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, 1999
-----------------------
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 31-1452807
(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)
Registrant's telephone number, including area code: (740)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 February 10, 2000, the latest practicable date, 479,450 the registrant's
common shares, without par value, were issued and outstanding.
Page 1 of 14 pages
London Financial Corporation
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II - OTHER INFORMATION 13
SIGNATURES 14
London Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 1999 1999
Cash and due from banks $ 1,062 $ 709
Interest-bearing deposits in other financial institutions 2,241 2,748
------ ------
Cash and cash equivalents 3,303 3,457
Investment securities designated as available
for sale - at market 59 127
Mortgage-backed securities held to maturity - at amortized
cost, approximate market value of $1,735 and $1,822
as of December 31, 1999 and September 30, 1999 1,741 1,829
Loans receivable - net 36,992 36,700
Office premises and equipment - at depreciated cost 500 511
Stock in Federal Home Loan Bank - at cost 267 262
Accrued interest receivable 415 403
Prepaid expenses and other assets - 31
Prepaid federal income taxes - 3
------ ------
Total assets $43,277 $43,323
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $37,430 $37,112
Advances from the Federal Home Loan Bank 300 800
Other liabilities 131 106
Accrued federal income taxes 28 -
Deferred federal income taxes 115 95
------ ------
Total liabilities 38,004 38,113
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued - -
Additional paid-in capital 2,413 2,413
Retained earnings - substantially restricted 4,211 4,163
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax effects (7) (22)
Shares acquired by Employee Stock Ownership Plan (327) (327)
Shares acquired by Management Recognition Plan (214) (214)
Less 49,550 treasury shares - at cost (803) (803)
------ ------
Total shareholders' equity 5,273 5,210
------ ------
Total liabilities and shareholders' equity $43,277 $43,323
====== ======
3
London Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
1999 1998
Interest income
Loans $769 $720
Mortgage-backed securities 26 40
Investment securities and interest-bearing deposits and other 37 33
--- ---
Total interest income 832 793
Interest expense
Deposits 418 380
Borrowings 11 29
--- ---
Total interest expense 429 409
--- ---
Net interest income 403 384
Provision for losses on loans 15 9
--- ---
Net interest income after provision for
losses on loans 388 375
Other income
Loss on sale of investment securities (13) -
Other operating 29 20
--- ---
Total other income 16 20
General, administrative and other expense
Employee compensation and benefits 158 151
Occupancy and equipment 28 21
Federal deposit insurance premiums 5 5
Franchise taxes 28 22
Data processing 19 15
Other operating 53 40
--- ---
Total general, administrative and other expense 291 254
--- ---
Earnings before income taxes 113 141
Federal income taxes
Current 25 34
Deferred 14 14
--- ---
Total federal income taxes 39 48
--- ---
NET EARNINGS $ 74 $ 93
=== ===
EARNINGS PER SHARE
Basic $.16 $.21
=== ===
Diluted $.16 $.20
=== ===
4
London Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
1999 1998
Net earnings $74 $93
Other comprehensive income, net of tax:
Unrealized holding losses on securities during
the period, net of tax of $4 in 1999 (9) -
Reclassification adjustment for losses included in net earnings,
net of tax of $4 in 1999 9 -
-- --
Comprehensive income $74 $93
== ==
5
London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
1999 1998
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 74 $ 93
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Loss on investment securities transactions 13 -
Provision for losses on loans 15 9
Amortization of deferred loans fees (25) (44)
Depreciation and amortization 12 7
Federal Home Loan Bank stock dividends (5) (5)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (12) (24)
Prepaid expenses and other assets 31 37
Other liabilities 25 37
Federal income taxes
Current 31 33
Deferred 14 14
------ ------
Net cash provided by operating activities 173 157
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities 76 -
Principal repayments on mortgage-backed securities 88 229
Principal repayments on loans 3,727 3,229
Loan disbursements (4,009) (3,628)
Purchase of office equipment (1) (17)
------ ------
Net cash provided by (used in) investing activities (119) (117)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 318 2,358
Repayments of advances from the Federal Home Loan Bank (500) (500)
Distributions paid on common shares (26) (28)
------ ------
Net cash provided by (used in) financing activities (208) 1,830
------ ------
Net increase (decrease) in cash and cash equivalents (154) 1,870
Cash and cash equivalents at beginning of period 3,457 1,778
------ ------
Cash and cash equivalents at end of period $ 3,303 $ 3,648
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ - $ 18
====== ======
Interest on deposits and borrowings $ 429 $ 409
====== ======
6
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 1999 and 1998
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 London Financial Corporation ("LFC" or the
"Corporation") included in the Annual Report on Form 10-KSB for the year ended
September 30, 1999. 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 period ended December 31, 1999, 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 The Citizens Bank of London ("Citizens"), an Ohio commercial bank
wholly-owned by LFC. Prior to January 4, 1999, Citizens was an Ohio savings and
loan association. All significant intercompany items have been eliminated.
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the London Financial Corp.
Employee Stock Ownership Plan (the "ESOP") that are unallocated and not
committed to be released. Weighted-average common shares outstanding, which
gives effect to 27,919 unallocated ESOP shares, totaled 451,531 for the three
month period ended December 31, 1999. Weighted-average common shares
outstanding, which gives effect to 32,725 unallocated ESOP shares, totaled
446,725 for the three month period ended December 31, 1998.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under LFC's stock
option plan. Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share totaled 452,821 for the three month period
ended December 31, 1999, and 465,207 for the three month period ended December
31, 1998. Incremental shares related to the assumed exercise of stock options
included in the calculation of diluted earnings per share totaled 1.2% and
18,482 for the three month periods ended December 31, 1999 and 1998,
respectively.
4. Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods of
accounting for hedging transactions, prescribes the items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
7
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 1999 and 1998
4. Effects of Recent Accounting Pronouncements (continued)
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on LFC's financial position or results of operations.
8
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 effect of certain recent accounting
pronouncements on financial position and results of operations.
Discussion of Financial Condition Changes from September 30, 1999 to December
31, 1999
At December 31, 1999, LFC had total assets of $43.3 million, a decrease of
$46,000, or .1% from September 30, 1999. The decrease in assets resulted
primarily from a $500,000 decline in borrowings, which was partially offset by a
$318,000 increase in deposits.
Cash and interest-bearing deposits totaled $3.3 million at December 31, 1999, a
$154,000, or 4.5%, decrease from the total at September 30, 1999.
Investment securities and mortgage-backed securities decreased by $156,000, or
8.0%, to a total of $1.8 million at December 31, 1999, primarily reflecting
principal repayments on mortgage-backed securities totaling $88,000 and a sale
of investment securities of $89,000.
Loans receivable increased by $292,000, or .8%, as loan disbursements of $4.0
million exceeded principal repayments of $3.7 million. Loan disbursements during
the period ended December 31, 1999, exceeded the volume of disbursements for the
same period in 1998 by $381,000, or 10.5%.
At December 31, 1999, Citizens' allowance for loan losses totaled $252,000,
compared to the $238,000 level maintained at September 30, 1999. Citizens had no
nonperforming loans at December 31, 1999 and September 30, 1999. At December 31,
1999, 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, 1999, based on the available facts and
circumstances, there can be no assurance 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 $37.4 million at December 31, 1999, an increase of $318,000, or
.9%, over the $37.1 million of deposits outstanding at September 30, 1999. Such
increase resulted primarily from management's efforts to increase deposits
through marketing strategies.
9
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from September 30, 1999 to December
31, 1999 (continued)
Advances from the Federal Home Loan Bank (the "FHLB") amounted to $300,000 at
December 31, 1999, a decrease of $500,000, or 62.5%, from September 30, 1999.
Proceeds from deposit growth and excess liquidity were used to repay such
advances during the period.
Shareholders' equity totaled $5.3 million at December 31, 1999, an increase of
$63,000, or 1.2%, over September 30, 1999, levels. The increase resulted
primarily from net earnings of $74,000, which were partially offset by regular
dividends totaling $26,000, or $.06 per share.
At December 31, 1999, Citizens was required to maintain regulatory capital
sufficient to meet certain minimum capital standards promulgated by the Federal
Deposit Insurance Corporation. As of December 31, 1999, Citizens' regulatory
capital was well in excess of such minimum capital requirements.
Comparison of Operating Results For the Three Month Periods Ended December 31,
1999 and 1998
General
Net earnings for the three month period ended December 31, 1999, totaled
$74,000, a decrease of $19,000, or 20.4%, from the comparable 1998 period. The
decrease in earnings resulted primarily from a $4,000 decrease in other income,
a $6,000 increase in the provision for losses on loans and a $37,000 increase in
general, administrative and other expense, which were partially offset by a
$19,000 increase in net interest income and a $9,000 decrease in the provision
for federal income taxes.
Net Interest Income
Interest income on loans for the three months ended December 31, 1999, increased
by $49,000, 6.8%, compared to the three months ended December 31, 1998. The
increase was primarily due to an increase in the weighted-average balance
outstanding. Interest income on mortgage-backed securities decreased by $14,000,
or 35.0%, due primarily to a decrease in the weighted-average portfolio balance
outstanding year to year. Interest income on investment securities and other
interest-earning assets increased by $4,000, or 12.1%.
Interest expense on deposits increased by $38,000, or 10.0%, during the three
months ended December 31, 1999. This increase resulted primarily from an
increase in the weighted average balance of deposits outstanding, which was
offset by a decrease in the cost of deposits.
10
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,
1999 and 1998 (continued)
Net Interest Income (continued)
Interest expense on borrowings decreased by $18,000, or 62.1%, during the three
months ended December 31, 1999. The decrease was primarily due to an decrease in
the weighted-average balance of advances outstanding.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $19,000, or 4.9%, during the three months ended
December 31, 1999, compared to the three months ended December 31, 1998.
Provision for Losses on Loans
Management elected to record a $15,000 provision for loan losses during the
three-month period ended December 31, 1999, compared to the $9,000 amount
recorded in the 1998 quarter. The current period provision was primarily
attributable to growth in the commercial loan portfolio. There can be no
assurance that Citizens' allowance for loan losses will be adequate to cover
losses on nonperforming assets in the future.
Other Income
Other income totaled $16,000, during the three months ended December 31, 1999, a
decrease of $4,000, or 20.0%, compared to the three month period ended December
31, 1998. The decrease resulted primarily from a $13,000 loss on sale of
investment securities, which was partially offset by a $9,000, or 45.0%,
increase in other operating income, 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 increased by $37,000, or 14.6%, during
the three months ended December 31, 1999, compared to the same period in 1998.
The increase was primarily due to an increase of $7,000, or 4.6%, in employee
compensation and benefits, due primarily to an increase in staffing levels year
to year, coupled with normal merit increases, a $7,000, or 33.3%, increase in
occupancy and equipment and a $13,000, or 32.5%, increase in other operating
expense year to year.
Federal Income Taxes
The provision for federal income taxes decreased by $9,000, or 18.8%, for the
three month period ended December 31, 1999, compared to the same period in 1998,
due primarily to a $28,000, or 19.9%, increase in pretax earnings. LFC's
effective tax rates amounted to 34.5% and 34.0% during the three months ended
December 31, 1999 and 1998, respectively.
11
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000 Compliance Matters
As with most providers of financial services, Citizens' operations are heavily
dependent on information technology systems. During the three year period
leading up to January 1, 2000, Citizens addressed the potential problems
associated with the possibility that the computers that control or operate
Citizens' information technology system and infrastructure may not have been
programmed to read four-digit date codes and, upon arrival of the year 2000, may
have recognized the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
Citizens' primary data processing applications are handled by a third-party
service bureau, Fiserv. Fiserv advised Citizens that it migrated to a fully Year
2000 compliant processing system that had been fully tested as of July 1, 1999.
Management has also reviewed Citizens' ancillary equipment and requested service
providers to assure Citizens that their systems and products are fully year 2000
compliant. Citizens upgraded its existing teller operating system with a capital
expenditure of approximately $65,000, which was recorded in fiscal 1999.
Citizens did not experience any technology-related problems upon arrival of
January 1, 2000, nor was there any interruption of services to its customers.
In addition to possible expense related to its own systems, Citizens could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in Citizens' primary market area. Because Citizens' loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and Citizens' primary market area is not significantly dependent upon
one employer or industry, Citizens does not expect, and to date has not
realized, any significant or prolonged difficulties that will affect net
earnings or cash flow.
12
London Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On January 27, 2000, the Annual Meeting of LFC's Shareholders
was held. Each of the four directors nominated were elected to
terms expiring in 2001 by the following vote:
John I. Andrix For: 343,196 Against: 2,500
Rodney A. Bell For: 343,396 Against: 2,300
John J. Bodle For: 343,396 Against: 2,300
Shirley C. Hansgen For: 343,396 Against: 2,300
One other matter was submitted to the shareholders, for which the
following votes were cast:
Ratification of the appointment of Grant Thornton LLP as
independent auditors of LFC for the fiscal year ended
September 30, 2000.
For: 331,868 Against: 12,828
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibit 27: Financial Data Schedule for the
three months ended December 31,
1999.
13
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 11, 2000 By: /s/John J. Bodle
John J. Bodle
President and
Chief Executive Officer
Date: February 11, 2000 By: /s/Joyce E. Bauerle
Joyce E. Bauerle
Treasurer and
Principal Accounting Officer
14