U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual report under Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1997
Commission File No.: 0-28162
LENOX BANCORP, INC.
(Name of small business issuer in its charter)
OHIO 31-1445959
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5255 BEECH STREET, ST. BERNARD, OHIO 45217
(Address of principal executive offices)
Issuer's telephone number: (513) 242-6900
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 .
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $195,000
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: $7,068,234 as of
March 23, 1998.
As of March 23, 1998, the issuer has 404,413 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM
10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
<PAGE>
INDEX
PART I PAGE
Item 1. Description of Business ..................................... 1
Additional Item. Executive Officers of Registrant
Item 2. Description of Properties.................................... 34
Item 3. Legal Proceedings............................................ 34
Item 4. Submission of Matters to a Vote of Security Holders.......... 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 35
Item 6. Management's Discussion and Analysis or Plan
of Operations................................................ 35
Item 7. Financial Statements......................................... 35
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16(a) of the Exchange Act............ 36
Item 10. Executive Compensation....................................... 36
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................... 36
Item 12. Certain Relationships and Related Transactions............... 36
PART IV
Item 13. Exhibits and Reports on Form 8-K............................. 37
SIGNATURES................................................................
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Lenox Bancorp, Inc. (also referred to as the "Company") was
incorporated under Ohio law on July 24, 1995. On July 17, 1996, the Registrant
acquired Lenox Savings Bank (the "Bank" or "Lenox") as a part of the Bank's
conversion from a mutual to a stock Ohio chartered savings bank. The Registrant
is a savings and loan holding company and is subject to regulation by the Office
of Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation
(the "FDIC") and the Securities and Exchange Commission (the "SEC"). Currently,
the Registrant does not transact any material business other than through the
Bank. The Registrant retained 50% of the net conversion proceeds amounting to
$1.89 million which it used to purchase investment securities and fund loan
demand. At December 31, 1997, the Company had total assets of $51.5 million and
stockholders' equity of $7.0 million (13.5% of total assets).
The Bank was originally chartered in 1887 as an Ohio building and loan
company for the primary purpose of serving the financial needs of the employees
of Procter & Gamble. The Bank later converted to an Ohio savings and loan
company and in November 1993, converted to an Ohio savings bank under its
current name. The Bank conducts its business from its main office located in St.
Bernard, Ohio and a branch office located at 3521 Erie Avenue, Cincinnati, Ohio
45208.
The Bank is primarily engaged in attracting deposits from the general
public in its primary market area and investing such deposits and other
available funds in mortgage loans secured by one- to four-family residences. At
December 31, 1997, the Bank had invested $35.4 million, or 90.7%, of its total
loan portfolio in one- to four-family mortgage loans. The Bank also invests in
consumer loans. Due to the close ties that have existed between the Bank and
Procter & Gamble, the Bank has a high concentration of borrowers and depositors
who are Procter & Gamble employees. The Bank has hired a mortgage loan
originator to help it attract borrowers and has also begun to market its
products and services more aggressively throughout its primary market area. In
times of low mortgage demand, the Bank has sought to invest available funds in
short-term investment securities including U.S. Government and Agency
securities.
MARKET AREA AND COMPETITION
The Bank primarily originates one- to four-family residential mortgage
loans within its primary market area. The Bank's deposit gathering and lending
markets are concentrated in Hamilton County, Ohio, however, the Bank also offers
loans in Warren, Butler and Clermont counties, Ohio and Boone, Campbell and
Kenton counties, Kentucky. The Bank's high concentration of lending to and
deposit gathering from Procter & Gamble employees has resulted in the Bank
directly competing with institutions throughout the Cincinnati area, and most
recently directly with a Cincinnati commercial bank that has opened branch
offices at Procter & Gamble facilities.
The Cincinnati area, which includes Hamilton County, has a stable
economic base supported by a variety of industries and employment sectors.
Cincinnati is the second largest metropolitan area in the state of Ohio.
Although Cincinnati's economy was founded on manufacturing, which remained the
dominant employment sector throughout much of the twentieth century,
manufacturing industries now trail services and wholesale and retail trade in
terms of employment. Following the national trend, service industries were the
fastest growing employment sector through the 1980s and are now the largest
employment sector in the
1
<PAGE>
Cincinnati metropolitan area, led by health, business, and legal services. The
second largest employment sector is the wholesale and retail trade sector.
Although less prominent, manufacturing remains a large employment sector,
providing employment in such industries as transportation equipment, food
products, industrial machinery and chemicals.
Cincinnati is the chosen headquarters for many Fortune 500 companies,
including Procter & Gamble, E.W. Scripps, Federated Department Stores and
Cincinnati Milacron. Many other companies among the Fortune 500 have also
established operations in Cincinnati, including Ford Motor Corp. and General
Electric. Overall, Cincinnati's popularity among large employers has served to
increase the size and stability of the Cincinnati economy.
The Cincinnati area's increasingly diverse economic mix provides the
metropolitan area with a strong degree of economic stability, which has served
to lessen the impact the national recession has had on the Cincinnati area.
Employment increases in the service and wholesale/retail trade industries,
coupled with less dependence on manufacturing employment has further insulated
the economy from recessionary trends. Hamilton County, the location of
Cincinnati, has benefitted the most from this economic diversification as
evidenced by its lower rate of unemployment relative to Ohio and U.S. averages.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger and
have greater financial resources than the Bank. The Bank's competition for loans
comes principally from commercial banks, savings and loan associations, mortgage
banking companies, credit unions and insurance companies. Its most direct
competition for deposits has historically come from savings and loan
associations and commercial banks. The Cincinnati area is the home to many
commercial banks and savings institutions. As of December 31, 1997, the Bank
estimates that it represented less than 1% of the total assets and market share
for loans and deposits, among financial institutions serving the Cincinnati
area. In addition, the Bank faces increasing competition for deposits from
non-bank institutions such as brokerage firms and insurance companies in such
areas as short-term money market funds, corporate and government securities
funds, mutual funds and annuities. Competition may also increase as a result of
the lifting of restrictions on the interstate operations of financial
institutions.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Bank has
been the origination of long-term fixed-rate and adjustable rate one- to
four-family mortgage loans. To a lesser extent, the Bank originates consumer
loans. At December 31, 1997, the Bank had invested $36.2 million, or 92.9% of
its total loan portfolio in one- to four-family mortgage loans. The Bank has
hired a mortgage loan originator to help it attract borrowers and has also begun
to market its products and services more aggressively throughout its primary
market area. As of December 31, 1997, the Bank exceeded all regulatory capital
requirements.
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of one- to four-family loans. The types of loans that the Bank may
originate are subject to federal and state law and regulations. Interest rates
charged by the Bank on loans are affected by the demand for such loans and the
supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by, among other things,
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board and legislative tax policies.
2
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ----------- ------------ ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S><C>
REAL ESTATE LOANS:
One- to four-family(1)................... $35,855 91.93% $35,124 93.68% $30,633 91.76%
Multi-family............................. 798 2.05 -- -- -- --
Construction(2).......................... 521 1.34 120 0.32 53 .16
------- ----- ------- ----- -------- ------
Total real estate loans............... $37,174 95.32 35,244 94.00 30,686 91.92
OTHER LOANS:
Consumer loans(3)........................ 2,092 5.36 2,399 6.39 2,817 8.44
------ ------ ------- ------ ------- ------
Total loans........................... 39,266 100.68 37,643 100.39 33,503 100.36
------ ------ ------
LESS:
Deferred loan fees....................... 53 0.14 42 0.11 43 .13
Loans in process......................... 145 0.37 48 0.13 16 .05
Allowance for loan losses................ 66 0.17 58 0.15 60 .18
------- ------ -------- ------ -------- ------
Total reductions......................... 264 .68 148 0.39 119 .36
------- ------ ------- ------ ------- ------
TOTAL LOANS RECEIVABLE, NET................. $39,002 100.00% $37,495 100.00% $33,384 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1994 1993
-------------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ------------------------- ------------
<S><C>
REAL ESTATE LOANS:
One- to four-family(1)................... $29,265 92.60% $26,112 92.58%
Multi-family............................. -- -- -- --
Construction(2).......................... -- -- 107 .38
------- ------ ------- ------
Total real estate loans............... 29,265 92.60 26,219 92.96
OTHER LOANS:
Consumer loans(3)........................ 2,465 7.80 2,213 7.85
------- ------ ------- ------
Total loans........................... 31,730 100.40 28,432 100.81
------ ------
LESS:
Deferred loan fees....................... 59 .19 80 .29
Loans in process......................... -- -- 82 .29
Allowance for loan losses................ 66 .21 66 .23
--------- ------ --------- ------
Total reductions......................... 125 .40 228 .81
-------- ------ -------- ------
TOTAL LOANS RECEIVABLE, NET................. $31,605 100.00% $28,204 100.00%
======= ====== ======= ======
</TABLE>
- ---------------------------
(1) Includes second mortgage loans and home equity lines of credit on
residential one- to four-family properties.
(2) Construction loans are originated for the construction of residential one-
to four-family homes. The Bank approves the borrowers for the end loan
financing on all construction loans it originates.
(3) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
3
<PAGE>
LOAN MATURITY. The following table shows the maturity of the Bank's
loans at December 31, 1997. The table does not include principal repayments.
Principal repayments totaled $8.2 million, $7.3 million and $6.5 million for the
years ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, all loans held by the Bank were classified as held to maturity. The table
does not include the effect of future loan prepayment activity. While the Bank
cannot project future loan prepayment activity, the Bank anticipates that in
periods of stable interest rates, prepayment activity would be lower than
prepayment activity experienced in periods of declining interest rates. In
general, the Bank originates adjustable and fixed-rate one- to four-family loans
with maturities from 15 to 30 years, one- to four-family loans with balloon
features which mature from 5 to 7 years and consumer loans with maturities of up
to 5 years.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------------
ONE- TO
FOUR- MULTI- TOTAL LOANS
FAMILY(1) FAMILY CONSUMER(2) RECEIVABLE
-------------- ------------ -------------- --------------
(IN THOUSANDS)
<S><C>
Amounts due:
One year or less............................... $ 116 $ -- $ 134 $ 250
After one year:
More than one year to three years........... 703 -- 1,119 1,822
More than three years to five years......... 2,362 -- 725 3,087
More than five years to ten years........... 4,411 -- 14 4,425
More than 10 years to twenty years.......... 9,500 798 -- 10,298
More than twenty years...................... 19,284 -- 100 19,384
------ ----- ----- ------
Total due after December 31, 1998......... 36,260 798 1,958 39,016
------ ----- ----- ------
Total amount due.......................... 36,376 798 2,092 39,266
------ ----- ----- ------
Less:
Undisbursed loan funds...................... 53
Deferred loan fees, net..................... 145
Allowance for loan losses................... 66
-------
Total loans, net...................... $39,002
=======
</TABLE>
- -----------------------------
(1) Includes second mortgage loans on residential one- to four-family
properties and construction loans originated to fund the construction of
residential one- to four-family mortgage loans.
(2) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
4
<PAGE>
The following table sets forth at December 31, 1997, the dollar amount
of gross loans receivable, contractually due after December 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1998
-----------------------------------------------------------------
Fixed Adjustable Total
-------------------- -------------------- -------------------
(In thousands)
<S><C>
One- to four-family................. $20,740 $15,520 $36,260
Multi-family........................ -- 798 798
Consumer............................ 1,858 100 1,958
------- ------- -------
Total loans...................... $22,598 $16,418 $39,016
======= ======= =======
</TABLE>
LOAN ORIGINATIONS. The following table sets forth the Bank's loan
originations, purchases, sales and principal repayment information for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ------------ ------------
(In thousands)
<S><C>
Gross loans:
Loans receivable, beginning of period.......... $37,553 $33,444 $31,671
Loans originated:
One- to four-family(1)..................... 7,524 9,278 6,201
Consumer(2)................................ 1,360 1,311 2,096
Loans purchased................................ 798 884 --
Principal repayments........................... (8,156) (7,365) (6,524)
Other changes, net............................. (11) 1 --
------- ------- -------
Increase (decrease) in loans receivable.... 1,515 4,109 1,773
------- ------- -------
Loans receivable, end of period................ $39,068 $37,553 $33,444
======= ======= =======
</TABLE>
- ---------------------
(1) Includes second mortgage loans and construction loans on residential one-
to four- family properties.
(2) Includes loans secured by automobiles, boats, common stock, savings
accounts and unsecured loans.
5
<PAGE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-rate
and adjustable-rate mortgage loans secured by one- to four-family residences,
primarily owner-occupied, located in the Bank's primary market area, with
maturities up to thirty years. Substantially all of such loans are secured by
property located in Hamilton County, Ohio.
At December 31, 1997, the Bank's total loans, net outstanding were
$39.0 million, of which $36.4 million or 93.27% of the Bank's total loan
portfolio were one- to four-family residential mortgage loans. Of the one- to
four-family residential mortgage loans outstanding at that date, 57.4% were
fixed-rate loans, and 42.7% were ARM loans. Currently, the interest rate for the
Bank's ARM loans are tied to the one and three year Constant Maturity Index
("CMI"). However, in the past, the Bank's index was based upon the monthly
national median cost of funds as reported by the OTS, which lags behind CMI and
the one year U.S. Treasury index and which results in those loans repricing at
interest rates that may be higher or lower than the prevailing market rates.
Approximately $5.9 million of the Bank's ARM loans, or 36.4% of the Bank's total
ARM loans, are based on that index, which adversely affects the Bank's results
of operations in an increasing rate environment because loans may be repricing
at a rate that is slower than the Bank's cost of funds. In addition,
approximately $3.2 million of the loans tied to the lagging market index bear
margins as little as 50 basis points above the lagging market index. The Bank
does not intend to offer one- to four-family ARM loans based on a lagging index
in the future and has standardized the margin it uses, which is currently at
least 2.75%. The Bank currently offers a number of adjustable-rate mortgage loan
programs with interest rates which adjust either annually or every 3-year
period. Such interest rate adjustments are limited to a 2% annual adjustment cap
and a 5% and 6% life-of-the-loan cap for the Bank's 15 year ARMs and 30 year
ARMs, respectively. The Bank also offers mortgage loans with balloon features.
In general, these loans may be refinanced on the balloon date if the customer
completes a new loan application and meets all of the underwriting criteria
required of new customers. The Bank currently has no mortgage loans that are
subject to negative amortization. Finally, the Bank offers a limited amount of
construction loans for the construction of one- to four-family homes that will
serve as the primary residence of the borrower. These loans are only made,
however, when the Bank will provide the end loan financing.
The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Bank's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. At the same time, the marketability of the
underlying property may be adversely affected. Periodic and lifetime caps on
adjustable-rate mortgage loans help to reduce these risks but also limit the
interest rate sensitivity of such loans.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses.
The Bank also offers second mortgage loans based upon a lagging market
index, the monthly national median cost of funds as reported by the OTS. The
second mortgage loans are originated as fixed rate loans for the first five
years and thereafter adjust on an annual basis. At December 31, 1997, the Bank
had second mortgage loans totalling $497,000.
6
<PAGE>
CONSUMER LENDING. The Bank's portfolio of consumer loans consists of a
combination of automobile, boat and common stock and savings secured loans. The
Bank also offers unsecured loans up to $5,000 for a maximum three year term. As
of December 31, 1997, consumer loans amounted to $2.1 million or 5.36% of the
Bank's total loan portfolio. Consumer loans are generally originated in the
Bank's primary market area and generally have maturities of one to five years.
The consumer loans secured by common stock are originated with terms up to five
years and the loan amounts are limited to 80% of the value of the common stock
securing the loan. The Bank reviews the loans secured by common stock on a
monthly basis and requires that borrowers pledge additional collateral in the
event fluctuations in the market value of the pledged common stock results in
the value of the collateral dropping below the required loan to value ratio of
80%.
Consumer loans are shorter term and generally contain higher interest
rates than residential mortgage loans. Management believes the consumer loan
market has been helpful in improving its spread between average loan yield and
costs of funds and at the same time improved the matching of its rate sensitive
assets and liabilities.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount.
Consumer loans entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans that are secured by
rapidly depreciable assets such as automobiles or that are unsecured. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. At December 31, 1997, the Bank had 8 consumer loans
totalling $22,000 that were 90 days or more delinquent.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
authorizes the lending activity of the Bank, establishes the lending policies of
the Bank and reviews properties offered as security. Consumer loans conforming
to the Bank's loan policy may be approved by the President, the Chief Operating
Officer or the lending operations supervisor. All other loans in amounts up to
$200,000 may be approved by two of the Bank's executive officers. Loans over
$200,000 must be approved by the Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency. If necessary,
additional financial information may be required. An appraisal of real estate
intended to secure a proposed loan generally is required to be performed by an
appraiser designated and approved by the Bank. For proposed mortgage loans, the
Board annually approves independent appraisers used by the Bank and approves the
Bank's appraisal policy. The Bank's policy is to obtain title and hazard
insurance on all mortgage loans.
7
<PAGE>
DELINQUENCIES AND CLASSIFIED ASSETS. Management and the Board of
Directors perform a monthly review of all delinquent loans. The procedures taken
by the Bank with respect to delinquencies vary depending on the nature of the
loan and period of delinquency. The Bank generally requires that delinquent
mortgage loans be reviewed and that a written late charge notice be mailed no
later than the 15th day of delinquency. The Bank's policies provide that
telephone contact will be attempted to ascertain the reasons for delinquency and
the prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. It is the Bank's
policy to place all loans that are delinquent by three or more payments on
non-accrual status, resulting in the Bank no longer accruing interest on such
loans and reversing any interest previously accrued but not collected. A
non-accrual loan may be restored to accrual status when delinquent principal and
interest payments are brought current and future monthly principal and interest
payments are expected to be collected. Property acquired by the Bank as a result
of foreclosure on a mortgage loan is classified as "real estate owned" and is
recorded at the lower of the unpaid principal balance or fair value less costs
to sell at the date of acquisition and thereafter. Upon foreclosure, the Bank
generally would require an appraisal of the property and, thereafter, appraisals
of the property on an annual basis and external inspections on at least a
quarterly basis.
The Bank's Classification of Assets Policy requires that the Bank
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. The Bank currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered Substandard if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as Doubtful have all of the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable.
Assets classified as Loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as Loss, it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
The FDIC, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy
8
<PAGE>
statement. As a result of the declines in local and regional real estate market
values and the significant losses experienced by many financial institutions,
there has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the FDIC. While the Bank believes that it has established an
adequate allowance for loan losses, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank to materially
increase at that time its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings at that time. Although
management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary.
The President of the Bank reviews the Bank's loans on a monthly basis
and classifies loans on a quarterly basis and reports the results of her review
to the Board of Directors. The Bank classifies loans in accordance with the
management guidelines described above. At December 31, 1997, the Bank had no
real estate owned as a result of foreclosure ("REO"). At December 31, 1997, the
Bank had $160,000 of assets classified as Special Mention, $71,000 of assets
classified as Substandard, and $2,000 classified as Doubtful or Loss.
9
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------------------------- --------------------------
60-89 Days 90 Days or More 60-89 Days
--------------------------- ------------------------- -------------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
------------ ----------- ----------- ----------- --------- ------------
(Dollars in thousands)
<S><C>
One- to four-family....................... 1 $52 4 $152 2 $90
Consumer.................................. 6 18 8 22 6 25
--- ---- --- ------ --- ---
Total............................ 7 $70 12 $174 8 $115
=== === === ==== === ====
Delinquent loans to total gross loans..... .18% .44% 0.31%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
------------------------
90 Days or More
------------------------
Principal
Number Balance
of Loans of Loans
---------- -----------
(Dollars in thousands)
<S><C>
One- to four-family....................... 3 $95
Consumer.................................. 8 14
-- ---
Total............................ 11 $109
== ====
Delinquent loans to total gross loans..... 0.29%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------------------
60-89 Days 90 Days or More
--------------------------- -------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------ ----------- ----------- -----------
(Dollars in thousands)
<S><C>
One- to four-family....................... 4 $116 2 $ 66
Consumer.................................. 10 20 11 23
-- --- -- ---
Total............................ 14 $136 13 $89
== ==== == ===
Delinquent loans to total gross loans..... .41% .27%
</TABLE>
10
<PAGE>
NON-ACCRUAL AND PAST-DUE LOANS. The following table sets forth
information regarding loans contractually past due 90 days or more. At such
date, there were no accruing loans past due 90 days or more. If all non-accrual
loans had been performing in accordance with their original term and had been
outstanding from the earlier of the beginning of the period or origination, the
Bank would have interest income of $8,647, $3,303, $3,146, $7,470, and $5,008
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
The Bank had no troubled debt restructurings within the meaning of SFAS No. 15
at any of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- ------------ ------------ ------------
(Dollars in thousands)
<S><C>
Non-accrual one- to four-family loans
delinquent 90 days or more............ $152 $ 95 $66 $88 $109
Non-accrual consumer loans
delinquent 90 days or more............ 22 14 23 5 1
---- ---- --- --- ----
Total non-performing loans.............. 174 109 89 93 110
Total investment in REO................. -- -- -- -- --
---- ---- --- --- ----
Total non-performing assets......... $174 $109 $89 $93 $110
==== ==== === === ====
Non-performing loans to total loans..... .45% .29% .27% .29% .39%
Non-performing assets to total assets... .34 .23 .31 .23 .26
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information available to management at such time. While management
believes the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. The allowance is
based upon a number of factors, including asset classifications, economic
trends, industry experience and trends, industry and geographic concentrations,
estimated collateral values, management's assessment of the credit risk inherent
in the portfolio, historical loan loss experience, and the Bank's underwriting
policies. As of December 31, 1997, the Bank's allowance for loan losses was .17%
of total loans as compared to .15% as of December 31, 1996. The Bank had
$174,000 of nonperforming loans at December 31, 1997 and $109,000 at December
31, 1996. The Bank will continue to monitor and modify its allowances for loan
losses as conditions dictate. Various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's valuation
allowance. These agencies may require the Bank to establish additional valuation
allowances, based on their judgments of the information available at the time of
the examination.
At December 31, 1997, the Bank had no REO. For a description of how the
Bank would treat REO, see the Financial Statements and Notes thereto appearing
elsewhere in this Form 10-K.
11
<PAGE>
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- -----------
(Dollars in thousands)
<S><C>
Allowance for loan losses:
Balance at beginning of period........................ $58 $60 $66 $66 $57
Provision (credit) for loan losses.................... 10 -- (2) -- 6
Charge-offs:
Consumer.......................................... 3 4 5 1 --
--- -- -- -- ---
Total charge-offs.............................. 3 4 5 1 --
Recoveries:
Consumer.......................................... 1 2 1 1 3
--- --- -- -- ---
Total recoveries............................... 1 2 1 1 3
--- --- -- --- ---
Net charge-offs....................................... 2 2 4 -- (3)
--- --- -- ---
Balance at end of period.............................. $66 $58 $60 $66 $66
=== === === === ===
Ratio of net loan charge-offs
during the period to average
loans outstanding during period.................... .01% .01% .01% --% (.01)%
Ratio of allowance for loan losses
to gross loans at end of period.................... .17 .15 .18 .21 .23
Ratio of allowance for loan losses
to non-performing loans
at end of period................................... 37.93 53.21 66.67 71.17 59.86
</TABLE>
12
<PAGE>
The following tables set forth the Bank's allocation of allowance for
loan losses by loan category, the percent of the allocated allowance to the
total allowance and the percent of each specific loan category to total loans.
The portion of the allowance for loan losses allocated to each loan category
does not represent the total available for future losses which may occur within
the loan category since the total allowance for loan losses is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------------- ------------ -------------- ------------ ------------ ----------------
(DOLLARS IN THOUSANDS)
<S><C>
One- to four-family.... $34 51.51% 94.67% $20 34.48% 93.63%
Consumer............... 32 48.49 5.33 38 65.52 6.37
--- ----- ------ --- ------ ------
Total allowance for
loan losses..... $66 100.00% 100.00% $58 100.00% 100.00%
=== ====== ====== === ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1995
-------------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE LOANS IN EACH
TO TOTAL CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS
----------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S><C>
One- to four-family.... $20 33.33% 91.59%
Consumer............... 40 66.67 8.41
-- ----- -----
Total allowance for
loan losses..... $60 100.00% 100.00%
=== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------- ---------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN EACH ALLOWANCE LOANS IN EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------------ ------------- --------------- ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
<S><C>
One- to four-family..... $20 30.30% 92.23% $20 30.30% 92.22%
Consumer................ 46 69.70 7.77 46 69.70 7.78
--- ------ ---- --- ------ ----
Total allowance for
loan losses......... $66 100.00% 100.00% $66 100.00% 100.00%
=== ====== ====== === ====== ======
</TABLE>
13
<PAGE>
INVESTMENT ACTIVITIES
Federal and state regulations require the Bank to maintain a prudent
amount of liquid assets to protect the safety and soundness of the Bank.
Therefore, the investment policy of the Bank as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk and
complement the Bank's lending activities. The Bank's policies generally limit
investments to government and federal agency-backed securities and other
non-government guaranteed securities, including corporate debt obligations, that
are investment grade. The Bank's policies provide the authority to invest in
U.S. Treasury and U.S. Government guaranteed securities, securities backed by
federal agencies such as Federal National Mortgage Association ("FNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal Farm Credit Bureau,
mortgage-backed securities which are backed by federal agency securities,
obligations of state and political subdivisions with at least an "A" rating,
certificates of deposit purchased through the FHLB and securities issued by
mutual funds which invest in securities consistent with the Bank's allocable
investments. The Bank's policies provide that the Chief Financial Officer is
authorized to execute all transactions within specified limits which are
reviewed by the Board of Directors on a monthly basis and are currently $1.0
million. From time to time the Board of Directors may authorize the Chief
Financial Officer to exceed the policy limitations.
At December 31, 1997, the Bank had a total of $11.2 million in
certificates of deposit, other interest earning deposits, corporate notes,
federal funds and other investment and mortgage-backed securities. At December
31, 1997, all investment and mortgage-backed securities were classified as
available for sale. Included in this total, at December 31, 1997, the Bank had
$4.3 million in U.S. Government and agencies securities and $1.0 million in
mortgage-backed securities. Collaterialized mortgage obligations of $4.8 million
are classified as held to maturity. Investments in mortgage-backed securities
involve a risk that actual prepayments will exceed prepayments estimated over
the life of the security which may result in a loss of any premium paid for such
instruments thereby reducing the net yield on such securities. In addition, if
interest rates increase, the market value of such securities may be adversely
affected which, in turn, would adversely affect stockholders' equity to the
extent such securities are held for sale. The Bank may invest in mortgage-backed
securities in the future.
14
<PAGE>
The following table sets forth certain information regarding the
carrying and market values of the Bank's federal funds sold and other short-term
investments and investment securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ---------- ----------- ---------- ------------ ----------
(IN THOUSANDS)
<S><C>
Certificates of deposit(1)...... $ 173 $ 173 $ 162 $ 162 $ 151 $ 151
Other interest-earning deposits. 162 162 357 357 164 164
Investment securities:
Corporate notes.............. -- -- -- -- 455 456
Federal funds................ 84 84 364 364 97 97
FHLB stock................... 625 625 436 436 407 407
U.S. government obligations.. 4,294 4,291 6,193 6,089 5,567 5,625
Mutual Funds................. 26 26 14 14 1 1
Mortgage-backed securities(2) 5,792 5,791 1,148 1,148 1,024 1,082
--------- --------- ------- ------- ----- -----
Total..................... $11,156 $11,152 $8,674 $8,570 $7,866 $7,983
======= ======= ====== ====== ====== ======
</TABLE>
- ----------------------------
(1) Includes certificates of deposit with original maturities of greater than 90
days.
(2) Includes mortgage-backed securities and collateralized mortgage obligations.
15
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
certificates of deposit, other interest-bearing deposits and investment
securities as of December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
---------- ----------- ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S><C>
Certificates of Deposit(1).............. $ -- --% $ 173 5.98% $ -- --%
Other interest-bearing deposits......... 162 5.90 -- -- -- --
Investment securities:
U.S. government obligations........ -- -- -- -- 2,096 6.97
Federal funds...................... 84 5.85 -- -- -- --
Mutual funds....................... 26 5.20 -- -- -- --
FHLB stock......................... -- -- -- -- -- --
Mortgage-backed securities......... 1 9.57 -- -- 208 7.69
----- ---- ------
Total............................ $ 273 5.80% $ 173 5.98% $2,304 7.04%
===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------
MORE THAN TEN YEARS TOTAL
----------------------- -------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S><C>
Certificates of Deposit(1).............. $ -- --% $ 173 5.98%
Other interest-bearing deposits......... -- -- 162 5.90
Investment securities:
U.S. government obligations........ 2,198 7.29 4,294 7.13
Federal funds...................... -- -- 84 5.85
Mutual funds....................... -- -- 26 5.20
FHLB stock......................... 625 7.50 625 7.50
Mortgage-backed securities......... 5,583 6.84 5,792 6.85
------ -------
Total............................ $8,406 7.01% $11,156 6.97%
====== =======
</TABLE>
- -----------------------------
(1) Includes certificates of deposit with original maturities of greater than
90 days.
(2) Include mortgage-backed securities and collaterialized mortgage
obligations.
16
<PAGE>
SOURCE OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, and cash flows
generated from operations are the primary source of the Bank's funds for use in
lending, investing and for other general purposes. The Bank also relies upon
advances from the FHLB.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. For the year ended December 31, 1997, certificates of
deposit constituted 67.10% of total average deposits.
The Bank's current deposit products include savings, NOW accounts,
money market and certificate of deposit accounts ranging in term from thirty
days to five years. Included in the Bank's certificate of deposit accounts are
certificates of deposit with balances in excess of $100,000 (jumbo
certificates), and Individual Retirement Accounts ("IRAs").
Deposits are obtained primarily from residents of Hamilton County,
Ohio. The Bank seeks to attract deposit accounts by offering a variety of
products, competitive rates, and service hours. Although a substantial amount of
the Bank's depositors are past and present Procter & Gamble employees, the Bank
has sought to attract new depositors through traditional methods of advertising,
including print media advertising. The Bank does not generally advertise outside
of its market area or utilize the services of deposit brokers. Management
believes that an insignificant number of deposit accounts are held by
non-residents of the Bank's primary market area.
The Bank sets interest rates on its deposits on a weekly basis, based
upon a number of factors, including: the previous week's deposit flow; a current
survey of a selected group of competitors' rates for similar products; external
data which may influence interest rates; investment opportunities and loan
demand; and scheduled maturities.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
-----------------------------------------------
1997 1996 1995
-------------- ------------- --------------
<S><C>
Balance beginning of period............ $32,551 $33,669 $35,526
Net increase (decrease)
before interest credited......... (2,171) (2,772) (3,506)
Interest credited................... 1,487 1,604 1,649
------- ------- -------
Balance end of period........... $31,867 $32,551 $33,669
======= ======= =======
</TABLE>
17
<PAGE>
At December 31 , 1997, the Bank had $4.0 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------------ ------------------
(DOLLARS IN THOUSANDS)
<S><C>
Three months or less................................. $709 6.56%
Over three through six months........................ 104 4.89
Over six through 12 months........................... 213 6.02
Over 12 months....................................... 2,973 6.42
-----
Total....................................... $3,999 6.39
======
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- --------- --------- -------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S><C>
Statement savings
accounts...... $ 5,113 16.42% 2.60% $ 6,047 17.67% 2.58% $ 5,805 16.94% 2.68%
NOW and Money
Market
accounts...... 5,131 16.48 2.75 5,281 15.43 2.46 5,155 15.05 2.47
Total certificate
accounts..... 20,890 67.10 5.81 22,896 66.90 5.75 23,299 68.01 5.87
------- ------- ------- ------ ------- ------
Total average
deposits......... $31,134 100.00% 4.78% $34,224 100.00% 4.68 $34,259 100.00% 4.81%
======= ======= ======= ====== ======= ======
</TABLE>
18
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1997
---------------------------------------------------------------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS
---------------- --------------- --------------- --------------- --------------
(IN THOUSANDS)
<S><C>
Certificate accounts(1):
0 to 4.00%............................... $ -- $ -- $ -- $ -- $ --
4.01 to 5.00%............................ 217 -- -- -- --
5.01 to 6.00%............................ 9,550 2,688 1,054 1,176 1,069
6.01 to 7.00%............................ 2,319 1,711 1,086 147 46
7.01 to 8.00%............................ -- 398 160 -- --
8.01 to 9.00%............................ -- -- -- -- --
Over 9.01%............................... -- -- -- -- --
------- ------- ------- ------- -------
Total................................. $12,086 $4,797 $2,300 $1,323 $1,115
======= ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- -------------------------------
(IN THOUSANDS)
<S><C>
Certificate accounts(1):
0 to 4.00%............................... $ -- $ -- $ --
4.01 to 5.00%............................ 217 412 797
5.01 to 6.00%............................ 15,537 16,122 12,972
6.01 to 7.00%............................ 5,309 5,187 7,944
7.01 to 8.00%............................ 558 149 753
8.01 to 9.00%............................ -- -- --
Over 9.01%............................... -- -- --
------- ------- -------
Total................................. $21,621 $21,870 $22,466
======= ======= =======
</TABLE>
- -------------------------
(1) Certificates of deposit include IRA accounts of $8,768, $9,430 and $9,899
as of December 31, 1997, 1996 and 1995, respectively.
19
<PAGE>
BORROWINGS
At December 31, 1997, the Bank had $7.0 million in outstanding advances
from the FHLB and had no other borrowings. The FHLB advances are used by the
Bank to fund assets, including loan originations. The majority of FHLB advances
bear fixed rates and have terms of one year or less. The maximum amount that the
FHLB will advance to member institutions, including the Bank, fluctuates from
time to time in accordance with current regulations. The Bank may obtain
additional advances from the FHLB as part of its operating strategy.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S><C>
FHLB advances:
Average balance outstanding.............................. $ 9,499 $5,924 $3,199
Maximum amount outstanding at any
month-end during the period......................... 12,287 7,007 5,806
Balance outstanding at end of period..................... 12,287 7,007 5,327
Weighted average interest rate during the period......... 5.70% 5.77% 6.16%
Weighted average interest rate at end of period.......... 5.78% 5.73% 6.09%
</TABLE>
PERSONNEL
As of December 31, 1997, the Bank had 14 full-time employees and one
part-time employee. The employees are not represented by a collective bargaining
unit, and the Bank considers its relationship with its employees to be good.
20
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Bank is an Ohio chartered savings bank, a member of the FHLB
system, and its deposit accounts are insured up to applicable limits by the FDIC
through the SAIF. The Bank is subject to extensive regulation, examination and
supervision by the FDIC and the Superintendent of the Ohio Division of Commerce,
Division of Financial Institutions (the "Superintendent"). The Bank must file
reports with the Superintendent and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the
Superintendent and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Superintendent, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws. Certain of the regulatory requirements
applicable to the Bank and to the Company are referred to below or elsewhere
herein.
As an insured depository institution, the Bank is subject to the
Community Reinvestment Act ("CRA") and to various statutes and implementing
regulations promulgated by the Board of Governors of the Federal Reserve System
(the "FRB") including, without limitation, regulations relating to equal credit
opportunity, reserves, electronic fund transfers, truth in lending, availability
of funds, and truth in savings. As lenders whose loans are secured by real
property and as owners of real property, financial institutions, including the
Bank, may be subject to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property. The Bank
is also subject to the usury laws of Ohio and other states in which it makes
loans. In Ohio, there is a maximum interest rate applicable to mortgage loans
secured by the borrower's residence which is no greater than eight percent in
excess of the discount rate on ninety-day commercial paper in effect at the
Federal Reserve Bank in the Fourth Federal Reserve District. There are also
limitations on interest rates for other loans, such as consumer loans, and
limitations on the amounts of fees which may be charged in connection with such
loans.
The FDIC has extensive enforcement authority over insured
Ohio-chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.
21
<PAGE>
The FDIC has authority to appoint a conservator or receiver for an
insured savings bank under certain circumstances. The grounds for appointment of
a conservator or receiver for a state savings bank on the basis of an
institution's financial condition include: (i) insolvency, in that the assets of
the savings bank are less than its liabilities to depositors and others; (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the savings bank will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all the institution's
capital with no reasonable prospect of replenishment of capital without federal
assistance.
DIVISION REGULATION
The Superintendent is responsible for the regulation and supervision of
Ohio savings banks in accordance with the laws of the State of Ohio. Ohio law
prescribes the permissible investments and activities of Ohio savings banks,
including the types of lending that such banks may engage in and the investments
in real estate, subsidiaries and corporate or government securities that such
banks may make. The ability of Ohio savings banks to engage in these
state-authorized investments generally is subject to various limitations under
FDIC regulations and oversight by the FDIC.
Any mergers involving, or acquisitions of control of, Ohio savings
banks are subject to the prior approval of the Superintendent. The
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio savings banks. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio savings bank in conservatorship or
receivership.
The Superintendent conducts regular examinations of the Bank
approximately once a year. The Superintendent imposes assessments on Ohio
savings banks based on the savings bank's asset size to cover the cost of
supervision and examination.
In addition to being governed by the laws of Ohio specifically
governing savings banks, the Bank is also governed by Ohio corporate law, to the
extent such law does not conflict with the laws specifically governing savings
banks.
Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act of 1991, all state-chartered financial institutions, including
savings banks and their subsidiaries have generally been limited to activities
and equity investments of the type and in the amount authorized for national
banks, notwithstanding state law. The FDIC is authorized to permit such
institutions to engage in state authorized activities or investments that do not
meet this standard (other than non-subsidiary equity investments) for
institutions that meet all applicable capital requirements if it is determined
that such activities or investments do not pose a significant risk to the SAIF.
All non-subsidiary equity investments were required to be divested by December
19, 1996, pursuant to an FDIC-approved divestiture plan. The FDIC restrictions
on state-chartered institutions have not affected the operations of the Bank.
FDIC REGULATIONS
CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The
22
<PAGE>
ratio of such regulatory capital to regulatory risk-weighted assets is referred
to as the Bank's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses limited to a maximum of 1.25% of risk
weighted assets, subject to certain limitations, less required deductions.
Savings banks are required to maintain a total risk-based capital ratio of 8%,
of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
federal banking agencies, including the FDIC, have proposed a uniform minimum
Tier 1 leverage ratio of 4% for all but the highest rated banks. The FDIC may,
however, set higher capital requirements on individual institutions when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
The following is a summary of the Bank's regulatory capital at December
31, 1997:
GAAP Capital to Total Assets......................... 13.5%
Total Capital to Risk-Weighted Assets................ 11.9%
Tier I Leverage Ratio................................ 23.8%
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy. The agencies have determined not to proceed with a previously
issued proposal to develop a supervisory framework for measuring interest rate
risk and an explicit capital component for interest rate risk.
DIVIDEND LIMITATIONS. The FDIC has authority to use its enforcement
powers to prohibit a savings bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice. Under Ohio
law, the Company and the Bank are prohibited from paying a dividend which would
result in insolvency. Ohio law requires the Bank to obtain Division approval
before payment of dividends in excess of net profits for the current and two
prior fiscal years, with certain adjustments. Federal
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law prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
is required to provide the OTS with 30 days prior written notice before
declaring any dividend. The Bank's Plan of Conversion also restricts the Bank's
payment of dividends in the event the dividend would impair the liquidation
account established in connection with the Conversion.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation, fees and benefits; and such
other operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings and compensation; fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the Federal Deposit
Insurance Act, as amended (the "FDI Act"). The final regulation establishes
deadlines for the submission and review of such safety and soundness compliance
plans.
LIQUIDITY. FDIC policy requires that savings banks maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) in an amount which it deems adequate to protect the safety and
soundness of the savings bank. The FDIC currently has no specific level which is
required.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1997, the Bank was categorized as "well capitalized."
The FDIC has adopted regulations to implement the prompt corrective
action legislation. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well capitalized" if it has a total risk-based capital ratio of 10% or greater,
a Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5%
or greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%.
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Subject to a narrow exception, the banking regulator is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently
insured by the SAIF. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Bank, to recapitalize the SAIF. The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF. As required by the Funds Act, the FDIC imposed a special assessment
of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995,
payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special
Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $225,000 on a pre-tax basis and $148,000 on an
after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO
bonds across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the
fund which primarily insures commercial bank deposits. Beginning on January 1,
1997, BIF deposits were assessed for a FICO payment of approximately 1.3 basis
points, while SAIF deposits pay approximately 6.4 basis points. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided
no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6.3 to 6.5 basis
points and the premium paid for this period was $21,000. A significant increase
in SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. Various proposals to eliminate the federal thrift charter,
create a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date
under some bills, or they would automatically become national banks. Under some
proposals, converted federal thrifts would generally be required to conform
their activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions. State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks. A more recent
bill passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities. The
grandfathering would be lost under certain circumstances such as a change in
control of the Company. The Bank is unable to predict whether such legislation
would be enacted or the extent to which the legislation would restrict or
disrupt its operations.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (E.G., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
ENFORCEMENT. Under the FDI Act, the FDIC has primary enforcement
responsibility over the Bank and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a
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wide range of violations and can amount to $25,000 per day, or even $1 million
per day in especially egregious cases. Federal law also establishes criminal
penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $1.48 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $49.3 million. The first $4.4 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.8 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements imposed by the OTS.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL") for purposes of the federal
regulations. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Multiple savings and loan holding companies are
prohibited from acquiring or retaining, with certain exceptions, more than 5% of
a non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by the HOLA. Recently proposed legislation
would treat all savings and loan holding companies
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as bank holding companies and would limit the activities of such companies to
those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof, or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS or acquiring
or retaining control of a depository institution that is not insured by the
FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to qualify
as a QTL, the Bank must maintain compliance with a Qualified Thrift Lender Test
("QTL Test"). Under the QTL Test, a savings institution is required to maintain
at least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month period. A holding company of a savings institution that
fails the QTL Test must either convert to a bank holding company and thereby
become subject to the regulation and supervision of the Federal Reserve Board,
or operate under certain restrictions. As of December 31, 1997, the Bank
maintained in excess of 85% of its portfolio assets in qualified thrift
investments. The Bank also met the QTL Test in each of the prior 12 months and,
therefore, met the QTL Test. Recent legislative amendments have broadened the
scope of "qualified thrift investments" that go toward meeting the QTL Test to
fully include credit card loans, student loans and small business loans. A
savings association may also satisfy the QTL Test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986
(the "Code").
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS during the past
five years. For its 1997 taxable year, the Bank is subject to a maximum federal
income tax rate of 34%.
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BAD DEBT RESERVES. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481(a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is permitted to make additions to its tax bad debt reserves. In addition, the
Bank is required to pay over a six year period the excess of the balance of its
tax bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987. As a result of such recapture, the Bank will incur
additional tax payments of approximately $82,000 which is generally expected to
be taken into income beginning in 1998 over a six year period.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non- dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal
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income tax purposes, assuming a 35% federal corporate income tax rate. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank currently
has none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). In addition,
for taxable years beginning after December 31, 1986 and before January 1, 1996,
an environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT, but may be subject to the environmental tax liability.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize the SAIF under this
legislation is deductible under Section 162 of the Code in the year of payment.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of the Bank after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of the Bank. The calculation of the exclusion from net worth is
based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Company may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
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The Bank is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with GAAP. As a "financial institution," the
Bank is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
IMPACT OF NEW ACCOUNTING STANDARDS
The following does not constitute a comprehensive summary of all
material changes or developments affecting the manner in which the Company keeps
its books and records and performs its financial accounting responsibilities. It
is intended only as a summary of some of the recent pronouncements made by the
FASB which are of particular interest to financial institutions.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement establishes accounting and reporting
standards for stock-based employee compensation plans including stock options
The statement defines a "fair value based method" for employee stock options and
encourages all entities to adopt that method for such options. However, it
allows an entity to continue to measure compensation cost for those plans using
the "intrinsic value based method" of accounting prescribed by APB Opinion No.
25. Entities electing to remain with the accounting in Opinion 25 must make
proforma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in this statement had been applied. This standard
was adopted in 1997 when the Company granted stock options.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The standards are based on
a consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125 supersedes SFAS No.
122. SFAS No. 125 is effective for transactions occurring after December 31,
1997. There was no impact from the adoption of this standard in 1997.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure" ("SFAS No. 129"). SFAS No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all securities
other than ordinary common stock but expands the number of companies subject to
portions of its requirements. Specifically, the Statement requires all entities
to provide
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the capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provisions of APB Opinion No. 15 will now
need to make those disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). 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. 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 net worth
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 is in the process of
determining the impact, if any, this statement will have on the Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
requires disclosures for each segment that are similar to those required under
current standards with the addition of quarterly disclosure requirements and a
finer partitioning of geographic disclosures. It requires limited segment data
on a quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal year beginning after December 15, 1997 with earlier
application permitted.
RECENT DEVELOPMENT
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company expects its year 2000 date conversion project to be
completed on a timely basis. During the execution of this project the Company
will incur internal staff costs as well as consulting and other expenses related
to enhancements necessary to prepare the systems for the year 2000. The expense
of the year 2000 project as well as the related potential effect on the
Company's earnings is not expected to have a material effect on its financial
position or results of operations.
32
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also directors.
<TABLE>
<CAPTION>
Age at Position with the Company and Bank
Name 12/31/97 and Past Five Years Experience
- ---- -------- ----------------------------------
<S><C>
Michael P. Cooper 40 Chief Financial Officer and Treasurer of the Company and the
Bank. Prior to joining the Company in 1997, Mr. Cooper was
Comptroller of a property management/personnel service and
dental insurer. From 1987-1994, Mr. Cooper was Chief Financial
Officer of Guardian Savings Bank.
Diane P. Irwin 42 Vice President, Chief Operating Officer and Secretary of the
Company and the Bank.
</TABLE>
33
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company and the Bank are located and conduct their business at the
Bank's main office located at 5255 Beech Street, St. Bernard, Ohio, and at a
branch on Erie Avenue in Cincinnati. The Company believes that the Bank's
current facilities are adequate to meet the present and immediately foreseeable
needs of the Bank and the Company. In prior years, the Bank has not been
required to pay rent for the office that the Bank has operated from. In 1995,
the lessor negotiated for lease payments through December 31, 1999 totalling
$105,000. The lease payments will be lower in the first years and increase in
later years to cover the total amount of the lease. There are no renewal
options, and the Bank may need to renegotiate at the end of the term. The
following table sets forth certain information relating to the Bank's office.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
DATE OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1996
- ---------------------------------------- ---------- ------------- -------------- ------------------------
<S><C>
5255 Beech Street
St. Bernard, Ohio 45217................ Leased 1995 2000 $240,000
3521 Erie Avenue
Cincinnati, Ohio 45208................. Owned 1997 -- $358,000
</TABLE>
In addition, at December 31, 1997 the Bank had a capitalized lease
obligation related to 3 of its ATMs. See Note 6 to the Notes to Financial
Statements appearing elsewhere in this Form 10-KSB. At December 31, 1996, the
Bank had a total of 3 ATMs. The Bank is currently in the process of
renegotiating the agreements it has with Procter & Gamble relating to the ATMs
located at Procter & Gamble facilities. The Bank expects that as the agreements
are renegotiated, it will either reduce the costs borne by the Bank related to
the continuing operation of the ATMs or eliminate them.
For further information related to the Bank's properties, see Note 4 to
the Notes to the Financial Statements included in the Company's 1997 Annual
Report to Stockholders.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
34
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1997 Annual Report to
Stockholders on the back inside cover. On December 31, 1997, the Company had 235
registered shareholders. The Company began paying quarterly dividends in fiscal
1997 of $.05 per share per quarter and most recently declared a dividend of $.05
per share payable on April 1 to all holders of record on March 15, 1998. See
also Note 10 to the Notes to the Company's financial statements. The Company
repurchased a total of 17,337 shares of its common stock in fiscal 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1997 Annual Report to Stockholders on pages 4 through 13 and is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of Lenox Bancorp, Inc. and its
subsidiary, together with the report thereon by Clark, Schaefer, Hackett & Co.
appear in the Registrant's 1997 Annual Report to Stockholders on pages 14
through 49 and are incorporated herein by reference.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 8, 1998, on
pages 4 through 6. Information concerning Executive Officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 10. EXECUTIVE COMPENSATION.
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 8, 1998, on pages 8 through
13.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 8,
1998, on pages 3 and 5 through 6.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 8, 1998, on
page 13.
36
<PAGE>
PART IV
ITEM 13. EXHIBITS.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1997 Annual Report to
Stockholders.
PAGE
Independent Auditors' Report..................................... 14
Consolidated Balance Sheet
as of December 31, 1997 and 1996................................. 15-16
Consolidated Statement of Income
for the Two Years Ended December 31, 1997........................ 17
Consolidated Statement of Changes in
Stockholders' Equity for Two Years Ended
December 31, 1997................................................ 18
Consolidated Statement of Cash Flows for
the Two Years Ended December 31, 1997............................ 19-20
Notes to Consolidated Financial Statements....................... 21-49
37
<PAGE>
The remaining information appearing in the 1997 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Amended Articles of Incorporation of Lenox Bancorp, Inc.
(filed herewith)
3.2 Amended and Restated Code of Regulations of Lenox Bancorp,
Inc. (filed herewith)
4.0 Stock Certificate of Lenox Bancorp, Inc.*
10.1 Form of Employment Agreement between the Company and Virginia
M. Porowski*
10.2 Form of Employment Agreement between the Bank and
Virginia M. Porowski*
10.3 Lenox Bancorp, Inc. Incentive Plan**
13.0 1997 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Item 1 - General"
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
- ---------
* Incorporated herein by reference to the Exhibits to Form S-1, Registration
Statement, and Pre-Effective Amendment No. 1, filed on August 25, 1995 and
March 8, 1996, respectively, Registration No. 33-96248.
** Incorporated herein by reference to the Proxy Statement for the 1997
Annual Meeting of Stockholders previously filed with the Commissioner.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
LENOX BANCORP, INC.
By: /s/ Virginia M. Porowski
_______________________________________________
Virginia M. Porowski
Dated: March 25, 1998 President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S><C>
/s/ Virginia M. Porowski President, Chief Executive Officer March 25, 1998
___________________________ and Director
Virginia M. Porowski (principal executive officer)
/s/ Michael P. Cooper Chief Financial Officer and Treasurer March 25, 1998
___________________________ (principal financial and accounting officer)
Michael P. Cooper
/s/ Gail R. Behymer Director March 25, 1998
___________________________
Gail R. Behymer
/s/ Richard C. Harmeyer Chairman of the Board March 25, 1998
___________________________
Richard C. Harmeyer
/s/ Robert R. Keller Director March 25, 1998
___________________________
Robert R. Keller
/s/ William P. Riekert, Jr. Director and Assistant Secretary March 25, 1998
___________________________
William P. Riekert, Jr.
/s/ Henry E. Brown Director March 25, 1998
___________________________
Henry E. Brown
/s/ Curtis L. Jackson Director March 25, 1998
___________________________
Curtis L. Jackson
/s/ Reba St. Clair Director March 25, 1998
___________________________
Reba St. Clair
</TABLE>
ARTICLES OF INCORPORATION
OF
LENOX BANCORP, INC.
The undersigned, desiring to form a corporation for profit under
Chapter 1701 of the Ohio Revised Code, does hereby certify:
FIRST: The name of the corporation shall be Lenox Bancorp, Inc.
SECOND: The place in Ohio where the principal office of the
corporation is to be located is in the City of St. Bernard, County of Hamilton.
THIRD: The purpose for which the corporation is formed is to engage
in any lawful act or activity for which corporations may be formed under Section
1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The authorized shares of the corporation shall be two
million (2,000,000) common shares, each without par value. The directors of the
corporation may adopt an amendment to the Articles of Incorporation of the
corporation in respect of any unissued or treasury shares of any class and
thereby fix or change: the division of such shares into series and the
designation and authorized number of each series; the dividend rate; the dates
of payment of dividends and the dates from which they are cumulative; the
liquidation price; the redemption rights and price; the sinking fund
requirements; the conversion rights; and the restrictions on the issuance of
shares of any class or series.
FIFTH: (A) The board of directors of the corporation shall have the
power to cause the corporation from time to time and at any time to purchase,
hold, sell, transfer or otherwise deal with (i) shares of any class or series
issued by it, (ii) any security or other obligation of the corporation which may
confer upon the holder thereof the right to convert the same into shares of any
class or series authorized by the Articles of the corporation, and (iii) any
security or other obligation which may confer upon the holder thereof the right
to purchase shares of any class or series authorized by the Articles of
Incorporation of the corporation.
(B) The corporation shall have the right to repurchase, if and
when any shareholder desires to sell, or on the happening of any event is
required to sell, shares of any class or series issued by the corporation.
(C) The authority granted in this Article Fifth shall not
limit the plenary authority of the directors to purchase, hold, sell, transfer
or otherwise deal with shares of any class or series, securities or other
obligations issued by the corporation or authorized by the Articles of
Incorporation of the corporation.
<PAGE>
SIXTH: Notwithstanding any provision of the Ohio Revised Code
requiring for any purpose the vote, consent, waiver or release of the holders of
shares of the corporation entitling them to exercise any proportion of the
voting power of the corporation or of any class or classes thereof, such action,
unless expressly otherwise provided by statute, may be taken by the vote,
consent, waiver or release of the holders of shares entitling them to exercise
not less than a majority of the voting power of the corporation or of such class
or classes; provided, however, that if the board of directors of the corporation
shall recommend against the approval of any of the following matters, the
affirmative vote of the holders of shares entitling them to exercise not less
than seventy-five percent (75%) of the voting power of any class or classes of
shares of the corporation which entitle the holders thereof to vote in respect
of any such matter as a class shall be required to adopt:
(A) A proposed amendment to the Articles of Incorporation of
the corporation;
(B) A proposed amendment to the Code of Regulations of the
corporation;
(C) A proposal to change the number of directors by
action of the shareholders;
(D) An agreement of merger or consolidation providing for
the proposed merger or consolidation of the corporation
with or into one or more other corporations;
(E) A proposed combination or majority share acquisition
involving the issuance of shares of the corporation and
requiring shareholder approval;
(F) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets, with
or without the goodwill, of the corporation; or
(G) A proposed dissolution of the corporation.
SEVENTH: No shareholder of the corporation shall have, as a matter of
right, the pre-emptive right to purchase or subscribe for shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such shares.
EIGHTH: Until the expiration of five years from the date of the
acquisition by the corporation of the capital stock of Lenox Savings Bank, no
Person (hereinafter defined) shall directly or indirectly Offer (hereinafter
defined) to Acquire (hereinafter defined) or Acquire the Beneficial Ownership
(hereinafter defined) of more than ten percent (10%) of any class of any equity
security of the corporation; provided, however, that such prohibition shall not
apply to the purchase of shares by underwriters in connection with a public
offering, or to the purchase of up
2
<PAGE>
to twenty five percent (25%) of any class of equity security of the corporation
by a tax-qualified employee stock benefit plan. In the event that any shares of
the corporation are Acquired in violation of this Article Eighth, all shares
Beneficially Owned by any Person in excess of ten percent (10%) of any class of
equity security of the corporation shall not be counted as shares entitled to
vote, shall not be voted by any Person and shall not be counted as a voting
share in connection with any matter submitted to the shareholders for a vote.
For purposes of this Article Eighth, the following terms shall have the meanings
set forth below:
(A) "Person" includes an individual, a group acting in
concert, a corporation, a partnership, an
association, a joint stock company, a trust, an
unincorporated organization or similar company, a
syndicate or any other group formed for the purpose
of acquiring or disposing of the equity securities of
the corporation, but does not include any employee
stock benefit plan of the corporation or subsidiary
of the corporation.
(B) "Offer" includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender
offer for, or request or invitation for tenders of, a
security or interest in a security for value.
(C) "Acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or
otherwise.
(D) "Acting in concert" means (i) participation in a
joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express
agreement, or (ii) a combination or pooling of voting
or other interests in the securities of an issuer for
a common purpose pursuant to any contract,
understanding, relationship, agreement or other
arrangement, whether written or otherwise.
(E) "Beneficial Ownership" shall include, without limitation,
(i) all shares directly or indirectly owned by a Person, by
an Affiliate (hereinafter defined) of such Person or by an
Associate (hereinafter defined) of such Person or such
Affiliate, (ii) all shares which such person, Affiliate or
Associate has the right to acquire through the exercise of
any option, warrant or right (whether or not currently
exercisable) through the conversion of a security, pursuant
to the power to revoke a trust, discretionary account or
similar arrangement, or pursuant to the automatic
termination of a trust, discretionary account or similar
arrangement, and (iii) all shares as to which such Person,
Affiliate or Associate directly or indirectly through any
contract, arrangement, understanding, relationship or
otherwise (including, without limitation, any written or
unwritten agreement to act in concert) has or shares voting
power (which includes the power to vote or to direct the
voting of such shares) or investment
3
<PAGE>
power (which includes the power to dispose or to
direct the disposition of such shares) or both.
(F) "Affiliate" shall mean a Person that directly or
indirectly, through one or more intermediaries
controls, is controlled by, or is under common
control with another Person.
(G) "Associate" of a Person shall mean (i) any corporation
or organization (other than the corporation or a subsidiary
of the corporation) of which the Person is an officer or
partner or is, directly or indirectly, the beneficial owner
of ten percent or more of any class of equity securities,
(ii) any trust or other estate, except any employee stock
benefit plan, in which the Person has a substantial
beneficial interest or as to which the Person serves as
trustee or in a similar fiduciary capacity, and (iii) any
relative or spouse of the Person, or any relative of such
spouse, who has the same home as the Person or is a director
or officer of the corporation or any of its parents or
subsidiaries.
IN WITNESS WHEREOF, I have hereunto signed my name this 20th day of
July, 1995.
/s/ Cynthia D. Barnes
_______________________________
Cynthia D. Barnes, Incorporator
4
<PAGE>
CERTIFICATE OF AMENDMENT
TO ARTICLES OF LENOX BANCORP, INC.
Virginia M. Porowski, President, and Richard Harmeyer, Secretary of Lenox
Bancorp, Inc., an Ohio corporation, with its principal office located at 5255
Beech Street, St. Bernard, Ohio, do hereby certify that, in lieu of holding a
special meeting of the holders of the shares of said corporation entitling them
to vote on the proposal to amend the Articles of Incorporation thereof, as
contained in the following resolution, a written consent was executed by the
sole shareholder of Lenox Bancorp, Inc., and that by the affirmative vote of the
sole shareholder, the following resolution was adopted to amend the articles:
NOW, THEREFORE, BE IT RESOLVED, that the Articles of the Company, be,
and they hereby are, amended by the addition to the Articles of the following
Article NINTH:
NINTH: Notwithstanding any provision of the General
Corporation Law of Ohio now or hereafter in effect, no
shareholder shall have the right to vote cumulatively in the
election of directors. Without limiting the generality of the
immediately preceding sentence, no shareholder shall have the
right at any time in the election of directors either to give
one candidate as many votes as the number of directors to be
elected multiplied by the number of his votes equals or to
distribute his votes on the same principle among two or more
candidates.
In witness whereof, Virginia M. Porowski and Richard Harmeyer, acting
for and on behalf of said corporation, have subscribed their names to this
Certificate this 1st day of April, 1996.
/s/ Virginia M. Porowski
_________________________
Virginia M. Porowski
President
/s/ Richard L. Harmeyer
_________________________
Richard L. Harmeyer
Secretary
AMENDED AND RESTATED CODE OF REGULATIONS
AS OF APRIL 1, 1996
OF
LENOX BANCORP, INC.
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the Shareholders of
this corporation ("Corporation") shall be held at any time within four months
after the close of the fiscal year of the Corporation at such date and time as
may be fixed by the Board of Directors.
Section 2. Special Meeting. Special meetings of the Shareholders may be
called at any time by the Chair of the Board, the President, or in the case of
the President's absence, death or disability, the Vice-President authorized to
exercise the authority of the President, a majority of the Board of Directors
acting with or without a meeting, or by the President or Secretary upon the
request of the holder or holders of fifty percent of all shares outstanding and
entitled to vote thereat. Calls for special meetings shall specify the time,
place and object or objects thereof, and, unless all Shareholders agree
otherwise, no business other than that specified in the call therefor shall be
considered at any such meeting.
Section 3. Place of Meetings. Annual and special meetings of
Shareholders shall be held at the principal office of the Corporation in the
City of St. Bernard, Ohio, or at any other reasonably convenient location either
within or without the State of Ohio, to be designated by the Board of Directors.
Section 4. Notice of Meetings. Unless waived, a written notice of each
annual or special meeting of the Shareholders, stating the date, the hour, the
place, and the purpose or purposes thereof, shall be served upon or mailed to
each Shareholder of record entitled to vote at such meetings not more than sixty
days nor less than seven days before any such meeting. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to the
Shareholder at his address as the same appears on the books of the Corporation.
Notice of adjournment of a meeting need not be given if the time and
place to which it is adjourned are fixed and announced at such meeting. In the
event of a transfer of shares after the record date for determining the
Shareholders who are entitled to receive notice of a meeting of Shareholders, it
shall not be necessary to give notice to the transferee. Nothing herein
contained shall prevent the setting of a record date in the manner provided by
law, the Articles of Incorporation of the Corporation ("Articles") or these Code
of Regulations ("Regulations") for the determination of Shareholders who are
entitled to receive notice of or to vote at any meeting of Shareholders or for
any purpose required or permitted by law.
<PAGE>
All notices with respect to any shares of record in the name of two or
more persons may be given to that person who is named first on the books of the
Corporation, with such notice being effective as to all the holders of record of
such shares.
Every person who by operation of law, transfer, or otherwise shall
become entitled to any share or right or interest therein, shall be bound by
every notice with respect to such share which, prior to his name and address
being entered upon the books of the Corporation as the registered holder of such
share, may have been given to the person in whose name such share appeared of
record.
Following receipt by the President or the Secretary of a request in
writing, specifying the purpose or purposes for which the persons properly
making such request have called a meeting of the Shareholders, delivered either
in person or by registered mail to such officer by any persons entitled to call
a meeting of Shareholders, such officer shall cause to be given to the
Shareholders entitled thereto notice of a meeting to be held on a date not less
than seven nor more than sixty days after the receipt of such request, as such
officer may fix. If such notice is not given within fifteen days after the
receipt of such request by the President or the Secretary, then, and only then,
the persons properly calling the meeting may fix the time of meeting and give
notice thereof in accordance with the provisions of these Regulations.
Section 5. Waiver of Notice. Notice of the time, place and purpose or
purposes of any meeting of Shareholders may be waived in writing, either before
or after the holding of such meeting, by any Shareholders, which writing shall
be filed with or entered upon the records of such meeting. The attendance of any
Shareholder, in person or by proxy, at any such meeting without protesting the
lack of proper notice, prior to or at the commencement of the meeting, shall be
deemed to be a waiver by such Shareholder of notice of such meeting.
Section 6. Quorum. The presence, at any Shareholders' meeting, in
person or by proxy, of holders of record of a majority of the voting shares of
the Corporation then outstanding and entitled to vote thereat shall be necessary
to constitute a quorum. The holders of a majority of the voting shares
represented at a meeting, whether or not a quorum is present, or the Chair of
the Board, the President, or the officer of the Corporation acting as Chair of
the meeting, may adjourn such meeting from time to time, and if a quorum is
present at such adjourned meeting any business may be transacted as if the
meeting had been held as originally called.
Section 7. Proxies. Any Shareholder entitled to vote at a meeting of
the Shareholders may be represented and voted thereat by proxy, appointed by an
instrument in writing, subscribed by the Shareholder, or by his duly authorized
attorney, and submitted to the Secretary at or before such meeting. No proxy
shall be valid after the expiration of eleven months after the date of its
execution, unless the Shareholder executing it shall have specified therein the
length of time it is to continue in force.
2
<PAGE>
Section 8. Voting. Each Shareholder of record on the books of the
Corporation on the record date for determining the Shareholders who are entitled
to vote at a meeting of Shareholders shall be entitled at such meeting to one
vote for each share of the Corporation standing in his name on the books of the
Corporation on such record date. The Directors may fix a record date for the
determination of the Shareholders who are entitled to receive notice of and to
vote at a meeting of Shareholders, which record date shall not be a date earlier
than the date on which the record date is fixed and which record date may be a
maximum of sixty days preceding the date of the meeting of Shareholders.
If a quorum of Shareholders is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the Shareholders, unless the vote of a
greater number is required by the Ohio Revised Code, by the Articles or by these
Regulations. Each outstanding share of common stock authorized by the Articles
to have voting power, shall be entitled to one vote upon each matter submitted
to a vote at a meeting of Shareholders. The voting rights, if any, of classes of
shares other than voting common stock shall be as set forth in the Articles or
by appropriate legal action of the Board of Directors.
Section 9. Order of Business. The order of business at any meeting of
Shareholders shall be determined by the officer of the Corporation acting as
chair of such meeting unless otherwise determined by a vote of the holders of a
majority of the voting shares of the Corporation then outstanding, present in
person or by proxy, and entitled to vote at such meeting.
Section 10. Action Without Meeting. Any action which may be taken at
any meeting of Shareholders may be taken without a meeting if authorized by a
writing signed by all of the holders of shares who would be entitled to notice
of a meeting held for such purpose.
Section 11. Inspectors of Election. In advance of any meeting of
Shareholders, the Directors may appoint Inspectors of Election to act at such
meeting or any adjournment thereof or, if inspectors are not so appointed, the
officer of the Corporation acting as chair of any such meeting may make such
appointment. In case any person appointed as Inspector fails to appear or act,
the vacancy may be filled only by appointment made by the Directors in advance
of such meeting or, if not so filled, at the meeting by the officer of the
Corporation acting as chair of such meeting. No other person or persons may
appoint or require the appointment of inspectors of election.
Section 12. Voting of Shares of Certain Holders. Shares standing in the
name of another Corporation may be voted by such officer, agent or proxy as the
by-laws or Code of Regulations of such Corporation may prescribe, or, in the
absence of such provision, as the board of directors of such corporation may
determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
3
<PAGE>
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority so to do
be contained in an appropriate order of the court by which such receiver was
appointed.
A Shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation shall not be
voted, directly or indirectly, at any meeting, and shall not be counted in
determining the total number of outstanding shares at any given time.
Section 13. Notice of Shareholder Business at Meetings. At any meeting
of Shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. In addition to any other requirements
imposed by or pursuant to law, the Articles or these Regulations, each item of
business to be properly brought before a meeting must (a) be specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors or the persons calling the meeting pursuant to these
Regulations; (b) be otherwise properly brought before the meeting by or at the
direction of the Board of Directors; or (c) be otherwise properly brought before
a meeting by a Shareholder. For business to be properly brought before a meeting
by a Shareholder, the Shareholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a Shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than thirty (30) days prior to the meeting;
provided, however, that in the event less than forty (40) days notice or prior
public disclosure of the date of the meeting is given or made to Shareholders,
notice by the Shareholder to be timely must be so received not later than the
close of business on the fifth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. A
Shareholder's notice to the Secretary shall set forth as to each matter he
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting; (b) the name and address, as they appear on the
Corporation's books, of the Shareholder(s) proposing such business; (c) the
class and number of shares of the Corporation which are beneficially owned by
the proposing Shareholder(s); and (d) any material interest of the proposing
Shareholder(s) in such business. Notwithstanding anything in these Regulations
to the contrary, no business shall be conducted at a meeting except in
accordance with the procedures set forth in this Article I. The Chair of a
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 13; and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. The Chairman of a meeting shall have absolute
authority to decide questions of compliance with the foregoing procedures, and
his ruling thereon shall be final and conclusive.
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ARTICLE II
BOARD OF DIRECTORS
Section 1. Authority and Qualifications. Except where the law, the
Articles or the Regulations otherwise provide, all authority of the Corporation
shall be vested in and exercised by its Directors. Directors need not be
Shareholders of the Corporation.
Section 2. Number of Directors. Until changed in accordance with the
provisions of this Section, the Board of Directors, none of which need be
Shareholders, shall consist of ten (10) members. This number of Directors may be
changed as provided in the Articles or by a majority vote of the Directors, but
no reduction shall have the effect of removing any Director prior to the
expiration of his term.
Section 3. Election of Directors. The election of the Directors shall
be held at the annual meeting of the Shareholders, or at a special meeting
called for that purpose. At each and every election of Directors, each
Shareholder entitled to vote shall have the right to vote either in person or by
proxy the number of shares owned by him for as many persons as there are
Directors to be elected. Directors shall not be elected in any manner other than
as provided in this Section 3.
Section 4. Term of Office. Directors shall hold office for a term of
three years, provided however, that with respect to the initial Board of
Directors, three Directors shall be elected at the first annual meeting of the
Shareholders; three Directors shall be elected at the second annual meeting of
Shareholders; and four Directors shall be elected at the third annual meeting of
Shareholders.
Section 5. Nomination of Directors. To be qualified for election as a
Director, Persons must be nominated in accordance with the following procedures.
Nomination of persons for election to the Board of Directors of the
Corporation may be made at a meeting of Shareholders by or at the direction of
the Board of Directors or by any Shareholder of the Corporation entitled to vote
for the election of Directors at the meeting who complies with the procedures
set forth in this Section 5. In order for persons nominated to the Board of
Directors, other than those persons nominated by or at the direction of the
Board of Directors, to be qualified to serve on the Board of Directors, such
nominations shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a Shareholder's notice shall be delivered to
or mailed and received by the Secretary of the Corporation not later than the
close of business on the fifth day following the day on which such notice of the
date of the meeting was mailed or any public disclosure thereof was made. Such
Shareholder's notice shall set forth (i) as to each person whom the Shareholder
proposed to nominate for election or re-election as a Director, (a) the name,
age, business address of such person, (b) the principal occupation or employment
of such person, (c) the class and number of shares of the Corporation which are
beneficially owned by such person, (d) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including without
limitation such person's
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written consent to being named in the proxy statement as a nominee and to
serving as a Director if elected), and (e) if the Shareholder(s) making the
nomination is a person, who is the beneficial owner, directly or indirectly, of
ten percent (10%) or more of the voting power of the outstanding voting stock of
the Corporation, or is an affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of ten percent (10%) or more of the voting power
of the then outstanding voting stock of the Corporation, details of any
relationship, agreement or understanding between the Shareholder(s) and the
nominee; and (ii) as to the Shareholder(s) making the nomination (A) the name
and address, as they appear on the Corporation's books, of such Shareholders and
(B) the class and number of shares of the Corporation which are beneficially
owned by such Shareholder(s).
At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a Director shall furnish to the Secretary of
the Corporation that information required to be set forth in a Shareholder's
notice of nomination which pertains to the nominee. No person shall be qualified
for election as a Director of the Corporation unless nominated in accordance
with the procedures set forth in this Section 5. The Chair of a meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the regulations, and if
he should so determine, he shall so declare to the meeting, and the defective
nomination shall be disregarded. The Chair of a meeting shall have absolute
authority to decide questions of compliance with the foregoing procedures, and
his ruling thereon shall be final and conclusive.
Section 6. Election. At each annual meeting of Shareholders for the
election of Directors, the successors to the Directors whose term shall expire
in that year shall be elected, but if the annual meeting is not held or if one
or more of such Directors are not elected thereat, they may be elected at a
special meeting called for that purpose. The election of Directors shall be by
ballot whenever requested by the presiding officer of the meeting or by the
holders of a majority of the voting shares outstanding, entitled to vote at such
meeting and present in person or by proxy, but unless such request is made, the
election shall be viva voce.
Section 7. Vacancies. The remaining Directors, though less than a
majority of the whole authorized number of Directors, may, by the vote of a
majority of their number, fill any vacancy in the Board for the unexpired term.
A vacancy in the Board exists within the meaning of this Section 7 in the event
the Shareholders increase the authorized number of Directors but fail at the
meeting at which such increase is authorized, or an adjournment thereof, to
elect the additional Directors provided for, or in the event the Shareholders
fail at any time to elect the whole authorized number of Directors, or in the
event the Directors increase the authorized number of Directors. A resignation
from the Board of Directors shall be deemed to take effect upon its receipt by
the secretary unless some other time is specified therein.
Section 8. Removal. All the Directors, or all the Directors of a
particular class, or any individual Director may be removed from office, without
assigning any cause, by the vote of the holders of record of 80% of the amount
of authorized, issued, and outstanding stock.
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Section 9. Meetings.
(a) Annual Meetings. An annual meeting of the Directors of this
Corporation shall be held immediately following the adjournment of each annual
Shareholders' meeting if all of the Directors can be duly notified for such
meeting. If the annual meeting is not so held, it shall be held at a time within
the next thirty days. If held thereafter, however, the validity of such meeting
shall not be questioned by reason of the late holding thereof.
(b) Special Meetings. Special meetings of the Board of Directors may be
called by the Chair of the Board or the President. Upon written request to the
President by any two Directors, the President shall call a meeting at the time
requested by the said Directors. In all cases, however, not less than two nor
more than thirty days notice of the special meeting must be given to all
Directors.
(c) Place of Meetings. All meetings of the Board of Directors shall be
held at the principal office of the Corporation in the City of St. Bernard,
Ohio, or at such other reasonably convenient location, either within or without
the State of Ohio, as the Board may designate from time to time and as may be
specified in the notice thereof.
(d) Notice of Meetings. Notice of the time and place of each meeting of
Directors for which such notice is required by law, the Articles, the
Regulations or the Bylaws shall be given to each of the Directors by at least
one of the following methods:
(i) In a writing mailed not less than three days before
such meeting and addressed to the residence or usual
place of business of a Director, as such address
appears on the records of the Corporation; or
(ii) By telegraph, cable, radio, wireless, or a writing
sent or delivered to the residence or usual place of
business of a Director as the same appears on the
records of the Corporation, not later than the day
before the date on which such meeting is to be held;
or
(iii) Personally or by telephone not later than the day
before the date on which such meeting is to be held.
Notice given to a Director by any one of the methods specified in the
Regulations shall be sufficient, and the method of giving notice to all
Directors need not be uniform. Notice of any meeting of Directors may be given
only by the Chair of the Board, the President or the Secretary of the
Corporation. Any such notice shall state the time and place of the meeting but
need not specify the purpose or purposes of the meeting. Notice of adjournment
of a meeting of Directors need not be given if the time and place to which it is
adjourned are fixed and announced at such meeting.
(e) Waiver of Notice. Notice of any meeting of Directors may be waived
in writing, either before or after the holding of such meeting, by any Director,
which writing shall be filed with or entered upon the records of the meeting.
The attendance of any Director at any meeting of
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Directors without protesting, prior to or at the commencement of the meeting,
the lack of proper notice, shall be deemed to be a waiver by him of notice of
such meeting.
(f) Quorum. A majority of the whole authorized number of Directors
shall be necessary to constitute a quorum of a meeting of Directors, except that
a majority of the Directors in office shall constitute a quorum for filling a
vacancy in the Board. The act of a majority of the Directors present at a
meeting at which a quorum is present is the act of the Board, except as
otherwise provided by law, the Articles or the Regulations.
(g) Action Without Meeting. Any action which may be taken at any
meeting of Directors may be taken without a meeting if authorized by a writing
signed by all of the Directors who would be entitled to notice of a meeting held
for such purpose.
Section 10. Compensation. Directors as such shall receive such
compensation and such reasonable expenses for attendance at each meeting,
regular or special, and for serving on committees, as the Directors by
resolution may determine; provided that nothing herein contained shall be
construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 11. Duties and Authority.
(a) General Powers. It shall be the duty of the Directors, acting as a
Board, to exercise general supervision over the affairs of the Corporation, to
fix, define, and limit the powers and duties of all officers, to direct and
advise all officers, to cause financial reports to be prepared, and to declare
dividends and order the same paid at such times as they may determine, and as
the net earnings and conditions of the business warrant. All such actions, and
any and all other actions, approvals, authorizations or delegations of authority
shall require approval of not less than a majority of the Directors present at a
meeting at which a quorum is present.
When approval of the Board of Directors has been given to a particular
transaction or undertaking, the Board of Directors may then delegate to
officers, employees, or agents the authority to complete such transaction or
undertaking.
(b) Inspection of Books. The Board of Directors shall, subject to the
laws of the state of incorporation, determine the conditions and regulations
under which books and accounts of this Corporation, or any of them, shall be
open to the inspection of the Shareholders of this Corporation.
(c) Election of Officers. At the annual meeting of the Board of
Directors in each year, and at any special meetings held for that purpose, the
Board of Directors shall elect officers of the Corporation by a majority vote of
the Board and designate and appoint such subordinate officers and employees as
it shall determine.
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(d) Committees. The Directors may create an executive committee or any
other committee of Directors, and may authorize the delegation to such executive
committee or other committees of any of the authority of the Directors, however
conferred, other than that of filling vacancies among the Directors or in the
executive committee or in any other committee of the Directors.
Such executive committee or any other committee of Directors shall
serve at the pleasure of the Directors, shall act only in the intervals between
meetings of the Directors, and shall be subject to the control and direction of
the Directors. Such executive committee or other committee of Directors may act
by a majority of its members at a meeting or by a writing or writings signed by
all of its members.
Any act or authorization of any act by the executive committee or any
other committee within the authority delegated to it shall be as effective for
all purposes as the act or authorization of the Directors. No notice of a
meeting of the executive committee or Directors shall be required. A meeting of
the executive committee or of any other committee of Directors may be called
only by the President or by a member of such executive or other committee of
Directors. Meetings of the executive committee or of any other committee of
Directors may be held through any communications equipment if all persons
participating can hear each other and participation in such a meeting shall
constitute presence thereat.
Section 11. Bylaws. The Directors may adopt, and amend from time to
time, Bylaws for their own government, which Bylaws shall not be inconsistent
with the law, the Articles or the Regulations.
ARTICLE III
OFFICERS
Section 1. Composition. The officers of this Corporation shall be a
President, a Secretary, and a Treasurer. The Corporation may also have a Chair
of the Board, an Executive Vice President, and such other officers as the Board
of Directors may determine. The Chair of the Board shall be chosen from among
the members of the Board of Directors.
Section 2. Term of Office. The officers shall hold office at the
pleasure of the Directors. Any officer may be removed with or without cause upon
the vote of a majority of the Board of Directors, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. A
vacancy in any office, however created, shall be filled by a majority vote of
the Directors. Any two or more offices may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity if such instrument is required by law, the Articles, the Regulations or
the Bylaws to be executed, acknowledged or verified by two or more officers.
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Section 3. Duties.
(a) Chair of the Board. The Chair of the Board, if one be elected,
shall preside at all meetings of the Board of Directors and shall have such
other powers and duties as may be prescribed by the Board of Directors.
(b) President. The President shall be the Chief Executive Officer of
the Corporation and shall perform such duties as shall be designated from time
to time by the Board of Directors. In any event she shall preside at all
meetings of the Shareholders and, in the absence of, or if a Chair of the Board
shall not have been elected, shall also preside at meetings of the Board of
Directors. She shall have authority to sign all certificates for shares. She
shall have authority to sign all deeds, mortgages, bonds, contracts, notes and
other instruments requiring the signature of the President.
(c) Vice President. The Vice President, if one be elected, shall
perform such duties as are conferred upon him by these Regulations, or as may
from time to time be assigned to him by the Board of Directors. At the request
of the President, or in his absence or disability, the Vice President,
designated by the President (or in the absence of such designation, the Vice
President designated by the Board), shall perform all the duties of the
President, and when so acting, shall have all the powers of the President. The
authority of the Vice President to sign in the name of the Corporation all
certificates for shares and authorized deeds, mortgages, bonds, contracts, notes
and other instruments shall be coordinated with like authority of the President.
(d) Secretary. The Secretary shall keep the minutes of all proceedings
of the Board of Directors and of the Shareholders and make a proper record of
the same, which shall be attested by him. He shall give notice of meetings of
Shareholders and Directors. He shall keep such books as may be required by the
Board of Directors, shall take charge of the seal and stock book of the
Corporation, and shall issue and attest all certificates of stock. He shall have
authority to sign all deeds, mortgages, bonds, contracts, notes and other
instruments requiring the signature of the Secretary.
He shall further have all the powers and duties as the Board of Directors may,
from time to time, assign to him.
The duties of the Secretary may be performed by an Assistant Secretary,
if any, in the absence of the Secretary or the inability of the Secretary to
act.
(e) Treasurer. The Treasurer shall have the custody of the funds and
securities of the Corporation which may come into his hands and shall do with
the same as may be ordered by the Board of Directors. When necessary or proper,
he may endorse for collection on behalf of the Corporation checks, notes, and
other similar obligations. All corporate funds disbursed shall be by check and
must be signed by the President or Treasurer of the Corporation. The Treasurer
shall deposit the funds of the Corporation to its credit in such banks and
depositories as the Board of Directors may from time to time designate. He shall
submit to the annual meeting of the Shareholders a statement of the financial
conditions of the Corporation and whenever thereto
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required by the Board of Directors, shall make and render a statement of his
accounts and such other statements as may be required by the Board of Directors.
He shall keep in books of the Corporation full and accurate accounts of all
monies received and paid by him for account of the Corporation. He shall perform
such other duties as may from time to time be assigned by the Board of Directors
to him.
The duties of the Treasurer may be performed by an Assistant Treasurer,
if any, in the absence of the Treasurer or in the inability of the Treasurer to
act.
(f) Assistant and Subordinate Officers. The Board of Directors may
appoint such assistant and subordinate officer as it may deem desirable. Each
such officer shall hold office during the pleasure of the Board of Directors and
perform such duties as the Board of Directors may prescribe. The Board of
Directors may from time to time authorize any officer to appoint and remove
subordinate officers, to prescribe their authority and duties, and to fix their
compensation.
(g) Delegation of Duties. In the absence of any officer of the
Corporation, or for any other reason the Board of Directors may deem sufficient,
the Board may delegate the powers or duties of such officer to any other
officer, Director, or other qualified person the Board may select.
Section 4. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE IV
STOCK
Section 1. Form. Certificates evidencing ownership of shares of the
Corporation shall be issued to those entitled to them. Each certificate
evidencing shares of the Corporation shall bear a distinguishing number; the
signatures of the Chair of the Board, the President, or Vice President, and of
the Secretary or an Assistant Secretary (except that when any such certificate
is countersigned by an incorporated transfer agent or registrar, such signatures
may be facsimile, engraved, stamped or printed); and such recitals as may be
required by law. Certificates evidencing shares of the Corporation shall be of
such tenor and design as the Directors may from time to time adopt and may bear
such recitals as are permitted by law.
Section 2. Transfers. Where a certificate evidencing a share or shares
of the Corporation is presented to the Corporation or its proper agents with a
request to register transfer, the transfer shall be registered as requested if:
(a) An appropriate person signs on each certificate so presented or
signs on a separate document an assignment or transfer of shares evidenced by
each such certificate, or signs a power to assign or transfer such shares, or
when the signature of an appropriate person is written without more on the back
of each such certificate; and
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(b) Reasonable assurance is given that the endorsement of each
appropriate person is genuine and effective; the Corporation or its agents may
refuse to register a transfer of shares unless the signature of each appropriate
person is guaranteed by a commercial bank or trust company having an office or a
correspondent in the City of New York or by a firm having membership in the New
York Stock Exchange; and
(c) All applicable laws relating to the collection of transfer or other
taxes have been complied with; and
(d) The Corporation or its agents are not otherwise required or
permitted to refuse to register such transfer.
Section 3. Transfer Agents and Registrars. The Directors may appoint
one or more agents to transfer or to register shares of the Corporation, or
both.
Section 4. Lost, Wrongfully Taken or Destroyed Certificates. Except as
otherwise provided by law, where the owner of a certificate evidencing shares of
the Corporation claims that such certificate has been lost, destroyed or
wrongfully taken, the Directors must cause the Corporation to issue a new
certificate in place of the original certificate if the owner:
(a) So requests before the Corporation has notice that such original
certificate has been acquired by a bona fide purchaser; and
(b) Files with the Corporation, unless waived by the Directors, an
indemnity bond, with surety or sureties satisfactory to the Corporation, in such
sums as the Directors may, in their discretion, deem reasonably sufficient as
indemnity against any loss or liability that the Corporation may incur by reason
of the issuance of each such new certificate; and
(c) Satisfies any other reasonable requirements which may be imposed by
the Directors, in their discretion.
Section 5. Uncertificated Shares. Anything contained in this Article IV
to the contrary notwithstanding, the Directors may provide by resolution that
some or all of any or all classes and series of shares of the Corporation shall
be uncertificated shares, provided that such resolution shall not apply to (a)
shares of the Corporation represented by a certificate until such certificate is
surrendered to the Corporation in accordance with applicable provisions of Ohio
law or (b) any certificated security of the Corporation issued in exchange for
an uncertificated security in accordance with applicable provisions of Ohio law.
The rights and obligations of the holders of uncertificated shares and the
rights and obligations of the holders of certificates representing shares of the
same class and series shall be identical.
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ARTICLE V
SEAL
The seal of the Corporation shall be a circular seal with the name of
the Corporation engraved around the margin and the word "SEAL" engraved across
the center. It shall remain in the custody of the Secretary and shall be affixed
to all certificates of the Corporation stock and all other instruments requiring
a seal. If deemed advisable by the Board of Directors, a duplicate seal may be
kept and used by any other officer of the Corporation.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS
OFFICERS AND EMPLOYEES
Section 1. Third Party Actions. The Corporation shall to the fullest
extent permitted by Ohio law, indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
including all appeals (other than action, suit or proceeding by or in the right
of the Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, trustee, officer, employee, member, manager or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, decrees, fines,
penalties, and amounts paid in settlement actually and reasonably incurred by
him in connection with such action, suit, or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the Corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 2. Derivative Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit, including all appeals, by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, trustee, officer, employee, member, manager or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall have
been finally adjudged to be liable for negligence or misconduct in the
performance of his duty
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to the Corporation unless, and only to the extent that the Court of Common Pleas
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case such person is fairly and reasonably entitled to
indemnity for such expenses as the Court of Common Pleas or such other court
shall deem proper.
Section 3. Rights After Successful Defense. To the extent that a
director, trustee, officer, employee, member, manager or agent has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1 or 2, or in defense of any claim, issue, or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 4. Other Determinations of Rights. Except in a situation
governed by Section 3, any indemnification under Section 1 or 2 (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, trustee,
officer, employee, member, manager or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1 or
2. Such determination shall be made (a) by a majority vote of directors acting
at a meeting at which a quorum consisting of directors who were not parties to
such action, suit, or proceeding is present, or (b) if such a quorum is not
obtainable (or even if obtainable), and a majority of disinterested directors
directs, by independent legal counsel (compensated by the Corporation) in a
written opinion, or (c) by the affirmative vote in person or by proxy of the
holders of a majority of the shares entitled to vote in the election of
directors, without regard to voting power which, may thereafter exist upon a
default, failure, or other contingency.
Section 5. Advances of Expenses. Expenses of each person indemnified
hereunder incurred in defending a civil, criminal, administrative, or
investigative action, suit, or proceeding (including all appeals), or threat
thereof may be paid by the Corporation in advance of the final disposition of
such action, suit, or proceeding as authorized by the Board of Directors,
whether a disinterested quorum exists or not, upon receipt of an undertaking by
or on behalf of the director, trustee, officer, employee, member, manager or
agent, to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation.
Section 6. Nonexclusiveness - Heirs. The indemnification provided by
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled as a matter of law or under the
Articles, these Regulations, any agreement, vote of Shareholders, any insurance
purchased by the Corporation, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, trustee, officer,
or employee and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
Section 7. Purchase of Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, trustee, officer, employee, member,
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manager or agent of another corporation, partnership, joint venture, trust, or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article or of the Ohio General Corporation Law.
ARTICLE VII
AMENDMENT
This Code of Regulations may be amended or new regulations adopted only
upon the written assent of the holders of record of a majority of the issued and
outstanding capital stock of the Corporation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company does not transact any material business other than though
its wholly-owned subsidiary, the Bank. The Bank's results of operations are
dependent primarily on net interest income, which is the difference between the
interest income earned on its interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities, such
as deposits and borrowing. The Bank also generates non-interest income such as
service fee income. The Bank's general, administrative and other expenses
primarily consist of employee compensation, occupancy and equipment expense,
federal deposit insurance premiums, franchise taxes and other operating
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and action of regulatory agencies. The Bank
exceeded all of its regulatory capital requirements at December 31, 1997.
The following pages provide an overview of the general business and
financial condition as of December 31, 1997, and results of operations for
fiscal 1997, as compared to prior years. In addition to this historical
information, the following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, the Bank's operations
and 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 in the Bank's general market area.
The forward-looking statements contained herein include, but are not
limited to the following matters.
1) Management's analysis of the interest rate risk of the Bank as
set forth under "Asset and Liability Management."
2) Management's determination of the amount of the allowance for
loan losses as set forth under "Comparison of Operating Results for the Years
Ended December 31, 1997 and December 31, 1996" and "Comparison of Operating
Results for the Years Ended December 31, 1996 and December 31, 1995."
3) Management's discussion of the liquidity of the Bank's assets
and the regulatory capital of the Bank as set forth under "Liquidity and Capital
Resources."
ASSET AND LIABILITY MANAGEMENT
The matching of the repricing characteristics of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it matures or reprices within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon certain assumptions,
to mature or re-price within a specific time period and the amount of
interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceed the amount of interest rate
sensitive liabilities maturing or re-pricing within a specific time frame. A gap
is considered negative when the amount of interest rate sensitive liabilities
exceed the amount of interest rate sensitive assets maturing or re-pricing
within that same time frame. Accordingly, in a rising interest rate environment,
an institution with a negative gap would not be in as favorable a position, as
compared to an institution with a positive gap, to invest in higher yielding
assets. This may result in the yield on its assets increasing at a slower pace
than the increase in the cost of its interest-bearing liabilities. During a
period of falling interest rates, an institution with a negative gap would tend
to have its assets repricing at a slower rate than its interest-bearing
liabilities, which consequently, may
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<PAGE>
result in its net interest income growing at a faster rate then an institution
with a positive gap.
The Bank's liabilities include a high level of short-term certificates
of deposit. These accounts typically react more quickly to changes in market
interest rates than the Bank's investments in mortgage-backed and related
securities and mortgage loans because of the shorter maturity and re-pricing
characteristics of deposits. As a result, generally, sharp increases in interest
rates may adversely affect earnings while decreases in interest rates may
beneficially affect earnings.
In managing its interest rate risk the Bank makes every effort to
provide a more equal match between the maturity of its liabilities and the
maturity or repricing of its investments. In monitoring this process the Bank
regularly conducts a comprehensive analysis of the Bank's balance sheet. The
Bank utilizes a discounted cash flow analysis arriving at a mark-to-market
comparison of assets and liabilities to book values and in calculating the net
present value of the Bank's equity position. The primary focus is on managing
market value and total return. In addition, but to a much lesser degree, the
Bank will review its asset-liability gap position as an indication of how it is
faring on matching its asset/liability maturity-repricing profile.
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997, that are
expected to reprice or mature in each of the future time periods shown, based on
certain assumptions. Except as stated below, the assets and liabilities shown
that reprice or mature during a particular period were determined in accordance
with the earlier of the term to repricing or the contractual terms of the asset
or liability. All mortgage-backed securities, and mortgages secured by one- to
four-family residences are assumed to prepay at a constant prepayment rate of
14%, which was chosen based upon a consensus of prepayment rates that apply to
various weighted average maturities and which are published by the larger
brokerage houses who deal in mortgage-backed and related securities. Lines of
credit reprice monthly, and consumer loans are based on amortized balances.
Additionally, all variable rate deposit accounts assume a 10% decay rate with
the remainder due in the tenth year for all periods. The liability assumptions
for variable rate deposit accounts were derived partly from industry methodology
standards of valuing core deposits and a blend of the Bank's own historical
experience. Management believes that all of the above assumptions are
reasonable.
Certain shortcomings are inherent in the method of analysis presented
in the following table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rate on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short term basis and over the life
of the assets. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their ARM loans may decrease in the event of an interest rate increase.
As shown by the table below, increases in interest rates will result in
net decreases in the Bank's net portfolio value, while decreases in interest
rates will result in smaller net increases in the Bank's net portfolio value.
- 5 -
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997, based on the
information and assumptions set forth above.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------
THREE FOUR ONE TO THREE TO
MONTHS MONTHS TO THREE FIVE
OR LESS ONE YEAR YEARS YEARS
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
INTEREST-EARNING ASSETS:
Interest bearing deposits.................. $272 $ -- $ -- $ --
Investments................................ 90 83
Mortgage-backed securities................. 203 587 1,304 964
Loans receivable, net...................... 2,382 3,517 9,255 6,743
------ ------ ------- ------
Total interest earning assets........ $2,857 $4,104 $10,649 $7,790
====== ====== ======= ======
INTEREST BEARING LIABILITIES:
Certificate accounts....................... $4,610 $7,477 $7,097 $2,438
Money market savings accounts.............. 77 225 403 451
Passbook accounts.......................... 128 375 878 711
NOW accounts............................... 51 149 350 283
FHLB advances.............................. 2,488 1,439 3,124 5,062
------ ------ ------- ------
Total interest bearing liabilities... $7,354 $9,665 $11,852 $8,945
====== ====== ======= ======
Interest rate sensitivity gap................ $(4,497) $(5,561) $(1,203) $(1,155)
======== ======== ======== ========
Cumulative interest rate sensitivity gap..... $(4,497) $(10,058) $(11,261) $(12,416)
======== ========= ========= =========
Cumulative interest rate sensitivity gap
as a percentage of total assets............ (8.73)% (19.53)% (21.86)% (24.10)%
====== ======= ======= =======
Cumulative interest rate sensitivity gap
as a percent of total liability............ (10.10)% (22.58)% (25.28)% (27.87)%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------
FIVE TO MORE
TEN THAN
YEARS TEN TOTAL
---------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
INTEREST-EARNING ASSETS:
Interest bearing deposits.................. $ -- $ -- $272
Investments................................ 2,102 2,814 5,089
Mortgage-backed securities................. 1,450 1,288 5,796
Loans receivable, net...................... 9,065 8,040 39,002
------- ------- -------
Total interest earning assets........ $12,617 $12,142 $50,159
======= ======= =======
INTEREST BEARING LIABILITIES:
Certificate accounts....................... $ -- $ -- $21,622
Money market savings accounts.............. 1,924 -- 3,080
Passbook accounts.......................... 3,033 -- 5,125
NOW accounts............................... 1,207 -- 2,040
FHLB advances.............................. 137 37 12,287
------- ------- -------
Total interest bearing liabilities... $6,301 $ 37 $44,154
====== ====== =======
Interest rate sensitivity gap................ $6,316 $12,105 $6,005
======= ======= =======
Cumulative interest rate sensitivity gap..... $(6,100) $6,005
======= =======
Cumulative interest rate sensitivity gap
as a percentage of total assets............ (11.84)% 11.66%
======= =====
Cumulative interest rate sensitivity gap
as a percent of total liability............ (13.69)% 13.48%
======= =====
</TABLE>
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<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Bank
at December 31, 1997 and for the years ended December 31, 1997, 1996 and 1995.
The yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown except
where noted otherwise. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused a material difference in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
AT DECEMBER 31, 1997 1997 1996
---------------------- ------------------------------ ---------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
------- ---- ------- -------- ---- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS:
Interest-earning assets:
Interest bearing deposits................. $ 272 5.82% $ 558 $ 27 4.84% $ 489 $ 25
Investments............................... 5,089 7.14 6,267 451 7.20 7,049 521
Mortgage-backed securities................ 5,796 6.85 1,221 88 7.21 1,125 80
Loans receivable, net..................... 39,002 7.77 38,943 2,977 7.64 35,449 2,710
------ ---- ------ ----- ---- ------ -----
Total interest-earning assets.......... 50,159 7.59 46,989 3,543 7.54 44,112 3,336
Non-interest-earning assets.................. 1,350 1,128 1,623
------ ----- ------
Total assets........................... $51,509 $48,117 $45,735
====== ======= =======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits.................................. $31,867 4.82% $31,134 $1,487 4.78% $34,224 $1,603
FHLB advances............................. 12,287 5.78 9,499 541 5.70 5,924 342
Capitalized lease obligations............. -- -- -- -- -- 13 1
--------- ------- --------- ------- --------- ------- ------
Total interest-bearing liabilities..... 44,154 5.07 40,633 2,028 4.99 40,161 1,946
Non-interest-bearing liabilities............. 390 287 6
------- ------- -------
Total liabilities...................... 44,544 40,920 40,167
Retained earnings............................ 6,965 7,197 5,568
------ ------ -------
Total liabilities and retained
earnings........................... $51,509 $48,117 $45,735
======= ======= =======
Net interest income/interest rate spread........ 2.52% $1,515 2.55% $1,390
==== ====== ==== ======
Net interest-earning assets..................... $6,005 $6,356 $3,951
====== ====== ======
Net interest margin............................. 3.22%
====
Ratio of interest-earning assets to
interest-bearing liabilities............... 113.60% 115.64%
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995
----------- -------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS:
Interest-earning assets:
Interest bearing deposits................. 5.11% $ 473 $ 24 5.07%
Investments............................... 7.39 6,601 452 6.83
Mortgage-backed securities................ 7.11 827 66 7.98
Loans receivable, net..................... 7.64 32,279 2,438 7.56
---- ------ ----- ----
Total interest-earning assets.......... 7.56 40,180 2,980 7.42
Non-interest-earning assets.................. 1,413
------
Total assets........................... $41,593
=======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits.................................. 4.68% $34,259 $1,649 4.81%
FHLB advances............................. 5.77 3,199 197 6.16
Capitalized lease obligations............. 7.69 26 2 7.69
---- ------- ----- ----
Total interest-bearing liabilities..... 4.84 37,484 1,848 4.93
Non-interest-bearing liabilities............. 319
-------
Total liabilities...................... 37,803
Retained earnings............................ 3,790
-------
Total liabilities and retained
earnings........................... $41,593
=======
Net interest income/interest rate spread........ 2.72% $1,132 2.49%
==== ====== ====
Net interest-earning assets..................... $2,696
======
Net interest margin............................. 3.15% 2.82%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities............... 109.84% 107.19%
====== ======
</TABLE>
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<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the period indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------------- -------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
----------- ----------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C>
INTEREST-EARNING ASSETS:
Interest earning deposits.......... $3 $-- $3 $1 $-- $1
Investments........................ (56) 1 (55) 32 37 69
Mortgage-backed securities......... 7 (14) (7) 20 (6) 14
Loans receivable, net.............. 267 (1) 266 242 30 272
--- --- --- --- -- ---
Total interest income......... 221 (14) 207 295 61 356
INTEREST-BEARING LIABILITIES:
Deposits........................... (148) 32 (116) (2) (44) (46)
FHLB advances...................... 204 (5) 199 156 (11) 145
Capitalized lease obligations...... (1) - (1) (1) - (1)
--- --- --- --- --- ---
Total interest expense........ 55 27 82 153 (55) 98
-- -- -- --- ---- --
Net change in net interest income..... $166 $(41) $125 $142 $116 $258
==== ===== ==== ==== ==== ====
- 8 -
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT
DECEMBER 31, 1997 AND DECEMBER 31, 1996.
Total assets increased $4.4 million, or 9.4% to $51.5 million at
December 31, 1997, from $47.1 million at December 31, 1996. The increase is
primarily attributable to an increase in loans and investments. Loans increased
$1.5 million, or 4.0% to $39.0 million at December 31, 1997, from $37.5 million
at December 31, 1996. Cash due from banks decreased $451,000 or 40.4% to
$664,000 at December 31, 1997, from $1.1 million at December 31, 1996.
Investment securities, (including mortgage-backed securities and collateralized
mortgage obligations), increased $2.9 million, or 40.3% to $10.1 million at
December 31, 1997, from $7.2 million at December 31, 1996. The primary source of
funds used to increase the balance of loans outstanding and investments was the
decrease in cash due from banks and increase in borrowings from the Federal Home
Loan Bank, which was partially offset by a decrease in deposits.
Advances from the Federal Home Loan Bank increased $5.3 million, or
75.4% to $12.3 million at December 31, 1997, from $7.0 million at December 31,
1996. The majority of the advances mature within five years.
Deposits decreased $685,000, or 2.1% to $31.9 million at December 31,
1997, from $32.6 million at December 31, 1996. The decrease is primarily due to
the Bank's decision not to aggressively pursue broker deposits.
Stockholders' equity decreased $305,000, or 4.2% to $7.0 million at
December 31, 1997, from $7.3 million at December 31, 1996. The decrease
primarily was the result of the Company repurchasing 17,735 shares of its common
stock at a total cost of $285,000, plus the expense associated with the
Company's stock benefit plans of $274,000 offset by net income of $195,000, and
an increase in unrealized gain of $70,000 net of income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND DECEMBER 31,
1996.
GENERAL. The Bank's net income for the year ended December 31, 1997,
increased by $9,000 or 4.9% to $195,000 as compared to $186,000 for year ended
December 31, 1996, primarily due to an increase in interest income of $207,000
to $3.5 million from $3.3 million for fiscal 1996, offset by a reduction in
other income of $22,000 to $131,000 from $153,000 for fiscal 1996, an increase
in interest expense of $82,000 to $2.0 million from $1.9 million for fiscal 1996
and increase in provision for income taxes of $38,000 to $119,000 for 1997 from
$81,000 for 1996.
INTEREST INCOME. Interest income for the year ended December 31, 1997,
was $3.5 million compared to $3.3 million for the year ended December 31, 1996,
an increase of $207,000 or 6.2%. The increase in interest income was primarily
due to an increase in the average interest earning assets from $44.1 million for
year ending December 31, 1996, to $47.0 million for the year ending December 31,
1997. The increase in average interest earning assets was primarily in loans
receivable, as average loans outstanding increased to $38.9 million for the year
ending December 31, 1997, from $35.5 million for the year ending December 31,
1996. The Bank used borrowings from the Federal Home Loan Bank to enhance
originations of one- to four-family loans during 1997. The average balance of
mortgage backed securities, investments, and other interest earning assets in
total decreased $617,000 to $8.0 million for the year ended December 31, 1997,
compared with $8.7 million for the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased by $82,000 or 4.2%, to
$2.0 million for the year ended December 31, 1997, from $1.9 million for the
year ended December 31, 1996. The increase resulted primarily from an increase
in interest expense on advances from the FHLB of $198,000, or 57.9% to $541,000
for year ended December 31, 1997, from $343,000 for year ended
- 9 -
<PAGE>
December 31, 1996, offset by a decrease in interest expense on deposits of
$116,000 from $1.6 million for year ended December 31, 1996, to $1.5 million for
year ended December 31, 1997. The increase in interest bearing liabilities
continued to fund growth, including through the funding of loan demand and
purchase of investment securities. The average balance of borrowings from the
FHLB increased $3.6 million from $5.9 million for the year ending December 31,
1996, to $9.5 million for the year ending December 31, 1997, whereas the average
interest bearing deposits decreased $3.1 million from $34.2 million for year
ending December 31, 1996, to $31.1 million for year ending December 31, 1997.
The Bank has experienced an increase in the interest rate paid on interest
bearing deposits to 4.78% for year ending December 31, 1997, compared to 4.68%
for year ending December 31, 1996. The interest rate on average borrowing from
the FHLB decreased from 5.77% for year ending 1996 to 5.70% for year ending
December 31, 1997.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased $11,000 for year ending December 31, 1997, compared to no provision
for year ending December 31, 1996. As a result, the allowance at December 31,
1997, totaled $66,000. The increase was a result of the increase in loan
production and was not a reflection of asset quality. The Bank closely monitors
its mortgage and consumer loan portfolios and maintains the allowance for loan
losses through the provision for loan losses, at a level which the Bank believes
to be adequate based on an evaluation of the collectibility of loans, prior loan
loss experience and general economic conditions. While management uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control. The Bank
has seen a slight increase in non-performing loans as of December 31, 1997, to
$174,000 at December 31, 1997, from $109,000 at December 31, 1996.
OTHER INCOME. Other income decreased $22,000 or 14.7% from $154,000 for
the year ending December 31, 1996, to $131,000 for the year ending December 31,
1997. The decrease was primarily due to no gain on sale of real estate owned for
year ending December 31, 1997, compared to $12,000 for year ending December 31,
1996, and no gain on sale of investments for the year ending December 31, 1997,
compared to $26,000 for the year ending December 31, 1996, offset by an increase
in service fee income of $16,000 or 13.6% to $131,000 for the year ending
December 31, 1997, from $115,000 for the year ending December 31, 1996.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses increased $45,000 or 3.5% to $1.32 million for the year ending
December 31, 1997, from $1.28 million for the year ending December 31, 1996. The
increase was primarily due to normal increases in salaries, staffing for the new
branch office and employee benefit plans of $103,000 or 22.8% from $448,000 for
the year ending December 31, 1996, to $551,000 for the year ending December 31,
1997. The increase in salary expenses was primarily due to an increase of staff.
The occupancy and equipment expense increased $18,000 or 10.9%, from $167,000
for the year ending December 31, 1996, to $185,000 for the year ending December
31, 1997, primarily due to the opening of the new branch. Franchise taxes
increased $33,000 or 61.8% from $52,000 for the year ending December 31, 1996,
to $85,000 for the year ending December 31, 1997. Other expenses increased
$153,000 or 46.9% and was due to additional expenses of operating a public
company and more aggressive marketing in conjunction with opening the new
branch. The increases were offset by a reduction in FDIC insurance premiums of
$262,000, or 92.5% from $283,000 for year ending December 31, 1996, to $21,000
for year ending December 31, 1997. General, administrative and other expenses in
1996 were unusually high due to the special assessment related to the
recapitalization of the SAIF fund of $225,000.
- 10 -
<PAGE>
INCOME TAX EXPENSE. The tax expense increased to $38,000 or 46.9% from $81,000
for the year ending December 31, 1996, to $119,000 for the year ending December
31, 1997. The increase in income taxes is due to the increase in net income
before taxes from $267,000 for the year ending December 31, 1996, to $314,000
for the year ending December 31, 1997. The effective tax rates for the years
ending December 31, 1997 and 1996 were 34% and 30%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1996 AND DECEMBER 31,
1995.
GENERAL. The Bank's net income for the year ended December 31, 1996,
increased by $157,000 or 549% to $186,000 as compared to $29,000 for the year
ended December 31, 1995, primarily due to an increase in net interest income of
$257,000 to $3.3 million from $3.0 million for Fiscal 1995 and an increase in
non-interest income of $51,000 to $154,000 from $102,000 for the fiscal 1995,
offset by an increase in general administrative expenses of $78,000 to $1.3
million for fiscal 1996 from $1.2 million for fiscal 1995, which was due to the
one time SAIF assessment and increase in provision for income taxes of $71,000
to $81,000 for fiscal 1996 from $10,000 for fiscal 1995.
INTEREST INCOME. Interest income for the year ended December 31, 1996,
was $3.34 million compared to $2.98 million for the year ended December 31,
1995, an increase of approximately $355,000 or 12.0%. The increase in interest
income was primarily due to an increase in the average interest earning assets
from $40.2 million for the year ended December 31, 1995 to $44.1 million for the
year ended December 31, 1996. The increase in average interest earning assets
was primarily in loans receivable as average loans outstanding increased to
$35.5 million for the year ended December 31, 1996, from $32.3 million for the
year ended December 31, 1995. The Bank has continued to emphasize the
origination of one- to four-family loans during 1996 and the proceeds from the
stock conversion were used primarily for loan origination. The Bank also
experienced an increase in the average yield on interest earning assets as the
rate increased to 7.56% for the year ending December 31, 1996, from 7.42% for
the year ended December 31, 1995. The average balance of mortgage backed
securities, investments, and other interest earning assets in total increased
$762,000 to $8.7 million for the year ended December 31, 1996, from $7.9 million
for the year ended December 31, 1995. The increase in other interest earning
assets was due to borrowings from the FHLB to fund the growth.
INTEREST EXPENSE. Interest expense increased $98,000 or 5.3% from $1.8
million for the year ended December 31, 1995, to $1.9 million for the year ended
December 31, 1996. Average interest bearing liabilities increased $2.7 million
to $40.2 million for the year ended December 31, 1996, from $37.5 million for
the year ended December 31, 1995. This increase in interest bearing liabilities
was used to fund the asset growth. The Bank has continued to fund loan demand
with the use of borrowings from the FHLB. The majority of these borrowings are
short-term loans with terms of less than one year. The Bank continues to believe
that short term borrowings are less costly than raising rates on deposit
accounts in the current competitive deposit market. The average balance of
deposits for the year ended December 31, 1996, has remained relatively stable
and was $34.22 million for the year ended December 31, 1996, compared to $34.26
for the year ended December 31, 1995. The Bank has increased its average
borrowings from the FHLB to $5.9 million for the year ended December 31, 1996,
from $3.2 million for the year ended December 31, 1995. The Bank has experienced
a reduction in the average interest rate paid on interest bearing liabilities to
4.84% for the year ended December 31, 1996, from 4.93% for the year ended
December 31, 1995, as the rates on borrowings and deposits have decreased during
the year ended December 31, 1996, as compared to December 31, 1995.
- 11 -
<PAGE>
PROVISION FOR LOAN LOSSES. The Bank had no provision for loan losses
for the year ended December 31, 1996, as compared to a credit of $2,000 for the
year ended December 31, 1995. The Bank closely monitors its mortgage and
consumer loan portfolios and maintains the allowance for loan losses through the
provision for loan losses, at a level which the Bank believes to be adequate
based on an evaluation of the collectibility of loans, prior loan loss
experience and general economic conditions. While management uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control. The Bank
has seen a slight increase in non-performing loans as of December 31, 1996, to
$109,000 at December 31, 1996, from $89,000 at December 31, 1995.
OTHER INCOME. Other income increased $51,000 or 50%, to $153,000 for
the year ended December 31, 1996, from $102,000 for the year ended December 31,
1995. The increase was due primarily to gain on sale of investments of $26,000
and gain of real estate owned of $12,000 for the year ended December 31, 1996,
with no corresponding amounts for the year ended December 31, 1995.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses increased $78,000 or 6.5% to $1.3 million for the year ended
December 31, 1996, from $1.2 million for the year ended December 31, 1995. The
increase in general, administrative and other expenses was due to the special
assessment related to the recapitalization of the SAIF fund during the third
quarter of 1996. The Bank's assessment was $225,000. Excluding this charge the
bank reduced general, administrative and other expenses by approximately
$147,000 to $1.05 million for the year ended December 31, 1996. The reduction
was due primarily to a reduction in other operating expenses of $102,000 from
$428,000 for the year ended December 31, 1995, to $326,000 for the year ended
December 31, 1996, as the Bank did not have expenses related to a lawsuit which
was settled in 1995. The Bank also experienced a reduction in the occupancy and
equipment expense of $48,000 as the Bank benefitted from changing to a new
provider of data processing services.
INCOME TAX EXPENSE. Income tax expense increased $71,000 to $81,000 for
the year ended December 31,1996 from $10,000 for the year ended December 31,
1995. The increase in income taxes is due to the increase in the net income
before taxes from $38,000 to $267,000 for the years ended December 31,1995 and
1996 respectively. The effective tax rates for the years ended December 31,
1996, and 1995 were 30% and 26%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and
interest payments on loans and FHLB advances. While maturities and scheduled
amortization of loans are predictable sources of funds, deposits flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. Due to the declining interest rate environment in
1992 and 1993 and management's determination not to aggressively price its
deposit products, the Bank experienced a decline in its level of deposits. The
FDIC requires savings banks to maintain a level of investments in specified
types of liquid assets sufficient to protect and ensure the safety and soundness
of the Bank. The Bank will maintain a minimum level of liquidity, as defined by
the FDIC, such that the total of cash and marketable investment securities
divided by total deposits and short term liabilities will exceed 15%. The Bank's
liquidity ratios were 17%, 21.6%, and 25% at December 31, 1997, 1996 and 1995,
respectively.
The primary investment activity of the Company is the origination of
one- to four-family mortgage loans and consumer loans, and the purchase of
investments. During the years ended December 31, 1997, 1996, and 1995, the Bank
originated mortgage loans in the amounts of $6.5
- 12 -
<PAGE>
million, $9.3 million and 6.2 million, respectively, and consumer loans in the
amount of $2.4 million, $1.3 million and $2.1 million, respectively.
The FDIC has adopted risk-based capital ratio guidelines to which the
Bank is subject. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk
weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues), retained earnings and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term
limited-life preferred stock, mandatory convertible securities, certain hybrid
capital instruments, term subordinated debts and allowance for loan and lease
losses, subject to certain limitations, less required deductions. Banks are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. The FDIC may, however, set higher capital requirements when a
bank's particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain a Tier I leverage ratio, including
tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, provided that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. At December 31,
1997, the Bank maintained a leverage ratio of 11.8% and total capital to risk
weighted assets ratio of 23.5%. See Note 9 to the Financial Statements appearing
elsewhere in this Annual Report.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At December 31, 1997, cash and
short term investments totaled $837,000.
At December 31, 1997, the Bank had outstanding loan commitments
(including undisbursed loan proceeds and unused lines of credit) of $1.5
million. The Bank anticipates that it will have sufficient funds available to
meet its current loan origination commitments. Certificates of deposits which
are scheduled to mature in one year or less from December 31, 1997, totaled
$12.1 million.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operation. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
- 13 -
<PAGE>
Independent Auditors' Report
The Board of Directors
Lenox Bancorp Inc.:
We have audited the accompanying consolidated balance sheets of Lenox Bancorp
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Bancorp's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lenox Bancorp Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Clark, Schaefer, Hackett & Co.
- ----------------------------------
Cincinnati, Ohio
January 23, 1998
- 14 -
<PAGE>
LENOX BANCORP INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
------
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
---- ----
<S> <C>
Cash and due from banks (including federal
funds of $83,627 and $364,337 at
December 31, 1997 and 1996) $ 663,856 1,114,879
Certificates of deposit 172,686 162,280
Investment securities - available for
sale, at fair value (amortized cost
of $4,293,779 and $6,192,698 at
December 31, 1997 and 1996) 4,291,434 6,088,737
Mortgage-backed securities - available
for sale, at fair value (amortized
cost of $1,026,034 and $1,148,411 at
December 31, 1997 and 1996) 1,030,094 1,148,411
Collateralized mortgage obligations - held to
maturity (fair value of $4,761,235 at
December 31, 1997) 4,765,592 -
Loans receivable, net 39,002,257 37,495,377
Accrued interest receivable:
Loans 153,435 148,392
Mortgage-backed securities 6,760 7,572
Collateralized mortgage obligations 26,525 -
Investments and certificates of deposit 84,098 129,606
Property and equipment, net 598,090 263,651
Federal Home Loan Bank stock - at cost 625,100 436,000
Prepaid expenses and other assets 88,681 79,450
----------- ----------
$51,508,608 47,074,355
=========== ==========
</TABLE>
See accompanying notes to financial statements.
- 15 -
<PAGE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
---- ----
<S> <C>
Deposits $31,866,533 32,551,255
Advances from Federal Home Loan Bank 12,287,123 7,006,703
Capitalized lease obligations - 4,867
Advance payments by borrowers for taxes
and insurance 134,075 93,643
Accrued expenses 117,669 52,440
Accrued federal income taxes 40,000 44,000
Deferred federal income taxes 98,583 51,650
----------- ----------
44,543,983 39,804,558
----------- ----------
Commitments - -
Stockholders' equity:
Common stock-authorized 2,000,000 shares
no par value, 425,677 issued and 400,258 and
425,677 outstanding at December 31, 1997 - -
and 1996, respectively
Additional paid in capital 3,712,823 3,710,763
Retained earnings - substantially restricted 4,072,811 3,953,726
Unearned ESOP shares (281,723) (326,080)
Shares acquired for Stock Incentive Plan (128,689) -
Less 25,419 shares held in treasury (411,729) -
Unrealized gain (loss) on available for sale
securities, net of income taxes 1,132 (68,612)
----------- ----------
6,964,625 7,269,797
----------- ----------
$51,508,608 47,074,355
=========== ==========
</TABLE>
- 16 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Income
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Interest and dividend income:
Loans $ 2,976,736 2,710,337 2,438,277
Mortgage-backed securities 78,082 79,968 66,438
Collateralized mortgage obligations 9,915 - -
Investments and interest bearing deposits 441,694 516,614 449,180
Federal Home Loan Bank 36,354 29,235 26,593
--------- --------- ---------
3,542,781 3,336,154 2,980,488
--------- --------- ---------
Interest expense:
Deposits 1,487,274 1,603,571 1,649,038
Borrowed money and capitalized leases 541,184 342,828 199,076
--------- --------- ---------
2,028,458 1,946,399 1,848,114
--------- --------- ---------
Net interest income before provision
for loan losses 1,514,323 1,389,755 1,132,374
Provision (credit) for loan losses 10,500 - (2,000)
--------- --------- ---------
Net interest income after provision
for loan losses 1,503,823 1,389,755 1,134,374
--------- --------- ---------
Other income:
Service fee and other income 130,988 115,343 102,356
Gain on sale of real estate owned - 12,295 -
Gain on sale of investments - 25,917 -
--------- --------- ---------
130,988 153,555 102,356
--------- --------- ---------
General, administrative and other expenses:
Compensation and employee benefits 550,460 448,229 427,028
Occupancy and equipment 185,002 166,833 215,345
Federal deposit insurance premiums 21,288 282,673 79,773
Franchise taxes 84,495 52,221 48,045
Other operating expenses 479,258 326,247 427,995
--------- --------- ---------
1,320,503 1,276,203 1,198,186
--------- --------- ---------
Income before provision for
income taxes 314,308 267,107 38,544
Provision for income taxes 119,019 81,000 9,860
--------- --------- ---------
Net income $ 195,289 186,107 28,684
========= ========= =========
Basic earnings per share (since July 1, 1996) $ 0.51 0.13 N/A
========= ========= =========
Diluted earnings per share (since July 1, 1996) $ 0.51 0.13 N/A
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
- 17 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Unearned on Available
Common Paid in Retained ESOP for Sale
Stock Capital Earnings Shares Securities
----- ------- -------- ------ ----------
<S> <C>
Balance at December 31, 1994 - - 3,738,935 - -
Net income for the year ended
December 31, 1995 - - 28,684 - -
Net unrealized gain on available-
for-sale securities net of tax
of $37,024, upon transfer of
securities at December 31, 1995 - - - - 80,511
--------- --------- --------- --------- ---------
Balance at December 31, 1995 - - 3,767,619 - 80,511
Reorganization to a stock company
with the issuance of common
stock - 3,708,196 - (340,540) -
Net income for the year ended
December 31, 1996 - - 186,107 - -
Decrease in unrealized gain (loss) on
available-for-sale securities net of
tax of $72,374 - - - - (149,123)
ESOP shares committed to be
allocated at average market price - 2,567 - 14,460 -
--------- --------- --------- --------- ---------
Balance at December 31, 1996 - 3,710,763 3,953,726 (326,080) (68,612)
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Stock
Treasury Incentive
Stock Plan Total
----- ---- -----
<S> <C>
Balance at December 31, 1994 - - 3,738,935
Net income for the year ended
December 31, 1995 - - 28,684
Net unrealized gain on available-
for-sale securities net of tax
of $37,024, upon transfer of
securities at December 31, 1995 - - 80,511
--------- --------- ---------
Balance at December 31, 1995 - - 3,848,130
Reorganization to a stock company
with the issuance of common
stock - - 3,367,656
Net income for the year ended
December 31, 1996 - - 186,107
Decrease in unrealized gain (loss) on
available-for-sale securities net of
tax of $72,374 - - (149,123)
ESOP shares committed to be
allocated at average market price - - 17,027
--------- --------- ---------
Balance at December 31, 1996 - - 7,269,797
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
- 18 -
<PAGE>
LENOX BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Unearned on Available
Common Paid in Retained ESOP for Sale
Stock Capital Earnings Shares Securities
----- ------- -------- ------ ----------
<S> <C>
Balance at December 31, 1996 - 3,710,763 3,953,726 (326,080) (68,612)
Net income for the year ended
December 31, 1997 - - 195,289 - -
ESOP shares committed to be
allocated at average market price - 11,610 - 44,357 -
Shares acquired for future Stock
Incentive Plan awards - - - - -
Shares acquired to be held in treasury - - - - -
Stock Incentive Plan awards - (9,550) - - -
Amortization of Stock Incentive Plan - - - - -
Increase in unrealized gain (loss) on
available-for-sale securities net of
tax of $35,933 - - - - 69,744
Cash dividends of $.20 per share - - (76,204) - -
--------- --------- --------- -------- --------
Balance at December 31, 1997 $ - 3,712,823 4,072,811 (281,723) 1,132
========= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Stock
Treasury Incentive
Stock Plan Total
----- ---- -----
<S> <C>
Balance at December 31, 1996 - - 7,269,797
Net income for the year ended
December 31, 1997 - - 195,289
ESOP shares committed to be
allocated at average market price - - 55,967
Shares acquired for future Stock
Incentive Plan awards (274,111) - (274,111)
Shares acquired to be held in treasury (285,125) - (285,125)
Stock Incentive Plan awards 147,507 (137,957) -
Amortization of Stock Incentive Plan - 9,268 9,268
Increase in unrealized gain (loss) on
available-for-sale securities net of
tax of $35,933 - - 69,744
Cash dividends of $.20 per share - - (76,204)
--------- --------- ---------
Balance at December 31, 1997 (411,729) (128,689) 6,964,625
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
- 19 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Cash flows from operating activities:
Interest and dividends received $ 3,517,133 3,239,825 2,872,709
Interest paid (1,975,424) (1,937,876) (1,848,114)
Loan origination fees received 27,322 27,841 10,176
Other fees 130,647 108,856 99,596
Cash paid to suppliers and employees (1,155,544) (1,306,003) (1,326,502)
Income taxes (paid) refunded (119,322) - 24,140
----------- ----------- ----------
Net cash provided (used) by operating activities 424,812 132,643 (167,995)
----------- ----------- ----------
Cash flows from investing activities:
Property and equipment additions (392,852) (28,183) (89,691)
Proceeds from sale of equipment - 11,500 16,750
Purchase of mortgage-backed securities
held to maturity - - (350,219)
Purchase of mortgage-backed securities -
available for sale - (953,053) -
Repayments of mortgage-backed securities 118,546 221,316 112,406
Proceeds from sale of mortgage-backed securities -
available for sale - 636,303 -
Purchase of collateralized mortgage obligations -
held to maturity (4,765,592) - -
Purchase of certificates of deposit (10,406) (10,406) (151,874)
Redemption of certificates of deposit - - 488,347
Purchase of Federal Home Loan Bank stock (152,900) - -
Loan disbursements (8,884,327) (10,578,760) (8,297,193)
Loans purchased (798,000) (884,168) -
Loan principal repayments 8,154,305 7,313,477 6,536,363
Purchase of investments - held to maturity - - (6,326,298)
Purchase of investment securities - available for sale - (6,886,789) -
Maturity of investment securities - held to maturity - - 4,460,000
Maturity of investments - available for sale 1,900,000 1,820,000 -
Proceeds from sale of investments - available for sale - 4,893,785 -
Proceeds from sale of real estate acquired through
foreclosure - 52,204 -
----------- ----------- ----------
Net cash used by investing activities (4,831,226) (4,392,774) (3,601,409)
----------- ----------- ----------
Net cash flows used by operating and investing
activities (subtotal carried forward) (4,406,414) (4,260,131) (3,769,404)
----------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
- 20 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Net cash flows used by operating and investing
activities (subtotal brought forward) (4,406,414) (4,260,131) (3,769,404)
Cash flows from financing activities:
Net decrease in deposits (684,722) (1,117,683) (1,857,011)
Borrowings from Federal Home Loan Bank 5,825,000 2,075,000 4,950,000
Repayment of Federal Home Loan Bank loans (544,580) (395,779) (24,041)
Payments on capitalized lease obligations (4,867) (11,395) (28,862)
Purchase of shares for future Stock Incentive Plan
awards (274,111) - -
Purchase of shares to be held in treasury (285,125) - -
Proceeds from sale of stock upon conversion - 3,575,549 -
Dividends paid on common stock (76,204) - -
----------- ---------- ----------
Net cash provided by financing activities 3,955,391 4,125,692 3,040,086
----------- ---------- ----------
Decrease in cash and cash equivalents (451,023) (134,439) (729,318)
Cash and due from banks at beginning of period 1,114,879 1,249,318 1,978,636
----------- ---------- ----------
Cash and due from banks at end of period $ 663,856 1,114,879 1,249,318
============ ========== ==========
</TABLE>
- 21 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
Reconciliation of Net Income to Net Cash
Provided (Used) by Operating Activities
---------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Net income $195,289 186,107 28,684
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 61,164 45,097 59,421
Provision (credit) for losses on loans 10,500 - (2,000)
Amortization of deferred loan fees (7,292) (14,963) (13,438)
Deferred loan origination fees (costs) 17,934 13,784 (2,756)
Federal Home Loan Bank stock dividends (36,200) (29,100) (26,400)
Gain on sale of investment and mortgage-
backed securities - (25,917) -
Gain on sale of equipment - (6,487) (2,760)
Gain on sale of real estate acquired
through foreclosure - (12,295) -
Amortization of stock incentive plan awards 9,268 - -
ESOP expense, net of tax benefit 55,967 - -
Effect of change in operating assets and liabilities:
Accrued interest receivable 14,752 (51,015) (70,179)
Prepaid expenses and other assets (9,231) (15,523) (210,181)
Advances by borrowers for taxes
and insurance 40,432 (1,122) 14,345
Accrued expenses 65,229 (17,923) 49,069
Accrued federal income tax (4,000) 44,000 -
Deferred federal income tax 11,000 18,000 8,200
-------- -------- ---------
Net cash provided (used) by
operating activities 424,812 132,643 (167,995)
======== ======== =========
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Investment and mortgage-backed securities with a carrying value of $7,045,505
were transferred to the available for sale classification at December 31, 1995.
Loans with a carrying value of $39,010 were transferred to real estate acquired
through foreclosure during 1996.
See accompanying notes to financial statements.
- 22 -
<PAGE>
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
Nature of operations and principles of consolidation
Lenox Bancorp Inc. (the Bancorp) is a holding company formed in
1995 in conjunction with the conversion of Lenox Savings Bank from
a mutual savings bank to a stock savings bank in July 1996. The
conversion culminated in the Corporation's issuance of 425,677
shares. The Bancorp's financial statements include the accounts of
its wholly-owned subsidiary, Lenox Savings Bank. All significant
intercompany transactions have been eliminated.
Lenox Savings Bank is a state chartered savings bank and a member
of the Federal Home Loan Bank system (FHLB) and subject to
regulation by the Federal Deposit Insurance Corporation (FDIC) and
the State of Ohio. As a member of the FHLB system, Lenox Savings
Bank maintains a required investment in capital stock of the
Federal Home Loan Bank of Cincinnati.
Savings accounts are insured by the Savings Association Insurance
Fund (SAIF), a division of the Federal Deposit Insurance
Corporation (FDIC), within certain limitations. Semi-annual
premiums are required by the SAIF for the insurance of such
savings accounts.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and that
affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Areas where management's estimates and assumptions are
more susceptible to change in the near term include the allowance
for loan losses and the fair value of certain securities.
- 23 -
<PAGE>
Cash and due from banks
For the purpose of presentation in the statements of cash flows,
the Bancorp considers all highly liquid debt instruments with
original maturity when purchased of three months or less to be
cash equivalents. Cash and cash equivalents are defined as those
amounts included in the balance sheets caption cash and due from
banks.
The Bancorp maintains its cash deposit accounts at financial
institutions where the balance, at times, may exceed federally
insured limits.
Investments, mortgage-backed securities and collateralized
mortgage obligations
The Bancorp adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity
Securities, as of January 1, 1994. Statement No. 115 requires the
classification of investments in debt and equity securities into
three categories; held to maturity, trading, and available for
sale. Debt securities that the Bancorp has the positive intent and
ability to hold to maturity are classified as held to maturity
securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of
selling in the near-term are classified as trading securities and
reported at fair value, with unrealized gains and losses included
in earnings. The Bancorp has no trading securities. Debt and
equity securities not classified as either held to maturity
securities or trading securities are classified as available for
sale securities and reported at fair value, with unrealized gains
or losses excluded from earnings and reported as a separate
component of equity, net of deferred taxes.
The Bancorp designates investment securities, mortgage-backed
securities and collateralized mortgage obligations as held to
maturity or available for sale upon acquisition. Gains or losses
on the sales of investment securities, mortgage-backed securities
and collateralized mortgage obligations available for sale are
determined on the specific identification method. Premiums and
discounts on investment securities, mortgage-backed securities and
collateralized mortgage obligations are amortized or accredited
using the interest method over the expected lives of the related
securities.
- 24 -
<PAGE>
In November 1995, the Financial Accounting Standards Board issued
a Special Report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities".
The guide provided technical interpretations and guidance relating
to the adoption of SFAS No. 115, issued in May 1993. This guide
allowed an enterprise to reassess the appropriateness of the
classifications of all securities held at that time and account
for any resulting reclassifications at fair value in accordance
with SFAS No. 115. Those one-time reassessments should have
occurred no later than December 31, 1995. Management reclassified
its entire portfolio of investments and mortgage-backed securities
from "held to maturity" to "available for sale" at December 31,
1995, in accordance with the guide to reflect their intention as
to the classification of the securities.
Loans receivable
Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances reduced by
any charge offs or specific valuation accounts and net of any
deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. At December 31, 1997,
the entire portfolio of loans was held for investment.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
The allowance for loan and real estate losses is increased by
charges to income and decreased by charge offs (net of
recoveries). Management's periodic evaluation of the adequacy of
the allowance is based on the Bancorp's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of
any underlying collateral, and current economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bancorp's
allowance for loan losses. Such agencies may require the Bancorp
to recognize additions to the allowance based on judgments
different from those of management.
Although management uses the best information available to make
these estimates, future adjustments to the allowances may be
necessary in the near term due to economic, operating, regulatory
and other conditions that may be beyond the Bancorp's control.
However, the amount of the change that is reasonably possible
cannot be estimated.
- 25 -
<PAGE>
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments
as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are
received.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan". This standard amends
Statement No. 5 to clarify that a creditor should evaluate the
collectibility of both contractual interest and contractual
principal on all loans when assessing the need for a loss accrual.
In October, 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosure", which amends Statement No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired
loans.
For impairment recognized in accordance with SFAS No. 114, the
entire change in present value of expected cash flows is reported
as bad debt expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad
debt expense that otherwise would be reported. Interest on
impaired loans is reported on the cash basis. Impaired loans are
loans that are considered to be permanently impaired in relation
to principal or interest based on the original contract. Impaired
loans would be charged off in the same manner as all loans subject
to charge off. For the years ended December 31, 1997 and 1996, the
Bancorp had no loans that were impaired as described in the
pronouncement and therefore, no interest income was recognized or
received on impaired loans.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
loss on foreclosed real estate.
- 26 -
<PAGE>
Property and equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization computed by straight-line and
accelerated methods over the estimated useful lives of the
respective assets.
Income taxes
Deferred tax assets and liabilities represent the tax effects of
the temporary differences in the basis of certain assets and
liabilities for tax and financial statement purposes, calculated
at currently effective tax rates of future deductible or taxable
amounts attributable to events that have been recognized on a
cumulative basis in the financial statements.
The Bancorp's principal temporary differences between pretax
financial income and taxable income result from different methods
of accounting for deferred loan origination fees and costs,
Federal Home Loan Bank stock dividends, the general loan loss
allowance and the post-1987 percentage of earnings bad debt
deduction. For certain assets acquired after December 31, 1980, a
temporary difference is also recognized for depreciation utilizing
accelerated methods for Federal income tax purposes.
Concentration of customers
The Bancorp grants real estate and consumer loans to, and accepts
deposits from, customers who are primarily employees of The
Procter & Gamble Company located in the Metropolitan Cincinnati
area.
Fair values of financial instruments
The following methods and assumptions were used by the Bancorp in
estimating fair values of financial instruments as disclosed
herein:
Cash and short-term instruments. The carrying amounts
of cash and short-term instruments approximate their
fair value.
Available-for-sale and held-to-maturity securities.
Fair values for securities excluding restricted
equity securities, are based on quoted market prices.
The carrying values of restricted equity securities
approximate fair values.
- 27 -
<PAGE>
Loans receivable. For variable-rate loans that reprice frequently
and have no significant change in credit risk, fair values are
based on carrying values. Fair values for certain mortgage loans
(for example, one-to-four family residential), credit-card loans,
and other consumer loans were estimated by discounting the future
cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposit liabilities. The fair values disclosed for demand
deposits, NOW and money market accounts are, by definition, equal
to the amount payable on demand at the reporting date (that is,
their carrying amounts). Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly
maturities on time deposits.
FHLB advances. The fair values of FHLB advances are estimated
using discounted cash flow analyses based on the Bancorp's current
incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest. The carrying amounts of accrued interest
approximate their fair values.
Off balance sheet instruments
In the ordinary course of business, the Bancorp has entered into off
balance sheet financial instruments consisting of commitments to extend
credit and commitments under line of credit loans. Such financial
instruments are recorded in the financial statements when they are funded
or related fees are incurred or received.
- 28 -
<PAGE>
Recent accounting pronouncements
In May 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 122,
"Accounting for Mortgage Servicing Rights". This statement
requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those
servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans
with servicing rights retained would allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans
based on their relative fair value. Statement No. 122 is effective
for fiscal years beginning after December 15, 1995. There was no
impact from the adoption of this standard in 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes accounting
and reporting standards for stock-based employee compensation
plans including stock options. The statement defines a "fair value
based method" for employee stock options and encourages all
entities to adopt that method for such options. However, it allows
an entity to continue to measure compensation cost for those plans
using the "intrinsic value based method" of accounting prescribed
by APB Opinion No. 25. Entities electing to remain with the
accounting in Opinion 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value method of
accounting defined in this statement had been applied. The Bancorp
has elected to remain with the accounting requirements of APB
Opinion No. 25.
In June 1996, the FASB issued SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" which established accounting and reporting standards
for transfers and servicing of financial assets and
extinguishments of liabilities. The standards are based on a
consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 supercedes No. 122. SFAS No. 125 was
effective for transactions occurring after December 31, 1996. The
adoption of this standard did not have a material impact on the
financial statements.
- 29 -
<PAGE>
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share"
which replaces the current presentation of "primary" and "fully
diluted" earning per share with newly defined "basic" and
"diluted" earnings per share. "Basic" earnings per share will not
include dilutive effects on earnings. "Diluted" earnings per share
will reflect the potential dilution of securities that could share
in an enterprises earnings. The statement requires dual
presentation of basic and diluted earnings per share on the income
statement for all entities having complex capital structures. It
is effective for all financial statements issued for periods
ending after December 15, 1997. This standard was adopted for the
year ended December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. This
statement 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.
This statement requires that (a) items of other comprehensive
income be classified by their nature in a financial statement and
(b) the accumulated balance of other comprehensive income be
displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial
position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Management is currently assessing the
impact that adoption will have on the Bancorp's financial
statements.
Reclassifications
Certain reclassifications were made to the prior year financial
statements to conform the current year presentation.
- 30 -
<PAGE>
2. Investments, Mortgage-Backed Securities and Collateralized
Mortgage Obligations:
The amortized cost and estimated fair values of investments and
mortgage-backed securities available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
U.S. Government and
agencies securities $ 4,293,779 16,753 19,098 4,291,434
Mortgage-backed
securities 1,026,034 8,042 3,982 1,030,094
--------- ------- ------- ---------
$ 5,319,813 24,795 23,080 5,321,528
========= ====== ====== =========
<CAPTION>
December 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
U.S. Government and
agencies securities $ 6,192,698 1,742 105,703 6,088,737
Mortgage-backed
securities 1,148,411 - - 1,148,411
--------- ----- ------- ---------
$ 7,341,109 1,742 105,703 7,237,148
========= ===== ======= =========
</TABLE>
The amortized cost and estimated market values of investments and
mortgage-backed securities at December 31, 1997 and 1996 by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Estimated Estimated
Market Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C>
Due in five to ten years $ 2,096,458 2,102,670 2,994,462 2,955,645
Due in over ten years 2,197,321 2,188,764 3,198,236 3,133,092
Mortgage-backed
securities 1,026,034 1,030,094 1,148,411 1,148,411
--------- --------- --------- ---------
$ 5,319,813 5,321,528 7,341,109 7,237,148
========= ========= ========= =========
</TABLE>
- 31 -
<PAGE>
The amortized cost and market values of investment securities by call date
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---- -----
<S> <C>
Callable in one year or less $ 3,294,475 3,285,982
Callable in one to three years 999,304 1,005,452
---------- ---------
$ 4,293,779 4,291,434
========= =========
</TABLE>
Proceeds and resulting gains and losses realized from sale of investments
and mortgage-backed securities for years ended December 31, 1997, 1996, and
1995 were as follows:
<TABLE>
<CAPTION>
Net
Realized
Gross Gross Gross Gain
Proceeds Gains Losses (Loss)
-------- ----- ------ ------
<S> <C>
Year ended December 31, 1997 $ - - - -
Year ended December 31, 1996 5,530,089 37,294 11,377 25,917
Year ended December 31, 1995 - - - -
</TABLE>
The amortized cost and estimated fair values of collateralized mortgage
obligations held to maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
Collateralized
mortgage obligations $ 4,765,592 22,585 26,942 4,761,235
========= ====== ====== =========
</TABLE>
At December 31, 1997, all collateralized mortgage obligations held to
maturity are due after twenty years. Expected maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
- 32 -
<PAGE>
3. Loans Receivable:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S><C>
Mortgage loans secured by one to
four family residences $ 35,380,451 34,832,212
Multi-family residential real estate 798,000 -
Home equity line of credit 997,660 412,248
Consumer 1,974,352 2,293,457
Unsecured consumer line of credit 99,825 91,090
Passbook loans 15,739 13,784
---------- ----------
39,266,027 37,642,791
---------- ----------
Less:
Loans in process 144,717 47,574
Allowance for loan loss 66,341 57,770
Deferred loan fees 52,712 42,070
---------- ----------
263,770 147,414
---------- ----------
$39,002,257 37,495,377
========== ==========
</TABLE>
At December 31, 1997 and 1996, adjustable rate loans approximated
$16,424,000 and $17,247,000.
Activity in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C>
Beginning balance $ 57,770 60,050 66,259
Provision (credit) for
loan losses 10,500 - (2,000)
Charge off of loans (2,963) (4,330) (5,411)
Recoveries of prior
charge-offs 1,034 2,050 1,202
------- ------- -------
$ 66,341 57,770 60,050
====== ====== ======
</TABLE>
- 33 -
<PAGE>
The Bancorp grants first mortgage and other loans to customers who are
primarily Procter and Gamble employees located in the Metropolitan
Cincinnati area. Accordingly, a substantial portion of its debtors'
ability to honor their contracts is dependent on continued employment
at Procter and Gamble as well as the health of the local economy and
market.
Loans to officers and directors totaled $828,879 and $575,451 as of
December 31, 1997 and 1996, respectively. An analysis of loan activity
for the years ended December 31, 1997 and 1996 follows:
1997 1996
---- ----
Outstanding balance, beginning $ 575,451 570,413
New loans issued 358,480 109,600
Repayments (105,052) (104,562)
------- -------
Outstanding balance, ending $ 828,879 575,451
======== =======
4. Property and Equipment:
Property and equipment at December 31, 1997 and 1996 is summarized by
major classification as follows:
1997 1996
---- ----
Land and building $ 321,311 -
Furniture and equipment 319,205 251,535
Leasehold improvements 244,466 240,595
------- -------
884,982 492,130
Accumulated depreciation 286,892 228,479
------- -------
$ 598,090 263,651
======= =======
In 1993, the Bancorp constructed an addition with a cost of $126,938
to the building that it is currently leasing. The Bancorp has an
agreement with the lessor that if the lease is terminated, the Bancorp
will receive from the lessor a set dollar amount based on a ten year
declining schedule. The building addition at the end of the lease
becomes the property of the lessor.
- 34 -
<PAGE>
Effective July 1, 1995, the Bancorp entered into a five-year lease
with Procter and Gamble for its facilities. Rent expense for the years
ended December 31, 1997 and 1996 was $22,977 and $22,975. Future
minimum lease payments on the lease at December 31, 1997 are as
follows:
1998 $ 28,528
1999 35,660
------
$ 64,188
======
The Bancorp may exercise a five year renewal option on the lease, only
upon the approval of the lessor. The Bancorp's continued use of its
facilities beyond the lease term is dependent upon the decisions of
the Procter and Gamble Company. The Bancorp previously leased its
facilities on a year to year basis from the Procter and Gamble Company
at a nominal annual amount.
In June 1995, the Bancorp entered into a sub-lease agreement with an
entity providing financial planning services to individuals. The lease
agreement provides for variable lease payments based on the operating
results of the lessee. The lease runs through June 1998. During 1997
and 1996 sub-lease income recognized by the Bancorp was $15,084 and
$1,034.
- 35 -
<PAGE>
5. Deposits
Deposit amounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
------------------------ ---------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C>
Statement savings $ 5,071,176 2.73% 5,138,815 2.61%
NOW and money market accounts 5,120,059 2.86 5,482,621 2.76
Other 53,521 2.38 59,445 2.38
---------- ----------
10,244,756 10,680,881
---------- ----------
Certificates:
Three months 2,111,988 6.57 116,032 4.66
Six months 1,251,007 5.52 1,006,950 5.24
Nine months 609,155 5.71 2,413,416 5.63
One year 4,285,331 5.80 3,909,170 5.41
Fifteen months 196,597 5.84 187,971 5.56
Eighteen months 1,972,124 5.85 1,663,240 5.65
Two years 2,169,232 5.62 2,981,025 5.80
Three years 588,161 6.08 668,694 5.68
Four years 617,310 6.86 569,318 6.35
Five years 7,820,872 6.30 8,354,558 6.28
---------- ---- ---------- ----
21,621,777 6.06 21,870,374 5.86
---------- ---- ---------- ----
$ 31,866,533 5.01% 32,551,255 4.82%
========== ==== ========== ====
</TABLE>
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Within one year $12,086,611 11,215,597
1 - 2 years 4,796,963 3,962,691
2 - 3 years 2,299,911 3,368,042
Over 3 years 2,438,292 3,324,044
----------- -----------
$21,621,777 21,870,374
========== ==========
</TABLE>
- 36 -
<PAGE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C>
Statement savings $ 130,228 142,814 155,368
NOW and Money Market 144,080 143,361 127,125
Certificates of Deposit 1,212,966 1,317,396 1,366,545
--------- --------- ---------
$ 1,487,274 1,603,571 1,649,038
========= ========= =========
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more was $3,998,557 and $3,568,326 at December 31, 1997 and
1996.
6. Capitalized Lease Obligations:
The Bancorp leased automated teller machines under capital leases. The
leases contained a bargain purchase option at the end of the lease.
The leased assets are included in furniture and fixtures at $48,691
less accumulated depreciation of $44,779 and $41,111 at December 31,
1997 and 1996 respectively. The final payments required under the
leases were made in 1997.
7. Federal Home Loan Bank Advances:
The Bancorp has advances from the Federal Home Loan Bank. These
advances range in maturity from ninety days to 15 years with interest
rates of between 5.10% and 6.40%. Future maturities on the advances
from the Federal Home Loan Bank are as follows:
1998 $ 3,927,116
1999 3,094,653
2000 28,604
2001 30,324
2002 5,032,153
Subsequent years 174,273
-----------
$12,287,123
===========
The advances are collateralized by a blanket pledge of residential
mortgage loans held by the Bancorp. The Bancorp has also pledged its
Federal Home Loan Bank stock and mortgage notes with unpaid principal
balances of approximately $18.4 million for future advances.
- 37 -
<PAGE>
8. Income Taxes:
The Bancorp had qualified under provisions of the Internal Revenue
Code, which permitted the Bancorp to deduct from taxable income an
allowance for bad debts based on a percentage of taxable income before
such deduction. The Tax Reform Act of 1969 gradually reduced this
deduction to 40% for years beginning in 1979. The Tax Reform Act of
1986 reduced this deduction to 8% beginning in 1988.
A bill repealing the thrift bad debt reserve has been signed into law
and is effective for taxable years beginning after December 31, 1995.
All savings banks and thrifts will be required to account for tax
reserves for bad debts in the same manner as banks. Such entities with
assets less than $500 million will be required to maintain a moving
average experience based reserve and no longer will be able to
calculate a reserve based on a percentage of taxable income.
Tax reserves accumulated after 1987 will automatically be subject to
recapture. The recapture will occur in equal amounts over six years
beginning in 1997 and can be deferred up to two years, depending on
the level of loans originated.
As a result of the tax law change, the Bancorp is expected to
ultimately recapture approximately $82,000 of tax reserves accumulated
after 1987, resulting in addition tax payments of $28,000. The
recapture of these reserves will not result in any significant income
statement effect to the Bancorp. Pre-1988 tax reserves will not have
to be recaptured unless the thrift or successor institution
liquidates, redeems shares or pays a dividend in excess of earnings
and profits.
Appropriated and unappropriated retained income at December 31, 1997
included earnings of approximately $1,096,000 representing such bad
debt deductions for which no provision for federal income taxes has
been made. In the future, if the Bancorp does not meet the federal
income tax requirements necessary to permit it to deduct an allowance
for bad debts, the Bancorp will be subject to federal income tax at
the then current corporate rate.
- 38 -
<PAGE>
An analysis of the provision for federal income taxes is as follows:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Current $108,019 63,000 1,660
Deferred 11,000 18,000 8,200
-------- ------ -----
$119,019 81,000 9,860
======= ====== =====
At December 31, 1997 and 1996, the deferred components of the Bancorp's
income tax liabilities, as included in the statements of financial
condition are summarized as follows:
1997 1996
---- ----
Deferred tax liabilities:
FHLB stock dividends $101,200 82,300
Bad debt reserve 4,000 7,000
Net unrealized gains on available
for sale securities 583 -
Depreciation 11,400 9,000
------- -------
Gross deferred tax liabilities 117,183 98,300
------- ------
Deferred tax assets:
Deferred loan fees 8,400 8,800
Amortization of stock awards 3,200 -
ESOP expense 2,600 -
Other 4,400 2,500
Net unrealized losses on available
for sale securities - 35,350
------- ------
Gross deferred tax assets 18,600 46,650
------- ------
Valuation allowance - -
------- ------
Net deferred tax liability $ 98,583 51,650
======== ======
- 39 -
<PAGE>
The Bancorp's income tax expense differed from the statutory federal rate
of 34% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C>
Tax expense at statutory rate $ 106,864 90,816 13,105
Sur - tax exemption - (6,678) (5,970)
Increase in deferred tax rate 6,907 - -
Other 5,248 (3,138) 2,725
--------- ------- ------
$ 119,019 81,000 9,860
======= ====== ======
Effective tax rate 37.9% 30.3% 25.6%
==== ==== ====
</TABLE>
9. Capital Requirements:
The Savings Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Savings Bank
financial statements. The regulations require the Savings Bank to meet
specific capital adequacy guidelines that involve quantitative
measures of the Savings Bank liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Savings Bank capital classification is also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and
ratios (set forth in the table below) of Tier I capital (as defined in
the regulations) to total average assets (as defined), and minimum
ratios of Tier I and total capital (as defined) to risk-weighted
assets (as defined). To be considered adequately capitalized (as
defined) under the regulatory framework for prompt corrective action,
the Savings Bank must maintain minimum Tier I leverage and Tier II
risk-based ratios as set forth in the table. The Savings Bank's actual
capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Required Actual Required
Amount Amount Excess Rate Rate
------ ------ ------ ---- ----
<S> <C>
Tier I $ 5,815,000 1,959,000 3,856,000 11.9 4.0
Tier II 5,881,000 1,978,000 3,903,000 23.8 8.0
<CAPTION>
December 31, 1996
-----------------
Required Actual Required
Amount Amount Excess Rate Rate
------ ------ ------ ---- ----
<S> <C>
Tier I $ 5,498,000 1,872,000 3,626,000 11.7 4.0
Tier II 5,556,000 1,845,000 3,711,000 24.1 8.0
</TABLE>
- 40 -
<PAGE>
10. Corporate Reorganization and Conversion to Stock Form:
On July 6, 1995, the Savings Bank's Board of Directors adopted an
overall plan of conversion and reorganization (the Plan) whereby
the Savings Bank would convert to the stock form of ownership,
followed by the issuance of all of the Savings Bank's outstanding
common stock to a newly formed holding company, Lenox Bancorp Inc.
(the Bancorp).
On July 17, 1996, the Savings Bank completed its conversion to the
stock form of ownership and issued all of the Savings Bank's
outstanding common shares to the Bancorp.
In connection with the conversion, the Bancorp sold 425,677 shares
to depositors of the Savings Bank at a price of $10.00 per share
which, after consideration of offering expenses totaling $548,574
and shares purchased by employee benefit plans, resulted in net
cash proceeds of $3.37 million.
At the time of the conversion in July 1996, the Bancorp
established a liquidation account in an amount of $3,767,619,
which is equal to the Bancorp's regulatory capital at December 31,
1995. The liquidation account will be maintained for the benefit
of eligible savings account holders who maintain their savings
account in the Bancorp after conversion.
In the event of a complete liquidation (and only in such event),
each eligible savings account holder will be entitled to receive a
liquidation distribution from the liquidation account in the
amount of the then current adjusted balance of savings accounts
held before any liquidation distribution may be made with respect
to capital stock. Except for the repurchase of stock and payment
of dividends by the Bancorp, the existence of the liquidation
account will not restrict the use or application of such related
earnings.
The Bancorp may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would
cause the regulatory capital of the Bancorp to be reduced below
either the amount required for the liquidation account or the
regulatory capital requirements imposed by the FDIC.
- 41 -
<PAGE>
11. Retirement Plans:
401(k) Savings Plan
In 1992, the Bancorp implemented a 401(k) savings plan which
covers substantially all employees. The employees may elect to
make contributions pursuant to a salary reduction agreement upon
meeting age and length of service requirements. The Bancorp
annually determines the contribution based on the percentage of
the employees plan compensation or employee pay contributed to the
Plan. The Bancorp matched the employee contribution to the plan up to
6% of employee compensation. Total contributions by the Bancorp for
the years ended December 31, 1997, 1996 and 1995 were $7,574, $9,400,
and $6,803 respectively.
Employee Stock Ownership Plan
Concurrent with the conversion from the mutual savings bank form to
the stock holding company form of organization, in July 1996, the
Bancorp established an Employee Stock Ownership Plan (ESOP) which
provides retirement benefits for substantially all employees who have
completed one year of service and have attained age 21. The ESOP
initially acquired 34,054 shares of common stock in the conversion
offering. The funds used by the ESOP to purchase the stock were
provided by a loan from the Bancorp which will be repaid by
contributions to the ESOP by the company in the future. Management
intends to allocate these shares to eligible employees' accounts over
the next ten years. Expense for shares committed to be allocated
during 1997 and 1996 was $63,270 and $17,027. Shares committed to be
allocated as of December 31, 1997 and 1996 totaled 4,179 and 1,703,
respectively. Remaining unearned shares at December 31, 1997 was
28,172.
1997 Stock Incentive Plan
During 1997, the shareholders approved the 1997 Incentive Plan. Under
the provisions of the Plan, 59,594 shares of common stock can be
reserved for awards. The maximum number of shares reserved for award
as Stock Awards is 17,027 shares. These shares were acquired during
1997 and held in treasury. On July 21, 1997, 9,353 of those shares
purchased were awarded to employees and non-employee directors. Plan
share awards are earned by a recipient over a 5- year period. The
Bancorp recognized $9,268 amortization expense relating to these
stock awards during 1997.
The Plan also allows for 42,567 shares to be reserved for incentive
and non-statutory stock options. Grantees are awarded 10-year options
to acquire shares at the market price on the date the option is
granted in five equal installments commencing one year after the date
of the grant.
- 42 -
<PAGE>
Set forth below is activity under the plan.
<TABLE>
<CAPTION>
1997 12/31/97 Option
Options Options Options Options Price
Date of Grant Granted Exercised Forfeited Outstanding Per Share
------------- ------- --------- --------- ----------- ---------
<S> <C>
July 21, 1997 30,735 - - 30,735 $ 14.75
====== ========== ========= ====== =====
Exercisable in 1997 -
======
Shares available for
future grants at
December 31, 1997 11,832
======
</TABLE>
The Bancorp applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its option plans. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Bancorp's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FASB
Statement 123, "Accounting for Stock-Based Compensation", the effect on net
income and earnings per share would have been reduced to pro forma amounts
indicated below:
1997
----
Net income:
As reported $ 195,289
Additional compensation expense 8,554
Pro forma 186,735
Basic earnings per share:
As reported $ 0.51
Pro forma 0.49
The estimated fair value of options granted was calculated by the
Black-Scholes method. Assumptions used in the calculations are as follows:
Risk-free interest rate U.S. Treasury Strips rate on date of grant
which was 6.18%
Expected life Life of the options which is ten years
Expected volatility 0.12% based on the 12-month history of prices
Expected dividends $0.20 per share
- 43 -
<PAGE>
Defined Benefit Pension Plan
The Bancorp was a member of The Financial Institution Retirement Fund,
a multi-employer defined benefit pension plan, for its employees. The
Fund is administered by the U.S. League of Savings Institutions which
also determines the required pension plan contribution. The pension
expense for the year ended December 31, 1995 was $8,416. The Bancorp's
policy was to fund pension cost accrued. This plan was terminated at
June 30, 1995.
12. Other Expenses:
Included in other operating expenses are the following expenses which
exceed 1% of interest income and other income:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Legal and litigation $ 68,402 28,589 121,651
Other professional fees 68,463 51,899 35,687
ATM expense 55,228 40,765 51,273
Advertising 45,573 15,986 19,543
</TABLE>
13. Fair Value of Financial Instruments:
The estimated fair values of the Bancorp's financial instruments at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C>
Financial assets:
Cash and certificates of
deposit $ 836,542 836,542 1,277,159 1,277,159
Investments and mortgage-
backed securities 5,321,528 5,321,528 7,237,148 7,237,148
Collateralized mortgage
obligations 4,765,592 4,761,235 - -
Loans receivable, net 39,002,257 38,956,000 37,495,377 37,439,000
Accrued interest receivable 270,818 270,818 285,570 285,570
Financial liabilities:
Deposits:
Demand accounts 10,244,756 10,244,756 10,680,881 10,680,881
Certificates 21,621,777 21,638,000 21,870,374 21,876,000
FHLB advances 12,287,123 12,298,000 7,006,703 7,006,703
</TABLE>
- 44 -
<PAGE>
14. Summarized Financial Information of the Parent Company:
The following condensed financial statements summarize the financial
position of Lenox Bancorp Inc. as of December 31, 1997 and 1996, and
the results of its operations for the year then ended.
LENOX BANCORP INC.
Statements of Financial Condition
---------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Assets:
Cash $ 820,237 1,497,814
Investment in Lenox Savings Bank 2,131,448 1,886,096
Accounts receivable and prepaid expenses 56,217 3,255
---------- ---------
$3,007,902 3,387,165
========== =========
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and
accrued expenses $ 9,789 2,526
Stockholders' equity:
Common stock - -
Additional paid in capital 3,698,646 3,708,196
Retained earnings 121,608 2,523
Less unearned ESOP shares (281,723) (326,080)
Shares acquired for Stock Plan (128,689) -
Less 25,419 shares held in treasury (411,729) -
---------- ---------
$3,007,902 3,387,165
========== =========
</TABLE>
Statements of Operations
------------------------
<TABLE>
<S> <C>
Interest income $ 27,902 23,755
Equity in earnings of Lenox Savings 245,352 -
Professional fees (75,655) (20,606)
Other operating expenses (19,389) -
Franchise taxes (8,921) -
Income tax benefit (expense) 26,000 (626)
---------- ---------
Net income $ 195,289 2,523
========== =========
</TABLE>
- 45 -
<PAGE>
15. Commitments and Contingencies:
The Bancorp was named in a lawsuit related to an age discrimination
matter seeking unspecified damages. An agreement to settle the
lawsuit in February 1996 was reached by mutual agreement of the
parties. All costs associated with the settlement were accrued in the
financial statements at December 31, 1995.
The Bancorp is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of their customers including commitments to extend
credit. Such commitments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in
the statement of financial condition. The contract or notional
amounts of the commitments reflect the extent of the Bancorp's
involvement in such financial instruments.
The Bancorp's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of
those instruments. The Bancorp uses the same credit policies in
making commitments and conditional obligations as those utilized for
on-balance-sheet instruments.
The following schedule lists commitments and off-balance-sheet items
at December 31, 1997 and 1996.
Loan Unused
Commitments Lines of Credit
----------- ---------------
1997 $ 399,600 1,080,415
1996 700,800 526,262
In the opinion of management, the loan commitments equaled or
exceeded prevalent market interest rates as of December 31, 1997, and
all commitments will be funded via cash flow from operations and
existing excess liquidity. Of the total loan commitments, at December
31, 1997, $174,600 were fixed rate residential loans. Management
expects no losses as a result of these transactions.
- 46 -
<PAGE>
16. SAIF Special Assessment:
The deposits of the Savings Bank are presently insured by the SAIF,
which together with the BIF, are the two insurance funds administered
by the FDIC. On November 8, 1995, the FDIC revised the premium
schedule for BIF-insured banks to provide a range of .00% to .31% of
deposits (as compared to the current range of .23% to .31% of
deposits for SAIF-insured institutions) due to the BIF achieving its
statutory reserve ratio. As a result, BIF members generally would pay
substantially lower premiums than SAIF members. It was previously
anticipated that the SAIF will not be adequately recapitalized until
2002, absent a substantial increase in premium rates or the
imposition of special assessments or other significant developments.
On September 30, 1996, the President signed an omnibus appropriations
package which included the recapitalization of the Savings
Association Insurance Fund (SAIF). All SAIF members were required to
pay a one-time assessment of 65.7 cents per $100 in deposits held on
March 31, 1995. The Savings Bank's special assessment was
approximately $225,000. The assessment was charged against earnings
during the 1996 year. Beginning January 1, 1997, SAIF members are
assessed a premium of 6.4 cents per $100 of deposits to cover the
FICO obligation plus a regular insurance premium. At the present time
the regular insurance premium which applies to the Savings Bank is
the minimum. Other provisions of the appropriations package required
the Treasury Department to provide Congress, by March 31, 1997, with
a report on merging of the bank and thrift charters and merging the
SAIF and Bank Insurance Fund (BIF) by January 1, 1999, provided that
the bank and thrift charters have been merged by that date. It also
required BIF and SAIF members to begin sharing the FICO obligation on
a pro-rata basis at the earlier of January 1, 2000, or when the BIF
and SAIF funds are merged.
- 47 -
<PAGE>
17. Earnings Per Share:
Earnings per share for the year ended December 31, 1997 and the six
months the Bancorp was operational for the year ended December 31,
1996 is calculated as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C>
Basic EPS
---------
Income available to common
stockholders $ 195,289 383,487 $ 0.51
=====
Effect of Dilutive Securities:
Stock plan awards 4,177
Stock options 1,892 792
------- -------
Diluted EPS
-----------
Income available to common
stockholders + assumed
conversions $ 197,181 388,456 $ 0.51
======= ======= =====
<CAPTION>
For the Six Months Ended December 31, 1996
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C>
Basic EPS
---------
Income available to common
stockholders $ 52,000 392,346 $ 0.13
=====
Diluted EPS
-----------
Income available to common
stockholders + assumed
conversions $ 52,000 392,346 $ 0.13
====== ======= =====
</TABLE>
Disclosure of earnings per shares for 1995 is not applicable, as the
Bancorp completed its conversion from mutual to stock form in July
1996.
- 48 -
<PAGE>
18. Selected Quarterly Financial Data (unaudited):
Summarized quarterly financial information (in thousands) for 1997
is as follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------
3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- --------
<S> <C>
Interest income $ 878 894 883 888
Interest expense 487 500 516 525
------ ---- ---- ----
Net interest income 391 394 367 363
Provision for loan losses 2 4 5 -
------ ---- ---- ----
Net interest income after
provision for loan losses 389 390 362 363
Other income 26 32 46 27
Other expenses 301 330 302 388
------ ---- ---- ----
Income (loss) before
provision for income taxes 114 92 106 2
Provision (credit) for income taxes 39 31 36 13
------ ---- ---- ----
Net income (loss) $ 75 61 70 (11)
====== ==== ==== ====
Basic earnings (loss) per share $ 0.19 0.15 0.20 (.03)
====== ==== ==== ===
Diluted earnings (loss) per share $ 0.19 0.15 0.20 (.03)
====== ==== ==== ===
</TABLE>
Summarized quarterly financial information (in thousands) for the
1996 quarters after the conversion is as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
9/30/96 12/31/96
------- --------
<S> <C>
Interest income $ 844 907
Interest expense 487 487
------ ----
Net interest income 357 420
Other income 29 44
Other expenses 477 308
------ ----
Income (loss) before
provision for income taxes (91) 156
Provision (credit) for income taxes (38) 51
------ ----
Net income (loss) $ (53) 105
====== ====
Basic earnings (loss) per share $(0.14) 0.27
====== ====
Diluted earnings (loss) per share (0.14) 0.27
====== ====
</TABLE>
Earnings per share for all quarters has been restated to reflect the
adoption of SFAS No. 128.
- 49 -
<PAGE>
CORPORATE INFORMATION
STOCK PRICE INFORMATION
Lenox Bancorp, Inc.'s common stock trades over the counter through the National
Daily Quotation Service "Pink Sheet " published by the National Quotation
Bureau, Inc. under the symbol: LNXC. The table below shows the reported high
and low sales prices of the common stock during the periods indicated in 1996
and 1997. The common stock began trading on July 18, 1996.
High Low
---- ---
Fourth Quarter, 1997 $16.75 $16.25
Third Quarter, 1997 $16.63 $14.75
Second Quarter, 1997 $15.00 $14.00
First Quarter, 1997 $14.50 $13.50
------ ------
Third Quarter, 1996 $11.75 $ 9.88
Fourth Quarter, 1996 $14.00 $10.50
Lenox Bancorp, Inc. had approximately 232 shareholders at December 31, 1997
based upon shareholders of record and an estimate of shares held in nominee
names.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 495
<INT-BEARING-DEPOSITS> 356
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,946
<INVESTMENTS-CARRYING> 4,766
<INVESTMENTS-MARKET> 0
<LOANS> 39,002
<ALLOWANCE> 66
<TOTAL-ASSETS> 51,509
<DEPOSITS> 31,866
<SHORT-TERM> 3,300
<LIABILITIES-OTHER> 391
<LONG-TERM> 8,987
0
0
<COMMON> 0
<OTHER-SE> 6,965
<TOTAL-LIABILITIES-AND-EQUITY> 51,509
<INTEREST-LOAN> 2,977
<INTEREST-INVEST> 530
<INTEREST-OTHER> 36
<INTEREST-TOTAL> 3,543
<INTEREST-DEPOSIT> 1,487
<INTEREST-EXPENSE> 2,028
<INTEREST-INCOME-NET> 1,515
<LOAN-LOSSES> 11
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,321
<INCOME-PRETAX> 314
<INCOME-PRE-EXTRAORDINARY> 314
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 6.99
<LOANS-NON> 174
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 58
<CHARGE-OFFS> 8
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 66
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 68
</TABLE>
