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, 1998
---------------------------------------
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, 1999, the latest practicable date, 479,450 of 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 Other 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 1998 1998
Cash and due from banks $ 471 $ 507
Interest-bearing deposits in other financial institutions 3,177 1,271
------ ------
Cash and cash equivalents 3,648 1,778
Investment securities designated as available
for sale - at market 121 121
Mortgage-backed securities - at amortized
cost, approximate market value of $2,488 and $2,733
as of December 31, 1998 and September 30, 1998 2,474 2,703
Loans receivable - net 32,952 32,588
Office premises and equipment - at depreciated cost 384 374
Stock in Federal Home Loan Bank - at cost 293 288
Accrued interest receivable 240 216
Prepaid expenses and other assets 23 60
Prepaid federal income taxes - 16
------ ------
Total assets $40,135 $38,144
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $33,658 $31,300
Advances from the Federal Home Loan Bank 1,300 1,800
Other liabilities 192 155
Accrued federal income taxes 17 -
Deferred federal income taxes 40 26
------ ------
Total liabilities 35,207 33,281
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued - -
Additional paid-in capital 2,391 2,391
Retained earnings - substantially restricted 4,011 3,946
Unrealized losses on securities designated as available
for sale, net of related tax effects (26) (26)
Shares acquired by Employee Stock Ownership Plan (381) (381)
Shares acquired by Management Recognition Plan (264) (264)
Less 49,550 treasury shares - at cost (803) (803)
------ ------
Total shareholders' equity 4,928 4,863
------ ------
Total liabilities and shareholders' equity $40,135 $38,144
====== ======
3
London Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
1998 1997
Interest income
Loans $720 $665
Mortgage-backed securities 40 57
Investment securities - 3
Interest-bearing deposits and other 33 47
--- ---
Total interest income 793 772
Interest expense
Deposits 380 371
Borrowings 29 26
--- ---
Total interest expense 409 397
--- ---
Net interest income 384 375
Provision for losses on loans 9 2
--- ---
Net interest income after provision for
losses on loans 375 373
Other income
Gain on investment securities transactions - 6
Other operating 20 16
--- ---
Total other income 20 22
General, administrative and other expense
Employee compensation and benefits 151 112
Occupancy and equipment 21 17
Federal deposit insurance premiums 5 5
Franchise taxes 22 4
Data processing 15 14
Other operating 40 60
--- ---
Total general, administrative and other expense 254 212
--- ---
Earnings before income taxes 141 183
Federal income taxes
Current 34 152
Deferred 14 (90)
--- ---
Total federal income taxes 48 62
---- ---
NET EARNINGS $ 93 $121
=== ===
EARNINGS PER SHARE
Basic $.21 $.26
=== ===
Diluted $.20 $.25
=== ===
4
London Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
1998 1997
Net earnings $ 93 $121
Other comprehensive income, net of tax:
Unrealized holding gains on securities during
the period - 8
Reclassification adjustment for gains included in net earnings - (4)
--- ---
Comprehensive income $ 93 $125
=== ===
5
London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
1998 1997
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 93 $ 121
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 9 2
Amortization of deferred loan origination fees (44) (35)
Depreciation and amortization 7 5
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 (24) 11
Prepaid expenses and other assets 37 16
Other liabilities 37 (24)
Federal income taxes
Current 33 46
Deferred 14 (90)
----- -----
Net cash provided by operating activities 157 94
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities - 506
Principal repayments on mortgage-backed securities 229 94
Principal repayments on loans 3,299 2,843
Loan disbursements (3,628) (2,276)
Purchase of office equipment (17) (3)
----- -----
Net cash provided by (used in) investing activities (117) 1,164
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 2,358 722
Repayments of advances from the Federal Home Loan Bank (500) -
Proceeds from other borrowed money - 1,400
Distributions paid on common shares (28) (2,564)
----- -----
Net cash provided by (used in) financing activities 1,830 (442)
----- -----
Net increase in cash and cash equivalents 1,870 816
Cash and cash equivalents at beginning of period 1,778 3,664
----- -----
Cash and cash equivalents at end of period $3,648 $4,480
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 18 $ 100
===== =====
Interest on deposits and borrowings $ 409 $ 378
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on investment securities designated
as available for sale, net of related tax effects $ - $ 4
===== =====
6
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 1998 and 1997
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, 1998. 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, 1998, 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 Bank, an Ohio commercial bank wholly-owned by LFC, ("Citizens").
Prior to January 4, 1998, 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 32,725 unallocated ESOP shares, totaled 446,725 for the three
month period ended December 31, 1998. Weighted-average common shares deemed
outstanding, which gives effect to 37,736 unallocated ESOP shares, totaled
472,694 for the three month period ended December 31, 1997.
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 465,207 for the three month period
ended December 31, 1998, and 486,808 for the three month period ended December
31, 1997.
4. Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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.
7
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 1998 and 1997
4. Effects of Recent Accounting Pronouncements (continued)
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. Management adopted SFAS No. 130
effective October 1, 1998, as required, without 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.
In June 1998, the FASB issued 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.
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 is effective for fiscal years beginning after June 15, 1999. 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 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, 1998 to December
31, 1998
At December 31, 1998, LFC had total assets of $40.1 million, an increase of $2.0
million, or 5.2%, over September 30, 1998. The increase in assets was funded
primarily by a $2.4 million, or 7.5%, increase in deposits.
Cash and interest-bearing deposits totaled $3.6 million at December 31, 1998, a
$1.9 million, or 105.2%, increase over the total at September 30, 1998.
Investment securities and mortgage-backed securities decreased by $229,000, to a
total of $2.6 million at December 31, 1998, reflecting principal repayments on
mortgage-backed securities.
Loans receivable increased by $364,000, or 1.1%, as loan disbursements of $3.6
million exceeded principal repayments of $3.3 million. Loan disbursements during
the three month period ended December 31, 1998, exceeded the volume of
disbursements for the same period in 1997 by $1.4 million, or 59.4%.
At December 31, 1998, Citizens' allowance for loan losses totaled $210,000,
compared to the $201,000 level maintained at September 30, 1997. Citizens had no
nonperforming loans at December 31, 1998, compared to nonperforming loans of
$268,000, or .82% of the total loan portfolio at September 30, 1998. At December
31, 1998, 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, 1998, 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 $33.7 million at December 31, 1998, an increase of $2.4
million, or 7.5%, over the $31.3 million of deposits outstanding at September
30, 1998. Such increase resulted primarily from management's efforts to increase
deposits through marketing strategies.
Advances from the Federal Home Loan Bank amounted to $1.3 million at December
31, 1998, a decrease of $500,000, or 27.8%, from September 30, 1998. Proceeds
from deposit growth were used to repay such advances during the period.
9
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from September 30, 1998 to December
31, 1998 (continued)
Shareholders' equity totaled $4.9 million at December 31, 1998, an increase of
$65,000, or 1.3%, over September 30, 1998, levels. The increase resulted
primarily from net earnings of $93,000, which were partially offset by regular
dividends totaling $28,000, or $.06 per share.
At December 31, 1998, Citizens was required to maintain regulatory capital
sufficient to meet certain minimum capital standards promulgated by the Office
of Thrift Supervision. As of December 31, 1998, Citizens' regulatory capital was
well in excess of such minimum capital requirements.
Comparison of Operating Results For the Three Month Periods Ended December 31,
1998 and 1997
General
Net earnings for the three month period ended December 31, 1998, totaled
$93,000, a decrease of $28,000, or 23.1%, from the comparable 1997 period. The
decrease in earnings resulted primarily from a $7,000 increase in the provision
for losses on loans and a $42,000 increase in general, administrative and other
expense, which were partially offset by a $9,000 increase in net interest income
and a $14,000 decrease in the provision for federal income taxes.
Net Interest Income
Interest income on loans for the three months ended December 31, 1998, increased
by $55,000, or 8.3%, compared to the three months ended December 31, 1997. The
increase was primarily due to an approximate $3.6 million increase in the
weighted-average balance outstanding. Interest income on mortgage-backed
securities decreased by $17,000, or 29.8%, 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 decreased by $17,000, or
34.0%.
Interest expense on deposits increased by $9,000, or 2.4%, during the three
months ended December 31, 1998. 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.
Interest expense on borrowings increased by $3,000, or 11.5%, during the three
months ended December 31, 1998. The increase is primarily due to an increase 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 $9,000, or 2.4%, during the three months ended
December 31, 1998, compared to the three months ended December 31, 1997.
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,
1998 and 1997 (continued)
Other Income
Other income totaled $20,000 during the three months ended December 31, 1998, a
decrease of $2,000, or 9.1%, from the three month period ended December 31,
1997. The decrease resulted primarily from a $6,000 gain on investment
securities transactions in the 1997 period, which was partially offset by a
$4,000, or 25.0%, increase in other operating income. 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 $42,000, or 19.8%, during
the three months ended December 31, 1998, compared to 1997. The increase was
primarily comprised of a $39,000, or 34.8%, increase in employee compensation
and benefits, due primarily to an increase in staffing levels year to year,
coupled with normal merit increases, coupled with an $18,000 increase in
franchise tax expense year to year.
Federal Income Taxes
The provision for federal income taxes decreased by $14,000, or 22.6%, for the
three month period ended December 31, 1998, compared to the same period in 1997.
LFC's effective tax rates amounted to 34.0% and 33.9% during the three months
ended December 31, 1998 and 1997, respectively.
Year 2000 Compliance Matters
As with most 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.
Citizens' primary data processing applications are handled by a third-party
service bureau, Fiserv. Fiserv has advised Citizens that it has migrated to a
fully Year 2000 compliant processing system that will be fully tested by May 1,
1999. Management has also reviewed Citizens' ancillary equipment and is in the
process of providing the appropriate remedial measures, including requesting
service providers to assure Citizens that their systems and products are fully
year 2000 compliant. Citizens is in the process of upgrading its existing teller
operating system with a capital expense budget of $65,000. No assurance can be
given, however, that significant expense will not be incurred in future periods.
In the unlikely 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.
11
London Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000 Compliance Matters (continued)
Citizens has developed a contingency plan in case mission-critical systems are
not successfully renovated in a timely manner or if they actually fail at Year
2000 critical dates. The contingency plan states that Citizens deems the
likelihood of failure of the service provider's efforts to implement Year 2000
changes to the on-line core account processing system to be remote; however, a
more likely scenario is that the service provider's system will be down for
several days or weeks upon arrival of Year 2000. The plan, therefore, primarily
addresses action to deal with the latter possibility rather than with a
catastrophic event, including Citizens' ability to process transactions manually
over a short-term period, if necessary, upon arrival of the year 2000. Citizens
does not consider contingency planning to be a static process; therefore, the
plan will be amended to address a catastrophic event if testing results indicate
greater concern.
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 any significant or prolonged
difficulties that will affect net earnings or cash flow.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that borrowers fail to prepare properly for Year
2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. Citizens is assessing such risks among
its customers. LFC could also be materially adversely affected if other third
parties, such as governmental agencies, clearing houses, telephone companies,
utilities and other service providers fail to prepare properly. Citizens is
therefore attempting to assess these risks and take action to minimize their
effect.
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 28, 1999, the Annual Meeting of LFC's Shareholders was
held. Each of the three directors nominated (Donovan D. Forrest,
Edward D. Goodyear and Kennison A. Sims) were elected to terms
expiring in 2001 by the following vote:
For: 319,687 Withheld: 0
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, 1999.
For: 306,900 Withheld: 0
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, 1998.
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 10, 1999 By: /s/John J. Bodle
------------------------- ---------------------------
John J. Bodle
President and
Chief Executive Officer
Date: February 10, 1999 By: /s/Joyce E. Bauerle
------------------------- ---------------------------
Joyce E. Bauerle
Treasurer and
Principal Accounting Officer
14