FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-26248
LONDON FINANCIAL CORPORATION
_______________________________________________________
(Exact name of registrant as specified in its charter)
OHIO 34-1800830
_______________________________ ______________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 East High Street
London, Ohio 43140
_____________________ __________
(Address of principal (Zip Code)
executive office)
Issuer's telephone number, including area code: (614) 852-0787
Check whether the issuer (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 _____
As of January 31, 1997, the latest practicable date, 529,000 of the registrant's
common shares, without par value, were issued and outstanding.
Page 1 of 12 pages
London Financial Corporation
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II - OTHER INFORMATION 11
SIGNATURES 12
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London Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 1996 1996
------------ -------------
Cash and due from banks $ 1,616 $ 319
Interest-bearing deposits in other financial institutions 1,834 2,324
-------- --------
Cash and cash equivalents 3,450 2,643
Investment securities designated as available for sale - at market 253 220
Investment securities - at amortized cost, approximate market
value of $1,002 and $1,991 at December 31, 1996
and September 30, 1996, respectively 1,000 2,000
Mortgage-backed securities - at cost, approximate market
value of $3,951 and $3,944 at December 31, 1996 and
September 30, 1996, respectively 3,952 4,032
Loans receivable - net 27,859 27,031
Office premises and equipment - at depreciated cost 348 354
Stock in Federal Home Loan Bank - at cost 266 261
Accrued interest receivable 166 178
Prepaid expenses and other assets 13 21
Deferred federal income taxes 6 77
-------- --------
TOTAL ASSETS $ 37,313 $ 36,817
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 28,795 $ 28,195
Advances from the Federal Home Loan Bank 300 300
Other liabilities 125 279
Accrued federal income taxes 101 136
-------- --------
Total liabilities 29,321 28,910
Shareholders' Equity
Common shares - authorized 5,000,000 shares without par value;
529,000 shares issued and outstanding -- --
Additional paid-in capital 4,910 4,910
Shares acquired by Employee Stock Ownership Plan (423) (423)
Retained earnings - substantially restricted 3,479 3,416
Unrealized gains on securities designated as available for
sale, net of related tax effects 26 4
-------- --------
Total shareholders' equity 7,992 7,907
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,313 $ 36,817
======== ========
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London Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
1996 1995
------ ------
Interest income
Loans $ 576 $ 591
Mortgage-backed securities 56 27
Investment securities 29 6
Interest-bearing deposits and other 32 37
----- -----
Total interest income 693 661
Interest expense
Deposits 349 387
Borrowings 7 7
----- -----
Total interest expense 356 394
----- -----
Net interest income 337 267
Other operating income 15 15
General, administrative and other expense
Employee compensation and benefits 107 102
Occupancy and equipment 17 17
Federal deposit insurance premiums 18 25
Franchise taxes 5 11
Data processing 14 14
Other 47 44
----- -----
Total general, administrative and other expense 208 213
----- -----
Earnings before income taxes 144 69
Federal income taxes
Current (109) 26
Deferred 60 --
----- -----
Total federal income taxes (49) 26
----- -----
NET EARNINGS $ 95 $ 43
----- -----
EARNINGS PER SHARE $ .20 N/A
===== =====
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London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
1996 1995
------ ------
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 95 $ 43
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (18) (23)
Depreciation and amortization 6 4
Federal Home Loan Bank stock dividends (5) (4)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 12 (3)
Prepaid expenses and other assets 8 (58)
Other liabilities (154) 14
Federal income taxes
Current (35) 6
Deferred 60 --
------- -------
Net cash used in operating activities (31) (21)
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 1,000 --
Principal repayments on mortgage-backed securities 80 37
Principal repayments on loans 1,368 1,567
Loan disbursements (2,178) (1,319)
------- -------
Net cash provided by investing activities 270 285
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 600 395
Dividends on common stock (32) --
------- -------
Net cash provided by financing activities 568 395
------- -------
Net increase in cash and cash equivalents 807 659
Cash and cash equivalents at beginning of period 2,643 2,844
------- -------
Cash and cash equivalents at end of period $ 3,450 $ 3,503
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 23 $ 20
======= =======
Interest on deposits and borrowings $ 356 $ 394
======= =======
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London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 1996 and 1995
In October 1995, the Board of Directors of The Citizens Loan and Savings Company
("Citizens") adopted a Plan of Conversion (the "Plan") providing for the
conversion of Citizens to the stock form of organization (the "Conversion"). In
connection with the Conversion, Citizens formed a holding company, London
Financial Corporation ("LFC"). On March 29, 1996, Citizens completed the
conversion to the stock form of organization, in connection with which Citizens
issued all of its outstanding shares to LFC and LFC issued 529,000 common shares
in a subscription offering and a community offering at a price of $10.00 per
share which, after consideration of offering expenses totaling $380,000, and
shares purchased by employee benefit plans totaling $423,000, resulted in net
cash proceeds of $4.5 million. The financial statements for the periods prior to
March 1996 are those of Citizens prior to the Conversion.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of consolidated
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of LFC included in the Annual Report on Form 10-KSB
for the year ended September 30, 1996. However, in the opinion of management,
all adjustments (consisting of only normal recurring accruals) which are
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three month periods ended
December 31, 1996 and 1995, are not necessarily indicative of the results which
may be expected for an entire fiscal year.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of LFC
and Citizens. All significant intercompany items have been eliminated.
3. EARNINGS PER SHARE
Earnings per share for the three month period ended December 31, 1996, is
computed based upon 486,680 weighted-average shares outstanding, which gives
effect to a reduction for the 42,320 unallocated shares held by the London
Financial Corporation Employee Stock Ownership Plan (the "ESOP") in accordance
with Statement of Position 93-6.
Earnings per share for the three month period ended December 31, 1995, is not
applicable as LFC completed its conversion to the stock form of ownership in
March 1996.
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London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 1996 and 1995
4. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that LFC will continue to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25 and, therefore, the
provisions of SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on LFC's consolidated financial position or results of
operations.
7
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Corporation's operations and the Corporation's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount of allowance for losses on
loans and the effect of certain accounting pronouncements.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1996 TO
DECEMBER 31, 1996
At December 31, 1996, LFC had total assets of $37.3 million, an increase of
$496,000, or 1.3%, over September 30, 1996. The increase in assets was funded
primarily from an increase in deposits of approximately $600,000.
Investment securities and mortgage-backed securities decreased by $1.0 million,
to a total of $5.2 million at December 31, 1996, reflecting the maturity of
investment securities totaling approximately $1.0 million and principal
repayments on mortgage-backed securities of $80,000.
Loans receivable increased $828,000, or 3.1%, as loan disbursements of $2.2
million exceeded principal repayments of $1.4 million.
At December 31, 1996, Citizens' allowance for loan losses totaled $187,000,
which equaled the level maintained at September 30, 1996. Nonperforming loans
totaled $299,000, or 1.0% of the total loan portfolio at December 31 1996, as
compared to nonperforming loans of $261,000, or .9% of the total loan portfolio
at September 30, 1996. At December 31, 1996, Citizens' allowance for loan losses
was comprised solely of a general loan loss allowance which is includible as a
component of regulatory risk-based capital. Although management of LFC believes
that its allowance for loan losses was adequate at December 31, 1996, based on
the available facts and circumstances, there can be no assurances that the
allowance will be adequate to absorb actual loan losses during the current
period or that additions to such allowance will not be necessary in future
periods, which could adversely affect LFC's results of operations.
Deposits totaled $28.8 million at December 31, 1996, an increase of $600,000, or
2.1%, from the $28.2 million of deposits outstanding at September 30, 1996. Such
increase resulted primarily from management's efforts to increase deposits
through marketing strategies.
As required by the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 and regulations promulgated thereunder by the Office of Thrift
Supervision, Citizens is required to maintain minimum levels of capital under
three separate standards. Citizens is required to maintain regulatory capital
sufficient to meet tangible, core and risk-based capital ratios of 1.50% and
3.00% of adjusted total assets, and 8.00% of risk-weighted assets, respectively.
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1996 TO
DECEMBER 31, 1996 (continued)
As of December 31, 1996, Citizens' regulatory capital exceeded all minimum
capital requirements as shown in the following table:
Regulatory capital
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
-------- ------- ------- ------- ---------- -------
(In thousands)
Capital under generally
accepted accounting
principles $5,527 $5,527 $ 5,527
Additional capital items
General valuation
allowances -- -- 187
------- ------ --------
Regulatory capital
computed 5,527 15.7 5,527 15.7 5,714 29.8
Capital requirement 529 1.5 1,058 3.0 1,533 8.0
------ -------- ------ -------- ------ --------
Regulatory
capital - excess $4,998 14.2% $4,469 12.7% $4,181 21.8%
====== ======== ====== ======== ====== ========
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1995
GENERAL
Net earnings for the three month period ended December 31, 1996, totaled
$95,000, an increase of $52,000, or 120.9%, over the comparable 1995 period. The
increase in earnings resulted primarily from a $70,000 increase in net interest
income and a $5,000 decrease in general, administrative and other expense, which
were partially offset by a $23,000 increase in the federal income tax provision.
NET INTEREST INCOME
Interest income on loans for the three months ended December 31, 1996, decreased
by $15,000, or 2.5%, as compared to the three months ended December 31, 1995.
The decrease was primarily due to a decline in yield, coupled with a $400,000
decrease in the weighted average portfolio balance year to year. Interest income
on mortgage-backed securities increased by $29,000, or 107.4%, due primarily to
a $2.0 million increase in the weighted average portfolio balance year to year.
Interest income on investment securities and other interest-earning assets
increased by $18,000, or 41.9%, due primarily to an increase of approximately
$725,000 in the weighted-average balance outstanding year to year. The increases
in interest income on investment and mortgage-backed securities reflect the
earnings on securities purchased from net proceeds of LFC's offering of common
shares.
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London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1995 (continued)
NET INTEREST INCOME (continued)
Interest expense on deposits decreased by $38,000, or 9.8%, during the three
months ended December 31, 1996. This decrease resulted primarily from a $2.3
million decline in the weighted average balance of deposits outstanding, coupled
with a decrease in the cost of deposits.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $70,000, or 26.2%, during the three months
ended December 31, 1996, as compared to the three months ended December 31,
1995. The interest rate spread totaled approximately 2.86% for the three months
ended December 31, 1996, compared to 2.89% for the same period in 1995, while
the net interest margin increased to approximately 3.80% in the 1996 period from
3.22% in the 1995 period.
PROVISION FOR LOSSES ON LOANS
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by Citizens,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to Citizens' market area, and
other factors related to the collectibility of Citizen's loan portfolio. As a
result of such analysis, management concluded that the allowance for loan losses
was adequate and, as a result, a provision for losses on loans was not necessary
during the three month periods ended December 31, 1996 and 1995. There can be no
assurance that the loan loss allowance of Citizens will be adequate to cover
losses on nonperforming assets in the future.
OTHER INCOME
Other income totaled $15,000 during each of the three months ended December 31,
1996 and 1995. Other income is comprised primarily of service fees on deposit
accounts, late charges on loan accounts and rental income on leased office space
and safety deposit boxes.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
General, administrative and other expense decreased by approximately $5,000, or
2.3%, during the three months ended December 31, 1996, as compared to 1995. This
decrease was primarily the result of a $7,000, or 28.0%, decline in federal
deposit insurance premiums, which resulted from lower premium rates during the
quarter.
FEDERAL INCOME TAXES
The provision for federal income taxes increased $23,000, or 88.5%, during the
three months ended December 31, 1996, due primarily to an increase in earnings
before income taxes of $75,000, or 108.7%. LFC's effective tax rates amounted to
34.0% and 37.7% during the three months ended December 31, 1996 and 1995,
respectively.
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London Financial Corporation
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1997 Annual Meeting of Shareholders of the Corporation, held on
January 23, 1997, each of Donald E. Forrest, Edward D. Goodyear and
Kennison A. Sims was elected to serve as a director of the Corporation
for a term expiring in 1999 by the following vote:
For: 418,390 Withheld: 0
Three other matters were submitted to the shareholders, for which the
following votes were cast:
1) Adoption of the London Financial Corporation 1997 Stock Option
and Incentive Plan.
For: 305,872 Against: 11,815 Abstain: 565
2) Adoption of The Citizens Loan and Savings Company Management
Recognition Plan and Trust.
For: 326,309 Against: 8,915 Abstain: 14,165
3) Ratification of the appointment of Grant Thornton LLP as
independent auditors of the Corporation for the fiscal year ended
September 30, 1997.
For: 417,075 Against: 1,000 Abstain: 315
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K: None.
Exhibits: Financial Data Schedule for the three
months ended December 31, 1996.
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SIGNATURES
Pursuant to the requirements 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.
Date: February 12, 1997 By: John J. Bodle
President and
Chief Executive Officer
Date: February 12, 1997 By: Joyce E. Bauerle
Treasurer
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