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, 1997
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 February 6, 1998, the latest practicable date, 510,160 of the registrant's
common shares, without par value, were issued and outstanding.
Page 1 of 13 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 12
SIGNATURES 13
2
London Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 1997 1997
Cash and due from banks $ 431 $ 322
Interest-bearing deposits in other financial institutions 4,049 3,342
------- -------
Cash and cash equivalents 4,480 3,664
Investment securities designated as available for sale - at market 161 155
Investment securities - at amortized cost, approximate market
value of $502 at September 30, 1997 - 500
Mortgage-backed securities - at cost, approximate market
value of $3,518 and $3,613 at December 31, 1997 and
September 30, 1997, respectively 3,492 3,586
Loans receivable - net 28,931 29,465
Office premises and equipment - at depreciated cost 358 360
Stock in Federal Home Loan Bank - at cost 285 280
Accrued interest receivable 158 169
Prepaid expenses and other assets 15 31
Deferred federal income taxes 36 -
--------- ------
Total assets $37,916 $38,210
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $30,673 $29,951
Advances from the Federal Home Loan Bank 300 300
Other borrowed money 1,400 -
Other liabilities 138 162
Accrued federal income taxes 187 141
Deferred federal income taxes - 52
------- ---------
Total liabilities 32,698 30,606
Shareholders' equity
Common shares - authorized 5,000,000 shares, without par value;
529,000 shares issued - -
Additional paid-in capital 2,388 4,910
Shares acquired by Employee Stock Ownership Plan (381) (423)
Shares acquired by Management Recognition Plan (315) (315)
Retained earnings - substantially restricted 3,773 3,683
Unrealized gains on securities designated as available for
sale, net of related tax effects 35 31
Less 18,840 treasury shares - at cost (282) (282)
-------- --------
Total shareholders' equity 5,218 7,604
------- -------
Total liabilities and shareholders' equity $37,916 $38,210
====== ======
3
London Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
1997 1996
Interest income
Loans $665 $576
Mortgage-backed securities 57 56
Investment securities 3 29
Interest-bearing deposits and other 47 32
---- ----
Total interest income 772 693
Interest expense
Deposits 371 349
Borrowings 26 7
---- -----
Total interest expense 397 356
--- ---
Net interest income 375 337
Provision for losses on loans 2 -
----- -----
Net interest income after provision for
losses on loans 373 337
Other income
Gain on investment securities transactions 6 -
Other operating 16 15
---- ----
Total other income 22 15
General, administrative and other expense
Employee compensation and benefits 112 107
Occupancy and equipment 17 17
Federal deposit insurance premiums 5 18
Franchise taxes 4 5
Data processing 14 14
Other 60 47
---- ----
Total general, administrative and other expense 212 208
--- ---
Earnings before income taxes 183 144
Federal income taxes
Current 152 (11)
Deferred (90) 60
---- ----
Total federal income taxes 62 49
---- ----
NET EARNINGS $121 $ 95
=== ====
EARNINGS PER SHARE
Basic $.26 $.20
=== ===
Diluted $.25 $.20
=== ===
4
London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
1997 1996
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 121 $ 95
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Gain on investment securities transactions (6) -
Provision for losses on loans 2 -
Amortization of deferred loan origination fees (35) (18)
Depreciation and amortization 5 6
Federal Home Loan Bank stock dividends (5) (5)
Amortization expense of stock benefit plans 53 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable 11 12
Prepaid expenses and other assets 16 8
Other liabilities (24) (154)
Federal income taxes
Current 46 (35)
Deferred (90) 60
------- -------
Net cash provided by (used in) operating activities 94 (31)
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 506 1,000
Principal repayments on mortgage-backed securities 94 80
Principal repayments on loans 2,843 1,368
Loan disbursements (2,276) (2,178)
Purchase of office equipment (3) -
-------- ----
Net cash provided by investing activities 1,164 270
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 722 600
Proceeds from other borrowed money 1,400 -
Distributions paid on common shares (2,564) (32)
----- -------
Net cash provided by (used in) financing activities (442) 568
------ ------
Net increase in cash and cash equivalents 816 807
Cash and cash equivalents at beginning of period 3,664 2,643
----- -----
Cash and cash equivalents at end of period $4,480 $3,450
===== =====
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 100 $ 23
====== =======
Interest on deposits and borrowings $ 378 $ 356
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized gains on investment securities designated
as available for sale, net of related tax effects $ 4 $ -
======== ====
5
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 1997 and 1996
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") included in
the Annual Report on Form 10-KSB for the year ended September 30, 1997. 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, 1997 and 1996, 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 Loan & Savings Company ("Citizens"). All significant
intercompany items have been eliminated.
3. Earnings Per Share
Basic earnings per share for the three month periods ended December 31, 1997 and
1996, is computed based upon 467,840 and 486,680 weighted-average shares
outstanding, respectively, which gives effect to a reduction for 42,320
unallocated shares held by the London Financial Corporation Employee Stock
Ownership Plan (the "ESOP") in accordance with Statement of Position 93-6.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares, i.e. the Corporation's stock
option plan. Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share totaled 486,808 for the three month periods
ended December 31, 1997, and 486,680 for the three months ended December 31,
1996.
4. Effects of Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments 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.
6
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 1997 and 1996
4. Effects of Recent Accounting Pronouncements (continued)
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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on LFC's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No.
131 is not expected to have a material impact on LFC's financial statements.
7
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 and adequacy of the allowance
for losses on loans, the effects of the year 2000 on certain information
technology systems and the effect of certain recent accounting pronouncements.
Discussion of Financial Condition Changes from September 30, 1997 to
December 31, 1997
At December 31, 1997, LFC had total assets of $37.9 million, a decrease of
$294,000, or .8%, from September 30, 1997. The decrease in assets resulted
primarily from the $5.00 per share return of capital distribution, totaling $2.5
million, which was paid to LFC's shareholders in November, 1997.
Investment securities and mortgage-backed securities decreased by $588,000, to a
total of $3.7 million at December 31, 1997, reflecting the maturity of
investment securities totaling approximately $500,000 and principal repayments
on mortgage-backed securities of $94,000.
Loans receivable decreased by $534,000, or 1.8%, as loan disbursements of $2.3
million were exceeded by principal repayments of $2.8 million.
At December 31, 1997, Citizens' allowance for loan losses totaled $181,000, a
$6,000 decline from the level maintained at September 30, 1997. Nonperforming
loans totaled $76,000, or .3% of the total loan portfolio at December 31 1997,
as compared to nonperforming loans of $268,000, or .9% of the total loan
portfolio at September 30, 1997. At December 31, 1997, 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,
1997, 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 $30.7 million at December 31, 1997, an increase of $722,000, or
2.4%, over the $30.0 million of deposits outstanding at September 30, 1997. Such
increase resulted primarily from management's efforts to increase deposits
through marketing strategies.
8
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from September 30, 1997 to
December 31, 1997 (continued)
Shareholders' equity totaled $5.2 million at December 31, 1997, a decrease of
$2.4 million, or 31.4%, from September 30, 1997, levels. The decrease resulted
primarily from the $2.5 million, or $5.00 per share, return of capital
distribution paid to LFC's shareholders in November, 1997, coupled with a
regular dividend totaling $31,000, or $.06 per share, which were partially
offset by net earnings of $121,000.
Pursuant to regulations promulgated by the Office of Thrift Supervision,
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. As of December 31, 1997,
Citizens' tangible and core capital totaled $6.0 million, or 16.0% of adjusted
assets and exceeded the $565,000 and $1.1 million requirements by $5.4 million
and $4.9 million, respectively. Citizens' risk-based capital totaled $6.2
million and exceeded the requirement by $4.6 million.
Comparison of Operating Results For the Three Month Periods Ended December 31,
1997 and 1996
General
Net earnings for the three month period ended December 31, 1997, totaled
$121,000, an increase of $26,000, or 27.4%, over the comparable 1996 period. The
increase in earnings resulted primarily from a $38,000 increase in net interest
income and a $7,000 increase in other income, which were partially offset by a
$4,000 increase in general, administrative and other expense and a $13,000
increase in the federal income tax provision.
Net Interest Income
Interest income on loans and mortgage-backed securities increased by $90,000, or
14.2%, for the three months ended December 31, 1997, as compared to the three
months ended December 31, 1996. The increase was primarily due to a $1.3 million
increase in the weighted average portfolio balance outstanding year to year,
coupled with an increase in yield. Interest income on investment securities and
other interest-earning assets decreased by $11,000, or 18.0%, due primarily to a
decrease in yields available on short-term deposits.
Interest expense on deposits increased by $22,000, or 6.3%, during the three
months ended December 31, 1997. This increase resulted primarily from a $1.8
million increase in the weighted average balance of deposits outstanding.
Interest expense on borrowings increased by $19,000, or 271.4%, due to an
increase in borrowings outstanding during the period, as LFC borrowed $1.4
million to partially fund the special $5.00 per share distribution paid in
November 1997.
9
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,
1997 and 1996 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $38,000, or 10.7%, during the three months
ended December 31, 1997, as compared to the three months ended December 31,
1996. The interest rate spread totaled approximately 3.25% for the three months
ended December 31, 1997, compared to 2.86% for the same period in 1996, while
the net interest margin increased to approximately 4.04% in the 1997 period from
3.80% in the 1996 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. The
provision for losses on loans totaled $2,000 for the three months ended December
31, 1997. 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 $22,000 during the three months ended December 31, 1997, an
increase of $7,000, or 46.7% over the same period in 1996. The increase resulted
primarily from a $6,000 gain realized upon the call of a $500,000 U.S.
Government agency bond. Other operating 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 increased by approximately $4,000, or
1.9%, during the three months ended December 31, 1997, as compared to 1996,
reflecting the $13,000, or 72.2%, decline in federal deposit insurance premiums,
due to lower premium rates during the quarter, while all other expenses
increased by $17,000, or 8.9%.
Federal Income Taxes
The provision for federal income taxes increased by $13,000, or 26.5%, during
the three months ended December 31, 1997, due primarily to an increase in
earnings before income taxes of $39,000, or 27.1%. LFC's effective tax rates
amounted to 33.9% and 34.0% during the three months ended December 31, 1997 and
1996, respectively.
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,
1997 and 1996 (continued)
Other Matters
As with all providers of financial services, Citizens' operations are heavily
dependent on information technology systems. Citizens is addressing the
potential problems associated with the possibility that the computers that
control or operate Citizens' information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. Citizens is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
As of the date of this Form 10-QSB, Citizens has not identified any specific
expenses that are reasonably likely to be incurred by Citizens in connection
with this issue and does not expect to incur significant expense to implement
the necessary corrective measures. No assurance can be given, however, that
significant expense will not be incurred in future periods. In the event that
Citizens is ultimately required to purchase replacement computer systems,
programs and equipment, or incur substantial expense to make Citizens' current
systems, programs and equipment year 2000 compliant, LFC's net earnings and
financial condition could be adversely affected.
In addition to possible expense related to its own systems, LFC 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 any significant or prolonged
difficulties that will affect net earnings or cash flow.
11
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 22, 1998, the Annual Meeting of LFC's Shareholders was
held. Each of the four directors nominated (John I. Andrix,
Rodney A. Bell, John J. Bodle, and Shirley C. Hansgen) were
elected to terms expiring in 2000 by the following vote:
For: 349,296 Withheld: 1,000
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, 1998.
For: 349,296 Withheld: 1,000
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, 1997.
12
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 6, 1998 By: /s/John J. Bodle
------------------------------ ----------------
John J. Bodle
President and
Chief Executive Officer
Date: February 6, 1998 By: /s/Joyce E. Bauerle
------------------------------ -------------------
Joyce E. Bauerle
Treasurer and
Principal Accounting Officer
13