and acceptance of new products and services and perceived overall value of these
products and services by users; (v) changes in consumer spending, borrowing and
savings habits; (vi) technological changes (including Year 2000 data systems
compliance issues); (vii) acquisitions and integration of acquired businesses;
(viii) the ability to increase market share and control expenses; (ix) the
effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which the Company and
its subsidiaries must comply; (x) the effect of changes in accounting policies
and practices, as may be adopted by the regulatory agencies as well as the
Financial Accounting Standards Board; (xi) changes in the Company's
organization, compensation and benefit plans; (xii) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; and (xiii)
the success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
16
20
ITEM 2. PROPERTIES
OFFICES AND OTHER MATERIAL PROPERTIES
The following table provides information on the Company's consolidated
branch network as of December 31, 1999:
BRANCH OFFICE INFORMATION Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1999 December 31, 1999
------------- ----------------- -------------- ---------------- ------------------
(Dollars In Thousands)
OKLAHOMA CITY METRO:
Bethany Office Owned -- 2,650 $ 46,414 $ 71
7723 N.W. 23rd Street
Bethany, OK 73008
Corporate Headquarters Owned -- 70,000 178,815 5,633
3601 N.W. 63rd
Oklahoma City, OK 73116
Crown Heights Office Owned -- 1,800 22,260 150
4716 North Western
Oklahoma City, OK 73118
Downtown Office Leased $1,358/mo. 1,164 15,324 3
100 West Park Avenue 5 Years
Oklahoma City, OK 73102 Expires 01/31/04
Edmond Office Leased $1,530/mo. 2,100 33,469 77
301 South Bryant 10 Years
Edmond, OK 73034 Expires 01/31/03
Santa Fe Office Owned -- 3,600 4,464 1,005
412 S. Santa Fe
Edmond, OK 73003
May Avenue Office Owned -- 14,090 72,483 345
5701 North May Avenue
Oklahoma City, OK 73112
Midwest City Office Owned -- 5,500 88,752 266
414 North Air Depot
Midwest City, OK 73110
Moore Office Owned -- 1,500 21,780 61
513 Northeast 12th Street
Moore, OK 73160
Norman Office Leased Rent-See Note (1) 6,000 58,591 615
2403 West Main Street 10 Years
Norman, OK 73069-6499 Expires 03/31/05
Penn South Office Owned -- 2,650 49,831 50
8700 South Pennsylvania
Oklahoma City, OK 73159
Portland Office Owned -- 1,800 40,454 206
1924 North Portland
Oklahoma City, OK 73107
Quail Creek Office Owned -- 3,250 36,102 599
12241 North May Avenue
Oklahoma City, OK 73120
17
21
BRANCH OFFICE INFORMATION Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1999 December 31, 1999
------------- ----------------- -------------- ---------------- ---------------------
(Dollars In Thousands)
Springbrook Office Owned -- 5,200 $ 43,946 $ 302
6233 N.W. Expressway
Oklahoma City, OK 73132
Yukon Office Leased $1,625/mo. 1,500 20,329 0
1203 Cornwell Note (2)
Yukon, OK 73099 5 Years
Expires 10/01/04
TULSA:
Downtown Office Leased $2,418/mo 3,400 14,146 38
111 West 5th Street Note (3)
Tulsa, OK 74103 5 Years
Expires 01/31/04
Harvard Office Leased $2,292/mo 2,500 41,031 64
3332 East 51st Street 5 Years
Tulsa, OK 74135 Expires 05/31/03
Hudson Office Leased $5,500/mo. 3,000 23,071 13
5801 East 41st Street Note (4)
Tulsa, OK 74135 5 Years
Expires 06/30/04
Lewis Office Owned -- 14,000 23,146 592
2250 East 73rd Street
Tulsa, OK 74136
Memorial Office Leased $3,430/mo. 3,000 26,425 32
8202 East 71st Street 5 Years
Tulsa, OK 74133 Expires 05/31/02
Yale Office Leased $1,300/mo. 2,400 58,411 0
2118 South Yale Note (5)
Tulsa, OK 74114 5 Years
Expires 02/28/00
OTHER LOCATIONS:
Ardmore Office Owned -- 7,000 40,277 123
313 W. Broadway
Ardmore, OK 73401
Broken Arrow Office Leased $2,020/mo. 3,424 25,051 4
3359 South Elm Place 3 Years
Broken Arrow, OK 74012 Expires 05/31/04
Chandler Office Owned -- 1,600 16,828 134
1804 East First Street
Chandler, OK 74834
Chickasha Office Owned -- 3,143 41,265 96
628 Grand Avenue
Chickasha, OK 73018
Claremore Office Owned -- 15,100 50,443 789
1050 Lynn Riggs Blvd.
Claremore, OK 74017
Clinton Office Owned -- 2,000 34,451 45
1002 West Frisco
Clinton, OK 73601
18
22
BRANCH OFFICE INFORMATION Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1999 December 31, 1999
------------- ----------------- -------------- ---------------- ---------------------
(Dollars In Thousands)
Commerce Office Owned -- 4,608 $ 21,664 $ 681
101 N. Mickey Mantle Blvd.
Commerce, OK 74339
Duncan Downtown Office Owned -- 2,500 44,168 86
1006 West Main Street
Duncan, OK 73533
Duncan North Office Owned -- 3,000 26,036 74
2210 North Highway 81
Duncan, OK 73533
Elk City Office Owned -- 10,300 51,458 207
200 Broadway
Elk City, OK 73644
Grove Office Owned -- 8,300 29,693 1,314
100 East Third
Grove, OK 74344
Guthrie Office Owned -- 6,000 35,140 1,094
120 N. Division Street
Guthrie, OK 73044
Lawton Downtown Office Leased $5,656/mo. 5,200 79,994 0
1 S. W. 11th Street 10 Years
Lawton, OK 73501 Expires 03/31/03
Lawton Mall Office Leased $2,700/mo. 3,400 19,039 86
#10 Central Mall 10 Years
Lawton, OK 73501 Expires 06/30/04
Lawton Financial Centre Owned -- 25,900 44,222 3,928
6425 NW Cache Road
Lawton, OK 73505
Lawton Lee Blvd. Owned -- 12,000 67,512 1,183
1420 West Lee Blvd.
Lawton, OK 73501
Lawton Cache Road Office Leased $2,500/mo. 3,000 14,181 111
2601 Cache Road 25 Years
Lawton, OK 73505 Expires 05/31/04
Lindsay Office Owned -- 1,200 18,708 16
420 South Main
Lindsay, OK 73052
Miami Office Owned -- 7,410 33,640 864
123 East Central
Miami, OK 74354
Monkey Island Office Leased $2,400/mo. 3,600 2,562 84
56371 E. Hwy 125 5 Years
Monkey Island, OK 74331 Expires: 06/01/04
Muskogee Office Leased $3,200/mo. 5,000 30,239 19
2401 East Chandler 5 Years
Muskogee, OK 74403 Expires 07/31/03
Owasso Office Owned -- 1,100 16,401 81
201 East 2nd Street
Owasso, OK 74055
19
23
BRANCH OFFICE INFORMATION Net Book Value of
Property and
Leasehold
Ownership Size Deposits as of Improvements at
Status Lease Terms (Square Feet) 12/31/1999 December 31, 1999
------------- ----------------- -------------- ---------------- ---------------------
(Dollars In Thousands)
Pauls Valley Office Owned -- 2,300 $ 22,982 $ 99
700 West Grant
Pauls Valley, OK 73075
Purcell Office Owned -- 3,000 16,491 677
422 West Main
Purcell, OK 73080
Sand Springs Office Leased $2,167/mo. 3,127 40,620 26
800 East Charles Page Blvd. 10 Years
Sand Springs, OK 74063 Expires 04/30/03
Springs Village Leased $1,369/mo. 1,642 14,658 2
3973 South Highway 97 5 Years
Sand Springs, OK 74063 Expires 05/31/04
Shawnee Office Owned -- 2,650 33,061 100
2512 North Harrison
Shawnee, OK 74801
Sulphur Office Owned -- 3,000 17,541 69
2009 West Broadway
Sulphur, OK 73086
Sapulpa Office Owned -- 2,255 25,588 451
911 East Taft
Sapulpa, OK 74066
Weatherford Office Owned -- 3,000 15,183 89
109 East Franklin
Weatherford, OK 73096
- -------------------------
(1) Monthly rent derived as follows: $4,000 (to 03/31/00) and $4,200 (04/01/00
to 03/31/05).
(2) Monthly rent derived as follows: $1,625 (to 10/01/02) and $1,750 (10/02/02
to 10/01/04).
(3) Monthly rent derived as follows: $2,418 (from 01/01/99 to 06/30/00); $2,556
(from 07/01/00 to 12/31/02) and $2,695 (from 01/01/03 to 01/31/04).
(4) Monthly rent derived as follows: $5,500 (to 06/30/02); $6,000 (07/01/02 to
06/30/04).
(5) New lease in progress.
ITEM 3. LEGAL PROCEEDINGS
The Company has one outstanding significant legal proceeding. The pending
case is between the Bank and the FDIC and concerns certain claims and
liabilities arising out of an assistance agreement (the "Assistance Agreement")
which was entered into by the Bank in conjunction with its acquisition of a
predecessor institution during 1989 (the "FDIC Case"). Recently, the Company has
settled another significant legal proceeding which had been pending between the
Company and the two individuals who were formerly the sole stockholders of the
Company (the "Selling Stockholders"), with regard to certain claims, liabilities
and disputes which had arisen between the Company and the Selling Stockholders
with regard to the terms and conditions of the Redemption Agreement entered into
in September 1997 ("Redemption Agreement") in connection with the redemption
(the "Redemption") of all of their shares of the Company's common stock (the
"Redemption Agreement Case"). The Redemption Agreement Case
20
24
was completely settled and dismissed by the agreement of the Selling
Stockholders and the Company pursuant to a settlement agreement executed on
August 26, 1999, effective as of May 27, 1999 ("Settlement Agreement"), the
essential terms of which are briefly described below.
FDIC CASE. In the FDIC Case, the Bank filed a lawsuit in 1996 against the
United States in which it asserted that the United States had breached the terms
of the Assistance Agreement and other related agreements by, among other things,
changing certain federal income tax laws that had provided financial assistance
and incentives to the Bank in connection with the Assistance Agreement (and
possibly certain related agreements). In the lawsuit, the Bank seeks to recover
for the loss of these tax benefits and for certain other claims (the "FDIC
Claim").
Under the Assistance Agreement, the FDIC is entitled to receive payments
from the Bank for certain portions of tax benefits attributable to the acquired
net operating loss carry forwards and other tax benefits which were realized by
the Bank from certain items for which assistance was provided to the Bank under
the Assistance Agreement. The FDIC has filed a counterclaim against the Bank in
the FDIC Case (the "FDIC Counterclaim") claiming that the Bank owes the FDIC a
substantial amount of money with regard to the tax benefits realized by the Bank
for which it has not paid the FDIC pursuant to the terms of the Assistance
Agreement (the "Tax Benefits Payment"). Management, after consultation with
legal counsel and based on available proceedings to date, has determined that
the Bank will have significant liability to the FDIC with respect to the FDIC
Counterclaim. At December 31, 1998, management estimated this liability to be
approximately $13.0 million, which has been reserved and is included in other
liabilities in the Consolidated Statements of Financial Condition as of December
31, 1998 (the "FDIC Reserve"). As an integral part of the Redemption Agreement,
the Company was required by the Selling Stockholders to maintain the FDIC
Reserve in that amount.
Management believes that as of December 31, 1999 the FDIC's estimate of
this liability was approximately $23.0 million. Pursuant to the Redemption
Agreement, as reaffirmed and amplified in the Settlement Agreement, the Selling
Stockholders have agreed to indemnify the Bank with respect to the Tax Benefits
Payment under the Assistance Agreement by agreeing to be individually liable for
and to fully pay any and all amounts for which the Bank is ultimately found to
be liable to the FDIC on the FDIC Counterclaim for the Tax Benefits Payment
which are in excess of the FDIC Reserve. In this regard, the Company deposited
$10.0 million of the redemption price to be paid to the Selling Stockholders for
the Redemption of their stock into an escrow account to be available for such
payment by the Selling Stockholders of the FDIC Counterclaim (the "Escrow"), if
necessary. All attorney fees and costs of handling the FDIC Case which are
incurred by the Company's counsel in the FDIC Case are also to be paid out of
the Escrow.
SETTLEMENT OF REDEMPTION AGREEMENT CASE. Under the terms of the Settlement
Agreement, the Selling Stockholders consented to the Company reducing the FDIC
Reserve on the Company's books to the sum of $7.7 million, which is included in
other liabilities in the Consolidated Statements of Financial Condition as of
December 31, 1999, while confirming their individual liability for and
obligation to fully pay any amounts which the Company is ultimately required to
pay to the FDIC on the FDIC Counterclaim to the extent such amount exceeds the
FDIC Reserve and the Escrow. Since the Selling Stockholders could have liability
on the FDIC Counterclaim for the Tax Benefits Payment, the Redemption Agreement,
as affirmed by the Settlement Agreement, requires that all actions taken by the
Company with regard to the litigation of the FDIC Case be consented to by the
Selling Stockholders and that any settlement of the FDIC Case and/or of the FDIC
Counterclaim be mutually agreed to by the Company and the Selling Stockholders.
However, the Settlement Agreement also authorizes the Selling Stockholders to
unilaterally settle the FDIC Case and the FDIC Counterclaim provided they pay
the Company, in cash, the full amount of any sum which would be owing to the
FDIC on the FDIC Counterclaim in excess of the FDIC Reserve and the Escrow
before the Company would become bound by any such settlement. Pursuant to the
Settlement Agreement a comprehensive settlement offer was communicated by the
Company's counsel to the FDIC in early September 1999. The FDIC recently
21
25
responded to that settlement offer requesting more information from the
Company's counsel. The Selling Stockholders and the Company will continue to
actively pursue a complete settlement of the FDIC Case with the FDIC.
The Settlement Agreement completely resolved all issues and disputes
between the Company and the Selling Stockholders with regard to the Redemption
Agreement. The Selling Stockholders and the Company mutually released and
discharged each other of any and all claims with regard to the Redemption, or
otherwise, except for the continuing respective rights, duties and obligations
of the Selling Stockholders and the Company with regard to the FDIC Case which
are provided for in the Redemption Agreement, as reaffirmed and supplemented by
the terms of the Settlement Agreement. As a consequence of the settlement of the
Redemption Agreement Case, the Company's stockholders' equity at December 31,
1999 was reduced in the sum of $1.8 million by an increase to the amount shown
under treasury stock on the Company's consolidated statement of financial
condition in recognition of the agreed adjustments to the claims, liabilities
and disputes which had arisen.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the periods
covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Local Financial Corporation's common stock (symbol LFIN) is quoted on the
Nasdaq National Market System. The following table sets forth the range of high
and low closing prices for the period indicated:
Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------------------- ----------------------------------
High Low High Low
----------------- --------------- ----------------- ----------------
First quarter $ 10.13 $ 8.50 $ -- $ --
Second quarter 10.19 9.25 13.75 12.63
Third quarter 10.88 8.88 13.06 8.50
Fourth quarter 10.38 8.13 9.56 6.94
Local Financial common stock began trading on April 22, 1998. The Board of
Directors of the Company does not presently intend to implement a policy of
paying dividends on the common stock. Rather the Company expects to retain
earnings to increase capital.
22
26
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by, the
Consolidated Financial Statements of the Company, including the related Notes,
included in Item 8 herein.
December 31, June 30,
---------------------------------------------- ----------------------------------------
1999 1998 1997 1997 1996 1995
-------------- -------------- -------------- ------------ ------------ ------------
BALANCE SHEET AND OTHER DATA:
Total assets $ 2,381,607 $ 2,128,979 $ 1,881,365 $ 2,625,181 $ 3,278,511 $ 3,264,850
Cash and due from banks 48,122 27,180 34,152 15,904 13,640 14,497
Loans receivable, net 1,685,550 1,362,272 953,470 1,013,824 1,018,135 804,610
Securities available for sale 529,230 570,964 518,107 985,565 1,741,725 361,402
Securities and other investments
held to maturity -- -- -- 408,207 392,324 1,983,756
Equity securities available for sale -- -- -- -- 11,604 12,287
Nonperforming assets(1) 7,536 4,270 921 12,570 16,185 10,889
Deposits 1,848,340 1,668,074 1,602,533 1,644,356 1,602,460 1,577,821
Securities sold under agreements to
repurchase -- -- -- 310,801 1,079,194 779,626
Promissory note payable -- -- -- 7,010 14,020 21,030
Senior notes payable 75,250 80,000 80,000 -- -- --
FHLB advances 302,035 220,033 80,136 531,161 439,011 703,202
Total liabilities 2,253,313 2,010,173 1,798,740 2,522,552 3,170,452 3,121,631
Stockholders' equity 128,294 118,806 82,625 102,629 108,059 143,219
Number of full service customer
facilities 51 50 41 41 41 41
Approximate number of full-time
equivalent employees 777 694 525 546 536 471
Six Months
Years Ended December 31, Ended December 31, Years Ended June 30,
--------------------------------- ----------------------- -----------------------------------
1999 1998 1997 1997 1996 1997 1996 1995
--------- ----------- ---------- ---------- ---------- ----------- ----------- ----------
(unaudited) (unaudited)
OPERATIONS DATA:
Interest and dividend income $ 168,298 $ 147,204 $ 188,768 $ 85,204 $ 119,100 $ 222,664 $ 236,156 $ 214,558
Interest expense 94,787 92,438 137,022 59,823 92,562 169,761 187,488 162,590
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest and dividend income 73,511 54,766 51,746 25,381 26,538 52,903 48,668 51,968
Provision for loan losses (2,000) (1,450) (44,272)(2) (25,578)(2) (9,734) (28,428)(2) (5,117) (1,157)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income(loss) after
provision for loan losses 71,511 53,316 7,474 (197) 16,804 24,475 43,551 50,811
Noninterest income (loss) 18,542 14,782 (126,458)(3) (107,149)(3) 2,185 (17,124)(3) 10,316 16,632
Noninterest expense 55,177 39,407 42,569 22,685 29,372 49,256 35,427 46,460
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes
and extraordinary item 34,876 28,691 (161,553) (130,031) (10,383) (41,905) 18,440 20,983
Provision (benefit) for income
taxes 12,627 10,254 (52,362) (44,075) (3,573) (11,860) 4,872 6,568
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item 22,249 18,437 (109,191) (85,956) (6,810) (30,045) 13,568 14,415
Extraordinary item, net of tax (257) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 21,992 $ 18,437 $(109,191) $ (85,956) $ (6,810) $ (30,045) $ 13,568 $ 14,415
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) per share:
Income (loss) before
extraordinary item:
Basic (4) $ 1.08 $ 0.90 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94
========= ========= ========= ========= ========= ========= ========= =========
Diluted (4) $ 1.08 $ 0.89 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss):
Basic (4) $ 1.07 $ 0.90 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94
========= ========= ========= ========= ========= ========= ========= =========
Diluted (4) $ 1.07 $ 0.89 $ (6.52) $ (4.76) $ (0.44) $ (1.95) $ 0.88 $ 0.94
========= ========= ========= ========= ========= ========= ========= =========
23
27
At or For the Years Ended At or For the Six Months
December 31, Ended December 31, At or For the Years Ended June 30,
---------------------------------- ------------------------ ----------------------------------
1999 1998 1997 1997 1996 1997 1996 1995
----------- ---------- ----------- ---------- ------------- ---------- ---------- ------------
(unaudited) (unaudited)
PERFORMANCE RATIOS(5):
Return on assets 0.99% 0.93% (4.35)% (3.84)% (0.21)% (0.98)% 0.41% 0.43%
Return on common equity 17.65 17.73 (117.17) (101.45) (6.35) (28.77) 10.00 10.59
Dividend payout ratio(6) - - - - - - - -
Net interest spread(7) 3.02 2.57 1.91 2.13 1.45 1.57 1.36 1.32
Net interest margin(8) 3.46 2.91 2.13 2.34 1.62 1.78 1.52 1.59
Noninterest expense to
average assets(9) 2.41 1.90 1.64 0.99 0.87 1.56 1.04 1.36
Efficiency ratio(10)(11) 58.76 54.61 N/A N/A 56.14 56.14 57.07 72.75
CAPITAL RATIOS OF THE Company (12):
Leverage capital 4.71 N/A N/A N/A N/A N/A N/A N/A
Core capital 6.81 N/A N/A N/A N/A N/A N/A N/A
Total capital 8.07 N/A N/A N/A N/A N/A N/A N/A
CAPITAL RATIOS OF THE BANK (12):
Leverage or tangible 7.93 7.61 6.89 6.89 4.99 5.17 4.94 4.89
Core 11.48 7.63 6.98 6.98 5.07 5.25 5.04 5.03
Total or risk-based 12.74 13.08 14.14 14.14 12.59 12.34 12.71 13.22
ASSET QUALITY RATIOS:
Nonperforming assets to total
assets at end of period(1) 0.32 0.20 0.05 0.05 0.93 0.48 0.49 0.33
Nonperforming loans to total
loans at end of period(1) 0.40 0.26 0.06 0.06 0.82 0.38 0.51 0.38
Allowance for loan losses to
total loans at end of period 1.65 2.00 2.09 2.09 0.50 1.10 0.31 0.56
Allowance for loan losses to
nonperforming loans at
end of period(1) 4.15x 7.80x 32.72x 32.72x 0.56x 2.91x 0.60x 1.48x
- -------------------------
(1) Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets consist
of nonperforming loans, real estate acquired through foreclosure or
deed-in-lieu thereof and repossessions, net of writedowns and reserves.
(2) Primarily reflects provisions established by management to cover realized
and inherent losses with respect to the Company's portfolio of indirect
automobile receivables which were sold as of December 31, 1997. See
"Management's Discussion and Analysis of Financial condition and Results of
Operations--Results of Operations--Provision for Loan Losses" in Item 7
hereof.
(3) Primarily reflects losses incurred by the Company relating to the
liquidation or disposition of certain hedging contracts and the disposition
of investment securities and adjustments to reflect market values. See
"Business--The Company--Strategy for Growth" in Item 1 hereof and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" in Item 7 hereof.
(4) Net income (loss) per share and dividends per share are based upon the
weighted average number of shares outstanding during the period. As a
result of the private placement and the redemption transactions described
under "Business--The Company--New Management Initiatives", the weighted
average number of shares used in the computation of income (loss) per share
and dividends per share is 15,400,000 for each of the years in the
three-year period ended June 30, 1997 (based on an equivalent number of
shares for the 60 shares outstanding prior to the recapitalization). For
the years ended December 31, 1999, 1998 and 1997, the weighted average
number of shares are 20,537,209, 20,431,698 and 16,754,795, respectively.
For the six months ended December 31, 1997, the weighted average number of
shares is 18,066,000. See also Note 1 of the Notes to Consolidated
Financial Statements in Item 5 hereof.
(5) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods presented. All ratios are annualized
where appropriate.
(6) The dividend payout ratio represents dividends declared per share divided
by net income per share.
(7) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(8) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(9) Noninterest expense excludes the amortization of intangibles.
(10) Represents noninterest expense (exclusive of amortization of intangibles)
divided by the aggregate of net interest income before provision for loan
losses and noninterest income (exclusive of gains and losses on sales of
assets).
(11) For the year ended June 30, 1997 and the six months ended December 31,
1996, the efficiency ratio does not reflect the $10.3 million one-time
special assessment (before applicable tax benefits) to recapitalize the
SAIF which was accrued during the quarter ended September 30, 1996. See
"Business--Regulation" in Item 1 hereof.
(12) The Bank became subject to Office of the Comptroller of the Currency
("OCC") regulatory authority in May 1999. Data presented as of December 31,
1999 is based on OCC regulatory requirements while data as of prior periods
is
24
28
based on Office of Thrift Supervision ("OTS") regulatory requirements. In
calculating leverage capital, the OCC uses total average assets while the
OTS uses tangible assets. In calculating core capital, the OCC uses
risk-weighted assets while the OTS uses adjusted tangible assets. See
"Business--Regulation" in Item 1 hereof for information with respect to the
Bank's regulatory capital requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto, included
in Item 8 hereof.
CHANGES IN FINANCIAL CONDITION
GENERAL
Local Financial's primary asset is the capital stock of the Bank. In August
1997, a group led by Mr. Edward A. Townsend, the Company's present Chairman,
undertook to redeem all of the stock of the Selling Stockholders. The Company
financed the redemption through a private placement of $197.0 million of common
stock and $80.0 million of senior notes due 2004. The private placement and
redemption were closed in September 1997. The Company subsequently registered
the common stock and senior notes for public resale, and the common stock and
senior notes began publicly trading on April 22, 1998.
The prior owners operated the Bank as a low cost institution, emphasizing
traditional savings institution products and services, indirect lending of
sub-prime automobile financing, residential mortgage products and a wholesale
securities portfolio. New management has changed the Bank's activities
significantly. As described more fully below, management has reduced the level
of CMOs with interest rate adjustments tied to the COFI, eliminated all swap and
hedging contracts and eliminated the Bank's portfolio of sub-prime, indirect
automobile loans. While these measures reduced the Bank's assets by over $1
billion and resulted in substantial losses on the sale and write-down of assets,
management believes the Bank's financial condition is greatly improved and it is
better positioned for future growth.
In pursuit of new management's growth strategy, the Bank has shifted its
activities from those of a traditional savings and loan to those generally
associated with a commercial bank. On May 11, 1999, the Bank converted from a
savings bank to a national banking association. The Bank has increased its
commercial and consumer lending and expects further increases in those areas.
The Bank also has targeted increases in non-interest income, increases in
lending activities rather than investing activities, and increases in direct
lending rather than indirect lending.
The Bank's business strategy is to provide its customers with a range of
banking products and services of a regional bank while retaining the appeal and
level of individualized service of a community bank. Management believes that as
a result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1998 TO DECEMBER 31, 1999
General. In connection with the Bank's charter conversion, the Company
filed an application with the FRB to become registered as a bank holding company
and was registered as a bank holding company on May 11, 1999.
25
29
On March 31, 1999, the Company completed its merger of Local Federal Bank,
FSB, and its subsidiary Local America Bank of Tulsa, FSB, with the merged entity
operating under the name Local Oklahoma Bank, FSB.
On May 26, 1999, the Company announced that the Bank had entered into a
definitive agreement to acquire Guthrie Savings, Inc., a Guthrie, Oklahoma bank
holding company, for approximately $9.3 million in cash. The merger was
effective October 15, 1999. Guthrie Savings, Inc. was the holding company of
Guthrie Federal Savings Bank, which had total assets, liabilities, deposits and
stockholders' equity of approximately $45.0 million, $37.7 million, $36.7
million and $7.3 million, respectively, as of October 15, 1999. This acquisition
was accounted for under the purchase method of accounting in which the purchase
price was allocated to the net assets acquired based upon their fair values as
of the date of acquisition.
Excluding the effect of the acquired institution, the Company's total
assets, deposits and total liabilities increased $207.6 million or 9.8%, $143.6
million or 8.6% and $205.5 million or 10.2%, respectively, during the period.
Stockholders' equity increased $9.5 million or 8.0% from December 31, 1998 to
December 31, 1999 as a result of net income during the period and the decrease
in accumulated other comprehensive income.
Cash and Cash Equivalents. Cash and cash equivalents (consisting of cash,
cash due from banks and interest-bearing deposits with other banks) amounted to
$55.8 million and $54.9 million at December 31, 1999 and December 31, 1998,
respectively. The Company manages its cash and cash equivalents based upon the
Company's operating, investing and financing activities. See "--Liquidity and
Capital Resources".
Securities. The Company views the securities available for sale as a source
of asset liquidity. Liquidity is derived from this source by receipt of interest
and principal payments and prepayments; by the ability to sell these securities
at market prices; and by utilizing unpledged securities as collateral for
borrowings. Management intends to emphasize lending activities as opposed to
investing activities in order to enhance the weighted average yield on its
interest-earning assets and thus, its results of operations. Future changes in
the securities accounts will be determined by, among other things, liquidity
guidelines established by the Company and applicable regulatory rules; pledging
requirements to retain public funds; and by the rate at which the Company can
grow its loan portfolio through originations.
26
30
The following table sets forth information regarding the carrying and
market value of the Company's securities at the dates indicated.
December 31, June 30,
------------------------------------------------------------------------- ----------------------
1999 1998 1997 1997
------------------------ ----------------------- ------------------------ ----------------------
Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value
----------- ------------ ----------- ----------- ----------- ----------- ---------- ----------
(Dollars in Thousands)
Available for sale:
U.S. Government
and agency
securities $ 21,533 $ 21,533 $ 39,092 $ 39,092 $ 6,000 $ 6,000 $ -- $ --
Municipal securities 540 540 965 965 -- -- -- --
Collateralized
mortgage
obligations 494,747 494,747 522,128 522,128 428,876 428,876 957,519 957,519
Mortgage-backed
securities 12,410 12,410 8,779 8,779 83,231 83,231 28,046 28,046
---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
$ 529,230 $ 529,230 $ 570,964 $ 570,964 $ 518,107 $ 518,107 $ 985,565 $ 985,565
========== =========== ========== ========== =========== ========== ========== ==========
Held to maturity:
U.S. Government
and agency
securities $ -- $ -- $ -- $ -- $ -- $ -- $ 74,119 $ 74,219
Collateralized
mortgage
obligations -- -- -- -- -- -- 156,159 149,484
Mortgage-backed
securities -- -- -- -- -- -- 177,929 175,214
---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
$ -- $ -- $ -- $ -- $ -- $ -- $ 408,207 $ 398,917
========== =========== ========== ========== =========== ========== ========== ==========
Loans Receivable. Net loans receivable amounted to $1.7 billion and $1.4
billion at December 31, 1999 and December 31, 1998, respectively. Net loans
receivable increased by $323.3 million or 23.7% during the year ended December
31, 1999. Under its new management, the Bank strategically focused its
commercial lending efforts towards growth of its Oklahoma-based commercial
portfolio, hiring 41 experienced commercial lending officers and supporting
staff and forming a new corporate lending unit. During 1999, the Bank's total
commercial lending portfolio experienced growth of $255.7 million or 27.6%, with
virtually all of that growth occurring from loans made in Oklahoma. Much of this
growth occurred early in the year as the newly-hired officers moved some of
their existing customer relationships to the Bank. Residential real estate loans
grew from $344.6 million to $362.4 million, an increase of $17.8 million or
5.2%. The Bank has continued to originate adjustable-rate and 15-year fixed-rate
loans for its own portfolio. In addition, consumer loans grew from $101.7
million to $161.3 million, an increase of $59.6 million or 5.9%. Most of this
increase was attributable to the Bank heavily promoting its consumer loan
products in the media and better utilizing its existing branch locations to
originate consumer loans. The Bank also continues to originate and sell a
variety of mortgage and consumer loan products. Approximately $61.5 million of
loans held for sale were sold during 1999 and the Bank intends to originate and
sell even more loans during 2000 as part of a program to control exposure to
longer-term interest rate risk and improve profitability of the more
labor-intensive lending functions. Management intends to continue its emphasis
on lending activities, and consequently, expects its loan portfolio to grow over
the next several years. For additional information, see "Business--Lending
Activities" in Item 1 hereof and Note 6 of the Notes to Consolidated Financial
Statements in Item 8 hereof.
Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the Company's total loan
portfolio at December 31, 1999, as well as the dollar amount of such loans which
are scheduled to mature after one year which have fixed or adjustable interest
27
31
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
Principal Repayments Contractually Due
Total at In Years Ended December 31,
December 31, --------------------------------------------------------------------------------
1999(1) 2000 2001 2002 2003 2004 Thereafter
-------------- ------------ ------------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
Residential real
estate $ 362,581 $ 30,846 $ 20,250 $ 19,665 $ 20,911 $ 20,299 $ 250,610
Commercial 1,183,368 202,460 134,338 82,925 147,500 132,195 483,950
Consumer 167,898 49,328 27,023 23,094 18,122 12,885 37,446
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total(1) $ 1,713,847 $ 282,634 $ 181,611 $ 125,684 $ 186,533 $ 165,379 $ 772,006
=========== ========== ========== ========== ========== ========== ==========
- -------------------------
(1) Of the $1.4 billion of loan principal repayments contractually due after
December 31, 2000, $776.0 million have fixed rates of interest and $655.0
million have adjustable rates of interest. Commercial, consumer and total
loans are presented net of undistributed loan proceeds.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which generally give the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates).
Nonperforming Assets and Allowance for Loan Losses. Nonperforming assets
(consisting of non-accruing loans, accruing loans greater than 90 days
delinquent and foreclosed assets) have increased primarily due to the growth in
commercial and consumer loans. At December 31, 1999, nonperforming assets
amounted to $7.5 million or 0.32% of total assets, as compared to $4.3 million
or 0.20% at December 31, 1998.
The following table presents information on the Company's nonperforming
assets at the dates indicated.
December 31, June 30,
------------------------------------------- -------------------------------------------
1999 1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- ------------- -------------
(Dollars in Thousands)
Non-accruing loans $ 5,730 $ 2,203 $ 626 $ 3,508 $ 3,794 $ 3,107
Accruing loans greater
than 90 days
delinquent: 1,083 1,374 -- 415 1,548 --
Foreclosed assets 723 693 295 8,647 10,843 7,782
--------- --------- --------- --------- --------- ---------
Total nonperforming
assets $ 7,536 $ 4,270 $ 921 $ 12,570 $ 16,185 $ 10,889
========= ========= ========= ========= ========= =========
Total nonperforming assets
as a percentage
of total assets 0.32% 0.20% 0.05% 0.48% 0.49% 0.33%
========= ========= ========= ========= ========= =========
The decline in nonperforming assets from June 30, 1997 to December 31, 1997
reflected a $2.9 million decline in non-accrual loans (primarily commercial real
estate loans) and an $8.4 million decline
28
32
in foreclosed assets (which was primarily due to a transfer of a $6.0 million
retail shopping center from real estate owned to real estate held for investment
during the period).
At December 31, 1998, the allowance for loan loss amounted to $27.9
million, representing 2.0% of total loans. The Company's allowance for loan loss
rose $396,000 or 1.4% during the year ended December 31, 1999, primarily as a
result of the allowance acquired in the acquisition of Guthrie Federal Savings
Bank for $340,000.
During 1999, the Bank continued to focus on commercial loan growth. As a
result, the Bank's total loan portfolio grew $323.3 million or 23.7%, with the
majority of this growth occurring in the newly formed commercial business
lending area as described herein. During 1998 the Company was very successful in
its formation of a corporate lending unit focused on commercial business lending
within the state of Oklahoma. During 1999, the Bank's commercial business
portfolio grew $163.8 million or 50.7% of the total loan portfolio growth. This
lending unit was staffed with area lenders with many years of experience and
established customer relationships in the Oklahoma market. Many of these
relationships were moved to the Bank during 1999 from competitor institutions
within the market. To support this function, the Bank added professionals in the
credit administration and loan review area to strengthen and expand the Bank's
credit policies to accommodate the new array of loan products and services being
offered. In light of the magnitude of changes which have occurred in the Bank's
loan portfolio and lending staff, there is no assurance that these changes will
not result in losses in excess of those historically experienced by this
institution.
The Bank also grew its loan portfolio through an acquisition amounting to
$25.1 million or 1.8%. The Bank pays particular attention to the loan portfolios
acquired but recognizes that the acquired portfolios are more mature than its
own, and therefore, may contain more nonperforming loans.
As part of its periodic review and analysis of the loss factors utilized in
the Bank's allowance methodology (see "Business--Asset Quality--Allowance for
Loan Loss" in Item 1 hereof), the Bank during 1998 revised those loss factors to
comply with regulatory guidance resulting in a reallocation of the Bank's
existing reserves. Due to the significant changes in the nature and volume of
the Bank's loan portfolio, it was recognized that historical loss experience
upon which the Bank's loss factors had been based would not be a representative
indicator of losses inherent in the portfolio.
29
33
The following table provides information on the Company's allowance for
loan losses as of the dates indicated (Dollars in Thousands):
Six Months Ended
Years Ended December 31, December 31,
------------------------------------------------ -------------------------------
1999 1998 1997 1997 1996
--------------- --------------- --------------- --------------- ---------------
(unaudited) (unaudited)
Balance at beginning of period $ 27,901 $ 20,484 $ 5,475 $ 11,435 $ 3,228
Loans charged off:
Residential real estate (314) (31) (8) (5) -
Commercial (2,397) (545) (14) (14) -
Consumer (1,142) (928) (29,298) (16,535) (8,083)
Recoveries 1,909 187 57 25 596
----------- ----------- ------------ ------------ ------------
Net loans charged off (1,944) (1,317) (29,263) (16,529) (7,487)
Allowances acquired 340 7,284 - - -
Provision for loan losses 2,000 1,450 44,272 25,578 9,734
----------- ----------- ------------ ------------ ------------
Balance at end of period $ 28,297 $ 27,901 $ 20,484 $ 20,484 $ 5,475
=========== =========== ============ ============ ============
Allowance for loan losses to total
nonperforming loans at end of 4.15x 7.80x 32.72x 32.72x 0.56x
period =========== =========== ============ ============ ============
Allowance for loan losses to total
loans at end of period 1.65% 2.00% 2.09% 2.09% 0.50%
=========== =========== ============ ============ ============
Years Ended June 30,
------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Balance at beginning of period $ 3,228 $ 4,593 $ 3,689
Loans charged off:
Residential real estate (3) (143) (191)
Commercial -- (1,368) (4)
Consumer (20,290) (5,026) (167)
Recoveries 72 55 109
----------- ------------ ------------
Net loans charged off (20,221) (6,482) (253)
Allowances acquired -- -- --
Provision for loan losses 28,428 5,117 1,157
----------- ------------ ------------
Balance at end of period $ 11,435 $ 3,228 $ 4,593
=========== ============ ============
Allowance for loan losses to total
nonperforming loans at end of 2.91x 0.60x 1.48x
period =========== ============ ============
Allowance for loan losses to total
loans at end of period 1.10% 0.31% 0.56%
=========== ============ ============
30
34
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
December 31,
------------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
Percent to Percent Percent
Total to to
Amount Allowance Amount Total Amount Total
Allowance Allowance
----------- ----------- ---------- ---------- ----------- ----------
Residential real estate $ 3,332 11.78% $ 3,311 11.87% $ 412 2.01%
Commercial 18,963 67.01 18,798 67.37 10,459 51.06
Consumer 6,002 21.21 5,792 20.76 6,203 30.28
General unallocated -- -- -- -- 3,410 16.65
-------- -------- -------- -------- -------- --------
Total $ 28,297 100.00% $ 27,901 100.00% $ 20,484 100.00%
======== ======== ======== ======== ======== ========
June 30,
------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Percent to Percent Percent to
Total to Total
Amount Allowance Amount Total Amount Allowance
Allowance
---------- ----------- ----------- ---------- ----------- -----------
Residential real estate $ 427 3.73% $ 407 12.61% $ 411 8.95%
Commercial 2,836 24.80 2,624 81.29 3,644 79.34
Consumer 8,172 71.47 197 6.10 538 11.71
General unallocated -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total $ 11,435 100.00% $ 3,228 100.00% $ 4,593 100.00%
======== ======== ======== ======== ======== ========
31
35
Deposits. At December 31, 1999, deposits totaled $1.85 billion, as compared
to $1.67 billion at December 31, 1998. One of the Company's strategies is to
promote retail deposit growth as a cost-efficient funding source as well as a
source of fee income and cross-selling opportunities. In connection with the
acquisition of Guthrie Federal Savings Bank, the Company acquired the branch
office and assumed $36.7 million of deposits (as of October 15, 1999). The
Company expects to continue to focus on improving its retail deposit franchise.
For additional information, see "Business--Sources of Funds--Deposits" in Item 1
hereof and Note 9 of the Notes to Consolidated Financial Statements in Item 8
hereof.
32
36
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type of the Company for the periods
indicated.
Years Ended December 31,
------------------------------------------------------------------------- Six Months Ended
1999 1998 December 31, 1997
----------------------------------- ------------------------------------- ------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid
----------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Noninterest-
bearing deposits $ 122,729 $ -- --% $ 72,215 $ -- --% $ 57,778 $ -- --%
Passbook accounts 75,849 2,219 2.93 73,068 2,110 2.89 78,731 1,009 2.56
NOW and money
market accounts 282,386 7,941 2.81 225,740 4,892 2.17 187,381 2,594 2.77
Term certificates 1,204,661 60,416 5.02 1,253,482 67,741 5.40 1,301,703 37,069 5.70
----------- ---------- ----------- ---------- ----------- -----------
Total deposits $ 1,685,625 $ 70,576 4.19% $ 1,624,505 $ 74,743 4.60% $ 1,625,593 $ 40,672 5.00%
=========== ========== ======== =========== ========== ======== =========== =========== ========
Year Ended June 30, 1997
--------------------------------------
Average
Average Rate
Balance Interest Paid
----------- ---------- ----------
(Dollars in Thousands)
Noninterest-
bearing deposits $ 52,087 $ -- --%
Passbook accounts 72,441 2,092 2.89
NOW and money
market accounts 195,606 5,381 2.75
Term certificates 1,329,463 75,618 5.69
----------- ----------
Total deposits $ 1,649,597 $ 83,091 5.04%
=========== ========== ========
33
37
Other Assets. Other assets declined by $5.2 million from December 31, 1998
to December 31, 1999, primarily due to the settlement of the $5.0 million
receivable from the Selling Shareholders. For additional information, see "Legal
Proceedings" in Item 3 hereof and Note 2 of the Notes to Consolidated Financial
Statements in Item 8 hereof.
Borrowings. Other than deposits, the Company utilized advances from the
Federal Home Loan Bank of Topeka ("FHLB") to fund its operations. Advances from
the FHLB increased $82.0 million from December 31, 1998 to December 31, 1999.
The increase came as the Company took advantage of favorable rates available at
the FHLB to fund earning assets and offset rate-sensitive movement of funds
within the deposit portfolio.
The following table sets forth certain information regarding the short-term
borrowings of the Company at or for the dates indicated.
At or For the Years At or For the Six At or For the
Ended December 31, Months Year
Ended December 31, Ended June 30,
-------------------------------------- ----------------------- ---------------
1999 1998 1997 1997 1996 1997
----------- ------------ ------------- ----------- ----------- ---------------
(Dollars in Thousands)
FHLB OF TOPEKA ADVANCES:
Average balance outstanding $ 292,758 $ 132,659 $ 549,465 $ 391,711 $ 987,618 $ 848,733
Maximum amount outstanding at any
month-end during the period 497,178 220,033 874,356 839,347 1,311,735 1,311,735
Balance outstanding at end of period 302,035 220,033 80,136 80,136 371,612 531,161
Average interest rate during the 5.09% 5.69% 7.12% 7.09% 6.50% 6.77%
period
Average interest rate at end of 5.78% 4.77% 6.06% 6.06% 5.59% 5.73%
period
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE
Average balance outstanding $ -- $ -- $ 161,988 $ 55,235 $ 567,000 $ 418,784
Maximum amount outstanding at any
month-end during the period -- -- 543,683 239,914 942,325 942,315
Balance outstanding at end of period -- -- -- -- 942,325 310,801
Average interest rate during the period(1) -- -- 7.31% 7.44% 6.45% 6.73%
Average interest rate at end of period -- -- -- -- 5.38% 5.55%
- -------------------------
(1) Average interest rate during the period reflects the effect of the
Company's interest rate swaps.
Pursuant to the private placement, the Company issued $80.0 million of
Senior Notes which are due in September 2004 and which bear interest at the rate
of 11.0%, payable semi-annually. During fiscal 1997, as anticipated in the
Purchase Agreement, the Company established an interest reserve account with an
independent trustee which contained $8.8 million, sufficient to pay the
aggregate interest payments scheduled to be made with respect to the first two
interest payment dates on the senior notes. Debt issuance costs of approximately
$4.3 million at December 31, 1997 were capitalized and the unamortized balance
is reflected as Other Assets in the Consolidated Statement of Financial
Condition. The Company intends to fund the semiannual interest payments through
dividends paid to the Company from the Bank. During 1999, the Company purchased
and retired $4.75 million of Senior Notes, resulting in a $257,000 extraordinary
loss. For additional information, see "Business--Sources of Funds--Borrowings"
in Item 1 hereof and Note 12 of the Notes to Consolidated Financial Statements
in Item 8 hereof.
Stockholders' Equity. Stockholders' equity increased from $118.8 million at
December 31, 1998 to $128.3 million at December 31, 1999. The increase in
stockholders' equity came primarily as a result of net income during the period.
Accumulated other comprehensive income decreased $10.7 million or 96.3% during
fiscal 1999, as the Company marked its available-for-sale security portfolio to
market net of taxes in accordance with GAAP. At December 31, 1999, the ratio of
the Company's stockholders' equity to total
34
38
assets amounted to 5.39% and the Bank exceeded its minimum regulatory capital
requirements. See "--Liquidity and Capital Resources".
RESULTS OF OPERATIONS
General. The Company's results of operations depend substantially on its
net interest and dividend income, which is the difference between interest and
dividend income on interest-earning assets, consisting primarily of loans
receivable, mortgage-backed and investment securities and various other
short-term investments, and interest expense on interest-bearing liabilities,
consisting primarily of deposits and borrowings. In prior periods the Company's
results of operations have been significantly affected by the net costs of
hedging its interest rate exposure. On an ongoing basis, the Company's results
of operations will be affected by the level of its noninterest income including
deposit related income; loan fees and service charges; net gains (losses) on
sales of loans; the level of its noninterest expense, such as compensation and
employee benefits, deposit insurance premiums, provisions for losses on
foreclosed assets, equipment and data processing expense and occupancy expense;
its provisions for losses on loans resulting from the Company's assessment of
the adequacy of its allowance for losses on loans; and provisions (benefits) for
income taxes.
Net Income (Loss). The Company reported net income (loss) of $22.0 million,
$18.4 million, ($86.0) million and ($30.0) million during the years ended
December 31, 1999 and 1998, the six months ended December 31, 1997, and the year
ended June 30, 1997, respectively. The net income reported for the year ended
December 31, 1999 is reflective of the Company's second full fiscal year of
operations since the restructuring initiatives contemplated by the private
placement and redemption. Net income increased by $3.6 million or 19.3% during
the year ended December 31, 1999, as compared to the year ended December 31,
1998, due to the increase in the net interest and dividend income as a result of
the Company's growth in the loan portfolio. The extraordinary item of $257,000,
net of tax, charged to income during the year ended December 31, 1999 occurred
as a result of the Company's purchase and retirement of $4.75 million of senior
notes. The net loss reported for the six months ended December 31, 1997 is
attributable to deliberate actions taken by the Company's new management
subsequent to the private placement and redemption to restructure the Company's
balance sheet. Specifically, the Company incurred $125.5 million of losses on
the sale and write-down of assets, of which an aggregate loss of $53.4 million
was incurred in connection with the liquidation or write-off of the hedging
contracts which the Company had entered into in order to reduce its exposure to
interest rates. See "Quantitative and Qualitative Disclosure about Market
Risk--Asset and Liability Management" in Item 7A hereof. These losses also
included a loss of $72.1 million on the sale and mark-to-market of the Company's
securities portfolio (which primarily related to the sale and mark-to-market of
the Company's COFI-based CMOs). Further the Company recorded a $25.4 million
provision for loan losses during the three-months ended September 30, 1997,
primarily to cover realized and inherent losses with respect to the Company's
portfolio of indirect automobile receivables which had been sold as of December
31, 1997. See "Business--Lending Activities--Consumer Loans" in Item 1 hereof.
The market for fixed income securities improved during the three-month period
ended December 31, 1997 and the Company sold $330.6 million of the remaining
COFI-based CMO portfolio for a gain of $12.7 million in furtherance of its plan
to accelerate the disposition of the COFI-based CMOs.
The net loss during fiscal year ended June 30, 1997 was primarily
attributable to a $28.4 million provision for loan losses, which was principally
associated with the Company's indirect automobile finance receivables, $29.9
million of losses which were related to the sale of CMOs with interest rate
adjustments tied to COFI, and a non-recurring $10.3 million special assessment
(before applicable tax benefits) which was recorded in connection with
legislation in 1996 which recapitalized the SAIF.
Net Interest and Dividend Income. Net interest and dividend income is
determined by the Company's net interest spread (i.e., the difference between
the yields earned on its interest-earning assets and
35
39
the rates paid on its interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities.
Net interest and dividend income totaled $73.5 million, $54.8 million,
$25.4 million and $52.9 million during the years ended December 31, 1999 and
1998, six months ended December 31, 1997, and year ended June 30, 1997,
respectively. Net interest and dividend income increased by $18.7 million or
34.2% during the year ended December 31, 1999, as compared to the year ended
December 31, 1998, due to an increase in the Company's net interest earning
assets (interest-earnings assets less interest-bearing liabilities) and a
corresponding 45 basis point rise in the Company's interest rate spread during
the period. Net interest and dividend income increased by $3.0 million or 5.8%
during the year ended December 31, 1998, as compared to the year ended December
31, 1997, due to an increase in the Company's net interest earnings assets and a
corresponding 66 basis point rise in the Company's interest rate spread during
the period. Net interest and dividend income decreased by $1.2 million or 4.4%
during the six months ended December 31, 1997 as compared to the six months
ended December 31, 1996 due to a significant decline of $1.1 billion in the
average balance of securities during the period, which is attributable to the
sale and writedown of such securities in connection with the restructuring
activities described above.
36
40
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).
Years Ended December 31,
-----------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- -------- ---------- ---------- -------
Interest-earning assets:
Loans receivable(1) $1,577,869 $ 130,869 8.29% $1,162,514 $ 96,851 8.33%
Securities(2) 501,781 34,141 6.80% 577,526 41,862 7.25%
Securities purchased under
agreements to resell -- -- -- 70,368 3,947 5.61%
Other earning assets(3) 46,423 3,288 7.08% 73,004 4,544 6.22%
---------- ---------- ---------- ----------
Total interest-earning
assets 2,126,073 168,298 7.92% 1,883,412 147,204 7.81%
---------- ====== ---------- ======
Noninterest-earning assets 93,673 93,316
---------- ----------
Total assets $2,219,746 $1,976,728
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 358,235 $ 10,160 2.84% $ 298,808 $ 7,002 2.34%
Term certificates of deposit 1,204,661 60,416 5.02% 1,253,482 67,741 5.40%
---------- ---------- ---------- ----------
Total deposits 1,562,896 70,576 4.52% 1,552,290 74,743 4.82%
Borrowings:
FHLB advances 292,758 14,901 5.09% 132,659 7,547 5.69%
Securities sold under
agreements to repurchase
and other -- -- -- 64 678 --
Promissory note payable -- -- -- -- -- --
Senior notes 78,442 9,310 11.81% 80,000 9,470 11.81%
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,934,096 94,787 4.90% 1,765,013 92,438 5.24%
---------- ====== ---------- ======
Noninterest-bearing liabilities 161,059 107,718
---------- ----------
Total liabilities 2,095,155 1,872,731
Stockholders' equity 124,591 103,997
---------- ----------
Total liabilities and
stockholders' equity $2,219,746 $1,976,728
========== ==========
Net interest-earning assets $ 191,977 $ 118,399
========== ==========
Net interest income/interest
rate spread $ 73,511 3.02% $ 54,766 2.57%
========== ====== ========== ======
Net interest margin 3.46% 2.91%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 109.93% 106.71%
====== ======
------------------------------------
1997
-----------------------------------
Average
Average Yield/
Balance Interest Cost
---------- ---------- --------
(unaudited)
Interest-earning assets:
Loans receivable(1) $1,036,300 $ 104,324 10.07%
Securities(2) 1,289,822 78,354 6.07%
Securities purchased under
agreements to resell 37,657 2,159 5.73%
Other earning assets(3) 64,707 3,931 6.08%
---------- ----------
Total interest-earning
assets 2,428,486 188,768 7.77%
---------- ==========
Noninterest-earning assets 84,115
----------
Total assets $2,512,601
==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 266,569 $ 7,300 2.74%
Term certificates of deposit 1,326,371 75,244 5.67%
---------- ----------
Total deposits 1,592,940 82,544 5.18%
Borrowings:
FHLB advances 549,465 39,095 7.12%
Securities sold under
agreements to repurchase
and other 161,988 11,848 7.31%
Promissory note payable 7,087 583 8.23%
Senior notes 24,986 2,952 11.81%
---------- ----------
Total interest-bearing
liabilities 2,336,466 137,022 5.86%
---------- =========
Noninterest-bearing liabilities 82,945
----------
Total liabilities 2,419,411
Stockholders' equity 93,190
----------
Total liabilities and
stockholders' equity $2,512,601
==========
Net interest-earning assets $ 92,020
==========
Net interest income/interest
rate spread $ 51,746 1.91%
========== =========
Net interest margin 2.13%
=========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 103.94%
=========
Six Months Ended December 31,
--------------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- -------- ------- ----------- --------- -------
(unaudited)
Interest-earning assets:
Loans receivable(1) $ 1,009,843 $ 49,788 9.78% $ 1,020,534 $ 53,179 10.34%
Securities(2) 1,000,808 31,306 6.21% 2,107,408 62,176 5.85%
Securities purchased under
agreements to resell 60,000 1,711 5.66% 38,921 1,040 5.30%
Other earning assets(3) 76,415 2,399 6.23% 78,544 2,705 6.83%
----------- -------- ----------- ---------
Total interest-earning
assets 2,147,066 85,204 7.87% 3,245,407 119,100 7.28%
-------- ====== --------- =======
Noninterest-earning assets 92,823 55,873
----------- -----------
Total assets $ 2,239,889 $ 3,301,280
=========== =============
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 266,112 $ 3,603 2.69% $ 269,044 $ 3,776 2.78%
Term certificates of deposit 1,301,703 37,069 5.65% 1,308,314 37,443 5.68%
--------- -------- ----------- ---------
Total deposits 1,567,815 40,672 5.15% 1,577,358 41,219 5.18%
Borrowings:
FHLB advances 391,711 14,005 7.09% 987,618 32,353 6.50%
Securities sold under
agreements to repurchase
and other 55,235 2,073 7.44% 567,000 18,426 6.45%
Promissory note payable 2,591 108 8.27% 14,020 564 7.98%
Senior notes 49,565 2,965 11.87% -- -- --
---------- -------- ----------- ---------
Total interest-bearing
liabilities 2,066,917 59,823 5.74% 3,145,996 92,562 5.84%
-------- ====== --------- =======
Noninterest-bearing liabilities 88,248 48,071
---------- -----------
Total liabilities 2,155,165 3,194,067
Stockholders' equity 84,724 107,213
---------- -----------
Total liabilities and
stockholders' equity $ 2,239,889 $ 3,301,280
=========== ===========
Net interest-earning assets $ 80,149 $ 99,411
=========== ===========
Net interest income/interest
rate spread $ 25,381 2.13% $ 26,538 1.44%
======== ====== ========= =======
Net interest margin 2.34% 1.62%
====== =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 103.88% 103.16%
====== =======
Year Ended June 30,
--------------------------------------------------------
1997
--------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------ ------------------ ------------------
Interest-earning assets:
Loans receivable(1) $ 1,041,342 $ 107,715 10.34%
Securities(2) 1,845,179 109,224 5.92%
Securities purchased under
agreements to resell 27,174 1,488 5.48%
Other earning assets(3) 65,903 4,237 6.43%
------------ ------------
Total interest-earning
assets 2,979,598 222,664 7.47%
------------ ==========
Noninterest-earning assets 92,630
------------
Total assets $ 3,072,228
==============
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) $ 268,047 $ 7,473 2.79%
Term certificates of deposit 1,329,463 75,618 5.69%
------------ ------------
Total deposits 1,597,510 83,091 5.20%
Borrowings:
FHLB advances 848,733 57,442 6.77%
Securities sold under
agreements to repurchase
and other 418,784 28,202 6.73%
Promissory note payable 12,852 1,026 7.98%
Senior notes -- -- --
------------ ------------
Total interest-bearing
liabilities 2,877,879 169,761 5.90%
------------ ==========
Noninterest-bearing liabilities 89,914
------------
Total liabilities 2,967,793
Stockholders' equity 104,435
------------
Total liabilities and
stockholders' equity $ 3,072,228
==============
Net interest-earning assets $ 101,719
==============
Net interest income/interest
rate spread $ 52,903 1.57%
============== ==========
Net interest margin 1.78%
==========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 103.53%
==========
- -------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and excludes the allowance
for loan losses which is included in noninterest-earning assets.
(2) Includes all securities classified as held to maturity and available for
sale, including the market valuation accounts.
(3) Includes cash and due from banks, equity securities, interest bearing
deposits and FHLB and FRB stock.
(4) Includes passbook, NOW, and money market accounts.
37
41
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior
volume); and (iii) changes in rate/volume (change in rate multiplied by
change in volume).
Year Ended December 31, 1999 compared to 1998
-----------------------------------------------------------------------------
Increase (decrease) due to
------------------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
--------------- ---------------- ------------- ------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ (432) $ 34,604 $ (154) $ 34,018
Securities (2,567) (5,490) 336 (7,721)
Securities purchased under
agreements to resell (3,947) (3,947) 3,947 (3,947)
Other earning assets 627 (1,655) (228) (1,256)
-------- --------- ------- --------
Total net change in income on interest-
earning assets (6,319) 23,512 3,901 21,094
-------- --------- ------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts 1,473 1,392 293 3,158
Term certificates of deposit (4,877) (2,638) 190 (7,325)
-------- --------- ------- --------
Total deposits (3,404) (1,246) 483 (4,167)
Borrowings:
FHLB advances (795) 9,108 (959) 7,354
Securities sold under agreements
to repurchase -- -- -- --
Promissory note payable -- -- (678) (678)
Senior notes 5 (184) 19 (160)
-------- --------- ------- --------
Total net change in expense on interest-
bearing liabilities (4,194) 7,678 (1,135) 2,349
-------- --------- ------- --------
Change in net interest income $ (2,125) $ 15,834 $ 5,036 $ 18,745
======== ========= ======= ========
Year Ended December 31, 1998 compared to 1997
------------------------------------------------------------------
Increase (decrease) due to
-------------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
--------- --------- ----------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ (17,988) $ 12,706 $ (2,191) $ (7,473)
Securities 15,139 (43,271) (8,360) (36,492)
Securities purchased under
agreements to resell (46) 1,875 (41) 1,788
Other earning assets 97 504 12 613
--------- --------- --------- ---------
Total net change in income on interest-
earning assets (2,798) (28,186) (10,580) (41,564)
--------- --------- --------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts (1,053) 883 (128) (298)
Term certificates of deposit (3,564) (4,135) 196 (7,503)
--------- --------- --------- ---------
Total deposits (4,617) (3,252) 68 (7,801)
Borrowings:
FHLB advances (7,836) (29,656) 5,944 (31,548)
Securities sold under agreements
to repurchase (11,848) (11,843) 12,521 (11,170)
Promissory note payable (583) (583) 583 (583)
Senior notes (2) 6,500 20 6,518
--------- --------- --------- ---------
Total net change in expense on interest-
bearing liabilities (24,886) (38,834) 19,136 (44,584)
--------- --------- --------- ---------
Change in net interest income $ 22,088 $ 10,648 $ (29,716) $ 3,020
========= ========= ========= =========
Six Months Ended December 31, 1997 compared to 1996
----------------------------------------------------------------------------
Increase (decrease) due to
----------------------------------------------------
Total Net Increase
Rate Volume Rate/Volume (Decrease)
-------- -------- ----------- ------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ (2,864) $ (557) $ 30 $ (3,391)
Securities 3,745 (32,649) (1,966) (30,870)
Securities purchased under
agreements to resell 70 563 38 671
Other earning assets (239) (73) 6 (306)
-------- -------- -------- --------
Total net change in income on interest-
earning assets 712 (32,716) (1,892) (33,896)
-------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts (133) (41) 1 (173)
Term certificates of deposit (186) (189) 1 (374)
-------- -------- -------- --------
Total deposits (319) (230) 2 (547)
Borrowings:
FHLB advances 2,958 (19,521) (1,785) (18,348)
Securities sold under agreements
to repurchase 2,854 (16,631) (2,576) (16,353)
Promissory note payable 20 (460) (16) (456)
Senior notes -- -- 2,965 2,965
-------- -------- -------- --------
Total net change in expense on interest-
bearing liabilities 5,513 (36,842) (1,410) (32,739)
-------- -------- -------- --------
Change in net interest income $ (4,801) $ 4,126 $ (482) $ (1,157)
======== ======== ======== ========
38
42
Interest Income. Total interest and dividend income increased by $21.1
million or 14.3% during the year ended December 31, 1999, as compared to the
year ended December 31, 1998. Total interest and dividend income decreased by
$41.6 million or 22.0% during the year ended December 31, 1998 as compared to
the year ended December 31, 1997. Total interest and dividend income decreased
by $33.9 million or 28.5% during the six months ended December 31, 1997 as
compared to the same period in the prior year. Interest income on loans
receivable increased $34.0 million or 35.1% during the year ended December 31,
1999 as compared to the year ended December 31, 1998. Interest income on loans
receivable declined $7.5 million or 7.2% during the year ended December 31, 1998
as compared to the year ended December 31, 1997. Interest income on loans
receivable decreased by $3.4 million or 6.4% during the six months ended
December 31, 1997, as compared to the same period in the prior year. The
increase in interest income on loans during the year ended December 31, 1999 was
due to the increase in the average balance from $1.2 billion for the year ended
December 31, 1998 to $1.6 billion for the year ended December 31, 1999. The
decrease in interest income on loans during both the year ended December 31,
1998 and the six months ended December 31, 1997 comparative periods was due to a
decline in the average yield earned on the Company's loan portfolio of 1.74% in
the twelve month comparative periods and 56 basis points in the six month
comparative periods. This decline in the average yield reflected, in part, the
discontinuance of the Company's third-party automobile loan purchase activity,
which generally carried higher yields than traditional real estate secured
loans.
Interest income on securities and other interest-earning assets (which
include mortgage-backed and related securities, including CMOs, U.S. Government
and agency securities, FHLB stock and FRB stock) declined by $12.9 million or
25.7%, $34.1 million or 40.4% and $30.5 million or 46.3% during the years ended
December 31, 1999 and 1998 and the six months ended December 31, 1997,
respectively, as compared to the same periods in the prior years. The decline in
interest income on such investments during the years ended December 31, 1999 and
1998 and the six months ended December 31, 1997 comparative periods was
primarily due to the decreases in the average balance of such investments of
$172.7 million, $671.3 million and $1.1 billion during each respective
comparative period. During the six months ended December 31, 1997 and in
connection with the private placement and the redemption, new management of the
Company determined that its remaining CMO portfolio was "other than temporarily
impaired" in accordance with SFAS No. 115 and, pursuant to GAAP, wrote-down the
portfolio by $54.7 million and sold $865.1 million of its COFI-based CMOs.
Interest Expense. Total interest expense increased by $2.3 million or
2.5% during the year ended December 31, 1999 and decreased by $44.6 million or
32.5% and $32.7 million or 35.4% during the year ended December 31, 1998 and the
six months ended December 31, 1997, respectively, as compared to the same
periods in the prior years. Interest expense on deposits is the largest
component of the Company's interest-bearing liabilities. Interest expense on
deposits declined by $4.2 million or 5.6%, $7.8 million or 9.5% and $547,000 or
1.3% during the years ended December 31, 1999 and 1998 and the six months ended
December 31, 1997, respectively, when compared to the same periods in prior
years. The decrease in interest expense on deposits for the year ended December
31, 1999 when compared to the same period in the prior year is due to a 30 basis
point decrease in costs of those funds. Average balance declines of
interest-bearing deposits for the year ended December 31, 1998 and the six
months ended December 31, 1997 comparative periods, coupled with declines in the
costs of those funds, led to the declines in interest expense noted in those
periods.
Interest expense on FHLB advances increased $7.4 million or 97.4%
during the year ended December 31, 1999 due to the 120.7% increase in the
average balance of those borrowings when compared to the same period in the
prior year. Interest expense on FHLB advances declined $31.5 million or 80.7%
and $18.3 million or 56.7% during the year ended December 31, 1998 and the six
months ended December 31, 1997 due to the 75.9% and 60.3% respective decline in
the average balance of those borrowings, when compared to the same periods in
the prior years. Similarly, interest expense on
39
43
reverse repurchase agreements declined $11.2 million or 94.3% and $16.4 million
or 88.8% during the year ended December 31, 1998 and six months ended December
31, 1997 as compared to the comparative periods. The increase in interest
expense for the year ended December 31, 1999 is due to the Company utilizing
FHLB advances to help fund the commercial loan growth for the year ended
December 31, 1999. The significant declines in interest expense during the year
ended December 31, 1998 and the six months ended December 31, 1997 is due to the
strategic balance sheet restructuring begun by the Company after the private
placement and the redemption and continuing through December 31, 1997. During
this period, the Company began to reduce its securities holdings through
periodic bulk sale transactions and utilized those proceeds to pay off its
reverse repurchase agreements and pay down FHLB advances. Prior to this time,
the Company's strategy had been to finance the purchase of mortgage-backed and
related securities primarily through FHLB borrowings and reverse repurchase
agreements.
During the periods presented, interest expense on notes payable
consisted of interest paid on a promissory note payable to the mother of the
Selling Stockholders and, since September 8, 1997, interest accrued with respect
to the Senior Notes. Interest expense on the promissory note amounted to
$108,000 and $1.0 million during six months ended December 31, 1997 and year
ended June 30, 1997, respectively. On September 8, 1997, in connection with the
closing of the private placement and the redemption, the Company issued $80.0
million of the Senior Notes (which are due in September 2004 and bear interest
at the rate of 11.0% payable semi-annually) and prepaid the promissory note held
by the mother of the Selling Stockholders at a price equal to the principal
amount thereof plus accrued and unpaid interest thereon. Interest expense and
amortization of issuance costs on the Senior Notes (which began to accrue on
September 8, 1997) amounted to $9.3 million, $9.5 million and $3.0 million
during the years ended December 31, 1999 and 1998 and six months ended December
31, 1997, respectively.
Provision for Loan Losses. The provision for loan losses is charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on (i) an estimate by management of loan losses
that occurred during the current period and (ii) an ongoing adjustment of prior
estimates of losses occurring in prior periods. To serve as a basis for making
this provision each quarter, the Company maintains an extensive 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, changes in collateral values, and detailed reviews of
specific large loan relationships. For large loans deemed to be impaired due to
an expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Company's recorded investment in the
loan to the present value of expected cash flows discounted at the loan's
effective interest rate, the fair value of the collateral or the loan's
observable market price. While management endeavors to use the best information
available in making its evaluations, future adjustments to the allowance for
loan losses may be necessary if economic conditions change substantially from
the assumptions used in making the evaluations. In addition, regulatory
examiners may require the Bank to recognize additions to its allowance based
upon their judgments about information available to them at the time of their
examination.
The Company established provisions for loan losses of $2.0 million,
$1.5 million, $25.6 million and $28.4 million during the years ended December
31, 1999 and 1998, the six months ended December 31, 1997 and the year ended
June 30, 1997, respectively. During such respective periods, loan charge-offs
(net of recoveries) amounted to $1.9 million, $1.3 million, $16.5 million and
$20.2 million. The $25.6 million and $28.4 million provisions established during
the six months ended December 31, 1997 and the year ended June 30, 1997 were
intended primarily to cover realized and inherent losses with respect to the
Company's portfolio of indirect automobile receivables. At December 31, 1997,
the Company's portfolio of such indirect automobile loans had been sold. See
"Business--Lending Activities--Consumer Loans" in Item 1 hereof.
Noninterest Income. Total noninterest income (loss) amounted to $18.5
million, $14.8 million, $(107.1) million and $(17.1) million during the years
ended December 31, 1999 and 1998, the six months
40
44
ended December 31, 1997 and the year ended June 30, 1997, respectively. The
components of noninterest income consist of deposit-related income, loan fees
and loan service charges, net gains (losses) on sale of assets and other
miscellaneous income. Total noninterest income increased by $3.8 million or
25.4% during the year ended December 31, 1999 as compared to the year ended
December 31, 1998. This increase is directly related to the increased
origination loan volume and increase in NSF fees and other service charges. The
noninterest income (losses) recognized during the year ended June 30, 1997 and
the six months ended December 31, 1997 primarily related to losses incurred on
the sale of securities and the liquidation of related hedges. During the three
month period ended September 30, 1997, such sales resulted in $125.5 million of
losses. These sales continued through December 31, 1997 as new management
dramatically restructured the balance sheet of the Company. Specifically, during
the quarter ended September 30, 1997, the Company (1) liquidated the hedging
contracts previous management had entered into in an attempt to reduce the
Company's exposure to interest rates, (2) sold the majority of its COFI-based
CMO portfolio and (3) wrote-down the remaining COFI-based CMO portfolio to
reflect market values. The market for fixed income securities improved during
the three month period ended December 31, 1997 and continued sales from this
portfolio resulted in a gain of $12.7 million reducing the loss to $112.8
million for the six months ended December 31, 1997. Net gains on sale of assets
recognized during the years ended December 31, 1999 and 1998 of $1.2 million and
$932,000, respectively, came as a result of the Company's sale of COFI-based
CMOs, mortgages and consumer loans. The Company routinely sells mortgages and
other longer-term loans with and without servicing released in order to manage
interest-rate risk. See "Qualitative and Quantitative Disclosure about Market
Risk--Asset and Liability Management" in Item 7A hereof. The noninterest income
recognized during the year ended December 31, 1998 is reflective of the core
noninterest income potential of the Company as this was the first year of
operations occurring subsequent to the balance sheet restructuring discussed
above.
Noninterest Expense. Total noninterest expense increased $15.8 million
or 40.0% during the year ended December 31, 1999 as compared to the year ended
December 31, 1998. Total noninterest expense declined $3.2 million or 7.4%
during the year ended December 31, 1998 as compared to the year ended December
31, 1997. Similarly, total noninterest expense decreased by $6.7 million or
22.8% during the six months ended December 31, 1997, as compared to the same
period in the prior year, while increasing $13.8 million or 39.0% during the
year ended June 30, 1997. During the year ended June 30, 1997, the increase in
noninterest expense came as a result of the one-time special SAIF assessment, as
discussed below. In addition, during the year ended June 30, 1997, the Company's
provision for uninsured risk and losses increased by $1.9 million or 140.5% due
to the Company's reassessment of its potential liability with respect to the
FDIC Case. See "Legal Proceedings" in Item 3 hereof. The increase in noninterest
expense for the year ended December 31, 1999 as compared to the year ended
December 31, 1998 resulted from additional compensation, benefits and other
noninterest expenses associated with the formation of the new corporate lending
unit. During the past 2 years, the Company has strategically refocused its
commercial lending efforts towards growth of its Oklahoma-based commercial
portfolio, hiring 41 experienced commercial lending officers and supporting
staff and forming a new corporate lending unit. Additional increases in
noninterest expense were due to the additional data processing expenses incurred
as a result of the Company's Year 2000 readiness efforts, additional costs
incurred in connection with the acquisition and operation of BankSouth as well
as start-up costs associated with the new Operations Center which became fully
functional during the year ended December 31, 1999. The decrease in noninterest
expense during the year ended December 31, 1998 as compared to the year ended
December 31, 1997 was due primarily to nonrecurring charges associated with the
private placement. The decrease in noninterest expenses attributable to the
private placement was partially offset by increases in compensation and employee
benefits during the year ended December 31, 1998 resultant from the Company's
strategic development of a commercial business lending line of business. The
decrease in noninterest expense during the six months ended December 31, 1996
was primarily due to the absence of the $10.3 million (before applicable tax
benefits) special assessment which was recognized by
41
45
the Company in September 1996 in connection with the recapitalization of the
SAIF. Pursuant to legislation effective September 30, 1996, all SAIF member
institutions were required to pay a one-time special assessment equal to 65.7
basis points for all SAIF-assessable deposits as of March 31, 1995. This
legislation resulted in the recapitalization of the SAIF and, consequently,
during the fourth calendar quarter of 1996, the FDIC lowered the Bank's
assessment rates. See "Business--Regulation and Supervision--Deposit Insurance
Assessments" in Item 1 hereof.
Provision (Benefit) for Income Taxes. During the years ended December
31, 1999 and 1998, the six months ended December 31, 1997 and the year ended
June 30, 1997, the Company recognized $12.6 million, $10.3 million, $(44.1)
million and $(11.9) million, respectively, of provisions (benefits) for income
taxes. At December 31, 1999, the Company had approximately $145.2 million of net
operating loss carryforwards available for state income tax purposes and had
$3.1 million of alternative minimum tax credits available for carryover for
federal income tax purposes. The state net operating loss carryforwards expire
in varying amounts between 2006 and 2013. At December 31, 1999 and 1998, a
valuation allowance for all available state net operating loss carryforwards was
established as it was determined to be more likely than not that the benefit of
the deferred tax asset would not be realized. Historically, the Company has
generated income for federal income tax purposes. Based on the current strategy
of new management, no valuation allowance for other deferred tax assets has been
established as the Company believes it is more likely than not that sufficient
income for federal income tax purposes will be realized. The change in ownership
of the Company did not result in a limitation on the utilization of the net
operating losses. See "Business--Taxation" in Item 1 hereof and Note 15 of the
Notes to Consolidated Financial Statements in Item 8 hereof.
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 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 of Topeka 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 invested 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 December 31, 1999, the Company had $300.0 million
in borrowing capacity under a collateralized line of credit with the FHLB of
Topeka, of which $32.0 million was outstanding as of such date.
At December 31, 1999, the Company had outstanding commitments
(including unused lines of credit) to originate mortgage and non-mortgage loans
of $218.3 million. Certificates of deposit which are
42
46
scheduled to mature within one year totaled $985.2 million at December 31, 1999,
and the Company did not have borrowings that are scheduled to mature within the
same period. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments and that, based upon past
experience and current pricing policies, it can adjust the rates of certificates
of deposit to retain a substantial portion of its maturing certificates and
also, to the extent deemed necessary, refinance any maturing borrowings.
During the years ended December 31, 1999 and 1998, the Company made
interest payments on the Senior Notes, which were to be initially funded through
an interest reserve account established with an independent trustee and
subsequently through dividends from the Bank. During the year ended December 31,
1999, the Company purchased and retired $4.75 million of the Senior Notes which
had been issued in connection with the Company's recapitalization in 1997. This
move will reduce future interest costs associated with those notes. The Senior
Notes have an annual debt service requirement of $8.3 million. During the year
ending December 31, 2000, the Company intends to fund the interest payments
scheduled to be made on March 1, 2000 and September 1, 2000 through dividends
from the Bank.
Capital Resources. Federally insured institutions such as the Company
and the Bank are required to maintain minimum levels of regulatory capital. See
"Business--Regulation and Supervision--Capital Requirements" in Item 1 hereof.
The following table reflects the Company's and the Bank's actual levels of
regulatory capital and applicable regulatory capital requirements at December
31, 1999.
Minimum Required Actual Excess
------------------- ----------------------- -------------------
Percent Amount Percent Amount Percent Amount
-------- --------- --------- ---------- --------- --------
(Dollars in Thousands)
The Company:
Leverage 4.00% $ 91,998 4.71% $ 108,231 0.71% $ 16,233
Core capital 4.00 63,581 6.81 108,231 2.81 44,650
Total capital 8.00 127,162 8.07 128,199 0.07 1,037
The Bank:
Leverage 4.00% $ 91,884 7.93% $ 182,057 3.93% $ 90,173
Core capital 4.00 63,425 11.48 182,057 7.48 118,632
Total capital 8.00 126,850 12.74 201,977 4.74 75,127
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented in
Item 8 hereof have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
available for sale securities which are carried at market value), without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, substantially all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's Notes to Consolidated Financial
Statements in Item 8 hereof.
43
47
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". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after December 15, 2000 with earlier application not permitted.
Management does not anticipate that this Statement will have a material adverse
impact on the consolidated financial position or the future results of
operations of the Company.
YEAR 2000 COMPLIANCE
The Company established an enterprise-wide program to prepare its
computer systems and applications for the Year 2000 date change and utilized
both internal and external resources to identify, correct and test the systems
for Year 2000 compliance. The compliance program also addressed various
third-party vendors and service providers and included providing for contingency
plans in the event that problems related to the Year 2000 date change arose.
The Company completed its reprogramming as of December 31, 1998 and
testing efforts were completed as of June 30, 1999. No system failures or
disruptions of operations occurred at January 1, 2000. The Company will continue
to monitor its systems and third-party relationships throughout 2000 to address
unanticipated problems (which may include problems associated with dates
subsequent to January 1 and to non-Year 2000 compliant third parties) and ensure
that all processes continue to function properly.
Testing and remediation of all of the Company's systems and
applications incrementally cost approximately $500,000 in 1999, excluding costs
of Company employees involved in Year 2000 compliance activities. All costs have
been budgeted and were funded by cash flows from operations. The Company does
not believe the costs and efforts related to the Year 2000 compliance project
were material to its financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Management Committee, which is comprised of the
Chief Executive Officer, the President, the Chief Financial Officer, the
Director of Retail Operations and the Investment Manager of the Company, in
accordance with policies approved by the Board of Directors of the Company. The
Asset/Liability Management Committee meets monthly or as
44
48
needed to review, among other things, the sensitivity of the Company's assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities and prepayments
of loans, investments and borrowings. The Asset/Liability Management Committee
also approves and establishes pricing and funding decisions with respect to
overall asset and liability composition and reports to the full Board of
Directors.
One of the primary goals of the Company's Asset/Liability Management
Committee is to effectively increase the duration of the Company's liabilities
and/or effectively contract the duration of the Company's assets so that the
respective durations are matched as closely as possible. This duration
adjustment can be accomplished either internally by restructuring the Company's
balance sheet, or externally by adjusting the duration of the Company's assets
and/or liabilities through the use of hedging contracts, such as interest rate
swaps, caps and floors. Although the Company has in the past hedged its interest
rate exposure externally through the use of various hedging contracts, the
Company's current strategy is to hedge internally through the use of core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments and FHLB advances, together with an emphasis on investing in
shorter-term or adjustable rate assets which are more responsive to changes in
interest rates, such as adjustable rate U.S. Government agency mortgage-backed
securities, short-term U.S. Government agency securities and commercial and
consumer loans. The foregoing strategies are more fully described below.
A commonly used method for evaluating interest rate risk includes an
analysis of the 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. Normally, 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. Due to differences between
institutions' balance sheets, these variances may affect institutions
differently. 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.
45
49
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1999, based on the information and assumptions set forth in the
notes below.
More Than
Three to More Than Three Years
Within Three Twelve One Year to to Five Over Five
Months Months Three Years Years Years Total
------------ ---------- ----------- ----------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets (1):
Loans receivable (2) $ 549,267 $ 238,622 $ 294,733 $ 377,534 $ 247,961 $1,708,117
Securities (3) 168,462 47,219 122,448 110,503 79,959 528,591
Other interest-earning assets (4) 80,642 -- -- -- -- 80,642
---------- ---------- ---------- ---------- ---------- ----------
Total $ 798,371 $ 285,841 $ 417,181 $ 488,037 $ 327,920 $2,317,350
========== ========== ========== ========== ========== ==========
Interest-bearing liabilities:
Deposits (5):
Money market and NOW
accounts $ 121,618 $ 18,063 $ 36,917 $ 26,860 $ 128,764 $ 332,222
Passbook accounts 4,727 14,182 24,483 13,512 16,642 73,546
Certificates of deposit 430,199 554,959 304,495 25,372 945 1,315,970
Borrowings:
FHLB advances (6) 277,005 25,000 -- -- 30 302,035
Senior notes -- -- -- 75,250 -- 75,250
---------- ---------- ---------- ---------- ---------- ----------
Total $ 833,549 $ 612,204 $ 365,895 $ 140,994 $ 146,381 $2,099,023
========== ========== ========== ========== ========== ==========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities $ (35,178) $ (326,363) $ 51,286 $ 347,043 $ 181,539 $ 218,327
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (35,178) $ (361,541) $ (310,255) $ 36,788 $ 218,327 $ 218,327
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets (1.48)% (15.18)% (13.03)% 1.54% 9.17% 9.17%
========== ========== ========== ========== ========== ==========
- -------------------------
(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 and FHLB
and FRB 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 call date rather than actual maturity date.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and economic value of equity ("EVE"), which is defined as
the net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and EVE that is authorized by the Board
of Directors of the Company.
46
50
The following tables set forth for the indicated dates the estimated
dollar and percentage change in the Company's net interest income over a four
quarter period and EVE based on the indicated changes in interest rates.
December 31, 1999 December 31, 1998
Net Interest Income Net Interest Income
(next four quarters) (next four quarters)
- ------------------ ------------------------------ ----------------------------
Change (in Basis Estimated Change Estimated Change
Points) in From Base % Change From Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
- ------------------ ---------------- --------- ---------------- ---------
+200 (10,771) (14) (5,494) (8)
+100 (4,985) (6) (1,259) (2)
0 76,842(2) -- 66,895(2) --
-100 6,990 9 14,141 21
-200 20,942 27 17,474 26
December 31, 1999 December 31, 1998
EVE EVE
- ------------------ ------------------------------ ----------------------------
Change (in Basis Estimated Change Estimated Change
Points) in From Base % Change From Base % Change
Interest Rates (1) (000's) from Base (000's) from Base
- ------------------ ---------------- --------- ---------------- ---------
+200 (44,864) (25) (34,595) (26)
+100 (21,150) (12) (13,739) (10)
0 179,137 - 134,252 -
-100 17,164 10 3,755 3
-200 16,143 9 1,973 1
- -------------------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) The base net interest income is an estimate made by utilizing yields and
rates on assets and liabilities in the existing balance sheet as of the
dates shown adjusted for assumptions based on, among other things, future
loan and deposit changes and estimated loan prepayment speeds.
The difference between December 31, 1998 and December 31, 1999 net
interest income in the base case is mainly due to an increase in interest
earning assets.
The difference between December 31, 1998 and December 31, 1999 EVE in
the base case is mainly due to the change from using industry-wide deposit decay
rates to applying Company historical decay rates to deposit accounts resulting
in longer durations for these deposits and increasing EVE. The difference in EVE
in the down shocks at December 31, 1999 versus December 31, 1998 is mainly due
to loans and securities increasing in market value to a greater degree at
December 31, 1999 due to the slowing of prepayment speeds and resultant longer
durations.
The model reflects only the effects of assumptions made by management
while running the different interest rate shocks. The only variables between the
different rate shocks are the interest rates and the prepayment speeds.
47
51
The prepayment assumptions used in the model are based on historical
and market estimates. Standard present value calculation methodology is used to
discount the estimated future cash flows of assets and liabilities at
appropriate discount rates. The market value for COFI-indexed CMOs is obtained
through a Bloomberg calculator.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates are reasonable; however, the interest rate sensitivity of the Company's
assets and liabilities and the estimated effects of changes in interest rates on
the Company's net interest income and EVE could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which they are based.
The preceding discussion about the Company's risk management activities
includes "forward-looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial statements at F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in and/or disagreements with accountants on
accounting and financial disclosure during the years ended December 31, 1999 and
1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information provided below regarding the Company's
executive officers, the information required in response to this Item is
incorporated herein by reference from the Company's proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by this report.
The following table sets forth the name and age of each executive
officer, his principal position with the Company, and the year he became an
officer.
Officer
Name Age Since Position
---- --- ------- --------
Edward A. Townsend 58 1997 Chief Executive Officer
Jan A. Norton 53 1997 President
Robert L. Vanden 53 1990 Executive Vice President of the Bank
Richard L. Park 68 1997 Executive Vice President
and Chief Financial Officer
Christopher C. Turner 41 1983 Executive Vice President of the Bank
James N. Young 51 1998 Executive Vice President, President
Tulsa Regional, and Manager of
Commercial Lending of the Bank
Harold A. Bowers 56 1998 Executive Vice President
and Chief Credit Officer of the Bank
William C. Lee 60 1998 Executive Vice President
Operations Division of the Bank
48
52
Biographical information regarding Messrs. Edward A. Townsend, Jan A.
Norton and Robert L. Vanden are incorporated herein by reference to the
Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this report. Biographical information regarding
Messrs. Richard L. Park, Christopher C. Turner, James N. Young, Harold A. Bowers
and William C. Lee are set forth below.
The executive officers serve until their successors are elected and
qualified. No executive officer is related to any director or other executive
office of the Company by blood, marriage or adoption. There are no arrangements
or understandings between any director of the Company and any other person
pursuant to which such person was elected an executive officer.
Richard L. Park. Mr. Park began serving as Executive Vice President and
Chief Financial Officer of the Company and the Bank in charge of finance in
September 1997. Mr. Park served as Chief Financial Officer of Green Country Bank
from October 1996 to February 1998, which was acquired by the Company. From
January 1991 through May 1996, Mr. Park was Chief Financial Officer of Western
Farm Credit Bank in Sacramento, California, the Eleventh District Bank in the
Federal Farm Credit System. Mr. Park is a Certified Public Accountant.
Christopher C. Turner. Mr. Turner has served as Executive Vice
President of the Bank in charge of residential and consumer lending, branch
administration and marketing since October 1996. Prior to October 1996, Mr.
Turner held various positions in the bank including Internal Audit Director,
Marketing Director and Director of Branch Administration. He joined the Company
in November 1980.
James N. Young. Mr. Young serves as President, Tulsa Region and manager
of Commercial Lending. From 1973 to 1994, Mr. Young served in various commercial
lending capacities with Bank of Oklahoma in both Tulsa and Oklahoma City, his
last assignment being President, Oklahoma City. From 1994 to January 1998, he
served as Senior Commercial Lending Manager for BankIV and its successors,
Boatmen's Bank and NationsBank in Oklahoma City. His last position with
NationsBank was President, Oklahoma City, and Senior Commercial Lending Manager
for the state of Oklahoma. Mr. Young joined Local in February 1998.
Harold A. Bowers. Mr. Bowers serves as Executive Vice President and
Chief Credit Officer. After serving four years as an officer in the United
States Air Force, Mr. Bowers started his banking career with Liberty National
Bank, Oklahoma City, Oklahoma. From 1970 to 1980 he served in various credit
capacities ultimately serving 6 years as Manager of Loan Administration. In
1980-81 he managed the Credit Department for Bank of Oklahoma, Tulsa, Oklahoma.
From 1981 to 1998, Mr. Bowers served with NationsBank and its predecessor banks
with both senior credit and commercial lending management responsibilities. Mr.
Bower joined Local in May 1998.
William C. Lee. Mr. Lee serves as Executive Vice President and is the
Bank's principal Operations Officer. Mr. Lee joined Local in May 1998. Prior to
joining the Bank, Mr. Lee was Executive Vice President and Chief Financial
Officer of the Annuity Board of the Southern Baptist Convention, a pension and
insurance management company, joining that institution in July 1991. Mr. Lee is
a Director of Ultrak, Inc. and is a Certified Public Accountant.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated
herein by reference from the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
49
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated
herein by reference from the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated
herein by reference from the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following financial statements for the Years
Ended December 31, 1999 and 1998, Six Months Ended December 31, 1997 and Year
Ended June 30, 1997 are filed as part of this report:
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Statements of Financial Condition as of December 31, 1999
and December 31, 1998.
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998, Six Months Ended December 31, 1997 and for the Year
Ended June 30, 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998, Six Months Ended December 31, 1997 and for
the Year Ended June 30, 1997.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998, Six Months Ended December 31, 1997 and for the Year
Ended June 30, 1997.
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
No financial statement schedules are included because they are not
required, not applicable, or the required information is contained
elsewhere.
(a)(3) Management Contracts or Compensatory Plan Arrangements
See exhibits marked with a double asterisk in Item 14(c) below.
50
54
(b) Reports on Form 8-K
On October 15, 1999, Local Financial Corporation issued a press release
announcing the acquisition of Guthrie Savings, Inc., which operates as
Guthrie Federal Savings Bank.
On October 26, 1999, Local Financial Corporation issued a press release
announcing its third quarter earnings.
On February 4, 2000, Local Financial Corporation issued a press release
announcing its earnings for 1999.
51
55
(c) List of Exhibits.
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1* Certificate of Incorporation of Local Financial Corporation
("Local Financial")(1)
3.2* Certificate of Amendment of Local Financial(1)
3.3* Bylaws of Local Financial(1)
4.3* Indenture between Local Financial and The Bank of New York
("BONY"), as Trustee, dated September 8, 1997
4.4* Form of Common Stock certificate of Local Financial
4.5* Form of Senior Note (included in Exhibit 4.3)
10.7* Employment Agreement between Local Financial and Edward A.
Townsend, dated September 8, 1997(2)*
10.8* Employment Agreement between Local Financial and Jan A.
Norton, dated September 8, 1997(2)*
10.10* Local Financial Stock Option Agreement between Local Financial
and Edward A. Townsend, dated September 8, 1997(2)*
10.11 Local Financial Corporation 1998 Stock Option Plan(2)*
10.12 Form of Severance Agreement, dated January 1, 1999(2)*
10.13 First Amendment to Employment Agreement between Local
Financial and Edward A. Townsend dated November 6, 1998(2)
10.14 First Amendment to Employment Agreement between Local
Financial and Jan A. Norton dated November 6, 1998(2)
10.15 1998 Non-qualified Stock Option Agreement between Local
Financial and Edward A. Townsend dated September 23, 1998(2)
10.16 1998 Non-qualified Stock Option Agreement between Local
Financial and Jan A. Norton dated September 23, 1998(2)
21.0* Subsidiaries of the Registrant(3)
27.0 Financial Data Schedule
- -------------------------
(1) *These exhibits were filed with the Company's Registration Statement Form
S-1, Registration No. 333-43727 (effective April 21, 1998) and are
incorporated by reference herein.
(2) These exhibits were filed with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and are incorporated by reference herein.
(3) This exhibit was filed with the Company's Post-Effective Amendment No. 1 to
its Registration Statement on form S-1, Registration No. 333-43727
(effective April 21, 1999) and is incorporated by reference herein.
*Exhibits identified with an asterisk are management contracts or are
compensatory plans or arrangements.
52
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 7, 2000 By: /s/ Edward A. Townsend
------------------------------------
Chairman and Chief Executive Officer
Date March 7, 2000 By: /s/ Richard L. Park
------------------------------------
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date March 7, 2000 By: /s/ Robert A. Kotecki
------------------------------------
Robert A. Kotecki, Director
Date March 7, 2000 By: /s/ Joseph A. Leone
------------------------------------
Joseph A. Leone, Director
Date March 7, 2000 By: /s/ George Nigh
------------------------------------
George Nigh, Director
Date March 7, 2000 By: /s/ Jan A. Norton
------------------------------------
Jan A. Norton, Director
Date March 7, 2000 By: /s/ Edward A. Townsend
------------------------------------
Edward A. Townsend, Director
Date March 7, 2000 By: /s/ Kenneth W. Townsend
------------------------------------
Kenneth W. Townsend, Director
Date March 7, 2000 By: /s/ J. David Rosenberg
------------------------------------
J. David Rosenberg, Director
Date March 7, 2000 By: /s/ Andrew M. Coats
------------------------------------
Andrew M. Coats, Director
53
57
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report....................................F-1
Report of Independent Public Accountants........................F-2
Audited Consolidated Financial Statements:
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998.............................F-3
Consolidated Statements of Operations
for the Years Ended December 31, 1999 and 1998,
Six Months Ended December 31, 1997
and the Year Ended June 30, 1997.............................F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999 and 1998,
Six Months Ended December 31, 1997
and the Year Ended June 30, 1997.............................F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999 and 1998,
Six Months Ended December 31, 1997
and the Year Ended June 30, 1997.............................F-6
Notes to Consolidated Financial Statements
for December 31, 1999, 1998 and 1997 and June 30, 1997.......F-9
54
58
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Local Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Local Financial Corporation and subsidiary (the Company) as of December 31,
1999 and 1998, and related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1999 and 1998, and for
the six months ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Local Financial
Corporation and subsidiary as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999 and
1998, and for the six months ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
February 4, 2000
F-1
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Local Financial Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Local Financial Corporation and
subsidiary (the "Company"), for the year ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, stockholders' equity
and cash flows referred to above present fairly, in all material respects, the
results of operations and cash flows of Local Financial Corporation and
subsidiary for the year ended June 30, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Oklahoma City, Oklahoma
August 27, 1997 (except with
respect to the matter discussed
in Note 2, as to which the date
is September 8, 1997)
F-2
60
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(Dollars in thousands, except share data)
ASSETS 1999 1998
---------- ----------
Cash and due from banks $ 48,122 27,180
Interest bearing deposits with other banks 7,700 27,700
Securities available for sale 529,230 570,964
Loans receivable, net of allowance for loan losses of
$28,297 at December 31, 1999 and $27,901 at December 31, 1998 1,685,550 1,362,272
Federal Home Loan Bank of Topeka stock and Federal Reserve Bank stock, at cost 24,820 42,693
Premises and equipment, net 31,805 23,959
Assets acquired through foreclosure and repossession, net 723 693
Intangible assets, net 18,227 17,843
Current and deferred taxes, net 14,217 29,250
Other assets 21,213 26,425
---------- ----------
Total assets $2,381,607 2,128,979
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 458,824 379,796
Savings 73,546 74,963
Time 1,315,970 1,213,315
---------- ----------
Total deposits 1,848,340 1,668,074
Advances from the Federal Home Loan Bank of Topeka 302,035 220,033
Senior notes 75,250 80,000
Other liabilities 27,688 42,066
---------- ----------
Total liabilities 2,253,313 2,010,173
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
20,537,269 shares issued and 20,537,209
shares outstanding at December 31, 1999 and 1998 205 205
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Additional paid-in capital 206,758 206,758
Retained earnings 72,189 50,197
Treasury stock, 60 shares, at cost (151,274) (149,436)
Accumulated other comprehensive income 416 11,082
---------- ----------
Total stockholders' equity 128,294 118,806
---------- ----------
Total liabilities and stockholders' equity $2,381,607 2,128,979
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
61
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollars in thousands, except share data)
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
----------- ------------ ------------ -----------
Interest and dividend income:
Loans $ 130,869 96,851 49,788 107,715
Securities available for sale 34,141 41,862 28,113 81,861
Securities held to maturity -- -- 3,193 27,363
Federal Home Loan Bank of Topeka and
Federal Reserve Bank stock 2,215 3,474 1,677 3,658
Other investments 1,073 5,017 2,433 2,067
----------- ------------ ------------ -----------
Total interest and dividend income 168,298 147,204 85,204 222,664
Interest expense:
Deposit accounts 70,576 74,743 40,672 83,091
Advances from the Federal Home Loan
Bank of Topeka 14,901 7,547 14,005 57,442
Securities sold under agreements to
repurchase -- 678 2,073 28,202
Notes payable 9,310 9,470 3,073 1,026
----------- ------------ ------------ -----------
Total interest expense 94,787 92,438 59,823 169,761
Net interest and dividend income 73,511 54,766 25,381 52,903
Provision for loan losses (2,000) (1,450) (25,578) (28,428)
----------- ------------ ------------ -----------
Net interest and dividend income (loss)
after provision for loan losses 71,511 53,316 (197) 24,475
----------- ------------ ------------ -----------
Noninterest income:
Deposit related income 13,606 10,389 4,105 7,410
Loan fees and loan service charges 2,679 1,737 981 2,730
Net gains (losses) on sale of assets 1,201 932 (112,669) (29,183)
Other 1,056 1,724 434 1,919
----------- ------------ ------------ -----------
Total noninterest income (loss) 18,542 14,782 (107,149) (17,124)
----------- ------------ ------------ -----------
Noninterest expense:
Compensation and employee benefits 28,193 19,287 7,731 14,588
Deposit insurance premiums 898 1,323 522 12,470
Provision for uninsured risk -- -- -- 3,300
Equipment and data processing 5,942 4,276 1,485 3,080
Occupancy 4,033 3,029 1,416 2,873
Advertising 1,498 2,080 522 1,556
Professional fees 2,587 2,142 984 1,152
Other 12,026 7,270 10,025 10,237
----------- ------------ ------------ -----------
Total noninterest expense 55,177 39,407 22,685 49,256
----------- ------------ ------------ -----------
Income (loss) before provision (benefit) for income taxes
and extraordinary item 34,876 28,691 (130,031) (41,905)
Provision (benefit) for income taxes 12,627 10,254 (44,075) (11,860)
----------- ------------ ------------ -----------
Income (loss) before extraordinary item 22,249 18,437 (85,956) (30,045)
Extraordinary item - purchase and retirement of
senior notes, net of tax (257) -- -- --
----------- ------------ ------------ -----------
Net income (loss) $ 21,992 18,437 (85,956) (30,045)
=========== ============ ============ ===========
Net income (loss) per share:
Income (loss) before extraordinary item:
Basic $ 1.08 0.90 (4.76) (1.95)
=========== ============ ============ ===========
Diluted $ 1.08 0.89 (4.76) (1.95)
=========== ============ ============ ===========
Net income (loss):
Basic $ 1.07 0.90 (4.76) (1.95)
=========== ============ ============ ===========
Diluted $ 1.07 0.89 (4.76) (1.95)
=========== ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
62
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years ended December 31, 1999 and 1998,
Six Months ended December 31, 1997 and
For the Year ended June 30, 1997
(Dollars in thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME(LOSS) EQUITY
-------- -------- -------- -------- ----------- --------
Balance, June 30, 1996 $ -- 8,797 147,761 -- (48,499) 108,059
Comprehensive income (loss):
Net loss -- -- (30,045) -- -- (30,045)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- -- -- 16,516 16,516
--------
Comprehensive income (loss) (13,529)
Capital contribution -- 8,099 -- -- -- 8,099
-------- -------- -------- -------- -------- --------
Balance, June 30, 1997 -- 16,896 117,716 -- (31,983) 102,629
Comprehensive income (loss):
Net loss -- -- (85,956) -- -- (85,956)
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- -- -- 34,321 34,321
--------
Comprehensive income (loss) (51,635)
Issuance of common stock 197 180,870 -- -- -- 181,067
Purchase of treasury stock -- -- -- (149,436) -- (149,436)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 197 197,766 31,760 (149,436) 2,338 82,625
Comprehensive income:
Net income -- -- 18,437 -- -- 18,437
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- -- -- 8,744 8,744
--------
Comprehensive income 27,181
Issuance of common stock 8 8,992 -- -- -- 9,000
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 205 206,758 50,197 (149,436) 11,082 118,806
Comprehensive income:
Net income -- -- 21,992 -- -- 21,992
Net change in unrealized gains on securities available
for sale, net of reclassification adjustment -- -- -- -- (10,666) (10,666)
--------
Comprehensive income 11,326
Settlement of the Redemption Agreement (note 2) -- -- -- (1,838) -- (1,838)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1999 $ 205 206,758 72,189 (151,274) 416 128,294
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
63
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
-------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------- ---------- ---------- ----------
Cash provided by operating activities:
Net income (loss) $ 21,992 18,437 (85,956) (30,045)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provisions for loan losses and
uninsured risk and losses on
assets acquired through
foreclosure and repossession 2,000 1,450 25,641 31,804
Deferred income tax expense (benefit) 7,941 11,259 (27,585) (1,429)
Accretion of discounts on loans
acquired (1,220) (2,836) (2,963) (6,019)
Amortization of deferred losses on
interest rate swaps -- -- 806 73
Amortization (accretion) of
premium (discount) on securities
available for sale, net (3,188) (5,390) (95) 8,265
Net amortization of premium on
securities held to maturity -- -- 97 2,090
Depreciation and amortization 3,261 3,448 1,347 2,688
Net change in loans held for sale 9,387 (9,055) 11,416 12,132
(Gain) loss on sale of assets (1,201) (932) 112,669 29,183
Stock dividends received from
Federal Home Loan Bank stock (2,070) (3,474) (1,677) (3,658)
Change in other assets 10,308 20,862 (15,299) (5,332)
Change in other liabilities (9,009) (1,140) 9,282 (9,296)
---------- ---------- ---------- ----------
Net cash provided by
operating activities 38,201 32,629 27,683 30,456
---------- ---------- ---------- ----------
Cash provided (absorbed) by investing activities:
Proceeds from sales of securities
available for sale 160,174 47,764 865,146 730,957
Proceeds from principal collections
on securities available for sale 246,140 233,323 52,735 13,245
Proceeds from principal collections
on securities held to maturity -- -- 28,054 52,161
Purchase of securities available for sale (367,496) (272,937) (6,001) --
Purchase of securities held to maturity -- -- (74,440) (73,389)
Payments on termination of interest
rate swap agreements -- -- (47,283) --
Proceeds from sales of equity
securities available for sale -- -- -- 12,986
F-6 (Continued)
64
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
-------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------- ---------- ---------- ----------
Purchases of securities under
agreements to resell $ -- (1,139,462) (424,000) --
Proceeds from maturity of securities
purchased under agreements to resell -- 1,317,462 246,000 --
Purchases of Federal Home Loan
Bank and Federal Reserve Bank stock (4,659) -- (3,424) (80,850)
Proceeds from the sale of Federal
Home Loan Bank and Federal Reserve Bank stock 24,602 8,797 -- 67,883
Loans made by non-bank subsidiary -- -- (26) (29,213)
Repayments of loans made by
non-bank subsidiary -- -- 13,710 49,755
Proceeds from the sales of loans -- 29,592 -- --
Change in loans receivable, net (308,612) (184,306) (24,814) (63,247)
Proceeds from disposal of assets
acquired through foreclosure and
repossession 1,757 738 6,381 18,257
Purchases of premises and equipment (9,933) (4,923) (465) (1,480)
Proceeds from sales of premises and
equipment 1,313 130 25 9
Cash paid in acquisition of Guthrie Savings, Inc., net
of cash and cash equivalents received (840) -- -- --
Cash acquired in acquisition of
Green Country Banking Corporation -- 2,512 -- --
Cash paid in acquisition of BankSouth
Corporation, net of cash and
cash equivalents received -- (12,966) -- --
---------- ---------- ---------- ----------
Net cash provided (absorbed) by
investing activities (257,554) 25,724 631,598 697,074
---------- ---------- ---------- ----------
Change in transaction accounts 63,320 39,809 (3,697) 7,635
Change in time deposits 80,250 (212,923) (38,126) 34,261
Change in securities sold under
agreements to repurchase -- -- (312,774) (770,223)
Preceeds from advances from the
Federal Home Loan Bank 655,237 918,905 1,303,599 9,978,290
Repayments of advances from the
Federal Home Loan Bank (573,235) (799,608) (1,757,377) (9,886,271)
Proceeds from issuance of common stock -- -- 181,067 --
Proceeds from issuance of senior notes -- -- 80,000 --
Payments of debt issuance costs -- -- (4,344) --
Repayments of note payable -- -- (7,010) --
Purchase of Senior notes (4,750) -- -- --
Purchase of treasury stock -- -- (149,436) --
Payment of liability assumed from
Green Country Banking Corporation -- (3,162) -- --
Change in advances by borrowers for
taxes and insurance (527) (646) (2,435) 542
---------- ---------- ---------- ----------
Net cash provided (absorbed) by
financing activities 220,295 (57,625) (710,533) (635,766)
---------- ---------- ---------- ----------
F-7 (Continued)
65
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(dollars in thousands)
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------- ---------- ------------ ----------
Net change in cash and cash equivalents $ 942 728 (51,252) 91,764
Cash and cash equivalents at beginning of
period 54,880 54,152 105,404 13,640
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 55,822 54,880 54,152 105,404
========== ========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 94,003 90,636 60,190 173,920
========== ========== ========== ==========
Income taxes $ (8,890) (12,042) (1,631) --
========== ========== ========== ==========
Supplemental schedule of noncash
investing and financing activities:
Loans made to facilitate the sale of
assets acquired through
foreclosure and repossession $ -- -- -- 79
========== ========== ========== ==========
Transfers of loans to assets acquired
through foreclosure and repossession $ 1,787 797 4,273 16,000
========== ========== ========== ==========
Transfer of investments from held to
maturity to available for sale at
estimated market value (amortized cost
of $454,496 for the six months ended
December 31, 1997) $ -- -- 448,180 --
========== ========== ========== ==========
Transfer of debt securities to
available for sale loans $ -- -- 1,425 --
========== ========== ========== ==========
Repayment of note payable and
accrued interest by shareholders $ -- -- -- 8,099
========== ========== ========== ==========
Transfer of assets acquired through
foreclosure and repossessions to
other assets $ -- -- 6,045 --
========== ========== ========== ==========
Receivable on loans sold in other
assets $ -- -- 34,594 --
========== ========== ========== ==========
Stock issued in acquisition of Green
Country Banking Corporation
(See note 3) $ -- 9,000 -- --
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
66
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Local Financial Corporation (Local Financial) is a bank holding company
which owns 100% of the outstanding common stock of Local Oklahoma Bank,
N.A. (Local). On March 31, 1999, Local Financial completed its merger of
Local America Bank of Tulsa (LAB) into LAB's parent company, Local Federal
Bank, with the merged entity operating under the name Local Oklahoma Bank.
The merger was accounted for at historical cost as a combination of
entities under common control similar to a pooling of interests. During
1999, Local filed an application with the Office of the Comptroller to
convert to a national banking association. Concurrent with Local's charter
conversion, Local Financial filed an application with the Federal Reserve
Board to become registered as a bank holding company. Both applications
were subsequently approved and Local converted to a national banking
association on May 11, 1999. The accounting and reporting practices of
Local Financial and its subsidiary reflect industry practices and are in
accordance with generally accepted accounting principles. The more
significant policies are described below.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Local Financial and its wholly owned subsidiary, Local, as
well as Local's subsidiaries, Local Acceptance Company (Local
Acceptance), Star Financial Services Corporation (Star Financial),
Local Mortgage Corporation (Local Mortgage), Local Securities
Corporation (Local Securities), and Star Properties, Incorporated
(Star Properties). Local is an insured depository institution which
obtains deposit funds primarily through retail branches throughout the
State of Oklahoma and lends those funds throughout the United States.
Local Acceptance's and Star Financial's principal activities were
originating auto loan contracts through dealerships in Florida and
Oklahoma, respectively (operations ceased as of December 31, 1997).
Local Mortgage and Star Properties are currently inactive. Local
Securities is a registered broker-dealer under the Securities Exchange
Act of 1934 and provides retail investment products to customers of
Local. Local Financial and its subsidiary, Local, are collectively
referred to as the Company. All significant intercompany accounts and
transactions have been eliminated in the accompanying consolidated
financial statements.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions. Those estimates and
assumptions relate principally to the determination of the allowance
for loan losses, income taxes, the valuation of assets acquired
through foreclosure and repossession and the fair value of financial
instruments. Actual results could differ from those estimates. The
accounting policies for these items and other significant accounting
policies are presented below.
(b) STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, the
Company defines cash and cash equivalents as cash and due from banks
and interest bearing deposits with other banks.
F-9 (Continued)
67
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(c) SECURITIES
The Company's securities consist primarily of mortgage-backed
certificates and U. S. Government and agencies securities.
Mortgage-backed certificates consist of mortgage-backed pass-through
certificates (MBS) and mortgage-derivative securities (MDS) such as
collateralized mortgage obligations and real estate mortgage
investment conduits. Local does not own any principal only, interest
only or residual tranches of mortgage-backed certificates. The Company
classifies its securities as held to maturity, available for sale and
held for trading. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held to maturity
securities are those securities for which the Company has the ability
and intent to hold until maturity. No investment securities within the
portfolio are considered trading or held to maturity at December 31,
1999 and 1998. The Company has classified all of its securities as
available for sale. At the time of purchase, the Company classifies
securities as available for sale when such securities may be sold at a
future date or if there are foreseeable circumstances under which the
Company would sell such securities prior to maturity.
Securities classified as available for sale are recorded at their
estimated market value. Changes in the estimated market value of
securities available for sale are included in stockholders' equity,
net of deferred taxes, as accumulated other comprehensive income.
Unrealized losses on available for sale securities, which are judged
to be other than temporary, are charged to earnings in the
consolidated statements of operations (see Note 5). Gains and losses
on available for sale securities are computed on a specific
identification basis. Premiums and discounts are amortized or accreted
in the consolidated statements of operations to approximate a level
yield over the life of the related security.
Investment in Federal Reserve Bank (FRB) and Federal Home Loan Bank of
Topeka (FHLB) stock are required investments and are carried at cost.
(d) LOANS RECEIVABLE
Loans receivable are recorded at the contractual amounts owed by
borrowers, less deferred fees, unearned interest, the allowance for
loan losses, undisbursed funds, and discounts on loans acquired or
originated. Interest on loans is credited to income as earned, to the
extent deemed collectible. Discounts on loans and unearned interest on
consumer loans are accreted into interest income to approximate a
level yield over the contractual lives of the loans, adjusted for
actual prepayments.
Loans are placed on nonaccrual status when they become 90 days past
due. Previously accrued but uncollected interest on loans placed on
nonaccrual status is reversed unless determined to be fully
collectible. Payments received on nonaccrual loans are generally
applied to principal as they are received. Upon full collection of the
principal balance or determination that future collection of principal
is probable, interest income is recognized as received.
F-10 (Continued)
68
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(e) PROVISION AND ALLOWANCE FOR LOAN LOSSES
Each period the provision for loan losses in the consolidated
statements of operations results from the combination of a) an
estimate by management of loan losses that occurred during the current
period and b) the ongoing adjustment of prior estimates of losses
occurring in prior periods.
To serve as a basis for making this provision each quarter, the
Company maintains an extensive credit risk monitoring process that
considers several factors including: current economic conditions
affecting the Company's customers, the payment performance of
individual large loans and pools of homogeneous small loans, portfolio
seasoning, changes in collateral values, and detailed reviews of
specific large loan relationships. For large loans deemed to be
impaired due to an expectation that all contractual payments will
probably not be received, impairment is measured by comparing the
Company's recorded investment in the loan to the present value of
expected cash flows discounted at the loan's effective interest rate,
the fair value of the collateral or the loan's observable market
price.
The provision for loan losses increases the allowance for loan losses,
a valuation account which is netted against loans on the consolidated
statements of financial condition. As the specific customer and amount
of a loan loss is confirmed by gathering additional information,
taking collateral in full or partial settlement of the loan,
bankruptcy of the borrower, etc., the loan is written down, reducing
the allowance for loan losses. If, subsequent to a writedown, the
Company is able to collect additional amounts from the customer or
obtain control of collateral worth more than previously estimated, a
recovery is recorded, thus increasing the allowance for loan losses.
(f) LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND RELATED COSTS
The Company defers loan origination fees, loan commitment fees and the
incremental direct costs (principally compensation and benefits
relating to successful underwriting efforts) relative to loans
originated. These deferred fees and costs are amortized into interest
income to approximate a level yield over the life of the related
loans, adjusted for actual prepayments.
Other loan fees such as loan servicing fees, late payment fees and
prepayment penalties are included as a component of noninterest income
in the accompanying consolidated statements of operations.
(g) LOANS HELD FOR SALE AND GAINS AND LOSSES FROM THE SALE OF LOANS
Loans originated and intended for sale are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized losses
are recognized through a valuation allowance by charges to income.
There were no loans other than residential real estate and student
loans held for sale at December 31, 1999 and 1998.
Gains and losses resulting from the sale of loans are determined by
the specific identification method and reflect the extent that sales
proceeds exceed or are less than the carrying value of the loans sold.
In some cases, the Company sells loans and continues to service such
loans for
F-11 (Continued)
69
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
the investor. In these cases, the Company recognizes either a
servicing asset, at its allocated previous carrying amount based on
relative fair value, or a servicing liability at fair value. Any
servicing assets recognized as part of the sale are amortized as a
deduction from servicing income in proportion to and over the period
of estimated net servicing income. To the extent sales of loans
involve the sale of part of a loan or a pool of loans, the cost basis
is allocated based upon the relative fair value of the portion sold
and the portion retained. Impairment of servicing assets is assessed
based on the fair value of those assets. Fair values are estimated
using discounted cash flows based on a current market interest rate.
At December 31, 1999 and 1998, the carrying value of servicing assets
was not impaired.
(h) LOAN SERVICING
Loans serviced by the Company for others are primarily the result of
the Company selling loans while retaining the servicing of those
loans. These loans are not included with loans receivable or any other
asset in the accompanying consolidated statements of financial
condition. Fees earned for servicing loans owned by investors are
reported as income when the related loan payments are collected. Loan
servicing costs are charged to expense as incurred. Loans serviced for
others totaled approximately $102,736,000 and $121,232,000, at
December 31, 1999 and 1998, respectively. Net servicing fees earned
totaled approximately $423,000, $466,000, $291,000 and $521,000 for
the years ended December 31, 1999 and 1998, the six months ended
December 31, 1997, and for the year ended June 30, 1997, respectively,
and are included as a component of loan fees and loan service charges
in the accompanying consolidated statements of operations.
At December 31, 1999 and 1998, unamortized servicing assets were
approximately $1,383,000 and $1,924,000, respectively, and are
included in other assets. Amortization of these assets totaling
approximately $706,000, $1,024,000, $363,000, and $1,006,000, was
charged against loan servicing income for the years ended December 31,
1999 and 1998, the six months ended December 31, 1997 and the year
ended June 30, 1997, respectively.
(i) PREMISES AND EQUIPMENT
Buildings, building improvements, furniture, fixtures and equipment
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets.
Estimated lives range from 25 to 30 years for buildings and building
improvements and 3 to 10 years for furniture, fixtures and equipment.
Maintenance and repairs are charged to expense as incurred and
building improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise
disposed of are eliminated from the accounts and any resulting gains
or losses are credited or charged to income.
(j) ASSETS ACQUIRED THROUGH FORECLOSURE AND REPOSSESSION
Assets acquired through foreclosure and repossession are recorded at
estimated fair value, net of estimated selling costs at the date of
foreclosure or repossession. The values of assets acquired through
foreclosure and repossession are monitored by the Company continually
F-12 (Continued)
70
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
through sales and rental activities and by updated appraisals and
other valuation methods when needed. The allowance for losses on
assets acquired through foreclosure and repossession is an amount
which management believes will be adequate to absorb losses from the
disposition and/or revaluation of these assets. Additions or reversals
of the allowance for losses on assets acquired through foreclosure and
repossession are provided as an expense or a benefit, respectively,
through other expense in the accompanying consolidated statements of
operations. The allowance for losses is charged or reduced as losses
through sales or revaluations are incurred.
(k) DEBT ISSUANCE COSTS
The Company capitalizes all costs related to the issuance of debt.
Unamortized debt issuance costs at December 31, 1999 and 1998, of
approximately $2,855,000 and $3,689,000, respectively, are included in
other assets in the consolidated statements of financial condition.
Debt issuance costs are amortized over the life of the senior notes as
a yield adjustment to notes payable interest expense in the
consolidated statements of operations.
(l) INTANGIBLE ASSETS
Intangible assets consist of goodwill and core deposit premiums.
Goodwill represents the excess cost over fair value of net assets
acquired in 1999 and 1998 and is being amortized on a straight-line
basis over a 15-year period. The Company evaluates the recoverability
of these intangible assets by assessing whether the amortization of
the asset balances over their remaining lives can be recovered through
projected cash flows. The amount of impairment, if any, is measured
based on projected discounted cash flows. No impairment was recognized
at December 31, 1999 and 1998.
Amortization expense totaled approximately $1,654,000 and $1,934,000
for the years ended December 31, 1999 and 1998, respectively, $619,000
for the six months ended December 31, 1997, and $1,238,000 for the
year ended June 30, 1997. Accumulated amortization of goodwill and
core deposit premiums at December 31, 1999 and 1998, totaled
approximately $4,527,000 and $11,473,000, respectively.
(m) INTEREST RATE SWAP, CAP AND FLOOR AGREEMENTS
Interest rate swap, cap and floor agreements may be entered into as a
hedge to stabilize the Company's funding cost and to stabilize the
Company's yield on floating rate debt securities, and as part of the
Company's overall asset/liability management program. The most
frequently used derivative products are various types of interest rate
swaps. However, interest rate caps and floors may also be utilized.
These derivatives are typically classified as either hedges or
synthetic alterations. The criteria that must be satisfied for each of
these classifications are as follows: (i) Hedge - the asset or
liability to be hedged exposes the Company, as a whole, to interest
rate risk; (ii) Synthetic alteration - the asset or liability
converted exposes the Company, as a whole, to interest rate risk and
the derivative is designed and effective as a synthetic alteration of
a statement of financial condition item. Net interest income or
expense from the interest rate swap, cap and floor agreements is
recorded as an adjustment to the interest income/expense of the hedged
asset/liability, respectively. Premiums paid for caps and floors are
amortized over their contractual lives using the straight-line method.
When
F-13 (Continued)
71
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
interest rate swap agreements are sold or settled without the
simultaneous disposition of a hedged item, any gain or loss is
deferred and amortized into interest income or expense over the
remaining term of the swap agreement or until disposition of the
hedged item. As the assets or liabilities being hedged are sold or
liquidated, a proportionate amount of the deferred gain or loss and
unamortized premiums is also recognized. Deferred gains or losses and
unamortized premiums are reflected as an adjustment to the carrying
value of the hedged item in the consolidated statements of financial
condition. There were no such agreements outstanding at December 31,
1999 and 1998.
(n) INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
(o) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based upon the weighted average
number of shares outstanding during the period. Stock options and
warrants to purchase common stock are considered in diluted income per
share calculations, if dilutive, and are computed using the treasury
stock method. As a result of the recapitalization discussed in Note 2,
the weighted average number of shares used in the computation of
income (loss) per share is 15,400,000 for the year ended June 30, 1997
(based on an equivalent number of shares for the 60 shares outstanding
prior to the recapitalization). For the year ended December 31, 1999
and the six months ended December 31, 1997 the weighted average number
of shares are 20,537,209 and 18,066,000, respectively. Stock options
and warrants to purchase common stock discussed in Notes 2 and 18 were
outstanding during the year ended December 31, 1999 and the six months
ended December 31, 1997, but were not included in the computation of
diluted income (loss) per share because the average share price was
below the exercise price during the year ended December 31, 1999, and
because of the net loss for the six months ended December 31, 1997.
The following table reconciles the net income and weighted average
shares outstanding used in the calculation of basic and diluted net
income per share for the year ended December 31, 1998.
WEIGHTED
AVERAGE
SHARES PER SHARE
NET INCOME OUTSTANDING AMOUNT
------------ ------------ ------------
Basic net income per share $ 18,437,000 20,431,698 $ .90
========
Effect of dilutive securities:
Warrants -- 52,599
Options -- 122,822
------------ ------------
Diluted net income per share $ 18,437,000 20,607,119 $ .89
============ ============ ========
F-14 (Continued)
72
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(p) 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. Local has one
active operating subsidiary, Local Securities, which qualifies as a
separate operating segment, however, is it 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 No. 131 "Disclosure
About Segments of an Enterprise and Related Information".
(q) 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 is required to be adopted by the Company in
2001 as set forth in SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". Management does not anticipate this statement to
have a material adverse impact on the consolidated financial position
or the future results of operations of the Company.
(r) RECLASSIFICATIONS
Reclassifications have been made to certain amounts reported in 1998
and 1997 to conform with the 1999 presentation.
(2) CHANGE IN OWNERSHIP AND MANAGEMENT
On September 8, 1997, the Company completed a securities offering in which,
after increasing the number of authorized shares from 2,000 to 25,000,000,
19,700,000 shares of common stock totaling $197,000,000 and $80,000,000 of
11% Senior Notes were issued to individual investors. Of the total net
proceeds received in the offering ($257,300,000), $7,200,000 was used to
repay the note payable and associated accrued interest and approximately
$154,000,000 was used to redeem all of the previously issued and
outstanding shares of the Company's common stock. The redemption amount is
subject to adjustment under terms set forth in the Redemption Agreement, as
defined. Subsequent to September 8, 1997, adjustments totaling
approximately $5,000,000 were assessed against the Selling Shareholders and
were reflected as a reduction to the cost of treasury stock with a
corresponding receivable from the Selling Shareholders of approximately
$5,000,000 recorded in other assets in the consolidated statements of
financial condition. The remainder of the proceeds was used to make capital
contributions to Local of approximately $83,839,000, establish an interest
reserve account for the Senior Notes of approximately $8,800,000 and
establish a cash account of approximately $3,000,000.
In connection with the securities offering and redemption, the existing
board of directors resigned and a new board of directors was appointed. In
addition, a new chief executive officer and a new
F-15 (Continued)
73
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
president of the Company were appointed. Prior to the securities offering
and change in management, the Company's strategy had been to operate a low
cost institution structured around the following areas: (i) a nationally
diversified wholesale commercial real estate mortgage portfolio; (ii) a
retail deposit franchise within Oklahoma operated on a low-overhead basis
delivering a traditional set of thrift products and services, including
conforming single-family residential home loans, equity, student
guaranteed, direct automobile and installment loans through its branch
network; (iii) a wholesale securities portfolio involving derivative
mortgage securities funded both by retail, as well as, wholesale funding
through advances from the FHLB and securities sold under agreements to
repurchase; and (iv) origination of indirect subprime automobile finance
contracts through dealerships in Oklahoma and Florida (originations ceased
in fiscal 1997). New management has among other things, (i) ceased the
wholesale securities strategy previously employed by the Company and caused
the Company to sell all or a substantial portion of its derivative mortgage
portfolio and (ii) utilized the proceeds to repay outstanding advances from
the FHLB and securities sold under agreements to repurchase, as well as
terminated and liquidated the Company's interest rate contracts associated
with the derivative mortgage portfolio and the advances from the FHLB and
securities sold under agreements to repurchase.
In connection with the securities offering, warrants to buy 591,000 shares
of common stock of the Company were issued to the placement agent. The
warrants will be exercisable for a five year period commencing upon the
date of consummation, September 8, 1997, at an exercise price of $10 per
share.
The issuance of new shares of common stock and Senior Notes and redemption
of all previously issued common stock have been accounted for as a
recapitalization with no adjustments to the carrying amounts of assets and
liabilities since none of the new investors individually or in concert
control the Company. Regulatory approval of the change in ownership was not
required as the Office of Thrift Supervision (OTS) does not require
regulatory approval unless an investor or group of investors in concert own
more than 9.9% of the voting common stock.
On August 26, 1999, the Company entered into a settlement of the Redemption
Agreement. As a consequence of the settlement of the Redemption Agreement,
the Company's stockholders' equity was reduced by approximately $1,800,000
by an increase to the cost of treasury stock in the consolidated statements
of financial condition in recognition of the agreed adjustments to the
claims, liabilities and disputes which had arisen (See note 16).
Supplemental cash flow information of noncash activities as a consequence
of the settlement were a transfer from other assets to other liabilities
and treasury stock of approximately $5,712,000 and $1,838,000,
respectively.
(3) ACQUISITIONS
On October 15, 1999, Local acquired Guthrie Savings, Inc. (Guthrie) and its
subsidiary, Guthrie Federal Savings Bank, F.S.B. for approximately
$9,340,000 in cash. This acquisition was accounted for under the purchase
method of accounting in which the purchase price was allocated to the net
assets acquired based upon their fair market values at the date of
acquisition.
F-16 (Continued)
74
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
Unaudited balance sheet information for Guthrie, at fair value, on the date
of acquisition is as follows (in thousands):
Cash and due from banks $ 8,500
Securities available for sale 10,180
Loans receivable, net 25,080
Premises and equipment, net 1,180
Other assets 42
----------
Total assets 44,982
----------
Deposits 36,696
Current and deferred taxes, net 114
Other liabilities 870
----------
Total liabilities 37,680
----------
Net assets at fair value $ 7,302
==========
The excess of the purchase price of approximately $9,340,000 over the net
assets acquired of approximately $7,302,000 was allocated to goodwill. The
resulting goodwill of approximately $2,038,000 is being amortized on a
straight-line basis over 15 years.
On February 16, 1998, Green Country Banking Corporation (Green Country) and
its subsidiary, Green Country Bank, F.S.B., were acquired and merged into
the Company. The acquisition was accounted for as a purchase in which the
purchase price was allocated to the net assets acquired based upon their
fair market values at the date of acquisition. Concurrent with the
acquisition, the Company issued 837,209 shares of its Common Stock for
approximately $9,000,000 to the three existing shareholders of Green
Country; two of the Green Country shareholders are officers and directors
of the Company.
On October 9, 1998, the Company acquired BankSouth Corporation (BankSouth)
for approximately $20,334,000 in cash, which included the redemption of its
preferred stock. This acquisition was accounted for under the purchase
method of accounting in which the purchase price was allocated to the net
assets acquired based upon their fair market values at the date of
acquisition.
The excess of the Green Country and BankSouth purchase price of
approximately $29,334,000 over the net assets acquired of approximately
$11,336,000 was allocated to goodwill. The resulting goodwill of
approximately $17,998,000 is being amortized on a straight-line basis over
15 years.
The following unaudited pro forma information presents the combined results
of operations as if the acquisitions of Guthrie, Green Country, and
BankSouth had occurred as of January 1, 1998, after giving effect to
amortization of goodwill. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
the companies been combined during such periods.
F-17 (Continued)
75
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998
----------------- ------------------
Net interest and dividend income $ 74,829,000 63,180,000
Income before extraordinary item 22,506,000 19,587,000
Net income 22,249,000 19,587,000
Net income per share:
Income before extraordinary item
Basic 1.10 0.96
Diluted 1.10 0.95
Net income
Basic 1.08 0.96
Diluted 1.08 0.95
(4) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell for the year ended December
31, 1998, are summarized as follows (in thousands):
Average outstanding balance $ 70,369
Maximum month-end balance 231,000
Mortgage-backed securities securing the agreements
at period-end:
Carrying value --
Estimated market value --
Securities purchased under agreements to resell are held by the
broker-dealers who arranged the transactions. The agreements generally
mature within one month. There are no securities purchased under agreements
to resell at December 31, 1999 and 1998.
(5) SECURITIES
A comparative summary of securities available for sale is as follows (in
thousands):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------ ------------ ------------
December 31, 1999:
U.S. Government and agency
securities $ 21,900 4 371 21,533
Municipal securities 535 5 -- 540
Collateralized mortgage obligations 493,767 10,479 9,499 494,747
Mortgage-backed securities 12,389 64 43 12,410
---------- ---------- --------- --------
$ 528,591 10,552 9,913 529,230
========== ========== ========= ========
F-18 (Continued)
76
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------ ------------ ------------
December 31, 1998:
U.S. Government and agency
securities $ 38,988 104 -- 39,092
Municipal securities 965 -- -- 965
Collateralized mortgage obligations 505,310 17,231 413 522,128
Mortgage-backed securities 8,653 128 2 8,779
--------- ---------- --------- --------
$ 553,916 17,463 415 570,964
========= ========== ========= ========
Maturities of investment securities classified as available for sale at December
31, 1999, are shown below (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ -------------
Due in one year or less $ 7,626 $ 7,595
Due from one to five years 14,798 14,463
Due greater than five years 11 15
----------- -----------
22,435 22,073
Mortgage-backed securities 12,389 12,410
Collateralized mortgage obligations 493,767 494,747
----------- -----------
$ 528,591 $ 529,230
=========== ===========
During the period following June 30, 1997, and prior to the change in
ownership of the Company on September 8, 1997, the Company purchased
approximately $74,440,000 in agency securities for the held to maturity
portfolio. These short-term securities were purchased to meet liquidity
requirements. Subsequent to the change in ownership of the Company, new
management elected to classify the held to maturity portfolio as available
for sale. The amortized cost of securities held to maturity transferred to
securities available for sale was approximately $454,496,000 with an
unrealized loss of approximately $6,316,000. Also, soon after the change in
ownership, the Company sold approximately $118,480,000 in agency
securities, approximately $75,482,000 in mortgage backed certificates and
approximately $345,176,000 in floating rate securities for a gross loss of
approximately $17,336,000. Management was of the opinion that the fair
value of the floating rate security portfolio would not fully recover the
amortized cost of the portfolio prior to the time of sale. As a result, the
Company recognized through earnings the unrealized loss on the remaining
floating rate portfolio of $54,724,000 which is included in net gains
(losses) on sale of assets in the accompanying consolidated statements of
operations for the six months ended December 31, 1997.
At December 31, 1999 and 1998, securities available for sale included
floating rate securities with an amortized cost of approximately
$156,433,000 and $299,746,000, respectively, and fixed-rate securities of
approximately $372,158,000 and $254,169,000, respectively. The
floating-rate securities' weighted average rate was 8.36% and 7.6% at
December 31, 1999 and 1998, respectively. The fixed rate securities'
weighted average rate was 6.73% and 6.36% at December 31, 1999 and
F-19 (Continued)
77
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
1998, respectively. The overall weighted average rate of securities was
7.21% and 7.05% at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, securities with a total par amount of
$67,719,000 and $276,566,000, respectively, were pledged to secure various
deposits, borrowings, and securitization transactions. Accrued interest
receivable on securities of approximately $3,108,000 and $3,307,000 was
included in other assets at December 31, 1999 and 1998, respectively.
Proceeds from sales of securities available for sale for the years ended
December 31, 1999 and 1998, the six months ended December 31, 1997, and for
the year ended June 30, 1997, were approximately $160,174,000, $47,764,000,
$865,146,000, and $730,957,000, respectively. Gross gains of approximately
$809,000, $2,189,000 and $12,788,000 were realized for the years ended
December 31, 1999 and 1998, and for the six months ended December 31, 1997,
respectively. No gross gains were realized for the year ended June 30,
1997. Gross losses of $685,000, $5,000, $17,398,000, and $29,889,000, were
realized for the years ended December 31, 1999 and 1998, the six months
ended December 31, 1997, and for the year ended June 30, 1997,
respectively, and are included in net gains (losses) on sale of assets in
the accompanying consolidated statements of operations. Gains and losses
from loans securitized and sold are not included above.
In prior years the Company owned Student Loan Marketing Association
Preferred Stock which was sold during 1997. Proceeds from the sale of those
securities during 1997 were approximately $12,986,000 with gross gains of
approximately $307,000 realized in 1997.
(6) LOANS RECEIVABLE
Loans receivable are summarized below at amortized cost (in thousands):
DECEMBER 31,
----------------------------------
1999 1998
----------------- ----------------
Residential real estate loans $ 362,351 344,565
Commercial 1,183,368 927,682
Held for sale 6,801 16,188
Consumer loans 161,327 101,738
----------------- ----------------
Total loans 1,713,847 1,390,173
Less:
Allowance for loan losses (28,297) (27,901)
----------------- ----------------
Loans receivable, net $ 1,685,550 1,362,272
================= ================
Accrued interest receivable on loans of approximately $13,360,000 and
$8,586,000 was included in other assets at December 31, 1999 and 1998,
respectively.
F-20 (Continued)
78
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
An analysis of the allowance for loan losses is as follows (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------------------ DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------------- ----------------- --------------- ----------------
Balance at beginning of period $ 27,901 20,484 11,435 3,228
Allowance acquired 340 7,284 -- --
Loans charged off (3,853) (1,504) (16,554) (20,293)
Recoveries 1,909 187 25 72
---------------- ----------------- --------------- ----------------
Net loans charged off (1,944) (1,317) (16,529) (20,221)
Provision for loan losses, 2,000 1,450 25,578 28,428
primarily related to
indirect automobile
loans prior to 1998
---------------- ----------------- --------------- ----------------
Balance at end of period $ 28,297 27,901 20,484 11,435
================ ================= =============== ================
Other than Oklahoma, the Company has granted commercial real estate loans
to customers principally in Texas, California, New York and Oregon. The
remainder of the Company's portfolio is significantly concentrated in
Oklahoma. Although the Company has a diversified loan portfolio, a
substantial portion of the debtors' ability to honor their loan contracts
is dependent upon the overall economy as well as the economy of the
respective states.
Beginning in fiscal 1994, the Company initiated a subprime indirect
automobile financing program, through dealerships in Oklahoma and Florida.
Loans were generated through a network of principally used automobile
dealers and were extended to borrowers who typically were not eligible for
traditional bank financing, due to past credit problems or inadequate
credit history. Loans were typically extended in amounts to include the
purchase price of the automobile, tag, tax and license fees and optional
credit life and vehicle maintenance warranty insurance coverage. Loan terms
included interest rates ranging from 13.9% to 30.9% and payment periods
ranging from 12 months to 60 months. Due to the nature of the borrowers
involved, a higher than normal risk of borrower default and inability to
collect all amounts due was likely. During fiscal 1997, the Company
experienced greater than expected borrower defaults and resultant losses
and chose to cease all further origination activities. At June 30, 1997,
the subprime loan portfolio totaled approximately $75,545,000, net of
discounts and unearned interest, in which an allowance for loan losses of
approximately $7,684,000, or 10%, of the carrying value of the subprime
loan portfolio had been established. From inception of the program through
December 31, 1997, loan originations totaled approximately $187,832,000
with associated charge offs of approximately $28,650,000 or 15%. The
allowance for loan losses was established for estimated inherent losses
that existed in the auto loan portfolio at June 30, 1997, based primarily
on the delinquency status of the loan portfolio, the estimated value of the
underlying collateral and historical loss experience. In December 1997, the
Company sold the subprime loan portfolio for approximately $43,968,000
which approximated the Company's book value less the valuation allowance.
In connection with the BankSouth acquisition in 1998 (see note 3), the
Company acquired a portfolio of indirect automobile loans of approximately
$20,000,000. Management believes that this portfolio, while containing more
risk than direct automobile loans, represents less risk than the
F-21 (Continued)
79
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
program previously conducted prior to the change in ownership. In
management's opinion, adequate allowances have been established to properly
reflect the losses inherent in these loans at December 31, 1999 and 1998.
At December 31, 1999 and 1998, the Company classified approximately
$2,222,000 and $1,176,000, respectively, of loans as impaired, as defined
by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The
average recorded investment in impaired loans for the years ended December
31, 1999 and 1998, was approximately $957,000 and $1,179,000, respectively.
Interest payments received on impaired loans are recorded as interest
income, unless collection of the remaining recorded investment is doubtful,
at which time the loan is placed on nonaccrual status and payments received
are recorded as reductions of principal. The Company recognized interest
income on impaired loans of approximately $115,000 and $48,000 for the
years ended December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, loans to directors, officers and employees
of the Company aggregated approximately $7,276,000 and $3,662,000,
respectively. In management's opinion, such transactions were made on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and did not involve more than normal risk.
(7) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
DECEMBER 31,
----------------------------------------
1999 1998
------------------- -------------------
Land $ 4,882 4,711
Buildings and building improvements 24,171 20,739
Furniture, fixtures and equipment 20,537 15,474
------------------- -------------------
49,590 40,924
Less accumulated depreciation and amortization (17,785) (16,965)
------------------- -------------------
$ 31,805 23,959
=================== ===================
Depreciation and amortization expense relating to premises and equipment
for the years ended December 31, 1999 and 1998, the six months ended
December 31, 1997 and the year ended June 30, 1997 was approximately
$2,305,000, $1,730,000, $692,000, and $1,450,000, respectively.
(8) ASSETS ACQUIRED THROUGH FORECLOSURE AND REPOSSESSION
Assets acquired through foreclosure and repossession amounted to $723,000
and $693,000 at December 31, 1999 and 1998, net of allowances of $114,000
and $139,000, respectively. For the years ended December 31, 1999 and 1998,
the six months ended December 31, 1997, and for the year ended June 30,
1997, income (expense) from assets acquired through foreclosure and
repossession totaled approximately $(36,000), $(127,000), $69,000, and
$873,000, respectively. The Company records net income (expense) from
assets acquired through foreclosure and repossessions in other noninterest
income if in a net income position or in other noninterest expense if in a
net expense position, while the gain or loss portion is included in net
gains (losses) on sale of assets.
F-22 (Continued)
80
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(9) DEPOSIT ACCOUNTS
Accrued interest on deposit accounts of approximately $4,019,000 and
$4,206,000 was included in other liabilities in the accompanying
consolidated statements of financial condition at December 31, 1999 and
1998, respectively.
The aggregate amount of certificates of deposit with a denomination greater
than $100,000 was approximately $207,000,000 and $93,000,000 at December
31, 1999 and 1998, respectively.
Contractual maturities of time deposits at December 31, 1999, are
summarized as follows (dollars in thousands):
YEAR ENDING DECEMBER 31, AMOUNT
------------------
2000 $ 983,980
2001 266,321
2002 39,351
2003 14,369
2004 and thereafter 11,949
------------------
$ 1,315,970
==================
Legislation was enacted in fiscal 1997 which required institutions
holding deposits insured by the Savings Association Insurance Fund (SAIF)
to pay a one-time fee of approximately 65 cents for each $100 of SAIF
insured deposits. The Company accrued its one-time assessment of
approximately $10,311,000 during September 1996.
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
DECEMBER 31, JUNE 30,
1997 1997
----------------- ---------------
Average outstanding balance $ 57,579 421,706
Weighted average interest rate during the period 5.61% 5.83%
Maximum Month-end balance $ 239,914 942,315
Outstanding balance at the end of the period -- 310,801
Weighted average rate at the end of the period -- 5.55%
Mortgage-backed securities securing the agreements at
period end:
Carrying value $ -- 335,202
Estimated market value -- 322,451
Accrued interest payable at the end of the period -- 1,327
Securities sold under agreements to repurchase were delivered to the
broker-dealers who arranged the transactions. The agreements generally
matured within one month.
Additional interest expense incurred on interest rate swaps not included in
the above average rates totaled approximately $444,000, and $5,227,000, for
the six months ended December 31, 1997, and the year ended June 30, 1997,
respectively.
F-23 (Continued)
81
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
There are no securities sold under agreements to repurchase at December 31,
1999 and 1998. All agreements outstanding at June 30, 1997, were either
retired or replaced with FHLB advances as part of the Company's ongoing
asset/liability management strategy.
(11) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA
Advances from the FHLB are summarized as follows (dollars in thousands):
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACTUAL CONTRACTUAL
BALANCE RATE BALANCE RATE
-------------- -------------- -------------- --------------
Variable rate $ 237,005 5.86% $ -- --%
Fixed rate 65,030 5.50 220,033 4.77
-------------- --------------
$ 302,035 5.78% $ 220,033 4.77%
=============== ============== ============== ==============
At December 31, 1999, the Company had $300,000,000 in borrowing capacity
under a collateralized line of credit with the FHLB. Approximately
$32,000,000 was advanced under the line of credit at December 31, 1999. The
line of credit expires on October 20, 2000, and bears interest at a
floating rate.
Additionally, the Company has letters of credit with the FHLB of
approximately $110,700,000 at December 31, 1999. The letters of credit have
one year terms 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 the letters of credit,
which can include such items as first mortgage loans, investment securities
and interest bearing deposits, which are not already pledged or encumbered.
At December 31, 1999, the Company had approximately $19,819,000 in
investment securities pledged against FHLB advances.
Scheduled principal repayments of advances from the FHLB at December 31,
1999, were as follows (dollars in thousands):
WEIGHTED
AVERAGE
CONTRACTUAL
YEAR ENDING DECEMBER 31, AMOUNT RATE
--------------------- ---------------------
2000 $ 82,005 5.88%
2001 -- --
2002 40,000 6.26
2003 25,000 4.29
2004 and thereafter 155,030 5.85
--------------------- ---------------------
$ 302,035 5.78%
===================== =====================
F-24
(Continued)
82
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(12) SENIOR NOTES
Senior notes of $75,250,000 and $80,000,000 at 11% and issued to individual
investors were outstanding at December 31, 1999 and 1998, respectively.
During 1999, the Company purchased and retired $4,750,000 of Senior Notes,
resulting in a $257,000 extraordinary loss, net of tax benefit of $138,000.
The extraordinary loss had a $(0.01) per share impact on basic and diluted
net income per share. Senior notes are due September 8, 2004 and pay
interest semiannually. Senior notes are general unsecured obligations of
Local Financial and will rank senior to such other indebtedness as the
Company may incur that is not expressly subordinated to the senior notes.
The indenture generally restricts the incurrence of additional indebtedness
by the Company, except for certain junior indebtedness.
(13) INTEREST RATE SWAP, CAP AND FLOOR AGREEMENTS
The Company is a party to financial instruments with off-balance sheet
risk, in the normal course of business, to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, options
written, standby letters of credit and financial guarantees, interest rate
caps and floors written, interest rate swaps, and forward and futures
contracts. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or notional
amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented
by the contractual notional amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. For interest rate caps,
floors, and swap transactions, forward and futures contracts, and options
written, the contract or notional amounts do not represent exposure to
credit loss. The Company controls the credit risk of its interest rate
swap, cap and floor agreements, and forward and futures contracts through
credit approvals, limits, and monitoring procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
The Company may enter into a variety of interest-rate swap transactions in
managing its interest rate exposure. Interest rate swap transactions
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts. The
Company minimizes its credit exposure to interest rate counterparties by
entering into the transactions with counterparties that have been rated in
one of the top three investment ratings by at least two nationally
recognized credit rating agencies. The Company may also utilize interest
rate caps and floors to manage its interest rate exposure through the use
of these instruments.
Effective with the change in ownership on September 8, 1997, all
outstanding interest rate swap, cap and floor agreements were terminated
and are included in net gains (losses) on sale of assets in the
consolidated statements of operations. The termination of the interest rate
swap agreements, totaling
F-25 (Continued)
83
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
approximately $500,000,000 notional principal amount, resulted in realized
gross losses of approximately $47,283,000. The termination of cap and floor
agreements totaling approximately $2,350,000,000 notional principal amount
resulted in realized gross losses of $2,234,000. Upon termination of the
interest rate swap, cap and floor agreements, and the corresponding
liquidation of the underlying hedged items, the Company recognized all
remaining deferred gains and losses which resulted in an additional loss of
approximately $3,920,000. The above losses resulted in a net tax benefit of
approximately $18,703,000.
During fiscal 1997, the Company terminated interest rate swaps used to
hedge securities sold under agreements to repurchase and FHLB advances with
a notional principal amount of $100,000,000 resulting in a loss of
approximately $3,825,000 which was being amortized over the life of the
original swap agreement of approximately 7 years. (See discussion above on
termination of interest rate swaps in connection with the change in
ownership on September 8, 1997.) As a result of interest rate swap
terminations, amortization of deferred gains and losses resulted in the
recognition of approximately $73,000 in net losses during fiscal year 1997.
The net effect of the interest rate swaps, caps and floors on net interest
income was a decrease of approximately $21,148,000 ($13,746,000 net of
income tax) for the year ended June 30, 1997. Such decrease was
attributable primarily to interest rate swaps used to hedge a portion of
the Company's cost of borrowings in periods of rising interest rates.
(14) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and net
unrealized gains (losses) on securities available for sale, net of
reclassification adjustment, and is presented in the consolidated
statements of stockholders' equity. Reclassification adjustment consists of
realized gains and loss on securities available-for-sale included in the
consolidated statement of operations.
The changes in the components of other comprehensive income (loss) are
reported net of income taxes for the periods indicated as follows:
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------------ ----------------- ------------------
Unrealized gain on securities:
Unrealized holding loss arising during the
period $ (16,285) 5,700 (10,585)
Less: reclassification adjustment for gains
included in net income (124) 43 (81)
------------------ ----------------- ------------------
Other comprehensive loss $ (16,409) 5,743 (10,666)
================== ================= ==================
F-26 (Continued)
84
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------------ ----------------- --------------------
Unrealized gain on securities:
Unrealized holding gain arising during the
period $ 15,636 (5,472) 10,164
Less: reclassification adjustment for gains
included in net income (2,184) 764 (1,420)
------------------ ----------------- ------------------
Other comprehensive income $ 13,452 (4,708) 8,744
================== ================= ==================
SIX MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------------ ----------------- ------------------
Unrealized loss on securities:
Unrealized holding loss arising during the
period $ (6,532) 2,286 (4,246)
Less: reclassification adjustment for losses
included in net income 59,334 (20,767) 38,567
------------------ ----------------- ------------------
Other comprehensive income $ 52,802 (18,481) 34,321
================== ================= ==================
YEAR ENDED JUNE 30, 1997
----------------------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------------ ----------------- -------------------
Unrealized loss on securities:
Unrealized holding loss arising during the
period $ (4,174) 1,462 (2,712)
Less: reclassification adjustment for losses
included in net income 29,582 (10,354) 19,228
------------------ ----------------- ------------------
Other comprehensive income $ 25,408 (8,892) 16,516
================== ================= ==================
F-27 (Continued)
85
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(15) INCOME TAXES
The provision (benefit) for income taxes has been allocated as follows,
including the tax effect of the changes in unrealized gains (losses) on
available for sale securities (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
--------------------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------------------ ------------------ ------------------ ---------------
Income (loss) from $
operations before
extraordinary item 12,627 10,254 (44,075) (11,860)
Extraordinary item (138) -- -- --
Stockholders' equity (5,743) 4,708 18,481 8,892
----------------- ------------------ ------------------ ---------------
$ 6,746 14,962 (25,594) (2,968)
================= ================== ================== ===============
Components of the provision (benefit) for income taxes from operations are
as follows (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
--------------------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------------------ ------------------ ------------------ ---------------
Current income tax expense
(benefit) $ 4,686 (1,005) (16,490) (10,431)
Deferred income tax expense
(benefit) 7,941 11,259 (27,585) (1,429)
------------------ ------------------ ------------------ ---------------
$ 12,627 10,254 (44,075) (11,860)
================== ================== ================== ===============
The effective income tax rates differ from the statutory federal income tax
rate of 35%. A reconciliation of the provision (benefit) for income taxes
based on the statutory rates with the effective rates is as follows (in
thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
--------------------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
------------------ ------------------ ------------------ --------------
Income tax at statutory rate (35%) $ 12,207 10,042 (45,511) (14,667)
Provision for deferred tax assets -- -- 742 2,000
Effect of state income tax
(benefit), net of federal 1,215 549 (5,236) (3,013)
Change in valuation allowance (1,370) (384) 6,254 2,949
Other, net 575 47 (324) 871
--------------- ------------- ---------------- --------------
Provision (benefit) for income
taxes $ 12,627 10,254 (44,075) (11,860)
=============== ============= ================ ==============
F-28 (Continued)
86
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
Current income tax payable of approximately $506,000 and current income tax
receivable of approximately $12,204,000 are included in current and
deferred taxes, net in the consolidated statements of financial condition
at December 31, 1999 and 1998, respectively. Deferred income tax assets and
liabilities are included in current and deferred taxes, net in the
consolidated statements of financial condition and consisted of the
following (in thousands):
DECEMBER 31,
-----------------------------
1999 1998
---------- ----------
Deferred income tax assets:
Realized losses on available for sale securities $ 6,458 7,711
Federal net operating loss carryforwards -- 6,668
AMT tax credits 3,051 6,087
State net operating loss carryforwards 5,665 7,035
Allowance for loan losses 7,691 4,200
Other 3,781 4,432
---------- ----------
26,646 36,133
---------- ----------
Deferred income tax liabilities:
Stock dividends receivable (2,031) (2,564)
Depreciation and amortization (1,698) (1,622)
Deferred loan fees (1,314) (1,287)
Unrealized gains on available for sale securities (223) (5,966)
Other (992) (613)
---------- ----------
(6,258) (12,052)
---------- ----------
Net deferred tax asset 20,388 24,081
Valuation allowance on state NOL's 5,665 7,035
---------- ----------
Deferred tax asset, net $ 14,723 17,046
========== ==========
At December 31, 1999, the Company had approximately $145,244,000 of
operating loss carryforwards available for state income tax purposes. The
state net operating losses expire in varying amounts between 2006 and 2013.
At December 31, 1999, the Company had approximately $3,051,000 of
alternative minimum tax credits available for carryover.
During 1997, the Company established a valuation allowance for the portion
of the available state net operating loss carryforwards for which it was
determined to be more likely than not that the benefit of the deferred tax
asset would not be realized. Historically, the Company has generated income
for federal income tax purposes. The tax loss for the year ended June 30,
1997, and the six months ended December 31, 1997, was a result of the
Company exiting the indirect subprime automobile lending program,
terminating the interest rate swap agreements, and discontinuing the
wholesale securities strategy previously employed by former management.
Based on the current strategy of new management and current taxable income
for the years ended December 31, 1999 and 1998, no valuation allowance for
other deferred tax assets has been established as the Company believes it
is more likely than not that sufficient income for federal income tax
purposes will be realized.
F-29 (Continued)
87
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
As a result of the Small Business Job Protection Act, the Company was
required to change its method of accounting for bad debts from the reserve
method to the direct charge-off method for income tax purposes during 1997.
The Company is required to recapture the excess of the qualifying and
nonqualifying tax loan loss reserves over the base year tax loan loss
reserves over a six-year period, beginning in its tax year ended June 30,
1999. The recapture amount is estimated to be $7,327,000 and the qualifying
and nonqualifying base year tax reserves totaled approximately $8,116,000
and $1,373,000, respectively.
In accordance with SFAS No. 109, "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the tax bad debt reserve and
supplemental reserves of the Company that arose in tax years that began
prior to December 31, 1987. At December 31, 1999, the portion of the tax
bad debt reserve and supplemental reserves attributable to pre-1988 tax
years was approximately $14,744,000. The amount of unrecognized deferred
tax liability at December 31, 1999, was approximately $5,161,000. This
deferred tax liability could be recognized if certain distributions are
made with respect to the stock of Local, or the bad debt reserve is used
for any purpose other than absorbing bad debt losses.
During 1997, the Company's federal income tax returns were examined by
and/or settled with the Internal Revenue Service through fiscal year 1993.
As a result of these examinations and related claims for refund, the
Company received a refund of taxes previously paid of approximately
$800,000 which had not been anticipated by the Company prior to the
examination.
(16) COMMITMENTS AND CONTINGENCIES
In conjunction with the acquisition of LAB during fiscal 1989, the Company
and LAB entered into an Assistance Agreement with the Federal Savings and
Loan Insurance Corporation (the FSLIC). Under the terms of the Assistance
Agreement, the FSLIC Resolution Fund (the FUND), which is managed by the
Federal Deposit Insurance Corporation (the FDIC), is entitled to receive
100% of the tax benefits attributable to acquired net operating loss
carryforwards and deductions resulting from certain items, other than
covered asset losses, for which the FUND has agreed to provide assistance
to the extent such tax benefits are realized by the consolidated group. LAB
is entitled to share in realized tax benefits of a portion of the FUND
assistance on a 50-50 basis.
Under the LAB Assistance Agreement, a dispute exists between LAB and the
FDIC regarding tax benefits which have been received. Management, after
consultation with legal counsel and based on available facts and
proceedings to date, has determined that it is probable that LAB has some
liability to the FDIC with regard to the tax benefits. The Company's
estimate of this liability was approximately $13,000,000, which is included
in other liabilities in the accompanying consolidated statements of
financial condition at December 31, 1998. The Company provided for this
liability through a provision for uninsured risk in the consolidated
statements of operations for the years ended June 30, 1997 and 1996. The
FDIC's estimate of this liability is approximately $23,000,000. Management
of the Company is of the opinion that the FDIC's estimate does not give
credit to the Company for certain tax benefits originally contracted for in
the Assistance Agreement, but later eliminated as a result of the Revenue
Reconciliation Act of 1993. Management intends to vigorously defend its
estimate of the liability.
F-30 (Continued)
88
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
Pursuant to the terms of the Redemption Agreement and settlement of the
Redemption Agreement discussed in Note 2, the Selling Shareholders
consented to the Company reducing the FDIC liability on the Company's books
to the sum of $7,700,000, which is included in other liabilities in the
accompanying statements of financial condition at December 31, 1999, while
confirming their liability for and obligation to fully pay any amount which
the Company is ultimately required to pay the FDIC to the extent such
amount exceeds the $7,700,000 liability. In this regard, the Company
deposited $10,000,000 of the redemption price to be paid to the Selling
Shareholders for the redemption of their stock into an escrow account to be
available for such payment, if necessary. The settlement agreement also
authorizes the Selling Stockholders to unilaterally settle the FDIC
obligation provided they pay the Company, in cash, the full amount of the
sum which would be owing to the FDIC in excess of the $7,700,000 liability.
In addition, the Selling Shareholders have agreed to be solely and
exclusively responsible for all reasonable litigation costs and expenses
which are incurred by the Company in connection with the prosecution,
defense and settlement with the FDIC.
In the ordinary course of business, the Company is subject to other legal
actions and complaints. 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.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. At December 31, 1999 and 1998, the Company had approximately
$218,272,000 and $133,333,000 of outstanding loan commitments consisting of
residential real estate, commercial real estate and commercial business
loans approved but unfunded.
During 1995, the Company securitized and sold approximately $62,147,000 of
fixed rate multi-family commercial loans with recourse. The maximum
contractual recourse obligation of the Company is 10% of the total unpaid
principal balance of the mortgages on the settlement date. At December 31,
1999 and 1998, the unpaid principal balance of loans sold totaled
approximately $14,144,000 and $18,543,000, respectively. The Company has
pledged a FHLB letter of credit in the amount of $2,600,000 under the
recourse provision of the securitization transaction. Management does not
expect any material losses to be incurred as a result of the recourse
provision.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The Company holds marketable securities
as collateral supporting those commitments for which collateral is deemed
necessary.
F-31 (Continued)
89
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
The Company leases certain real estate and equipment under operating
leases. For the years ended December 31, 1999 and 1998, the six months
ended December 31, 1997, and for the year ended June 30, 1997, lease
expense totaled approximately $1,094,000, $594,000, $387,000, and $730,000,
respectively. Future obligations under operating leases at December 31,
1999, are summarized as follows (in thousands):
YEAR ENDING DECEMBER 31,
2000 $ 870
2001 848
2002 831
2003 638
2004 and thereafter 653
----------
$ 3,840
==========
(17) REGULATORY MATTERS
Local Financial and Local are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on Local Financial's and Local's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Local Financial and Local must meet
specific capital guidelines that involve quantitative measures of Local
Financial's and Local's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Local
Financial's and Local's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Local Financial and Local to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999, that Local Financial and Local meet all capital
adequacy requirements to which they are subject. Prior to the conversion to
a national banking association in 1999, Local was required to maintain
minimum amounts and ratios (set forth in the following table) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), of core capital (as defined) to adjusted tangible assets (as
defined) and of tangible capital (as defined) to tangible assets.
As of December 31, 1999, the most recent notification from the OCC
categorized Local as well capitalized under the regulatory framework for
prompt corrective action. As of December 31, 1998, the most recent
notification from the OTS categorized Local as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized Local must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since those notifications that management believes
have changed Local's category.
F-32 (Continued)
90
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
TO BE WELL CAPITALIZED
MINIMUM FOR CAPITAL FOR PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
LOCAL FINANCIAL
As of December 31, 1999:
Total capital (to risk weighted assets) $ 128,199 8.07% $ 127,163 8.00% $ 158,954 10.00%
Tier I Capital (to risk weighted assets) 108,231 6.81% 63,581 4.00% 95,372 6.00%
Tier I capital (to average assets) 108,231 4.71% 91,998 4.00% 114,998 5.00%
LOCAL
As of December 31, 1999:
Total capital (to risk weighted assets) $ 201,977 12.74% $ 126,850 8.00% $ 158,563 10.00%
Tier I Capital (to risk weighted assets) 182,057 11.48% 63,425 4.00% 95,138 6.00%
Tier I capital (to average assets) 182,057 7.93% 91,884 4.00% 114,856 5.00%
LOCAL
As of December 31, 1998:
Total capital (to risk weighted assets) $ 174,398 13.08% $ 106,669 8.00% $ 133,337 10.00%
Core capital (to adjusted tangible assets) 158,786 7.63% 62,448 3.00% 104,080 5.00%
Tangible capital (to tangible assets) 158,362 7.61% 31,218 1.50% N/A N/A
Tier I Capital (to risk weighted assets) 158,786 11.91% N/A 80,002 6.00%
Management intends to continue compliance with all regulatory capital
requirements.
Federal regulations allow Local Financial and Local to pay dividends during
a calendar year up to the amount that would reduce their surplus capital
ratio, as defined, to one-half of their surplus capital ratio at the
beginning of the calendar year, adjusted to reflect their net income to
date during the calendar year. At the beginning of calendar year 2000,
under applicable regulations of the OCC, the total capital available for
the payment of dividends by Local to Local Financial was approximately $44
million.
(18) STOCK COMPENSATION
Effective with the securities offering and redemption in September 1997,
the board of directors adopted a stock option plan. The stock option plan
has 1,720,370 shares of common stock authorized and provides for the
granting of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code as well as
non-incentive or compensatory stock options and stock appreciation rights.
On September 8, 1997, non-qualified stock options for 1,116,005 shares of
common stock were granted to executive officers of the Company at an
exercise price of $10 per share. On December 31, 1997, incentive stock
options for 158,000 shares of common stock were granted to officers and
compensatory stock options for 60,000 shares of common stock were granted
to directors of the Company at an exercise price of $11.75 per share.
During the year ended December 31, 1998, all previously issued options were
rescinded and canceled in exchange for an equal number of options at an
exercise price of $10 per share. An additional 278,000 and 63,000 shares
were issued at $10 per share during 1999 and 1998, respectively. During the
year ended December 31, 1999, 3,000 shares were forfeited. Stock options to
buy 1,141,005 and 531,000 shares of common stock shall be exercisable in
three and five equal annual installments, respectively, commencing with the
end of the first twelve month period
F-33 (Continued)
91
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
following the date the stock options were granted. The stock options expire
ten years from the effective dates of the respective option agreements.
The per share weighted-average fair value of stock options granted for the
years ended December 31, 1999 and 1998, was $4.07 and $2.01, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 6.34% and 4.54%,
respectively, or volatility rate of 32.96% and 0%, respectively, expected
life of 5 years for both periods, and no expected dividend yield.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for its stock option rights. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, "Accounting for Stock Based Compensation," the
Company's net income (loss) for the years ended December 31, 1999 and 1998,
would have been decreased and for the six months ended December 31, 1997,
would have been increased to the pro forma amounts below.
1999 1998 1997
------ ------ -------
Net income (loss) (in thousands) As reported$ 21,992 18,437 (85,956)
Pro forma 21,296 17,787 (86,148)
Basic net income (loss) per share As reported 1.07 0.90 (4.76)
Diluted net income (loss) per share As reported 1.07 0.89 (4.76)
Basic net income (loss) per share Pro forma 1.04 0.87 (4.77)
Diluted net income (loss) per share Pro forma 1.04 0.86 (4.77)
Stock options of 1,672,005 were outstanding at December 31, 1999, with an
exercise price of $10 and contractual life of outstanding options of 8.8
years. Stock options of 1,397,005 and 1,334,005 were outstanding at
December 31, 1998 and 1997, respectively, with an exercise price of $10 and
contractual life of outstanding options of 10 years. At December 31, 1999,
849,270 options were exercisable compared to 418,335 at December 31, 1998.
No options were exercisable at December 31, 1997.
(19) EMPLOYEE BENEFITS
On November 1, 1999, the Company established a nonleveraged employee stock
ownership plan (the ESOP Plan) that covers substantially all of its
full-time employees. Contributions to the ESOP Plan are discretionary as
determined by the Board of Directors of the Company. Contributions shall be
allocated and credited to those participants who accrue credited service
for such plan year and who are employed on the last day of the plan year.
Contributions will be allocated to participants in the ratio in which each
participant's compensation bears to the total compensation of all
participants. In December 1999, the Board of Directors of the Company
declared a cash contribution to the ESOP Plan of approximately $2,700,000
which has been accrued and is included in compensation and employee
benefits in the accompanying consolidated statements of operations. The
ESOP Plan held no common stock of the Company as of December 31, 1999.
The Company has a retirement plan (the Plan), which is a noncontributory
defined benefit pension plan, covering substantially all of its full-time
employees. The benefits are based on years of service
F-34 (Continued)
92
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
and the employees' compensation during the last five years of employment.
The Company's policy, generally, is to fund pension costs unless the Plan
is overfunded and no contribution is required. Contributions are intended
to provide not only for benefits attributed to service to date but also for
those expected to be earned in the future. No contributions were made
during the years ended December 31, 1999 and 1998, the six months ended
December 31, 1997, or the year ended June 30, 1997, as the Plan is
overfunded.
In September 1999, the Company adopted a plan to freeze the accrual of
benefits under the Plan, effective October 31, 1999, and terminate the
plan. Termination of the Plan is currently in process and is expected to be
completed in 2000. Upon termination, the assets held by the Plan's trustee
will be distributed to Plan participants or beneficiaries in the order
provided by the Employee Retirement Income Security Act of 1974 with any
excess distributed to the Company. As a result of the Plan amendment and
proposed termination of the Plan, a curtailment gain of approximately
$2,734,000 was recognized and is included in compensation and employee
benefits in the accompanying consolidated statements of operations.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated statements of financial condition
and operations for the periods indicated (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period $ 12,141 9,126
Service cost 713 646
Interest cost 647 718
Recognized net gain from past experience different from
that assumed 277 2,139
Prior service cost -- (35)
Transition asset -- (84)
Plan amendment 459 --
Curtailment gain (2,734) --
Benefits paid (416) (369)
---------- ----------
Benefit obligation at end of period 11,087 12,141
---------- ----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period 19,944 19,783
Actual return on plan assets 1,422 530
Benefits paid (416) (369)
---------- ----------
Fair value of plan assets at end of plan period 20,950 19,944
---------- ----------
Funded status 9,863 7,803
Unrecognized net gain from past experience different from
that assumed (5,012) (5,663)
Unrecognized prior service cost -- (478)
Unrecognized transition asset being recognized over
15 years (56) (127)
---------- ----------
Prepaid benefit cost $ 4,795 1,535
========== ==========
F-35 (Continued)
93
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------------- JUNE 30,
1999 1998 1997
---------- ---------- ----------
COMPONENTS OF NET PERIODIC PENSION BENEFIT
Service cost $ 713 646 515
Interest cost 647 718 627
Expected return on plan assets (1,580) (1,999) (3,820)
Net amortization and deferral (765) (265) 2,017
Curtailment gain (2,734) -- --
Plan amendment 459 -- --
---------- ---------- ----------
Net periodic pension benefit $ (3,260) (900) (661)
========== ========== ==========
The Company had a projected net periodic pension benefit for the actuarial
year ended June 30, 1998, based on the June 30, 1997, valuation; however,
the Company did not record any prepaid pension benefit for the six months
ended December 31, 1997, due to the uncertainty of any changes made by new
management.
A weighted average discount rate of 7.5% and 6.75% in 1999 and 1998,
respectively, and a rate of increase in future compensation levels of 5.5%
was used in determining the actuarial present value of the projected
benefit obligation for 1999 and 1998. The expected long-term rate of return
on assets was 8.0% and 11.0% for 1999 and 1998, respectively.
The Company does not provide postretirement benefits other than pensions.
As a result of the acquisition of Green Country (see note 3), the Company
adopted the Green Country Bank 401(k) plan with amendments effective
February 16, 1998. Eligible employees of the Company may elect to defer a
portion of their salary and contribute to the 401(k) plan to fund
retirement benefits. The Company currently does not participate with
matched or fixed contributions.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions set forth below
for the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are
not available. Because broadly traded markets do not exist for most of the
Company's financial instruments, the fair value calculations attempt to
incorporate the effect of current market conditions at a specific time.
Fair valuations are management's estimates of the values, and they are
often calculated based on current pricing policy, the economic and
competitive environment, the characteristics of the financial instruments,
expected losses and other such factors. These calculations are subjective
in nature, involve uncertainties and matters of significant judgment and do
not include tax ramifications; therefore, the results cannot be determined
with precision, substantiated by comparison to independent markets and may
not be
F-36 (Continued)
94
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
realized in an actual sale or immediate settlement of the instruments. The
Company has not included certain material items in its disclosure, such as
the value of the long-term relationships with the Company's depositors,
since this intangible is not a financial instrument. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash
flows, could significantly affect the results. For all of these reasons,
the aggregation of the fair value calculations presented herein do not
represent, and should not be construed to represent, the underlying value
of the Company.
The following table presents a summary of the Company's financial
instruments, as defined by SFAS No. 107 (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash and cash equivalents $ 55,822 55,822 54,880 54,880
Securities available for sale 529,230 529,230 570,964 570,964
Loans receivable, net 1,685,550 1,675,267 1,362,272 1,379,964
FHLB stock and FRB stock 24,820 24,820 42,693 42,693
Financial Liabilities:
Deposits 1,848,340 1,849,452 1,668,074 1,676,485
Advances from the FHLB 302,035 301,129 220,033 220,178
Senior notes 75,250 79,765 80,000 85,397
The following are descriptions of the methods used to determine the
estimated fair values:
(a) CASH AND CASH EQUIVALENTS
The carrying amount is a reasonable estimate of fair value because of
the relatively short period of time between the origination of the
instrument and its expected realization.
(b) SECURITIES
The carrying value and estimated fair value of securities at December
31, 1999 and 1998, are set forth in Note 5. The estimated fair value
of FHLB and FRB stock approximates the carrying value as of December
31, 1999 and 1998.
(c) LOANS
The fair valuation calculation process differentiates loans based on
their financial characteristics, such as product classification, loan
category, pricing features and remaining maturity. Prepayment
estimates are evaluated by product and loan rate. In establishing the
credit risk component of the fair value calculations for loans, the
Company considered several approaches, including the use of variable
discount rates based on relative credit quality, forecasting cash
flows, net of projected losses and secondary market pricing for
certain third party loan sale transactions. After evaluating such
information, the Company concluded that the allowance for loan losses
represented a reasonable estimate of the credit risk component of the
fair value of loans at December 31, 1999 and 1998.
F-37 (Continued)
95
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997, June 30, 1997
The fair value of commercial real estate loans, other real estate mortgage
loans, real estate construction loans, and commercial business loans is
calculated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates that reflect the Company's current pricing for
loans with similar characteristics and remaining maturity.
For real estate single family first and junior lien mortgages, fair value is
calculated by discounting contractual cash flows, adjusted for prepayment
estimates, using discount rates based on the Company's current pricing for loans
of similar size, type, remaining maturity and repricing characteristics.
For other consumer loans, the fair value is calculated by discounting the
contractual cash flows, adjusted for prepayment estimates, using discount rates
based on the Company's current pricing for loans of similar size, type, and
remaining maturity.
(d) DEPOSIT LIABILITIES
SFAS No. 107 states that the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, interest-bearing
checking and savings deposits and market rate savings, is equal to the
amount payable on demand at the measurement date. Although SFAS No. 107's
requirements for these categories are not consistent with the market
practice of using prevailing interest rates to value these amounts, the
amount included for these deposits in the previous table is their carrying
value at December 31, 1999 and 1998. The fair value of certificates of
deposit and other time deposits is calculated based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for similar duration deposits.
(e) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA AND SENIOR NOTES
The estimated fair value of FHLB advances is based on the discounted value
of contractual cash flows. The discount rate is estimated using the current
market rate for similar duration borrowings. Commitments are related
primarily to variable rate loans originated at current market rates. The
estimate of fair value of these commitments is considered to be immaterial.
The estimate of value of senior notes is based on the discounted value of
contractual cash flows.
(f) LIMITATIONS
The information presented in this note is based on market quotes and fair
value calculations as of December 31, 1999 and 1998. These amounts have not
been updated since these dates; therefore, the valuations may have changed
since that point in time.
F-38
96
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(21) SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of the unaudited interim results of operations for
the years ended December 31, 1999 and 1998 (in thousands, except per share
data):
FIRST SECOND THIRD FOURTH FULL
1999 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
Interest and dividend income $ 39,200 40,467 43,608 45,023 168,298
Net interest and dividend income $ 17,029 18,149 19,082 19,251 73,511
Provision for loan losses $ 500 500 500 500 2,000
Income before provision for income
taxes and extraordinary items $ 8,069 8,694 8,988 9,125 34,876
Extraordinary item - purchase and
retirement of senior notes, net
of tax $ -- -- (182) (75) (257)
Net income $ 5,139 5,547 5,555 5,751 21,992
Net income per common share:
Income before extraordinary item
Basic $ 0.25 0.27 0.28 0.28 1.08
Diluted $ 0.25 0.27 0.28 0.28 1.08
Net income
Basic $ 0.25 0.27 0.27 0.28 1.07
Diluted $ 0.25 0.27 0.27 0.28 1.07
FIRST SECOND THIRD FOURTH FULL
1998 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
Interest and dividend income $ 35,491 35,025 36,386 40,302 147,204
Net interest and dividend income $ 11,848 12,441 14,035 16,442 54,766
Provision for loan losses $ 150 300 500 500 1,450
Income before income taxes $ 6,580 6,952 7,398 7,761 28,691
Net income $ 4,249 4,525 4,725 4,938 18,437
Net income per common share:
Basic $ 0.21 0.22 0.23 0.24 0.90
Diluted $ 0.21 0.22 0.23 0.24 0.89
F-39
97
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
(22) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Local Financial Corporation is as
follows (in thousands):
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------------
1999 1998
---------- ----------
Assets:
Cash and due from banks $ 1,825 2,019
Investment in subsidiary 200,700 187,464
Other assets 3,859 12,743
---------- ----------
Total assets $ 206,384 202,226
========== ==========
Liabilities and Stockholders' Equity:
Senior notes $ 75,250 80,000
Other liabilities 2,840 3,420
---------- ----------
Total liabilities 78,090 83,420
---------- ----------
Common stock 205 205
Additional paid-in capital 206,758 206,758
Retained earnings 72,189 50,197
Treasury stock (151,274) (149,436)
Accumulated other comprehensive income 416 11,082
---------- ----------
Total stockholders' equity 128,294 118,806
---------- ----------
Total liabilities and stockholders' equity $ 206,384 202,226
========== ==========
F-40
98
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 1997
STATEMENTS OF OPERATIONS
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
----------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------- ---------- ------------ ----------
Income:
Dividend income from subsidiary $ 7,900 2,000 -- 500
Equity in undistributed earnings (losses)
of subsidiary 20,936 23,067 (83,925) (29,886)
Other 171 192 -- 200
---------- ---------- ---------- ----------
Total income (loss) 29,007 25,259 (83,925) (29,186)
Expense:
Interest expense 9,310 9,470 3,073 1,026
Compensation and employee benefits 115 -- -- --
Other 879 922 52 145
---------- ---------- ---------- ----------
Total expense 10,304 10,392 3,125 1,171
Income (loss) before provision (benefit) for
income taxes and extraordinary item 18,703 14,867 (87,050) (30,357)
Benefit for income taxes (3,546) (3,570) (1,094) (312)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item 22,249 18,437 (85,956) (30,045)
Extraordinary item, net of tax (257) -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ 21,992 18,437 (85,956) (30,045)
========== ========== ========== ==========
F-41
99
LOCAL FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997, June 30, 1997
STATEMENTS OF CASH FLOWS
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------- DECEMBER 31, JUNE 30,
1999 1998 1997 1997
---------- ---------- ------------ ----------
Cash provided (absorbed) by operating activities:
Net income (loss) $ 21,992 18,437 (85,956) (30,045)
Adjustments to reconcile net income (loss) to
net cash provided (absorbed) by
operating activities:
Equity in undistributed losses
(earnings) of subsidiary (20,936) (23,067) 83,925 29,886
Change in other liabilities (580) 228 3,012 (558)
Change in other assets 4,320 (2,682) (5,582) (398)
---------- ---------- ---------- ----------
Net cash provided (absorbed) by operating activities 4,796 (7,084) (4,601) (1,115)
Cash provided (absorbed) by investing activities:
Investment in subsidiary (240) (2,087) (83,839) --
Cash acquired in acquisition of Green Country -- 2,512 -- --
---------- ---------- ---------- ----------
Net cash provided (absorbed) by investing activities (240) 425 (83,839) --
Cash provided (absorbed) by financing activities:
Proceeds from issuance of common stock -- -- 181,067 --
Capital contribution -- -- -- 8,099
Purchase of treasury stock -- -- (149,436) --
Repayment of note payable -- -- (7,010) (7,010)
Purchase of Senior notes (4,750) -- -- --
Proceeds from issuance of senior notes -- -- 80,000 --
Payments of debt issuance costs -- -- (4,344) --
Payment of liability assumed from Green Country -- (3,162) -- --
---------- ---------- ---------- ----------
Net cash provided (absorbed) by financing activities (4,750) (3,162) 100,277 1,089
Net change in cash and cash equivalents (194) (9,821) 11,837 (26)
Cash and cash equivalents at beginning of period 2,019 11,840 3 29
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 1,825 2,019 11,840 3
========== ========== ========== ==========
Supplemental schedule of noncash investing activity:
Tax benefit contributed to subsidiary $ -- -- -- 535
========== ========== ========== ==========
F-42
100
FORM 10-K
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule